August 24, 2006
Special Session Update
Governor Jim Risch is convening a special session of the Legislature
on Friday, August 25, to consider a new proposal to eliminate the school property
tax and raise the sales tax 1 cent. Below is the information that we will provide
to legislators on this issue. The proposal will be placed on the November ballot
for an advisory vote if it passes. In that event, we'll provide a 3-5 page brief
on the issue as part of our voter information.
Information Provided to Legislators for the Special
August 24, 2006
We have not briefed and polled our members on RS-16445 and are not taking a
position on it. As you know, we did brief and poll our members on the school
property tax replacement issue during the regular session. In the hopes that
it may be useful to you as you consider RS-16445, we wanted to provide you what
we could on this important issue.
To summarize, 70% of our members were opposed to the versions of M&O proposed
during the regular session, which put us just over our two-thirds threshold
for taking a position. Developments since the regular session can be described
as lessening both the advantages and disadvantages of M&O replacement. Consequently,
were we to brief and poll our members on RS-16445 we would likely either continue
to oppose it or be neutral on it. It seems quite unlikely that we would reach
the two-thirds level support we would require to take an official position in
Although we are not taking an official position on RS-16445, we would like
to raise the question of whether it is appropriate to consider this measure
in a one-day special session in which the usual opportunities for consideration
of alternative proposals, deliberation, and public input are severely constrained.
Special sessions with such limited deliberation would seem to be advisable only
when two criteria have been met:
1. There is a crucial problem that can’t wait until
the regular session for a solution.
2. There is strong consensus in the Legislature and among
the public about the solution to the problem.
The Legislature’s decision to reject the elimination of the school property
tax after full deliberations during the regular session calls into question
the degree of consensus for eliminating it now. Our analysis and polling on
the M&O proposals during the regular session indicates that a compelling
consensus in support has not been reached. Furthermore, recent evidence of a
substantial cooling in the Idaho housing market calls into question the urgency
of reconsidering this issue before the next regular session.
Given that this issue is to be considered in the unusual circumstances of a
very limited special session, we suggest that Legislators should require a higher
level of confidence than usual that this measure is advisable and urgently needed
before voting for it.
Attached is a summary of our original analysis and poll results as well as
an update of our analysis that takes into account developments since the regular
session. Best wishes as you deliberate on this significant policy question.
Summary of Our Original Analysis
As we reviewed the M&O replacement proposals during the regular session,
we found compelling arguments in favor, including:
- M&O replacement would provide more substantial property tax relief
than any other measure, including the expanded and indexed Homeowners Exemption.
- The relief is tailored to the problem of rapidly rising home values in parts
of the state. Since M&O property taxes can rise as fast as property appreciates
in value, those whose homes rapidly appreciate into the future would see the
biggest property tax savings, while those whose homes do not rapidly appreciate
will see less property tax savings. Those non-residential properties that
don’t appreciate as rapidly would also receive less relief going forward
than owners of rapidly appreciating homes. Since it has been so difficult
to find solutions to the property tax problems that work well in the various
parts of our state that have very different profiles, this can be seen as
a major asset of the proposal.
Our review also found compelling arguments against the M&O
replacement proposals considered during the regular session, including:
Concerns about the level of school support in the future.
- Sales tax revenue is less stable than property tax revenue, making education
more vulnerable to economic downturns.
- Schools would have to compete each year for the new general fund sales
tax revenue with every other aspect of the budget, including rapidly rising
spending on Medicaid and corrections.
Concerns about who wins and loses in shifting from property tax to
- Some analyses suggested that many lower and middle income families, particularly
renters, would end up paying more taxes overall, while others would pay less
in overall taxes, including higher income families, big businesses, and those
who own very valuable vacation homes.
Updates to the Analyses
The effects of the developments since the regular session can be summarized
as lessening both the advantages and disadvantages of M&O replacement.
• A cooling housing market: Our original analysis pointed to the record-breaking
pace of home value appreciation as the major driver of frustration over property
taxes. Mounting evidence indicates that the Idaho housing market has significantly
cooled, particularly in just the last month or two. Consequently, the advantage
of greater relief where homes were appreciating especially rapidly has diminished
• Less concern about education funding: The $100 million for the school
stabilization fund provided by RS-16445 goes much further in addressing the
vulnerability of schools to economic downturns than the proposals during the
• Less concern about net tax losers: Analyses by the State Tax Commission
since the regular session suggest that most lower and middle income citizens
(other than renters) will not pay more in sales tax than they save in property
taxes. That said, these analyses also indicate that the net tax benefit for
most low and middle income taxpayers will be quite small, usually less than
Summary of Regular Session Polling Results and Positions
Our members chose property taxes and K-12 education funding as two of our issues
to study in the regular session. School M&O property tax replacement, of
course, is relevant to both of these topics and we asked members randomly assigned
to both topics about the proposals presented during the regular session.
The majority of our 94 members who studied the property tax issue in depth
along with a brief review of K-12 funding issues were opposed to the combination
of eliminating half of school property tax and raising the sales tax a half
61% opposed; 39% supported
We had 59 members weigh in who studied K-12 education funding in depth along
with a brief review of property tax issues. A higher proportion of these members
opposed the combination of eliminating half of the school property tax and raising
the sales tax a half cent:
81% opposed; 19% supported
The average of our two groups of members came to:
71% opposed; 29% supported
Since that average met our two-thirds threshold, we took an official position
against H 678 & H 679.
When it looked as if the proposal to eliminate all school M&O property
tax and increase the sales tax by 1 cent would again be considered, we added
a question about that to our K-12 questionnaire (the property tax questionnaire
was no longer active by that time). 32 of our 59 members studying K-12 funding
answered that question. The results indicate that moving to eliminate all of
school property tax and raising the sales tax by 1 cent increased opposition
87% opposed; 13% supported
March 1, 2006
To see the RESULTS of our members' poll, CLICK
To open a separate window with the LIST OF QUESTIONS,
To open the BRIEF in a seperate window in your web browser,
If you have Adobe Acrobat and would like to open the BRIEF
in it, CLICK
Property taxes. None of us likes them. We especially don't like
them when they go up significantly like they have in Idaho, particularly in
some parts of our state. In fact, there have been efforts by some to get a voter
initiative on the ballot that would limit the rise in property taxes. Concerned
that a complicated topic like property taxes may not be effectively addressed
through ballot initiative, the Legislature established an interim committee
last year to study the issue and come back this year with recommendations.
The result of all this property tax concern is a raft of property
tax bills—more than 30—in this session of the Legislature. In Sections
4 through 8 of this brief, we review these proposals. First, however, we provide
background information that provides perspective on the debate currently taking
place in the Legislature. In Section 2 we review the problem—growth in
property taxes—in a little more detail. In Section 3 we review the competing
explanations for the rise in property taxes which lead people to different conclusions
about the appropriate solutions that we review in Sections 4 through 8.
2. The Problem: Rising Property Taxes
Property taxes have been going up fast in recent years. In 2005
property taxes were up 8.6% statewide over the previous year. In the five years
before that, 2000 - 2004, property taxes rose an average of 5.8% each year.
But those overall figures mask the growth that is causing so much concern. Taxes
on owner occupied homes were up 11.7% on average in 2005. This more rapid rise
in taxes on residential property reflects a long-term trend. While
taxes on residential property have increased rapidly in the last few decades,
commercial property taxes have increased slowly and taxes on on agricultural,
timber, mining, and utility property have tended to increase even more slowly.
