Monday, August 1, 2016

More Background on IP28 (Measure 97?), cont.

 Fred Thompson checks in with another post on IP28. 

Is it true, as asserted by OCPP and Our Oregon, “that businesses benefited greatly from seismic changes to Oregon’s property tax system in the 1990s,” which caused a “shift in property taxes away from businesses and onto households.” This claim is an important part of the justification for IP-28 (Measure 97?), at least insofar as enactment of this measure is supposed to redress corporate tax gains made at the expense of the citizenry at large, but, in fact, it is probably not true that businesses benefited disproportionately from Measures 5 and 50.

So, let’s start with what is certain.

It is certain that Oregon used to be a high property tax state and that now, because of Measures 5 and 50, it is a middling one. Prior to Measures 5 and 50, Oregon property taxes averaged about 5 percent of disposable income; nowadays they’re more like 3.5 percent, as depicted in the following figure from the Research Section of the Oregon Department of Revenue. As a result of these measures, Oregon’s property tax growth is also a lot more stable (less volatile).

It is also certain that in 2014-15 taxes on residential properties accounted for the lion’s share of property-tax payments, about 57.6 percent, and for about the same share of the state’s net assessed property value. However, it is also certain that Measure 50 caused assessed value to deviate from real market value (or, perhaps, more correctly restored the discrepancies between assessed value and real market value that were commonplace before Measure 5) – over time the faster the growth in real market value, the greater the discrepancy. Evidently, the real market value of residential property has grown faster than the values of other kinds of property. As a result, the average effective tax rate (tax payments/real market value) on residential property is only now 1.06 percent and on owner occupied housing it’s even lower, while the effective tax rate on all other property is significantly higher at 1.32 percent.[1] If anything, this suggests that Oregon’s current property tax system is biased in favor of the owners of residential properties rather than businesses, although the fact that businesses get more than half of the property tax exemptions granted by state and local jurisdictions offsets this bias somewhat.

Finally, it is certain that, over time, residential real-estate wealth has assumed an increasing portion of the burden of the property tax. Prior to Measures 5 and 50, owners of residential properties remitted less than 45 percent of all property tax payments; today they pay well over half.

However, it is by no means certain that this is due to Measures 5 and 50. It is entirely possible, for example, that the real cause is Oregon's system of land-use regulation, which has, over time, increased residential real estate values faster than it has commercial real estate values. One interpretation of the figure above is that the shift, which OCPP attributes to Measures 5 and 50, is simply the result of long-term trends in the relative growth and value of residential real estate, which would have occurred even if Measures 5 and 50 had never happened. This view is entirely consistent with the conventional wisdom, which holds that, by tying residential property taxes directly to booming real market values, Measure 5 inadvertently gave businesses (commercial, industrial property owners) a lot more tax relief than it gave homeowners, that Measure 50’s cuts were aimed at redressing this imbalance and, that, by rolling back residential property tax assessments and restraining assessment growth, they were largely successful.

Other property tax considerations relevant to IP-28

Most local jurisdictions have compensated for the loss of property-tax revenue wrought by Measures 5 and 50 by increasing user fees. Consequently, to the plurality of economists who see property taxes, at least those levied in support of local services (which may or may not include public schools), as user fees, this shift is largely a matter of complete indifference. Furthermore, most of the increased user fees are remitted by businesses, which suggests that, even if Measures 5 and 50 had had the effect of shifting a portion of the burden of property taxes from businesses to residences, user fee increases probably more than made up for the difference (although, as is the case with property taxes, the ultimate incidence of certain of those user fees remains somewhat unsettled, so that is by no means necessarily the case).

There are two important caveats that should be raised here. First, these conclusions do not apply to public schools. Instead, Measure 5 shifted responsibility for school funding from local districts to the state, which has failed to fully offset the effects of Measures 5 and 50, and, over the past 15 years, the state has allowed things to get progressively worse. Second, the state has imposed property-tax rate caps on local tax districts in a dozen or so counties that are not subject to Measure 5 compression (i.e., have combined statutory rates of less than 1.5 percent). Those caps have caused a lot of unnecessary hardship and are stupid.

[1]I calculated an effective tax rate for industrial and business and commercial property as well, 1.41 percent. However, for that purpose I used a different data set, from the census rather than from the DoR, which may or may not be consistent with the figures reported above.

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