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Wringing Hands Over Property Tax Reform

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By Lowell L. Kalapa

As a result of declining property values since the burst of the Japanese “bubble,” county governments have been grappling with ways to squeeze more revenues out of the shrinking property tax base.

Since elected officials dislike being cast as the culprit who raised taxes, the strategy to accomplish a tax hike to raise additional revenues without being stuck with the negative image of raising taxes is to reform the property tax system. While reform of the tax system is always welcome as time and circumstances change, taxpayers should be alert to smoke and mirrors cloaked in the efforts to reform the system.

More and more, county officials are beginning to recognize that a return to a single rate for all classes of property is in the best interest of not only the county but also for taxpayers. Since the improved residential category comprises the largest portion of the real property tax base in nearly every county, it can help to smooth out the peaks and valleys of changing values and therefore the need to adjust the rates for other classes of property.

However, over the years county officials have tended to “take care” of the residential property owner because it is the residential owner who comprises the largest portion of the voting electorate. Not wanting to offend these voters, elected officials have tended to keep the residential rate lower than the rates for other classes of property. While that sounds like a good idea, this meant that officials had to raid other classes of property to collect the revenues they like to spend.

In the “good times,” businesses didn’t pay much attention because they could just adjust their prices to cover the additional cost represented by the higher property tax. But that strategy has hit a brick wall in this “down” economy. Businesses can no longer accommodate the added cost.

More importantly, what this strategy allowed elected officials to do was to hide the true cost of running county government. Homeowners were lulled into believing that they could have all the county services at reasonable cost since the property tax on their home was constantly lowered or was kept from going up because of the shift in the tax burden. What homeowners did not realize was that the cost of county government was hidden in everything they bought at the store.

Thus, a return to a single rate will put county officials back on the accountability pedestal. However, getting to that point might provide officials an opportunity to generate the additional revenues they would otherwise have had difficulty in raising because it would be characterized as a tax increase.

Moving back to a single rate will indeed mean that property tax bills for homeowners will go up. That is because the property tax burden that was shifted to nonresidential properties, like businesses and farms, has to come down to some point where those rates will be the same as the residential real property tax rate. In undertaking this shift, taxpayers need to make sure that rates are not being adjusted both up and down for the respective classes such that there is a net overall increase in revenues resulting from the real property tax reform.

Under the single rate scenario, rates for residential properties will rise and the rates for commercial, industrial, agricultural, and hotel/resort categories should go down. The same rate should be applied across the board. The determination of that rate should result in no more revenue dollars than were received in the year prior.

Some will argue that there is nothing wrong with having differential rates for residential property as opposed to nonresidential property because businesses can pass the cost on to their customers, especially to visitors who don’t vote. However, in these lean times in the visitor industry, it is painfully apparent who ends up paying that added cost. Unless we as consumers stop buying from local businesses, we all end up paying that added cost.

Thus, while tax reform is always a good direction, how that reform takes place and what the intent is can determine whether or not that reform is really beneficial for all taxpayers.

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