In areas where there has been more rapid growth and appreciation in home values,
the taxes on homes have gone up even more rapidly than the 11.7% average. Some
homeowners who live in a particular neighborhood where expensive new homes are
being built have seen their property taxes increase 20% or 30% in a single year.
These areas of particularly fast growing residential property taxes include
the Coeur d'Alene and Sandpoint areas, the McCall and Cascade resort areas,
the Sun Valley area, the areas close to the Tetons, and Boise and surrounding
3. The Causes of Rising Property Taxes
Why the rapid increase in property taxes, particularly on homes?
Here's where the policy debate begins. There is considerable disagreement over
how much various factors contribute to rising property taxes. Much of the disagreement
about policy solutions stem from these differing explanations of the problem.
Too Much Spending by Local Government
The first explanation given for rising property taxes is the simplest.
Many argue that the rise in property taxes is primarily a local problem. Governor
Kempthorne expressed this perspective in his State-of-the-State Address when
he said, "[T]he State does not assess, collect, or spend a single penny
of property taxes." Those who view the issue from this perspective observe
that although property values go up, this does not mean that local governments
must actually tax more. If citizens are concerned about their property taxes
being too high, they should take their concerns to their county commissioners,
city councilors, school board members, and other local elected leaders.
Increased spending by schools is particularly singled out as a
problem. All local governments, except schools, are limited to 3% annual increases
in the budget, plus the amount of new construction. Schools cannot increase
the rate at which they tax property, but they can apply the current rate to
rapidly rising property values and thus tax more.
Three of the elected officials who have the greatest influence
on such policy share the perspective that increases in property taxes are primarily
a local problem. In addition to Governor Kempthorne, Representative Delores
Crow, who chairs the House Revenue and Taxation Committee in which tax bills
originate, strongly adheres to this perspective. The Speaker of the House, Bruce
Newcomb, also shares this view. These three individuals present significant
hurdles for major efforts to address property tax concerns at the state level.
Growth Not Paying for Itself
Idaho's population is growing fast. In fact, Idaho is now the
third fastest growing state in the nation. A second explanation that is offered
for rising property taxes points to the costs that growth imposes. In areas
growing rapidly, local governments incur significant costs to provide services
for new arrivals. For example, cities must pay for new police and fire stations.
School districts must build new schools and buy more buses. And, of course,
local governments face all the personnel and operational costs associated with
new facilities. While growth imposes significant new costs on local government
up front, the revenue from taxes on new construction lags a year or more behind.
From this perspective, increased local government spending is the problem, but
not because irresponsible local officials are wasting taxpayer money.
Most of those who argue that growth doesn't pay for itself also
observe that this problem needs to be addressed at the state level. It is state
law that creates the lag in property taxes paid on new construction. State law
does, however, provide many local governments like cities and counties with
the authority to assess "impact fees" on new development. Impact fees
are charged to developers to help cover costs imposed by new development such
as the costs of building a new fire or police station.
The interim committee heard extensive testimony from local government
officials, however, that the state impact fee law is very difficult, time consuming,
and expensive for local governments to implement. For example, Kootenai County
found that they would have to spend $80,000 to go through all the planning and
evaluation steps required by the impact fee law. Many local governments conclude
that it's not worth the effort, particularly given the fact that even if they
do successfully complete the process, the scope of impact fees is quite limited
in the statute. For example, they can only be used for projects that have a
20-year life. Impact fees will help build a fire station, but won't help buy
a police car or help pay the officer in it. New growth imposes some of its greatest
costs on schools, but the existing statute does not allow school districts to
charge impact fees at all.
Insufficient State Support for Local Government
at a Time of Rapidly Rising Costs
A third explanation offered for increasing property taxes is that
during the difficult state budgets of the last several years state support for
local governments has been low, just at a time when governments have been experiencing
costs that are rising at an unusually high rate. In addition to the costs that
new growth has been imposing on local government, local governments have been
experiencing a particularly dramatic rise in such costs as healthcare benefits
On the revenue side of the equation, state support for local governments
has been more limited in recent years. This is partly because the state has
also faced rapidly growing healthcare costs, particularly through its obligations
under the federal Medicaid program. Another rapidly rising cost at the state
level is the result of a dramatically increasing population of convicted criminals
on probation or in prison. These costs have been spiking at the same time that
a flagging economy has resulted in lower than expected income and sales tax
revenues. Although the economy, and thus income and sales tax revenues, have
turned around in the last year, local governments have leaned on property taxes
more as state support has been more limited.
Rapid Appreciation in the Residential
Real Estate Market
The first three explanations for increasing property taxes do
little to account for the more rapid increase in residential property taxes
specifically. A fourth explanation directly addresses this issue. According
to this explanation, a higher rate of inflation, in other words appreciation,
in the price of existing residential real estate is a major reason that homeowners
are paying so much more in taxes. Under current law, the same tax rate is supposed
to be assessed against the market value of all categories of property. In this
system, if the market value of residential property goes up and the market value
of other categories of property stay flat, then the residential proportion
of the property tax burden goes up and the other categories' proportion
goes down. This occurs regardless of whether a local government is spending
more, the same, or less in property taxes.
Many who argue that this higher rate of appreciation in the residential
real estate market explains much of the increase particularly in residential
property taxes point out that while homes might be worth more "on paper,"
the homeowners don't actually have that new value in their checking account
and won't until they sell it, which they may not do for decades. Yet they have
to write the check for their higher property tax now.
Two arguments are offered against the conclusion that rapid residential
real estate appreciation is a problem that needs to be fixed. First, some argue
that the rise in the residential proportion of the property tax burden is less
a function of appreciation of existing homes than of considerable construction
of new homes. With Idaho growing so rapidly, there is clearly a great deal of
new home construction taking place. The reason the residential piece of the
property tax pie is growing, some argue, it that there are more people living
in more homes who are paying residential property taxes. Many of those who argue
that new construction is the major explanation for rising residential property
taxes often also argue that there is, therefore, little need for property tax
reform at either the local or state level.
Second, some argue that even if some or much of the rise in residential
property taxes is due to appreciation rather than new construction, it is perfectly
fair that homeowners pay more of the property tax burden and that owners of
other property get a break when homeowners' property appreciates much more than
other property. The only reason that a homeowner is paying more is because that
homeowner now has greater property wealth while owners of other kinds of property
do not. The property tax is designed, after all, to be a tax on market value.
Differences in the Way Residential Property is Treated
A fifth explanation that is offered for increasing property taxes
also specifically addresses the particular rise in residential property taxes.
Some argue that although all categories of property are theoretically supposed
to be treated the same, in practice, they argue, different categories of property
are treated differently in several ways. First, assessors primarily rely on
the price at which comparable homes in a given area were recently sold to determine
the market value of a given home. Other categories of property involve other
considerations. So commercial and agricultural property, for example, are assessed
partly based on their costs and the amount of income they produce. Some argue
that these other assessment methods used on non-residential property tend to
undervalue those properties relative to what they would actually sell for and
relative to how residential properties are valued. A number of knowledgeable
people on this matter, including senior staff at the State Tax Commission, however,
believe that this effect is negligible.
