MEMORANDUM To From Re Date Professor Yinger Tim Redding Florida by bigpoppamust


To:     Professor Yinger
From:   Tim Redding
Re:     Florida Property Tax Crisis
Date:   May 7, 2007

I urge you to reject Governor Crist’s and House Republicans’ proposals to address the
current property tax crisis in Florida, and recommend instead that you vote to repeal the
Save Our Homes tax amendment. Repealing Save Our Homes will ease the onerous tax
burden on non-homestead property owners, including businesses and seasonal residents,
encourage homeowner mobility within the state, and reduce horizontal inequity.
Moreover, eliminating Save Our Homes will shift some of the property tax burden back
to homestead property owners, ensuring that they have sufficient incentives to monitor
local taxing and spending decisions and decreasing the likelihood that local governments
will over-invest in public services.


Over the past decade, property tax levies in Florida have more than doubled, from $11.2
billion in FY 1994-95 to $25.7 billion in FY 2005-06.1 Much of this growth is recent; in
the past five years alone, property taxes grew by 80%.2 These increases have been driven
by rapidly appreciating property values and have outpaced combined growth in
population and inflation (32%) and personal income (39%) during the same period.3
Rather than reduce tax rates to compensate for escalating property values, however, local
governments have used the increased revenue to expand public services.4 They have
been able to do so, in large part, because of the Save Our Homes tax preference.

Save Our Homes (“SOH”) is an amendment to the Florida constitution that was approved
by voters in 1992. Similar to Proposition 13 in California and Proposition 2 ½ in
Massachusetts, SOH limits annual growth in the assessed value of homestead properties
to the lesser of 3% or inflation, with assessed value never allowed to exceed market
value. SOH applies to persons who own property in Florida in which they maintain a
permanent residence, and continues until ownership of the homestead parcel changes, at
which point the assessed value is reset to the current market or “just” value. In addition
to SOH, resident homeowners also benefit from a $25,000 homestead exemption. Until
recently, the homestead exemption greatly overshadowed SOH; however, with the rapid
rise in property values over the last several years, SOH has quickly surpassed the
homestead exemption in terms of removing property value from the tax rolls.5

Fundamentally, Save Our Homes shifts some of the property tax burden from homestead
to non-homestead property owners. With SOH, non-homestead residential and non-
residential properties make up 34.5% and 32.5% of property tax rolls, respectively.6
Without SOH, these proportions would be reduced to 28.5% and 26.2%.7 Thus, SOH
lowers the tax price for homestead property owners, and all else equal, these owners have
less incentive to monitor local government spending. Indeed, these owners will generally
demand more public services since the cost of providing these services is born to a
greater extent by non-homestead property owners, while the benefits accrue to everyone.
The recent increase in property tax levies, for example, was funded primarily by non-
homestead property owners who do not benefit from SOH and who were thus vulnerable
to large increases in their assessment values when the real estate market boomed. Non-
homestead owners naturally opposed the tax increases; however, because homestead
owners generally favored spending the excess revenue on better public services, non-
homestead property owners lacked the political presence to combat government over-
spending. Thus, SOH may have contributed to an over-demand for public services and
caused property tax rates to remain higher than they otherwise would have been without


In 2006, Governor Jeb Bush authorized a committee to study property taxes in Florida
and to make recommendations on how to alleviate the rising tax burden. In its
preliminary report, the Property Tax Reform Committee (“PTRC”) identified several
important consequences of the current property tax scheme which needed to be


Initially, the PTRC indicated that rising taxes had made property unaffordable for many
new homebuyers, as well as seasonal residents, renters, and businesses not protected by
SOH. In support of its conclusion, the PTRC noted that the annual property tax bill per
household, adjusted for inflation, was $2,687 in FY 2005-06, a 74% increase from FY
1994-95.8 Moreover, beginning in FY 2001-02, increases in property taxes exceeded
personal income growth, and by FY 2005-06 property taxes accounted for 4.2% of
personal income on average, as compared to 3.3% in FY 2000-01.9 Thus, the PTRC
concluded that some persons and businesses wishing to relocate or to establish a second
home in Florida had been deterred from doing so by the potential tax burden, while some
current non-homestead owners had been forced to leave or to downsize.

