Property Tax Assessment Limits

During the 30 years since California adopted its groundbreaking tax limitation measure known as Proposition 13, pressure has persisted for states to adopt various forms of property tax relief. These pressures to decrease property taxes often intensify during times of extremely rapid housing price inflation such as many states experienced between 1998 and 2006, but they remain a constant feature of the fiscal landscape in periods of both rising and declining property values. The anniversary year of Proposition 13 in 2008 provides an opportunity to evaluate various states’ experiences with a limitation on assessed property values, which has become one of the most popular instruments for property tax reduction.

The evidence shows, however, that limits on assessed values, while favored by many homeowners, are a deeply flawed measure to counter rising property taxes. Assessed property value limits are used in hope of reducing property tax bills and slowing the shift in property tax burdens to residents, but in fact they can result in higher property taxes for the very homeowners they are intended to assist and can cause unpredictable new shifts in tax liabilities.

By severing the connection between property values and property taxes, assessment limits impose widely differing property tax obligations on owners of identical property; reduce economic growth by distorting taxpayer decision making; and greatly reduce the transparency and accountability of the property tax system as a whole. The report comes to the following conclusions.

• • Better tax policy options exist for timely and efficient aid to needy taxpayers.

• • Circuit breaker programs reduce property taxes that rise above a given percentage of income, thus targeting assistance to those whose property tax liabilities are out of proportion to their ability to pay.

• • Truth in taxation measures lower the likelihood of invisible tax increases when property values rise but nominal tax rates stay the same.

• • Deferral options allow qualified taxpayers to delay property tax payments and remain in their homes.

• • Partial exemptions on owner-occupied or homestead properties and classified tax rates benefit residential taxpayers without distorting the market value tax base.

Fashioning timely and targeted relief for those facing difficulty in meeting their property tax obligations is an ever-present challenge to state legislators. As economic conditions, demographic trends, and housing values change, so will the appropriate instruments for extending such aid. This report is designed to inform this process by identifying the lessons offered by three decades of assessment limits as a vehicle for property tax relief.

About the Authors

Mark Haveman, executive director of the Minnesota Taxpayers Association, joined the organization in 2002 as part of an effort to revitalize its research and education arm, the Minnesota Center for Public Finance Research. Previously, Haveman was vice president of a policy and technology consulting firm specializing in environmental protection and resource conservation issues. He has also served on policy and project advisory boards for the U.S. Environmental Protection Agency, the National Institute for Standards and Technology, as well as for several state agencies, academic institutions, and private foundations

Terri A. Sexton is professor of economics at California State University, Sacramento, and associate director of the Center for State and Local Taxation at the University of California, Davis. Sexton’s research has focused on the economic and fiscal impacts of various state and local taxes including a comprehensive study of Proposition 13, with Steven M. Sheffrin and Arthur O’Sullivan, that culminated in Property Taxes and Tax Revolts: The Legacy of Proposition 13 (Cambridge University Press, 1995). Her research has appeared in such publications as National Tax Journal, Land Economics, Rand Journal of Economics, and Journal of Urban Economics.