A second differential treatment of non-residential property identified
is the range of exemptions that are granted for other categories of property.
For example, large corporations like Micron have been granted property tax exemptions
to encourage them to stay or expand in Idaho. Agricultural property has a "speculative
value" exemption that exempts the market value of agricultural property
above the income it will produce when devoted to agriculture. It should be noted,
however, that one of the largest exemptions in current law is the homeowner's
A third way in which some argue the non-residential property is
treated differently is that powerful and wealthy owners of many other categories
of property appeal and otherwise contest their property taxes more than homeowners
do and consequently win more favorable treatment for themselves. The effect
of this was amplified, some argue, when the burden of proof for showing an excessive
property tax assessment was reduced a few years ago.
Evidence for the Competing Explanations
The differences in explanations for increasing property taxes
are partly matters of differences in judgment or perspective where there is
no objectively right or wrong answers. Some of the explanations, however, are
based largely on factual claims that can be tested against available evidence.
We have analyzed data regarding how much the rise in overall property taxes
is due to increased local government spending and regarding how much new construction
and appreciation explain the rise in residential property taxes in particular.
The results of this analysis can be seen in Tables 1 and 2 below. We also discuss
the relevance of these results for each of the relevant explanations.
Increased Local Spending.
There is a wide range of local taxing districts, including everything from counties
to mosquito abatement districts. The three main units of local government that
can collect property taxes are cities, counties, and school districts. Overall,
local government spending of property taxes has been growing at a fairly steady
annual rate that has averaged a little over 6% over the last ten years.
School spending is particularly singled out by those pointing
to local spending as a major cause of increased property taxes. This is because
school districts are the only unit of local government whose spending increases
are not capped at 3% annual increases plus the value of new construction.
Are increases in local school spending a significant part of the
property tax problem? Table 1 summarizes the evidence. First, we should explain
that Table 1 reports increases in Maintenance and Operation (M&O) spending
because this is the portion of their budget for which school districts can collect
property taxes. M&O accounts for about three-quarters of all school spending
and includes everything from the cost of instruction to the cost of building
maintenance. Property taxes account for roughly one-quarter of all the revenues
that fund school M&O. Most of the rest of the revenue comes from the state.
Table 1: Evidence for the School Spending Explanation
Last Ten Years
Last Five Years
Last Two Years
|1. Avg Annual Increase in Property Taxes
2. Annual Rate of Increase
|3. Avg Annual Increase in Assessed Market Value of Residential
4. Annual Rate of Increase
|5. Avg Annual Increase in School M&O Spending
6. Annual Rate of Increase
Proponents of the school spending explanation can draw the comparison
between rows 1 and 2, on the one hand, and rows 5 and 6 on the other hand, in
Table 1 to support their argument. Overall school M&O spending increases
(from all sources of revenue, not just property taxes) are equal to well over
half of the overall increase in property taxes (row 1 compared to row 5). Those
who argue that local government spending is the problem can use these figures
to argue that if school districts had chosen not to spend as much, they could
have taxed property less.
Proponents of this argument further observe that much bigger increases
in school M&O property taxes are coming. When the assessed market value
of property increases, the resulting increase in school M&O property taxes
lag a year behind increases in other property taxes. This means that the record-setting
market value increases in the last year are yet to be felt in terms of school
property tax increases.
Critics of the school spending explanation offer several responses.
First, they point out, as we noted, that only about one-quarter of the revenue
for school M&O spending comes from property taxes. In fact, this proportion
has been growing somewhat as state funding of school M&O costs, generally
around 70% of overall M&O revenue, have been fairly flat in recent years.
Accordingly, some argue, property tax increases due to M&O spending is partly
the result of more limited state support in a time of increasing costs.
Second, critics of the school spending explanation point out that
school spending has been increasing less than spending for other units of local
government. Again, overall local spending of property taxes has increased steadily
at a little over 6% annually in recent years while row 6 of Table 1 shows that
school M&O spending has grown about 3-4% annually. The schools part of the
state budget has also been growing slower than overall state spending in recent
Third, beyond contending that these numbers not only defy the
argument that school spending is a major component of increases in property
taxes, they also argue that increases in school spending should actually be
greater. According to BSU's annual public policy survey, most Idahoans believe
that far from being excessive, spending on K-12 education should be increased
in Idaho. We can include a large majority of members of The Common Interest
with those who have this view. Both last year and this year we chose school
funding as one of our issues. After reviewing the issue of school funding thoroughly
last year, 82% of our members assigned to this issue opposed the Legislature's
level of funding as too low. The vast majority of our members argued that it
is penny-wise and dollar-foolish to shortchange investment in education. Among
other things, our members commented that by investing more in education, we
would increase revenues because a more highly educated workforce would attract
higher paying jobs and would decrease costs because those with better education
rely less on the government for health care and end up in prison less.
Those who argue that school spending is excessive respond that
Idaho is generous relative to other states in terms of how much of the income
that we have we contribute to education. Our briefing
materials on K-12 education funding last year reported that Idaho ranked
15th out of the 50 states in terms of the proportion of our personal income
dedicated to funding public schools. Those who say that school funding is excessive
argue that we can only fund what we can afford as the concern over property
The majority of our members and other Idahoans, even recognizing
the generous proportion of our income that we dedicate to schools, argue that
it is not enough. They point to another ranking reported in our briefing
materials: Idaho ranks 45th out of the 50 states in terms of spending per
student. There are two reasons that Idaho is 15th in terms of proportion of
personal income dedicated to schools and 45th in terms of per student spending.
First, we have a lower average income per person in Idaho than in most other
states. Second, we have a higher proportion of school age children whose education
must be funded by a smaller proportion of the population who are adults, relative
to most states. Many of our members and others argue that one way we increase
the lower average income level is to educate our people better.
New Construction &
Appreciation Explanations of Growth in the Residential Proportion of Property
Taxes. As we noted above, the residential proportion of the property
tax burden has increased significantly in recent years. This is because the
assessed market value of all residential property in the state has grown much
more quickly than it has for other categories of property. As seen in rows 3
and 4 of Table 2, the annual increases in residential property value are large
and getting larger.
Table 2: Evidence for New Construction and Appreciation
Last Ten Years
Last Five Years
Last Two Years
|1. Avg Annual Increase in Property Taxes
2. Annual Rate of Increase
|3. Avg Annual Increase in Assessed Market Value of Residential
4. Annual Rate of Increase
|5. Avg Annual Increase in Assessed Market Value of Residential
Property Due to NEW CONSTRUCTION
6. Annual Rate of Increase
|7. Avg Annual Increase in Assessed Market Value Due to APPRECIATION
8. Annual Rate of Increase
|9. Estimate of Percentage of Increase in Assessed Market Value
of Residential Property Due to NEW CONSTRUCTION
|10. Estimate of Percentage of Increase in Assessed Market Value
of Residential Property Due to APPRECIATION
Why has the assessed market value of residential property grown
so quickly, while the value of properties in other categories has been flat
or decreasing? As noted above, two of the leading explanations offered for the
increase in the market value of residential property are new construction and
appreciation. Each explanation can be tested with evidence. We used the monthly
Idaho Construction Report published by Wells Fargo Bank, and formerly First
Security Bank, as well as data on new construction provided to us by the State
Tax Commission to estimate how much of the growth in residential market value
is due to new construction. We used the House
Price Index (HPI) for Idaho, which is maintained by the federal government,
to estimate how much growth in residential market value is due to appreciation
of existing residential property. (For more details on the methodology of our
The evidence indicates that the value of new residential construction
has been significant, as seen in row 5 in Table 2, and has been rapidly accelerating,
as seen in row 6. The increase in market value due to appreciation of existing
residential property has also been significant, as seen in row 7, and has been
accelerating significantly, as seen in row 8. Although the rate of increase
has been more rapid for new construction than for appreciation, the increase
in absolute dollars of market value due to appreciation is greater. This is
because the growth in appreciation applies to all existing residential property
while the rate of new construction applies only to that proportion that is new
Consequently, even though we are building new houses at a faster
rate every year in Idaho, over time the proportion of the increase in residential
market value that is due to new construction is decreasing and the proportion
that is due to appreciation is increasing. As seen in rows 9 and 10, last year
only about 20% of the increase in residential market value was due to new construction
and about 80% was due to appreciation.
