This summer, the Utah Legislature’s Interim Revenue and Taxation
Committee will be discussing acquisition-based valuation for property
tax purposes. Acquisition-based valuation is a fundamental component of
California’s Proposition 13, which California voters passed in 1978.
Utah currently uses fair market valuation in which property valuations
are based on current assessments by the county assessor.The Utah Taxpayers Association has researched acquisition-based
valuation and has come to the following conclusions.
Utah property tax burdens are typically lower than California’s
Despite the hype about California’s property tax system, Utah’s property
tax burdens as a percent of personal income are consistently lower than
California’s, as the accompanying graph demonstrates.
While several factors contribute to property tax burdens in both states
– legislative decisions to cut property taxes, Truth-in-Taxation, caps
on growth, acquisition-based valuation and fair market valuation,
government efficiency, total government tax and fee burdens – Utah’s
property tax burdens are lower even though Utah’s total tax and fee
burdens are higher than California’s.
Utah’s ability to keep property tax burdens lower than California’s even
though Utah’s total tax and fee burden is higher than California’s is
evidence that Utah is doing something right with regards to property taxes.
During the 1990s, the Utah Legislature cut the statewide basic levy for
education twice and allowed counties to reduce property taxes in
exchange for imposing a 0.25% sales tax. Some of these tax cuts were
offset by local governments increasing their property tax levies at the
same time because legislative tax cuts and shifts had created additional
“headroom” in the property tax.
Acquisition-based valuation is inequitable to young, working families
Acquisition-based valuation’s largest single flaw is that it treats
property owners inequitably.
Households who own their property longer pay lower property taxes than
those who own their property for a shorter amount of time, all other
things being equal.
Proponents of acquisition-based valuation cannot adequately explain why
a household’s obligation to fund government services such as education,
public safety, and transportation should be based on how long they have
lived in their current residence. After all, everyone’s property
benefits from public services, not just those who have recently
purchased a home.
Acquisition-based valuation is especially harmful to young families
moving into a new home and those who move because they change jobs. The
following example concerning two identical homes – – one purchased
twenty years ago and one purchased this year — demonstrates the inequity.
Annual increase in home price, 1990 to 2007: 6.8%
Acquisition-based valuation, assuming 6.8% annual increase
Home purchased 20 years ago: $100,000
Home purchased this year: $373,000
Property tax, 1.1% effective nominal tax rate and 55% residential exemption
Home purchased 30 years ago: $605
Home purchased this year: $2,257
Fair market valuation prevents targeting industries with discriminatory
property taxes
Departing from the constitutional protections of fair market value opens
the possibility of assessing property taxes based on populism instead of
sound tax policy. Currently, the Legislature and local governments
cannot impose higher, discriminatory property taxes on specific property
owners, such as certain types of businesses, because the state
constitution mandates that property taxes be based on fair market value.
Acquisition-based valuation is not economically neutral
Taxes should be economically neutral. An economically neutral tax does
not incent or disincent specific economic activity. Acquisition-based
valuations discourage home owners from selling their property – just
like high capital gains taxes discourage selling of capital assets that
have appreciated — because home owners will experience a huge increase
in annual property taxes when they purchase their new home. Many elderly
in California are discouraged from moving into a smaller home when they
retire because the taxes on the smaller home are many times higher than
their larger family home.
Acquisition-based valuation violates “low rate, broad base” principle
of taxation.
Tax policy experts nearly universally agree that a tax system with low
rates and broad, uniform bases, such as a system based on fair market
value, is superior to a system that carves out exemptions for specific
groups. Acquisition-based valuation exempts valuation growth that occurs
after a property is purchased. Assuming a conservative annualized market
value growth rate of 5%, a property that is held for thirty years would
have more than 75% of its current fair market value exempt from property
taxes.
Acquisition-based valuation doesn’t adequately offset deficiencies in
fair market valuation.
Despite errors in fair market valuations, the current system generates
more equitable and accurate valuations than a system that bases
valuations on transactions that occurred ten, twenty, or thirty years ago.
Utah already has a 45% primary residential exemption
While the 45% primary residential exemption violates several tax policy
principals (low rate and broad base, for example), it is still one of
the most generous exemptions in the nation. California’s exemption, by
comparison, is $7,000, which would equate to a 2.8% exemption on a
$250,000 home.
Circuit breaker is a targeted, efficient method for helping low-income
elderly
Acquisition-based valuation generally benefits the elderly while harming
younger, first-time homebuyers, even though elderly households generally
have more disposable wealth than young families. However, some older
households have difficulty paying property taxes. Targeted tax breaks
for low-income elderly households such as circuit breakers are more
efficient than giving property tax breaks to large number of homeowners
at the expense of taxpayers in general. |
