States Try to Calm Ire Over High Property Taxes

Taxpayers in the Arizona communities of Rio Verde and Troon found a novel way to keep their property-tax bills low: They created a school district in name only. The scheme helps them avoid higher real-estate taxes while they send their students to nearby districts.

Property-tax increases, fed by rising real-estate values, are awakening a slew of tax relief proposals across the country, including some that look at lessening public schools’ heavy reliance on local real-estate taxes. About half of all property taxes go to public schools, according to a special report from the Tax Foundation.

Texas last year passed a $15.7 billion property-tax cut by shifting some of the costs of funding schools to higher taxes on cigarettes and some business activities. This year, New York Gov. Eliot Spitzer (D) and Connecticut Gov. M. Jodi Rell (R) both are pitching proposals to increase state aid to schools to take some of the costs off the back of homeowners.

Proposals for property-tax cuts are in vogue once again. The most famous property-tax revolt occurred in California in 1978 when voters approved Proposition 13, which limited annual increases to 2 percent and led the way for copycat proposals in nearly half the states.

This year, governors of Arkansas, Florida, Maine, Montana, Vermont and Virginia are among those championing proposals to aid homeowners.

New Jersey, home of the highest-in-the-nation property taxes, is awaiting the signature of Gov. Jon S. Corzine (D) on a package that spells out how the state will use the money from last year’s 1 percent sales increase to offset a cut in property taxes. The proposal would cut the average homeowner’s property tax bill by $1,000. The plan would restrict annual property tax increases to 4 percent, down from the average of 7 percent in recent years. The governor last summer shut down state beaches, casinos and state government in a showdown with the Legislature over property tax relief.

“Governors and states are really focused on this,” says Harley Duncan, executive director of the Federation of Tax Administrators (FTA ) , an organization that tracks state-by-state tax developments.

“No tax riles the American people more than property taxes,” says Gerald Prante, an economist at the Tax Foundation, which ranks New Hampshire, Vermont, Connecticut, and Wisconsin as the highest property-tax states after New Jersey. Property taxes make up less than 2 percent of states’ revenues, but local governments rely heavily on the tax to provide a range of services, including fire and police protection, and especially schools.

Property-tax relief this year could come to homeowners in various forms:

• Arkansas Gov. Mike Beebe (D) is close to signing an increase in a property-tax break for homeowners known as the homestead credit, from $300 to $350.
• Maine Gov. John Baldacci’s (D) proposal would freeze property taxes for permanent Maine residents, but not for second-home owners who aren’t residents.
• Minnesota Gov. Tim Pawlenty (R) wants to cap property taxes by placing a limit on how much any local unit of government can increase property taxes without voter approval .
• Montana Gov. Brian Schweitzer (D) wants to give homeowners a one-time $400 property-tax rebate.
• V ermont Gov. James Douglas’s (R) proposed property tax cap would tie into his plan to hold down school spending.
• Virginia Gov. Tim Kaine (D) is trying to amend the state constitution to allow local governments to give homeowners property-tax breaks.

Last year, Arizona, New York, Pennsylvania and Rhode Island acted to calm homeowners’ ire over property taxes by providing larger rebates or clamping down on future increases.

Proposals in the Florida, Indiana and Illinois statehouses would swap lower property taxes for increases in other taxes, a route that Idaho, South Carolina, Texas and most famously New Jersey took last year. The “property tax swap” in New Jersey helped end the six-day government shutdown and laid the groundwork for the reform package pending there now. In exchange for lower property taxes, Corzine secured a 1 percent sales tax increase.

One of the more unusual proposals this year comes from Florida Gov. Charlie Crist (R). He wants to allow homeowners to take their current tax rate and a 3 percent cap on property-tax increases with them when they move elsewhere in the state . Crist has argued that that the cap traps many people in their homes because even a move to a smaller home could lead to higher tax bills.

The Palm Beach Post reported earlier this month that one legal analysis suggests the plan is probably unconstitutional. To enact Crist’s proposal, the Legislature would have to put Crist’s “portable” tax cap question to voters. Crist also wants to double the state’s $25,000 “homestead exemption” so that it would exclude the first $50,000 of a home’s assessed value from being taxed.

Because of school districts’ reliance on property taxes, some tax-relief proposals are linked to education reforms.

In New York, Spitzer’s proposal would build on last year’s property-tax relief package and cut property taxes by a whopping $6 billion over three years for all but the wealthiest New Yorkers. His plan would give more state aid directly to school districts so schools would have to rely less on homeowners’ property taxes. But the extra state money comes with a catch. School districts would get new money only if they sign ” contracts of excellence” and show the extra funds helped improve student performance.

In Connecticut, Rell stunned state lawmakers recently week with her proposal to increase the income tax rate by 10 percent to bring in $1.3 billion of new money for education. The move would reduce the state’s reliance on property taxes for schools.

And two Illinois lawmakers are so fed up with an impasse in revamping the way the state funds education they have proposed a constitutional amendment that would eliminate the use of property taxes for schools within three years. “Surely, that will jump-start the debate,” Illinois Rep. Lou Lang (D), one of the cosponsors, told the Quad-City Times.

Back in Arizona, which ranks 32 ^nd in terms of property taxes, state Sen. Linda Gray (R) has proposed legislation to forbid communities from following the lead of Rio Verde and Troon and creating phantom school districts as a way to keep their property-tax bills low. “The main purpose of what they were doing was avoiding paying higher taxes,” Gray told The Arizona Republic.