Our analysis can be summarized in terms of two trends. First,
the annual increase in the market value of residential property is large and
accelerating. Second, a large and rapidly growing proportion of that accelerating
increase is due to appreciation rather than construction.
Implications for Property Tax Policy
So where does this discussion of the competing explanations for
rising property taxes—and the evidence for those explanations—leave
us? Two central factual conclusions are clearly warranted. First, local government
spending has increased and contributed to rising property taxes. If local government
generally, and schools specifically, had increased their spending less in recent
years, the overall amount of property tax in Idaho would have increased less.
Taxes specifically on residential property would also have increased less if
local government spending increased less.
Second, while residential property taxes would have increased
less if local government spending had been less, they still would have increased
significantly for most homeowners even if local government spending had not
increased at all. The evidence is clear that because the market value of residential
property in Idaho in recent years has grown much more rapidly than other categories
of property, and because that increase is due mostly and increasingly to appreciation
and not new construction, most residential property owners were going to experience
significant increases in property taxes even with no increase in local government
Beyond these factual conclusions, different people can draw different
policy implications. We turn now to a discussion of the specific property tax
proposals before the Legislature. A wide variety of solutions have been proposed
to the problem of rapidly increasing property taxes. Most of those solutions
can be characterized in terms of the explanation of the problem at which they
are targeted. In Section 4, we review policy proposals that are based on the
conclusion that increasing property taxes are primarily a result of increased
spending by local governments. In Section 5, we review proposals based on a
conclusion that taxes that are rising much more for residential property is
the problem. In Section 6, we review proposals based on a conclusion that new
growth does not pay for itself. In Section 7, we review proposals for alternatives
to property taxes for school funding. In Section 8, we review proposals to eliminate
tax exemptions that are thought to not be justified.
4. Solutions Aimed at Local Government
Proposals that focus on local government spending as the problem
can be divided into two types: local solutions and state solutions.
Local Problem, Local Solutions
We have already noted that one proposed approach is to have citizens
take their complaints about increasing property taxes to their local elected
leaders who levy and collect property taxes. Governor Kempthorne, House Speaker
Newcomb, and Representative Crow, Chairman of the House Revenue and Taxation
Committee, and others subscribe to this view and conclude that there is no or
only a limited role for the state to play in solving the problem.
As discussed above, our analysis found that most homeowners' property
taxes would have gone up significantly in recent years even if local government
spending had not increased at all because of rapid appreciation in home values
and little appreciation for property in other categories. Since local officials
do not have the discretion to tax different categories of property at different
rates, seeking property tax relief from local officials would do little to address
this significant component of increasing property taxes.
State Limits on Local Taxes
Many who see local government spending as the explanation for
the problem of rising property taxes believe that the state can nevertheless
play an appropriate role in addressing the problem by placing more restrictive
limits on local taxes than currently exist. Three different strategies for dealing
with local government spending have been advanced.
Spending Caps. House
Bill (HB) 478, would simply cap increases in the spending of property tax revenues
for every unit of local government at 3% each year. Existing law provides for
a 3% cap, but this bill would make that cap more restrictive in two major ways.
First, the bill eliminates the option that currently exists that allows local
governments to add to the 3% the amount of tax that could be assessed against
the value of new construction. Second, the bill would apply this 3% cap to school
districts who are currently the one unit of local government whose budget is
not capped. To provide a safeguard that these limits are not overly restrictive,
HB 478 provides local governments with the option to increase spending from
property taxes more than 3% if two-thirds of the voters approve it. Again, our
analysis indicates that if home values continue to appreciate much more rapidly
than other categories of property, such a cap will provide limited tax relief
Market Value Caps. HB
503 and HB 455 would cap increases in the market value that can be
taxed rather than limiting spending itself. For any given real property owner,
the annual increase in the value of real property subject to tax would be capped
at 3% under HB 503 and capped at 5% under HB 455. Both valuation caps would
apply to school districts as well as other units of local government.
Unlike caps on local government spending, these limits on the
increase in market value that can be taxed aim to specifically address the problem
of residential property appreciating much more rapidly than other categories.
If a home appreciates more than 3% or 5% in a given year, then they would receive
the tax relief offered by this exemption. Proponents argue that because these
valuation caps are property specific, unlike spending caps, they would give
tax relief for those whose property is appreciating rapidly, but not to those
whose property taxes are not increasing rapidly. Accordingly, value caps appear
to be an approach that is much more tailored to the problem of rapidly rising
home values then spending caps.
Alan Dornfest, a nationally-recognized property tax expert who
works for the Idaho State Tax Commission, thought this might be a promising
approach and tested the value cap idea by analyzing what the effects of such
caps would have been in Kootenai (Coeur d'Alene area) and Ada (Boise area) counties.
The results indicated that value caps have a strong, unintended consequence:
they disproportionately benefit those who have very high value homes while actually
leading to higher taxes for most other homeowners, particularly those who starter
or middle class homes. Because very high value homes have tended to appreciate
more rapidly than others, these homes would get enormous tax breaks that is
then borne, in the form of higher tax rates, by all other homeowners. Even many
homes that qualify for the value cap would end up paying more, not less. In
Kootenai County, for example, the owners of large, beautiful vacation homes
on lakefront property would be the big winners in a value cap system while starter
and middle class home owners in typical Coeur d'Alene neighborhoods would be
the losers and would actually pay more property taxes because of the value cap.
will be published shortly in the Journal of Property Tax Assessment and
Spending Limits by Voter
Initiative. A modified version of a bill introduced
earlier would give taxpayers a mechanism for lowering their property taxes through
the ballot box. If 10% of the voters within a given taxing district signed a
petition that proposed a specified dollar amount limitation in the property
tax budget for that district that district would be required to hold an election
on that proposal. A two-thirds majority vote in that election would require
that the specified budget restriction for the following year be implemented.
Proponents of this bill argue that since voters have a mechanism
for approving increases in their property taxes through a bond levy election,
it is only fair that they should be given a ballot box mechanism for reducing
the taxes they pay.
Opponents of this bill argue that, like with the spending limits
discussed above, voter-driven limits on spending will provide limited relief
for homeowners if homes continue to appreciate at a greater rate than other
categories of property.
5. Solutions Aimed Specifically at
Rising Residential Property Taxes
A number of bills specifically address the problem of home values
increasing more rapidly than the value of other categories of property.
