Save Our Homes Amendment
There are a number of things to explain regarding our current situation. Florida has an amendment to the constitution (amendment 10) called the "Save Our Homes" amendment. On the surface it seems like a fantastic solution. The concept is that we will limit our property taxes on homesteaded property to 3% or the consumer price index, whichever is smaller. The amendment was promoted in order to avoid people being taxed out of their homes. As property values increased in value, we would prevent the taxes on those homes from rising. The result, however, is not what was being promoted.
Over the last several years property values have increased dramatically. The taxes on homesteaded property have been held relatively steady. When cities or counties in Florida increased taxes over the years it didn't affect the vast majority of people since they were homesteaded. The effects that the increases had were limited to non-homesteaded property. Because of that limitation most people didn't object as our tax base increased each year. The problem is that as taxes went up and the majority of people (homesteaded property owners) were unaffected the remaining group was dramatically affected. In fact they were affected at an exponential rate. If you've ever seen a chart of exponential growth, you'll realize that it doesn't take long for a number to grow entirely out of control. In fact, in 2006, non-homesteaded properties paid 96% of the annual increase in property taxes in Volusia County! That's exponential growth in action.
The people who were affected are very straight forward:
- Anyone who had to move
- People moving into the community
- Commercial property
- Non-homeowners (renters)
The first group often is the same people that the program was designed to protect. One of the original concepts was to protect the retiree who's property tax increases grew out of control and effectively taxed her out of the home. Under the new plan, though, the retiree who wanted to downsize from the large home with substantial maintenance costs would likely be looking at an increase in property taxes to move into a smaller home. In addition, the existing home may have a reduction in value since the new homeowner will be assessed a MUCH higher tax once it is out from the protection. The person who is forced to move is losing substantial potential equity because the new owner must factor the tax differential. For example, it is not uncommon for a new owner to pay four times what the previous owner was paying for the same house. From a real estate perspective this reduces the frequency of moves. People typically move every three to five years based on changes in their lives or economic status. That is not happening and is having a negative effect on the real estate industry (Realtors, mortgage companies, furniture companies, builders, contractors, etc.).
The second group of people is moving into the community whether from out of state or not. This group is being assessed at much higher taxes than the people who have been here. Many local people aren't concerned about these new people but I should mention that, as in the example above, it has a negative impact on home values. It also has a negative impact on economic development. If you were considering relocating a business to a new community you may be hard pressed to choose a place that is going to charge you much higher income taxes on your personal residence as well as those of all of your employees. These are certainly factors that will be considered. In addition, this creates an inequality as people move into a neighborhood or community and realize that they are paying substantially higher taxes than their neighbors. These problems infuriate and confuse new homeowners and cause unnecessary friction.
The third consideration is commercial property. This is one of the most important because these are the job providers. We are taxing our job providers at such an incredible rate that it will have a negative impact on our ability to attract strong industry. Further, small business represents the bulk of the employers in the United States. When your tax bill is increasing as quickly as ours are it is very difficult to consider growth and tough decisions need to be made. In Florida our job providers are facing increased taxes, insurance, and health care expenses such that wages will have to be considered as a source of future savings which will mean job loss if we can't control our spending.
Lastly, we are taxing the poorest of our people. If you can't afford to buy a house in Florida you can not benefit from the homestead exemption and you can expect your rents to reflect it. Investment property, apartment complexes, and other rental property are part of the properties that are bearing 96% of our tax increases. Landlords who typically collect very small profits, if any, from their investments today will have no choice but to continue to raise rents. This will apply pressure to the people that need to feel it least of all in our community. While we all talk about the importance of affordable housing we are applying one of the most egregious regressive taxes of all time on our citizenry.
A number of solutions have been put forth and are currently being discussed in the legislature. Both houses of congress and the Governor have all put forth potential solutions. I'll not claim to be an expert on all of them but I will list a few of the most commonly discussed.
1. Increase the homestead exemption from $25,000 to $50,000. - I'm not certain what effect this will have except to exacerbate the problem. It doesn't address commercial properties or renters. It simply reduces the amount of money coming into government, thereby forcing government to raise the millage rate and increase taxes across the board.
2. Extend the 3% property tax cap to commercial, industrial, and investment properties. - This one seems on the surface to be a good idea. My concern is that the remaining properties where tax increases are available would be dramatically effected. Moving either into the community as either an individual or as a business would be catastrophic. It would simply eliminate the ability to attract new business to the state of Florida as this tiny minority would be responsible for all new taxes.
3. Portability - The concept of portability is that you can use all or a portion of your current savings when you move to a new home. This will help with the groups who would like to downsize their homes or move to larger homes as their families need. This will also help to alleviate the negative effect felt by the real estate industry. Given that your author is in the real estate industry you might think I would favor this concept. However, this solution will cause a number of problems. It will dramatically increase the costs to businesses and to the poor. It could have such a negative impact on economic development that the long term prospects are not positive at all. Further, there are challenges to Counties like Volusia and Flagler. We are the lowest priced coastal property in Florida. If someone was to move from a higher priced are (Naples, Sarasota, Miami, or Ft. Lauderdale) to our area, their savings (based on how the law was written) could substantially reduce, and possibly eliminate) the property taxes they pay in our Counties.
4. Sales tax increases - Similar to "The Fair Tax" concept, one proposal is to either dramatically reduce property tax or eliminate it entirely and replace it with an increase in sales tax ranging from 2.5 to 4 cents. Opponents to the concept say that sales tax is a regressive tax while property tax is not. I would encourage them to reexamine our system. There are also concerns that this could have a negative impact on commerce. Particularly with regards to larges purchases where it may make sense to buy out of state and save the tax difference. I don't think I can see all of the potential impacts of this change but it does seem interesting.
5. Replace our current solution - One opportunity is to replace our existing cap with a flat tax across the board. This seems very interesting. Rather than having a homestead and a cap on top of it, we would levee a tax of 62% of the just value of the home. According to Morgan Gilreath, the result would be revenue neutral. The taxing authorities would generate the same amount as they otherwise would and property tax would not change much for property owners. In fact, it would be slightly down (on average) for people whose homes are assessed at under $400,000 and slightly up for people whose homes are assessed at higher prices. Interestingly, 96.5% of residential property in Volusia County is assessed at under $500,000. Further, houses priced at up to $1,000,000 would see property taxes of about $12,000 per year compared to a current average of about $10,000. Owners of those homes would likely see a fantastic increase in property values as there is a general reluctance to purchase a home whose taxes are likely to run $40,000 under the current system. The approach is similar to our neighboring state of Georgia who uses 60% of just value as a starting point. This system, too, has a flaw though. I think it highly unlikely that any elected official will propose a repeal of the Save Our Homes amendment which would be necessary to pass this legislation. The amendment as it stands is so confusing to the average individual that they don't understand the negative impact that it has on their property value, our economic well being as a community, our businesses, and our poor.
In addition to any recommendation regarding our taxing solution, we also can discuss limitation of government spending. It is very clear that local government spending is out of hand. However, if we can find a solution that puts everyone back on a level playing field rather than having most homeowners “locked-in” at a particular rate, we should start to see homeowners exert themselves to keep spending in check. Our current solution only taxes businesses and those who have recently moved. These are not the vocal majority that will exercise their power in the polls to ensure that spending is appropriate.
More than anything I hope that we can find a solution to this problem. There is one certainty with regards to exponential functions. The impact gets worse every day. The Save Our Homes amendment offers a real challenge to the future of Florida's economic health and is a topic which is too confusing for most people to have a strong understanding.