Tuesday, June 26, 2007

Florida Tax Reform – What does it mean to me? A look at the numbers!

In the State of Florida most municipalities derive most or all of their income from property taxes. Property taxes in the State are determined based on a percentage (millage rate) of the total property value. Each taxing district establishes a millage rate. Taxing districts range by area but typically include the County, City, hospital, and schools as the major expenses. Other taxing districts may include water management, inland navigation, mosquito control, etc.

While the taxing districts are determining their millage rate, the County’s Property Appraiser is determining the value of every single property in the County. The Property Appraiser uses recent sales data and sets a value as of January 1st. He or she then combines all of the millage rates appropriate for each property, calculates any tax exemptions, and sends out a Truth in Millage statement, or TRIM notice, to each property owner. That statement informs each property owner of their new taxes in advance of the actual bill.

When property owners receive their TRIM notices, they have several actions that they can take to dispute the taxes. First, they can petition their City, County, and other taxing authorities to lower their taxes. Of course the City or County Commissioners and other elected officials will try to find a happy medium by determining a budget with which they can run their municipality while also satisfying the voters.

Some property owners may disagree with the Property Appraiser’s assessment of their value rather than, or in addition to, the millage rates. These people have the right to appeal to the Property Appraiser and eventually may be able to appeal to a court of law.

Ultimately, each property owner will receive a bill for the appropriate taxes and the process allows our governments to continue with each person paying a fair share. Over the years, however, a number of exemptions have been created in order to provide benefits to certain individuals and organizations.


Several properties are entirely exempt from property tax. It wouldn’t make much sense, for example, to tax hospitals, parks, and schools who derive all or a portion of their revenue from the taxes themselves. Likewise, there are facilities that are offered reduced taxes on an incentive basis. It may be in the best interest of a municipality to defer or exempt taxes on property in order to entice a company to expand or move to the area. It may also be in the best interest of the municipality to offer tax incentives for preservation of historic properties. These exemptions are removed from the tax roll and the costs that they would normally pay are distributed to all other properties on a fair share basis.

Florida also seeks to protect each homeowner’s primary home using a technique known as a homestead. Each landowner can claim a homestead on one piece of property which must be their primary dwelling. In an effort to help homeowners, the State provides an exemption of $25,000 on that homesteaded property. In addition, there are other exemptions available for widows, veterans, and other specially designated individuals. This homestead exemption is an advantage that a property owner has on their primary dwelling that is not extended to non-homesteaded properties (commercial, investment/rental, and industrial property for example).

In the mid 1990’s however, the $25,000 exemption seemed to be insufficient to protect homeowners as properties continued to rise in value. Each year, as property values increased, property taxes increased in the same fashion. If your property value doubled, for example, your property taxes would double (with the exception of the $25,000 exemption). In response to the concern that some people were being “taxed out of their homes” by the rising expense, a new amendment to the Florida Constitution was proposed and passed. This new amendment, number 10, is called the “Save Our Homes Amendment” and provides an ongoing and growing benefit. Under the new rules, each year the property appraiser determines the value of each property. For homesteaded property, however, he will also calculate the previous year’s property value and add the value of the consumer price index (CPI), or 3% if the CPI is more than 3%. He will examine both of the prices and uses the lower of the two. That calculation will keep homesteaded properties from increasing in price for purposes of tax calculations.

Problems with Save Our Homes

There are a few challenges related to the Save Our Homes amendment. The biggest issue is that homesteaded property values are more or less locked in place. Since the property values from a taxable perspective don’t increase on homesteaded property, non-homesteaded property must make up the difference. Those properties include second homes, investment homes, rental homes, commercial property and industrial property. As property values increased throughout the second half of the 1990’s and drove rapidly upward until 2006, the property taxes rose dramatically. Most homeowners were almost entirely unaffected by the changes. Being unaffected, the voters had little incentive to police the municipalities who control millage rates.

Let’s look at an example:

For purposes of discussion, this table assumes that property prices increased by 10% per year each year from 1995 until 2006. Realistically, there were some years at 5% price increases and a few with 30% price increases. Further, the example assumes that the millage rate is 20 mills and remains consistent the entire time.

