Editor's note: As a special feature for April, TheStreet.com offers a series of 20 stories on everything you need to know about real estate. Today's installment is Part 7.
Property values shot up all over the country during the recent housing market boom, and so did property tax bills. The increased burden is fueling homeowner outrage, prompting reform efforts that could drastically alter tax policies in many states.
Even though housing prices in many parts of the country are now cooling, property tax hikes are unlikely to slow, making a bad situation for homeowners even worse.
According to the nonpartisan Tax Foundation, inflation-adjusted per capita property taxes jumped 12% during the height of the housing boom from 2000 to 2004. That's nearly double the rate of income growth during that same period. Thirty-nine percent of Americans consider property taxes unfair, more than any other form of taxation.
Local governments prize property taxes for their predictability. A county or municipality is able to assess the value of property in an area and come up with a tax rate that guarantees the right amount of money will be raised. Unlike income or sales taxes, there is little chance of a shortfall.
In theory, there should also be no windfall. When property values increase due to appreciation or development, the government should be able to reduce tax rates and generate the same revenue. In reality, Tax Foundation economist Gerald Prante says "many governments end up pocketing the money," keeping rates the same or even raising them.
There can be good reasons why more money is needed. Local governments across the country argue that they are being forced to pay more for education, energy and public employees while receiving less help from the state and federal level. In areas where home values have now started to decline, a loss in projected revenue could add to the strain.
In 2005, New Yorkers had the fourth-highest tax bills in the nation, equal on average to 1.2% of their home value or 4.6% of their income. Lawmakers in Albany have tried to ease the pain by offering a plethora of rebates and exemptions. The School Tax Relief (STAR) program alone hands out $2.5 billion statewide.
Unfortunately, those programs seem to create confusion. In Oneida County, Sherrill City Manager Robert Comis says taxpayers often appear frustrated at his doorstep, unsure of what assistance is available. "If it takes 45 minutes to explain something," he says, "it is not clear."
Some residents are clamoring for a simpler solution. Gioia Shebar of Gardiner in Ulster County spearheads a grass-roots effort to eliminate property taxes for education through her Web site taxnightmare.org. She never thought she would get involved in something as "unsexy as tax reform" but believes rebates are a "Band-Aid, not a real solution."
Her movement has attracted an eclectic collection of conservative and liberal supporters, including photographer and self-described socialist Marlise Momber. Like many homeowners hit hardest by recent property tax increases, Momber is house-rich with a moderate income. Her Victorian home in New Paltz cost her $133,000 in 1997. It was recently assessed at $340,000. Momber, whose taxes have already jumped 62% over the past decade, says she "dreads going to the assessor" to face another increase.
Shebar says homeowners with "five-figure incomes and five-figure tax bills" illustrate the regressive and unfair nature of property taxes. She and her supporters want them eliminated but aren't saying what should replace them. On its Web site, the group says finding an alternative to property taxes is "not our job."
Florida TaxWatch analyst Kurt Wenner says rapid real estate appreciation and rising property tax bills in his state have exposed deep flaws in a program meant to solve the tax affordability issue for many homeowners.
Starting in 1995, a measure known as "Save Our Homes" capped annual property assessment increases at 3% for primary residences. As a result of the law, billions of dollars in tax burden have shifted over the past decade from longtime Florida homeowners to newcomers and owners of commercial and rental property. Today, next-door neighbors have drastically different tax bills, landlords are passing off tax increases on tenants, and beneficiaries of "Save Our Homes" are finding themselves trapped in houses they no longer want or need because their savings are not portable.
Lawmakers in the state legislature have responded with plans to cut everyone's property taxes or even eliminate them for primary residences, while raising the state sales tax from 6% to 8.5%, making it the highest in the nation.
These proposals are highly controversial. County and local governments worry that they might lose revenue and be forced to cut vital services. Groups such as Florida TaxWatch say that a massive sales tax increase could end up damaging the state economy. Still, almost everyone agrees that residents need some form of tax relief. "This is a very complex situation with no easy answers," Wenner says.
Some analysts suggest the battle over property taxes may obscure a deeper problem. The Tax Foundation's Prante points out any plan to curb property taxes will lead to an increase in some other form of taxation -- so long as spending levels continue to climb. "There is no such thing as a free lunch," Prante says.
Coming up next: Avoid new-home defects.