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Our
MISSION
is to perform and review research on state-level fiscal and
economic matters with particular attention to their impact
on low and moderate/middle income families and individuals
and indigenous small businesses owned by, and employing,
such families and individuals. |
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June
21, 2007
Report from
the Center on Budget and Policy Priorities
Link to
this report at cbpp.org
THE PROBLEMS WITH PROPERTY TAX
REVENUE CAPS
By Karen
Lyons and
Iris J. Lav
Several states
(Connecticut, Florida, Minnesota, New Jersey, Rhode
Island, and Texas) have recently considered imposing
severe caps on property tax revenue.[1]
These caps restrict the amount that property tax
revenue can increase from year to year to a low
fixed percentage, a formula based on the inflation
rate, or some combination of the two.[2]
While such caps may hold
down property taxes, they are likely to impair local
governments’ ability to provide education, public
safety, and other services residents demand and
need. They also are likely to make the local
revenue system more regressive.
Property tax caps do
nothing to change the main drivers behind higher
property taxes. They cannot slow the increase in
the cost of health care or fuel, for example, which
reflects forces outside of the control of local
officials. Nor do they change the demand for local
public services, such as quality K-12 education,
public safety, and good roads.
There are ways to
mitigate the effects of property tax caps by
replacing the lost revenue, but each of them has
serious drawbacks:
- Increased state
aid to replace property tax revenue is sometimes
promised at the time a cap is enacted. The
evidence suggests, however, that state aid is
not reliably sustained over time — particularly
during economic downturns, when state aid to
localities often declines.
- Most caps
include provisions permitting citizens in a
locality to vote to override the limit
temporarily, or sometimes even permanently.
Citizens unhappy with deteriorating services
have frequently used this provision. The
evidence suggests, however, that wealthier
communities both attempt more overrides and are
more successful in passing them. This can
exacerbate disparities across the state in
education and other important services, leaving
lower-income communities even worse off relative
to their higher-income counterparts.
- Localities may
shift their revenue bases to other local
sources, such as local sales taxes and fees, if
permitted to do so under state law. The
evidence suggests that localities under property
tax caps often shift to these other revenue
sources in order to maintain existing services.
Such shifts, however, can place greater tax
burdens on low-income residents than if the
property tax were maintained.
When none of these
strategies succeeds in completely alleviating the
effects of the cap, serious reductions in the level
and quality of public services are likely to follow.
For example, K-12 spending per pupil in California
fell dramatically under Proposition 13, dropping
from more than $600 above the national average in
1978 (when Proposition 13 was passed) to more than
$600 below the national average in 2000.[3]
School districts in the state have been forced to
cut programs such as music, physical education, and
art; reduce class offerings; and cut positions, such
as librarians and counselors.[4]
Similarly, some
Massachusetts towns have had to lay off school and
municipal employees (including fire and police),
freeze wages, close the town library and senior
center, and stop funding infrastructure projects in
order to comply with that state’s severe property
tax cap.[5]
And in Illinois, school districts affected by the
state’s cap have eliminated positions, reduced the
number of teaching assistants, imposed salary
freezes, and cut certain classes.[6]
Academic studies have
found that in most cases, property tax limits have
led not to a shrinkage in the public sector but
instead to a shift to other revenue sources, such as
state aid and fees. In places where the caps have
had an effect, however, the outcome has been
negative. For example, evidence suggests that caps
disproportionately affect lower-income communities:
“the implications are that [tax and expenditure
limits] are most constraining on the ability of
governments serving economically less prosperous and
at-risk populations to meet public service needs,”
according to a study by Dr. Daniel Mullins, an
expert on state and local fiscal issues.[7]
Some studies have found strong evidence that
property tax caps lead to lower student test scores;
they may also lead to higher dropout rates and a
reduction in teacher preparedness.[8]
Click here to read the full-text of this report in
PDF (11 pp.)
End Notes:
[1] In July 2006, the Rhode Island
legislature passed a bill to lower the state’s
property tax revenue cap from 5.5 percent to 4
percent by fiscal year 2013. In April 2007, New
Jersey passed a property tax revenue cap that limits
revenue growth to 4 percent per year for five years.
[2] For example, Massachusetts’
Proposition 2 ½ allows 2.5 percent growth per year,
Colorado’s Taxpayer Bill of Rights (TABOR) restricts
growth to the inflation rate, and for certain
localities in Illinois, property tax revenue can
increase by the lesser of 5 percent or the inflation
rate.
[3] Jennifer Sloan McCombs and Stephen J.
Carroll, “Who Is Accountable for Education If
Everybody Fails?” RAND, 2005,
http://www.rand.org/publications/randreview/issues/spring2005/ulttest.html.
[4] Tom Bell, “Fort Bragg schools feel
sting of Proposition 13,” Portland Press Herald, May
16, 2004.
[5] Massachusetts Municipal Finance Task
Force, “Local Communities At Risk: Revisiting the
Fiscal Partnership Between the Commonwealth and
Cities and Towns,” September 2005,
http://www.mapc.org//Local%20Communities%20At%20Risk%20Report.pdf.
[6] Linda Dawson, “Feeling the impact of
tax caps,” Illinois School Board Journal,
January-February 2001.
[7] Daniel R. Mullins, “Tax and
Expenditure Limitations and the Fiscal Response of
Local Government: Asymmetric Intra-Local Fiscal
Effects,” Public Budgeting & Finance, 24:4 (2004),
pp. 111-147.
[8] Thomas Downes and David Figlio, “Do
Tax and Expenditure Limits Provide a Free Lunch?
Evidence on the Link Between Limits and Public
Service Quality,” National Tax Journal, Vol. 52 No.
1 (March 1999), pp. 113-128.
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Economic Policy
2245 South Monroe Street, Tallahassee, Florida 32301
Phone: 850-325-6480 Fax: 850-325-6482
Email:
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