Expansion of the Homeowner's Exemption
Three bills propose expansions of the Homeowner's Exemption (HOE)
to varying degrees. The HOE was originally passed by voter initiative in 1982
during another time when homeowners were concerned that their property taxes
were going up too rapidly. It exempts 50% of the assessed market value of owner-occupied
homes or $50,000, whichever is less, from property taxes. At the time that it
was passed, it was not indexed so that the $50,000 maximum value would increase
with inflation. If it had been, the maximum allowable amount would now be about
$100,000 dollars. Many observe that if that were the case, homeowners wouldn't
be feeling so much property tax pain.
All three bills would change that existing HOE to make the land
on which the home sits part of the assessed market value eligible for the exemption.
All three would also mandate that maximum amount would go up at the rate of
inflation in the future, as measured by the Consumer Price Index (CPI). They
differ in terms of the one time adjustment they would make to the maximum amount
for the coming year that would then be adjusted for inflation going forward.
One of the three bills, HB 421, was introduced as the recommendation
of the interim committee. HB 421 would raise the maximum amount allowed for
the exemption to $75,000 or 50% of the assessed value of the home, whichever
is less, in 2006, and then be indexed to inflation after that. The second bill,
HB 456, and would do the same as HB 421 except that it would raise the maximum
amount allowed for the exemption to $100,000. The third bill, HB 423, would
leave the maximum amount allowed for the exemption at $50,000, but would index
it for inflation going forward.
Arguments for Expanding
the Homeowner's Exemption. The primary rationale for expansion
of the HOE is the rapid rise in home values. Proponents argue that it is not
fair for homeowner's to pay so much more in taxes on wealth they have not yet
realized. Some also argue that to maintain the policy voters put in place, the
maximum eligible value should be increased to $100,000. Those who support the
expansion also argue that the different assessment methods for different categories
of property is a major factor explaining the disproportionate rise the assessed
value of homes.
The combined effect of rapid increases in homeowners' property
taxes due to appreciation and the differences in the way properties are valued
may provide the strongest justification for expansion of the Homeowners Exemption.
Because valuation methods for property in categories other than residential
include a substantial income factor, the amount of taxes that must be paid on
those properties is more closely related to the owners' current income than
it is for homeowners. It is only homeowners, particularly under conditions of
rapid appreciation, who have to pay much higher taxes on their property even
when their current income hasn't increased. This strikes many homeowners as
Arguments against Expanding
the Homeowner's Exemption. Several arguments are offered against
expansions of the HOE. First, opponents argue that new construction is a significant
component of the growth in homeowner's share of the property tax burden. Second,
they argue that even if a significant component of the growth in the homeowner's
share of the property tax is also due to rapid appreciation, it is appropriate
for homeowner's to pay more taxes on property that has grown that much more
valuable. Third, opponents argue that expanding the HOE does nothing to limit
A fourth argument is that expansion of the HOE will mean decreased
funding for schools. Unlike other local government units who can increase their
property tax rates, school districts property tax rate is fixed at .3% of market
value. Consequently, a substantial increase in a property tax exemption of any
kind translates directly into less property tax revenue for schools. Proponents
of expansion of the HOE acknowledge that it has this effect on schools, but
argue that expansion is still advisable and that funding for schools should
be increased from other sources to offset the loss.
A fifth argument against expansion of the HOE is particularly
emphasized by opponents. The higher the HOE, they observe, the more it shifts
property taxes to others. Again, this shift effect occurs even if local governments
don't spend any more. If the total market value of property that local governments
can tax is reduced because more of the value of homes is exempt, the rate at
which they tax the market value of all property will increase in order to provide
the same level of services.
This is unfair in the view of those who oppose expansion of the
HOE, particularly since they tend to attribute more of the growth in homeowner's
share of the property tax burden to new construction. They also point to analyses
that indicates that other categories of property, such as agricultural and commercial
property, tend to use less services for every dollar of property tax they pay
than do residential properties. Imagine 400 acres of pasture with an assessed
value of $200,000 compared to the home of a family of five worth $200,000. The
home of the family of five creates much more demand on local government services,
including fire protection, police protection, and schools than the pasture does.
Since the HOE exemption applies only to owner-occupied homes,
those who make this third argument that the HOE exemption shifts taxes to other
property point out that it also shifts more property taxes onto residential
properties that are rented. Since those who rent tend to have lower incomes
than those who own homes, the shift in taxes from wealthier homeowners to renters—through
the increase in rents charged—is seen by opponents as particularly unfair.
This shift argument is also applied to owner-occupied homes worth
either much less or more than whatever the maximum amount of the exemption is.
If a home has an assessed value of $500,000, then expanding the maximum exemption
amount from $50,000 to $100,000 will mean that $50,000 more of that value will
be exempt from property taxes. It also means that the $400,000 in assessed value
above the exemption will be taxed at a higher rate, since property tax rates
will presumably increase to keep revenue at the same level after the expanded
exemption is implemented. That higher rate on the $400,000 not eligible for
the exemption will likely more than offset the savings of having $50,000 less
value subject to property tax.
On the lower end of the home market, opponents also argue, a $100,000
home would still only have $50,000 worth exempted from taxes, because not more
than 50% of the value of the home can be exempted. Yet, the tax rate on the
$50,000 they still have to pay taxes on would now be higher.
Supporters of expanding the HOE concede that the net effect will
be higher taxes on more valuable homes, but argue that it is sound policy to
have a "progressive" tax in which those in a position to pay more
do. They respond to the argument on lower value owner-occupied homes by pointing
out that all of the HOE bills also make the land on which the home sits eligible
for the exemption. The house assessed at $100,000 has to sit on a lot that also
has an assessed value on which tax is paid. Imagine that the lot is assessed
at $50,000 for a total of $150,000 in assessed value of the home and the lot.
That would mean that 50% of the assessed value would now be $75,000 rather than
$50,000. That $25,000 more of their property that is exempt from the property
tax, proponents argue, would offset the effect of the increased rate being paid
on the remaining $75,000 worth of property they still pay taxes on. Some supporters
of expanding the HOE also suggest that Idaho could implement "renters credits"
like many other states. These are modest income tax credits that renters receive
in recognition that some of their rent likely goes to help pay the landlord's
property tax bill.
Arguments for Compromising
at an Expansion to $75,000. Some argue that the way to resolve
the arguments for or against expansion of the HOE is to split the middle and
expand it, but only to $75,000. Proponents of this compromise argue that it
provides substantial property tax relief to homeowners who need it most while
limiting the negative effects of increasing the tax on other categories of property,
including rental properties, and decreasing funding for schools. Proponents
of this solution argue that it is not simply a mindless, split-the-middle compromise.
They observe that the first $25,000 increase in the exemption (from $50,000
to $75,000) shifts substantially less tax onto other property and takes less
revenue away from schools than does the second $25,000 exemption (from $75,000
to $100,000) because so many homes are worth between $150,000 and $200,000.
They also point out that the actual tax benefit for average and higher priced
homes, typically about $200 - $500, is fairly negligible for those with higher
value homes and not worth the increase in property taxes for others and the
decrease in funding for schools. Largely for these reasons, HB 421 (the expansion
to $75,000) was the recommendation of the interim committee.