You’ll notice that both properties start at a value of $100,000. Initially, the homesteaded property has an advantage of $25,000 in savings due to the Florida homestead exemption. Next you’ll notice that as the value increases the homesteaded property does not move substantially while the non-homesteaded property increases dramatically. Imagine the effect the last column would have on a renter. The cost would increase from $167/month of the rent check going to taxes to $476/month! That is a very difficult pill for the renter to swallow.

For another example, consider a one million dollar commercial property in the same situation. The non-homesteaded property would increase in value from $20,000 annually to $57,060. The difference of $27,060 is roughly the same as the average wage in many parts of Florida. Consider the impact on economic development and business recruitment when telling an industrial business owner who is considering multiple states that a choice in Florida will dramatically increase their taxes on corporate property and that their employees will have higher rents to pay.

Another situation to consider is someone who is living in a home that they have been in for some time. At some point, whether a home owner wants to upgrade to a larger home or move into something smaller, the tax difference must be taken into account. There are some people who can not afford to move because of the difference in cost. The “Save Our Homes” amendment was designed to protect people from having to sell their homes. Unfortunately, it had the unintended consequences of keeping people locked into their homes.

These points become substantially more important when you consider that in Volusia County Florida, an astounding 96% of the increases in taxes from 2006 to 2007 were borne by non-homesteaded property owners.

The New Solution
Recently the Florida legislature passed a new Constitutional amendment that will be put forth to the voters in January. The new amendment, if approved by 60% of the voters, will repeal the “Save Our Homes” amendment and eliminate the current $25,000 homestead exemption and replace it with an entirely new system.

Under the new system, there is a 75% exemption on the first $200,000 of home value and a 15% exemption on the next $300,000. Under both the current homestead exemption and the new plan, the lower price homes receive a higher benefit that higher priced homes. However, the repeal of the Save Our Homes amendment means that the long term benefits of the tax cap will be phased out. Fortunately for the people who are currently protected by the Save Our Homes amendment, the benefit will only be lost when the property owner elects to change to the new benefit system, sells their home, or dies.

Let’s look at the impact compared to the standard homestead exemption:

The chart above represents a comparison of the homestead solution that is currently in place vs. the new system that has been proposed. Clearly, the new solution offers a higher level of exemption at every level but in particular, it helps the people at the lowest level. The chart above, however, doesn’t consider the impact of the SOH amendment.

The chart above uses the same basic assumptions as we examined in the SOH review. We assume a 10% annual return for over 10 years with no moves. The advantages to the tax payer under the SOH system are dramatic. Of course, the cost to renters or businesses would be the same under both systems and can be determined by looking at the column “2006 Value”, there are no exemptions for most rental and commercial properties. Importantly, property that is currently protected by the SOH amendment, will not be forced to change unless they move to a new home.

Effect on non-homesteaded property
The new amendment has no direct impact on non-homesteaded property. There is no exemption for non-homesteaded property and there is no direct benefit. However, there is a dramatic indirect effect. The fact that properties will not have a fixed cap but will fluctuate with the property values means that as property grows, the non-homesteaded property will be effected at a similar proportion to the homesteaded property. While the two will not be directly in line, it will be less stressful on the non-homesteaded property than the current solution.

Ultimately, the solution that has been proposed is not the ultimate solution. A better solution would be a more aggressive change from the current solution to something similar to the new option. However, a more aggressive change would be very difficult to overcome at the polls. Homeowners and voters should remember that any solution which dramatically reduces taxes will have to generate them somewhere and we must determine the source of those new taxes and ensure that we are not harming ourselves in other ways.

The solution that has been suggested is strong enough that it should be accepted. Because it grandfathers current taxpayers, it hurts no one and can only serve to better people’s position in the mid term. In the long run, it will phase us back into a solution that provides an equilibrium between homesteaded and non-homesteaded property and provide an environment where both individuals and businesses can flourish.

No comments: