Tuesday, June 17, 2014

Fred Thompson: Some Modest Suggestions For Fixing Oregon’s Property Tax System

Note: here is another dispatch from Fred Thompson.

Thanks to a series of initiatives and referenda during the decade of the 1990s, primarily Measure 5, enacted in 1990, and Measure 50, enacted in 1997, Oregon has acquired a one-off property-tax system, which emphasizes stable growth in tax payments and inter-jurisdictional uniformity in tax rates. The system seems to be somewhat popular. At least the property tax no longer consistently tops the worst-tax list in local polls. Nevertheless, the prestigious City Club of Portland, after a year spent studying property taxes, concluded that “the current Frankentax has got to go” and proposed to restore the property tax system that was in effect in 1990, with some major modifications.

My reading of the evidence tells me that they are wrong, in the sense that they want to take a sledgehammer to things where a tack hammer would suffice. The current system gives Oregon a lot more funding predictability and stability than the old one, it places different jurisdictions on a more equal footing with respect to the provision of public services, it has reduced the burden of property taxes across the board, and has led to increased understanding on the part of voters about how much they will pay and why; it has, as the City Club stresses, also greatly reduced local autonomy, made public schools creatures of the state, reduced government services, and reduced reliance on one of the most progressive tax sources available (given that both wealth and income are measures of ability to pay).

Like the City Club, I too am troubled by the transfer of fiscal autonomy from local school districts to the state. But, evidently, that is precisely what the state’s taxpayers wanted. Insuring equal student funding, while preserving local autonomy, is about as practicable as building a perpetual motion machine. Much the same thing can be said about the regime’s effects on the provision of general-government services. Here too, I share the City Club’s concerns.
However, I would point out that the most severe local service shortfalls, as in Curry and Josephine Counties, have occurred in jurisdictions with statutory tax rates below one percent. State mandated lock-in of general-government o tax rates was justified by compression-driven cannibalization of inter-jurisdictional tax bases, but it applies equally to all jurisdictions, whether they are in compression or not. That hardly makes sense. Indeed, rather than freezing them, requiring the approval of any affected jurisdiction to increase local rates would on the face of it constitute a more reasonable fail-safe mechanism. If none of a jurisdiction’s neighbors are affected by a tax increase or if arrangements satisfactory to all the parties concerned can be worked out, the jurisdiction ought to be free to raise rates consistent with the levies its citizens have authorized.
Moreover, we now have conclusive proof assessment quality is slowly but inexorably deteriorating. That means that the burden of the property tax is increasingly not borne in proportion to the value of property owned, but is in fact arbitrarily and capriciously allocated. That is unfair. It is also something that can and should be fixed.
With respect to this issue, the League of Oregon Cities recently proposed a constitutional amendment that would “reset” a property’s assessment for tax purposes to real market value when it is sold. This looks like a reasonable solution to the problem of deteriorating assessment quality. Reassessment to market tends to improve tax uniformity. Moreover, from what we know about residential mobility, the folks who are most likely to stay put are the ones we want most to protect against rapid, unanticipated increases in their tax bills: senior citizens without mortgages, perhaps the most important beneficiaries of Measure 50. Shifting to a system of reassessment to market at title transfer would preserve that protection. In any case, given the high proportion of properties now at the Measure 5 limit and the general increase in the assessment ratios that has taken place over the past five years, this seems like a politically opportune time for political action. Right now reassessment on title transfer would harm relatively few homeowners, primarily the ones who have already received disproportionate gains under Measure 50.

How well would this work? Probably reasonably well. Assessment quality is deteriorating at the rate of about one percent each year; real estate turnover is about eight percent. Consequently my guess is that reset at transfer would take us to a stable coefficient of dispersion of less than 10 percent and covariance levels between market value and tax payments of 90 percent or better.


Doug Gabbard said...

I completely agree that the current property tax system--even from a municipality's perspective--is not that bad. Like other municipal finance officers, I whined about the declining changed-property ratios around 2006 and 2007 and how my city's tax revenues were taking a big hit. But after the financial crisis hit, I began to appreciate the shock absorber effect of Measure 50.

I don't doubt that some voter-approved reform is necessary. But while we're waiting for hell to freeze over, cities might want to consider revisiting their annexation, zoning, and development policies to make sure (1) that the land is bringing forth the maximum market value (and ultimately the maximum assessed value) that it can and (2) that investments in infrastructure yield a positive return.

fthompso said...

Thanks, Doug. I appreciate your comment.