Finally, we should note that the analysis done by The Common Interest
on the contribution of home appreciation to increased property taxes for homeowners
has led an increasing number of legislators and others to suggest that the House
Price Index (HPI) for Idaho should be used as an index for the Homeowner's Exemption
going forward, rather than CPI which measures inflation more generally. That
way, the HOE would expand at the same rate that homes appreciate. It would also
not expand as rapidly if the housing market cools considerably in future years.
In either case, some argue, the HPI maintains the value of the HOE where it
should better than the CPI.
Proposals that Focus on Elderly, Low Income Homeowners
The burden imposed by large increases in property taxes, particularly
on residential property, is perhaps most acutely felt by the elderly on low,
fixed incomes. While their homes may be worth more on paper, they in particular
do not have an increase in income to pay the increased tax. The problem is significant
enough that some have to consider selling their home. Three bills aim to lessen
the property tax burden specifically on low income, elderly homeowners.
Expansion of the Circuit
Breaker Program. One of these three bills, HB 422, enlarges the
"Circuit Breaker" law which provides property tax relief to low income
elderly, widowed, and disabled homeowners. In this program the state pays all
or part of their property taxes. The lower the income level of the recipient
the more property tax relief is provided. The income qualification thresholds
go up each year at the same rate as the overall rate of inflation in the economy,
as measured by the Consumer Price Index (CPI).
House Bill (HB) 422, which was introduced on behalf of the interim
committee, recognizes that residential property taxes have increased faster
than inflation generally and would raise the highest annual income level allowable
to qualify for the program from $22,500 to $28,000. It would also raise the
maximum benefit from $1,200 to $1,320 for those with less than $12,050 in annual
Perhaps no other property tax reform enjoys more widespread support
than the proposal to expand the Circuit Breaker. HB 422 addresses the problem
of rapidly rising residential values and taxes for those who are most impacted
by them. Since this is a program in which the state pays the property tax for
the eligible recipient, rather than exempting them from property tax, there
is no shift in the property tax burden to others (though the costs of the program
are paid out of income and sales tax revenues that we all pay).
The most common criticism raised in response to this bill, and
the current Circuit Breaker program, is that the income eligibility requirement
does not take into account income from various kinds of assets such as capital
gains. Accordingly, some argue that wealthy retired people who should not qualify
for the program can. Some, including members of the Senate Local Government
and Taxation Committee, are exploring whether some sort of asset test might
be included. Others suggest that it would be difficult to implement an asset
test in a feasible way and that the number of people who take advantage of this
loophole is likely small.
Others have also suggested that credits for renters should be
part of the Circuit Breaker program, as it is in the vast majority of other
states with Circuit Breaker programs. Supporters of this modification observe
that this would be particularly appropriate to do if the Homeowner's Exemption
is expanded because it would help offset its tendency to shift taxes to rental
properties and thus to increase rents.
As with the HOE, others reviewing our analysis of the causes of
increases in residential property taxes have suggested that the Circuit Breaker
be indexed to the HPI for Idaho rather than to the CPI.
The second of the three bills aimed at lessening the property
tax burden on low income and elderly homeowners was also introduced on behalf
of the interim committee. HB 425 would make it possible for financial institutions
to offer "reverse mortgages" to homeowners over age 62. A reverse
mortgage is a loan used to pay property taxes and other expenses on the person's
home that can then be repaid with the proceeds when the owner chooses to sell
the home or after the person passes away. This addresses the problem of retired
homeowners having to pay rising property taxes on unrealized wealth from appreciation
by giving them a way to tap into that wealth. Little criticism has been offered
to this proposal.
Tax Deferrals. The
fourth bill is another proposal where Governor Kempthorne sees an appropriate
role for the state to play in addressing property tax concerns (he also supports
expansion of the Circuit Breaker). HB 439 is sponsored by the Governor and allows
individuals who qualify for the Circuit Breaker to defer payment of the property
taxes on their homes. The deferred taxes and 6% interest would be due when both
the homeowner and spouse have died, or the home is sold or no longer eligible
for the homeowner's exemption. This is another mechanism by which older homeowners
can deal with the problem of paying taxes on the unrealized wealth in their
home. It has stimulated little criticism.
6. Solutions Aimed at School Funding
As explained above, school districts are essentially the only
unit of local government whose spending of property taxes is not caped at 3%
annual growth plus new construction. School districts can simply tax the market
value of property in their district up to .3%. Accordingly, property taxes for
schools can go up at the same rate that property values go up. Given the rapid
appreciation in residential value in recent years, many argue that this must
HB 678 would replace half of the .3% school property tax, in other
words .15%, with state revenue for schools. This translates into roughly a $125
million reduction in property taxes. HB 679 would make up most of this, roughly
$105 million, through an increase in the sales tax from 5% to 5.5% (a half cent
on every dollar). HB 678 also caps increases in spending from the remaining
school property tax at 3%. HB 679 does not specify that the new revenue from
the half-cent sales tax increase go to support schools.
Proponents argue that replacing half of the school property tax
with state revenue from sales tax would relieve property owners of the only
portion of their property tax that can rise as fast as their values rise. Because
the sales taxes from which the replacement revenue would be raised do not have
the problem of taxing homeowners on unrealized "paper wealth," proponents
argue, these measures go to the heart of the problem identified in our analysis
showing that appreciation is driving the rise in residential property taxes.
Particularly given that last year's historic appreciation of home values has
yet to be reflected in school M&O property taxes, proponents argue that
this measure is important and urgent.
Opponents argue that while these measures may provide real property
tax relief, they do so at the expense of a reliable, stable source of funding
for schools. The proposed replacement revenues are problematic for several reasons,
they argue. First, they point out, HB 678 provides new revenue that would only
party make up the lost property tax. Given that the Legislature has provided
only very small increases in the funding they are already responsible for providing
to schools, opponents question whether it makes sense to increase the state
responsibility for school funding dramatically. Opponents point out that much
of the justification for flat school funding from the state in recent years
is the budget pressure created by rapid increases in the costs of healthcare
and prisons. Since few people think those pressures are going to lessen substantially
anytime soon, opponents argue that the state cannot be relied upon to fund schools
Second, opponents argue that history confirms their suspicions.
In 1995, Idahoans were also concerned with rising property taxes. On the basis
of the same arguments that proponents are now making for replacing school property
taxes, the Legislature passed a measure that reduced the school property tax
from .4% to the .3% that it is today. Under this law the costs to the state
for replacing school property taxes went up as fast as property values went
up, creating the same problem for the state that homeowners have faced. Two
years ago the state responded to their end of the problem by capping the total
amount of replacement funding they would provide at $75 million. If not for
the cap, school districts would have received almost $84 million in replacement
funding this year.
Third, opponents contend that the combination of HB 678 and HB
679 provides even less reliable replacement of property tax revenue for schools
than the 1995 legislation since, unlike the 1995 legislation, the new half-cent
sales tax revenue is not dedicated to supporting schools. Rather, schools have
to compete each year with Medicaid, prisons, and every other aspect of the budget
for those revenues.
Fourth, opponents argue that property taxes are a better source
of revenue for schools than sales and income tax because they are both more
stable and because they are local. The fact that property taxes are local, they
argue, means there is greater local accountability.
Fifth, opponents argue that the effect of replacing property tax
with sales tax will be to increase the combined taxes on lower income households
and decrease the combined taxes on higher income households. This is because
sales tax tends to be more "regressive" than property taxes because
the purchase prices of essential goods are a larger proportion of lower income
households' total income. A study by economists at the University of Idaho and
Washington State University found that the breakeven point for HB 678 and HB
679 was at $100,000 of household annual income. Households with less than $100,000
in income would pay slightly more combined sales and property tax and households
with more than $100,000 in income would pay slightly more in combined sales
and property taxes.
7. Solutions Aimed at Growth Not Paying for Itself
Two main approaches to make growth pay for itself to a greater
degree have been discussed.
The first approach to making growth pay for itself to a greater
degree is for the state to expand the ability of local governments to assess
impact fees. HB 504 and HB 426 would both give school districts the authority
to assess impact fees. HB 504 would extend the same impact fee authority to
schools that cities and counties have. HB 426 was introduced on behalf of the
interim committee and would give school districts the authority to assess up
to $2.50 per square foot of new homes. Proponents of both these bills argue
that schools particularly bear the burden of growth. Accordingly, they argue,
it is only appropriate that they have impact fee authority.
Although a formal bill has not yet been introduced, there is also
serious discussion of a need for a bill that would modify the existing impact
fee law so that it would be less burdensome to implement and so that impact
fees could be used for a broader range of costs imposed by growth.
Developers and realtors have been opposed to these expansions
of impact fees. Given how powerful they are as a lobby in the Legislature, some
have doubted whether serious impact fee legislation can be passed.
Local Option Sales Taxes
The second approach for dealing with the costs of growth, as well
as the implications of rapidly appreciating residential property, is to extend
the authority for counties to implement a local sales tax if approved by the
voters. Current law allows counties to assess up to a half-cent sales tax if
approved by two-thirds of the voters in that county. The proceeds from this
half-cent sales tax can only be used for county property tax relief or for building
jails. This law is set to expire in 2009, but two bills would modify and extend
This legislation was originally passed with counties in mind that
are growing rapidly and that have resorts in them. As already discussed, these
circumstances tend to be associated with rapid residential appreciation and
the costs that high growth rates impose. These areas also see large influxes
of visitors who use local government services. The result, proponents of the
existing law successfully argued, was that existing property owners were unfairly
bearing the costs for new construction and services for short-term residents.
The solution was to provide for a sales tax through which visitors would help
pay for the services they used. Kootenai County, which has seen annual residential
appreciation rates in excess of 20%, has availed itself of this option. If it
were not for this provision, property taxes in Kootenai County would be even
higher than they are now.
The first bill, HB 501, would remove the sunset provision of this
law and require that half of the revenues be used for property tax relief. It
would also broaden the uses of the revenue to include not only property tax
relief and capital or infrastructure projects but also for affordable housing
for full-time employees of local governments. The proponents of HB 501 argue
that in counties like Blaine County, where Sun Valley is, residential property
has appreciated so much that local governments cannot hire and retain employees
because these employees can't afford to buy a home there. This is particularly
a problem, proponents argue, for public safety employees such as firefighters
and police who must be on a call and able to respond quickly to an emergency.
The second bill, HB 502, would similarly remove the sunset provision
of this law and require that half of the revenues be used for property tax relief.
It would also broaden the uses of the revenue to include property tax relief
and any capital or infrastructure projects but would not authorize the use of
these funds specifically for affordable housing. Finally, HB 502 would require
that 40% of the registered voters in the county had actually voted in an election
in which a local option sales tax was approved by two-thirds of the voters.
The most common criticism of these bills is that they do not address
the issue of local government spending. In fact, opponents argue, they just
give local governments one more way to raise taxes. A second criticism is simply
that these mechanisms do not work as well for non-resort areas.
Public Infrastructure Improvement Districts
HB 485 would authorize the creation of "public infrastructure
improvement districts" (PIDs) within cities and counties. These PIDs would
be a new local government entity with the authority to levy property taxes to
finance the construction of public infrastructure such as water and sewer systems
and roads. The process for creating a PID would be initiated by a petition asking
a city or county to create a PID. The petition would have to be signed by all
landowners within a proposed PID. After a hearing on the question, the city
council or county commission then would decide whether or not to approve the
creation of the PID.
After a PID had been created, it could levy property taxes up
to 5% of the market value of the property within the PID (average overall property
tax rates currently tend to be a little over 1% of market value). The revenue
for the property taxes can be used to pay off bonds that the PID can issue (i.e.
debt) to pay for the development of public infrastructure projects. All such
bonds must be approved by two-thirds of the voters within the PID. This bill
modifies the usual definition of registered voters to include landowners who
may live out of the PID or even out of the state.
HB 485 has been proposed by the realtor and developer community
as a means of financing the costs of growth. They emphasize the voluntary nature
of PIDs. They can only be created where the landowners within the proposed PID
and the city or county agree to do so. PIDs can only issue bonds when two-thirds
of the voters approve of such a bond.
Opponents of the PID argue that they are, in fact, not voluntary
for those who would actually end up paying the property taxes that they levy.
Imagine that a developer purchases a substantial amount of undeveloped land
on the outskirts of a growing Idaho city. That development company could petition
the county to create a PID for its land and planned development. Since the development
firm is the only landowner within the proposed PID, the petition process is
rather meaningless, opponents argue. The representative of the firm would be
the only signature on the petition. If the developer can then convince the county
to create a PID, then they would then have the power to issue bonds to finance
the construction of much of the infrastructure, such as sewer, water, and roads,
that counties would usually require developers to construct and pay for themselves.
Opponents point out that the bond levy election could be held while the development
firm still owned most or all of the property. The development firm would thus
be in a position to pass a bond so that future owners of the homes being constructed
would have to pay off the costs that the developer otherwise would have paid.
Some are particularly alarmed at the prospects of a PID given
the experience in Ada County with the recent approval of the large Avimor development
next to Highway 55 north of Boise. Although many citizens opposed the development,
the county approved it nevertheless. Critics argue that this experience demonstrates
the ability of large, wealthy development firms to persuade local officials
to do things not in their citizens' best interest. SunCor, the developer who
proposed Avimor, is owned by a large Arizona utility. Critics are skeptical
of the access that SunCor officials had to Ada County commissioners when the
public wasn't present. Critics argue that this access included trips for Ada
County commissioners to Arizona where they were inappropriately wined and dinned.
8. Solutions Aimed at Eliminating Tax Exemptions
Discussions of tax fairness inevitably turn to questions about
whether many of the various tax exemptions that have been granted over the years
are justified and whether they create an unfair tax burden on those who do not
qualify for these exemptions. Accordingly, during this legislative session that
has seen so much attention given to issues of tax fairness, one proposal has
been made to address one particular property tax exemption. A second proposal
has been made to address the problem of tax exemptions generally.
Repealing the "Developer Discount"
While general dissatisfaction with property taxes has intensified
in recent years, perhaps no other aspect of the current property tax system
has generated more intense protest than a provision in current law that has
come to be known, not at all affectionately, as the "Developer Discount."
Current property tax law exempts land "devoted to agriculture" from
property taxes on the "speculative portion of the value of the land."
"Speculative portion" is defined as that portion of the value for
which it could be currently sold that is above the income that the land will
generate from agricultural production.
Several years ago there was a proposal that farmers and ranchers
should be able to prepare their land for development by platting it (developing
and recording a plan for subdividing land into smaller parcels) without losing
the agricultural exemption as long as they were still farming or ranching it.
Developer and realtor lobbyists managed to modify the language of the bill such
that a developer who purchased platted land that had been, but was no longer,
devoted to agriculture could also receive the exemption until construction began.
This has created an enormous property tax break for those who
have purchased agricultural ground around resort areas for investment and development
purposes rather than for agricultural purposes. The attention and controversy
has been further fueled by the fact that Governor Kempthorne is one of the beneficiaries
of this loophole. Governor Kempthorne purchased 14 acres in the area around
Tamarack resort in 2004. Although this property would sell for a significant
sum on the market today, his property tax bill is only $9.73.
All this controversy has created significant pressure to close
the loophole. Two bills, HB 428 and HB 510, use slightly different technical
language to repeal the current provision outright, but would provide elsewhere
in statute that land currently "devoted to agriculture" would not
loose the "speculative portion" exemption simply by platting the land.
The interim committee has introduced another bill, HB 427, that does not repeal
the existing provision but amends it such that individual platted parcels that
are sold are no longer eligible for the exemption unless they continue to be
"devoted to agriculture." Proponents of these three bills argue that
they will, in fact, close the unfair loophole.
Another bill, HB 569, is sponsored by Tamarack resort. It would
repeal the current provision that provides the "Developer Discount."
However, it would also establish a new law called the "Economic Development
Initiative" which would exempt vacant lots in subdivisions from property
taxes on two-thirds of their market value. Although this means a one-third reduction
in the current "Developer Discount," it actually provides a new exemption
for two-thirds of the market value for lots that had not previously been eligible
for an exemption. The existing "Developer Discount" applies only to
land that was farmed or ranched and that was located in counties that had less
than 100,000 in population. The new "Economic Development Initiative"
would apply to vacant subdivision lots in all counties, regardless of population
and regardless of whether it had been farmed or ranched by the previous owner.
Because so many more vacant sub-division lots are in larger counties than in
rural counties, HB 569 actually creates a substantially larger, new "Developer
Discount" at the same time it repeals the old one. Proponents argue that
this will stimulate new development and thus economic growth.
Given the uproar about the "Developer Discount," many
believe that something along the lines of HB 427, HB 428, or HB 510 will pass
the Legislature this year. Given the power of the development and realtor lobby
in the Legislature, however, many think it is likely that something new along
the lines of Tamarack's HB 569 will replace the existing "Developer Discount."
Review of Tax Exemptions Generally
For many, the "Developer Discount" is just one example
of a serious, more general problem with the fairness not only of property taxes,
but income and sales taxes as well. Every year, special interests of one variety
or another propose legislation that would give members of their interest group
a tax benefit. Because the tax breaks provide a benefit that is concentrated
on a sub-group of Idahoans—often a small minority—the benefit to
them can be substantial. Because the burden that one specific tax break would
impose is spread out among everyone else who doesn't get it—usually the
vast majority of Idahoans—the burden of that tax break, in terms of higher
taxes and/or less government service, for any one taxpayer is relatively small.
Consequently, those who would receive the tax break are far more
motivated to promote it than those who would be burdened by it are motivated
to oppose it. The high motivation for tax break beneficiaries translates into
time and money invested in researching out the tax break, mobilizing to contact
and to donate to legislators, and hiring powerful professional lobbyists. The
more powerful and wealthy the special interest that pursues the tax break, the
more disproportionate their influence is. And, of course, those who are promoting
a tax break are smart enough to pitch it as a measure that would promote the
common interest, not just their special interest.
The low motivation to oppose that the rest of us have who would
bear the burden of a given tax break translates into a lack of awareness that
such a tax break is even being proposed, not to mention our failure to mobilize
politically. Consequently, many argue that too many tax breaks are passed that
serve special interests at the cost of the common interest of Idahoans. Even
those tax breaks that did serve a compelling public interest when passed, many
argue, stay on the books long after the original justification for it has passed.
While the burden of any one tax break may be small, the cumulative
effect of this special interest influence year after year is substantial. If
all the tax breaks that didn't serve the common interest were eliminated, many
argue, property, sales, and income tax rates could be substantially lower and
more fairly distributed without compromising government services.
How can this age-old problem of special interests and taxes be
addressed? Although it may be tempting simply to eliminate all tax breaks, there
are clearly many tax breaks that, most of us would agree, do serve the public
interest. How do we discern the appropriate tax break that serves the common
interest versus the unjustified tax break that serves a special interest at
the expense of the common interest?
Amidst the flurry of attention on property taxes specifically,
an intriguing approach to the general problem of special interests and taxes
has been suggested. Republican Senator Tim Corder has proposed legislation that
would require the Joint Legislative Oversight Committee to review 10% of all
tax breaks each year for the next ten years so that by 2016 every tax break
would have been reviewed. The two co-chairs of the Joint Legislative Oversight
Committee (JLOC) are required to be from different houses and different political
parties. By law, JLOC
includes an equal number of members from each major party and an equal number
of members from each house.
The proposed legislation would require JLOC to instruct the director of the
Office of Performance Evaluations to conduct the required analysis of all tax
breaks. OPE is staffed by full-time professionals trained in conducting independent
evaluations. The proposed legislation would require OPE, under JLOC's supervision,
to conduct an analysis of the:
- Public purpose intended or gained by the original enactment of the tax exemption
- Amount of money the tax exemption or credit represents
- Affected taxpayers who would pay additional taxes because of the repeal
of the exemption or credit
- Public benefits or detriments that would occur because of the repeal of
the exemption or credit
Update, February 20, 2006
With so many property tax bills before the Legislature this year,
we made a decision not to review every one of them. One bill has received considerable
attention since we initially posted this brief and we think it warrants review.
We explained above that local governments can increase their property tax spending
by 3% per year, plus the value of new construction. Cities can also add the
value of property within newly annexed areas. HB 508 would change this so that
cities could only add 50% of the value of property in the newly annexed areas
in terms of how much they can increase their budget.
This does not mean that property owners in the newly annexed area
would only pay half as much city property tax as everyone else. Rather, it means
that the city's overall property tax spending could go up half as much
as it now does because of annexed property. In other words, everyone's property
taxes inside and outside the newly annexed area would be a little less than
they otherwise would when a city annexed a new area.
Proponents argue that cities currently annex simply to increase
their budgets and that this legislation would discourage that. They also argue
that currently citizens who don't want to be annexed can be annexed against
their will and that HB 508 would limit these forced annexations. Proponents
also argue that in cities in the state are growing so much that they are beginning
to run into each other, calling into question the role of counties.
Opponents argue that property taxes go up by the same as demand
for services goes up due to annexation. That is the case under current law,
they argue, but would not be the case under HB 508. They also observe that the
vast majority of annexations are "friendly" annexations, meaning that
the residents in the area ask the city to annex them. Often, the residents of
new subdivisions just outside existing city limits want the services, including
fire and police protection and water and sewer services, that come with being
in a city. Sometimes, residents of older subdivisions to which the city has
grown welcome annexation in order to gain those same services. Under HB 508,
they argue, cities will almost never annex again because they won't be able
to afford having providing more services without a proportional increase in
revenue to fund those services.