The PTRC, however, did not account for the likelihood that higher taxes had already been
capitalized into property values. With capitalization, an increase in property taxes will be
offset by a simultaneous reduction in property values.10 Thus, affordability should not be
an issue for new buyers, because they will pay less initially for property that they expect
to pay higher relative taxes on in the future. Instead, the higher property taxes burden
current non-homestead property owners, who must either pay the higher taxes or sell their
property for less than they would have received without SOH.11 Inevitably, some owners
on the margin who cannot afford to pay the higher taxes will be forced to sell, while
others may use their properties less efficiently so as to qualify for homestead benefits
under SOH. Owners of rental units, for example, may turn them into condos or single-
family homes. This, in turn, may lead to shortages in affordable housing and commercial
properties, especially for low-income residents and small businesses.12
The “Lock-in” Effect

Recent tax increases have also discouraged Florida residents from relocating within the
state. The Save Our Homes assessment cap protects permanent resident homeowners
from rapid tax increases so long as they remain in their home; if they sell their home,
however, they lose their SOH benefits since property is reassessed at market value upon
resale. In FY 2005-06, for example, the average annual tax savings for homestead
owners was $1,130; thus, many resident homeowners who wish to move would see their
property taxes increase, even, in some cases, if they are buying a smaller home.13 They
may feel trapped as a result and use property less efficiently. Retirees or empty-nesters,
for example, may be reluctant to downsize, while young growing families may be
unwilling to move to a larger home. Similarly, resident homeowners may not seek
employment or accept promising job offers elsewhere in the state if the costs of
relocation and the potential increase in their taxes outweigh the perceived benefits of a
new job. Although there is no direct evidence currently available to measure the strength
of the lock-in effect in Florida, preliminary estimates released by the Florida Department
of Revenue suggest that the annual turnover rate in Florida declined from 3.90% in 2003
to approximately 3.25% in 2005.14 This coincides with the dramatic increase in SOH
benefits during the real estate market boom and lends credence to the idea that resident
homeowners are increasingly reluctant to relocate within the state.

Horizontal Equity

Under SOH, wide disparities in tax treatment have developed between similarly-situated
homeowners. Unlike the homestead exemption, which applies equally to all homestead
properties, the value of SOH benefits varies with the length of a homeowner’s tenure.
Thus, owners who have resided in their homes the longest typically pay taxes on only
26.6% of the market value of their property, as compared to relative newcomers, who are
assessed at 88.3% of market value.15 This constitutes a 61.7% differential in the assessed
value of properties which have essentially the same market value. Some proponents of
SOH argue that long-term residents should be rewarded, presumably because they are
willing to invest more in their community; however, it is not altogether clear that
residents who live in their homes longer contribute more to the community in terms of
service, leadership, and financial investment than residents who purchased their house
more recently.


Newly-elected Governor Charlie Crist and Republican leaders in the Florida House of
Representatives have introduced two competing proposals that would purportedly address
the current property tax crisis in Florida. Although both proposals contain some positive
provisions, neither standing alone addresses the root of the current crisis, and indeed, the
proposals may create more problems than they solve. Thus, I recommend instead that
you vote to repeal Save Our Homes. By repealing SOH, Florida will shift some of the
property tax burden back to homestead property owners, minimizing the likelihood that a
single class of citizens will have to pay higher property taxes to subsidize services
enjoyed by all. Additionally, this move will eliminate the lock-in effect and greatly
reduce horizontal inequity under the current property tax system.

In contrast, Governor Crist advocates doubling the homestead exemption to $50,000 and
shoring up SOH by extending it to business and rental properties and allowing for one-
time, statewide portability of a homeowner’s assessment reduction.16 This proposal
would diminish the lock-in effect, but by doubling the homestead exemption, it ensures
that non-homestead property owners will continue to bear a greater property tax burden,
even if they are granted protection from rapidly rising assessment values under SOH.
This perpetuates the current situation, in which non-homestead property owners are
conscripted by homestead property owners to pay for more public services. Moreover, it
simply extends the horizontal inequities that exist between homestead properties to non-
homestead properties; thus, a business that purchased its property twenty years ago will
pay substantially lower property taxes than a similarly-situated business that relocated to
Florida ten years ago. Finally, doubling the homestead exemption and expanding SOH
removes an enormous amount of value from the property tax base;17 since it is unlikely
that local governments can raise tax rates high enough to compensate for the diminished
tax base, they will be forced to find other ways of raising revenue and will have to make
drastic cuts to public services.18

More recently House Republicans introduced a plan that would require local
governments to roll back property taxes to 2000-01 levels, adjusted for population growth
and inflation.19 They also recommend capping growth in property tax revenues in the
future; local legislatures could only exceed the cap by a unanimous vote. This essentially
resets taxes to levels which existed prior to the recent market boom and would constrain
future growth. Republicans suggest that this would reduce current taxes by 19%, or
$5.77 billion; the average homestead owner would save $433 annually in property taxes,
while seasonal homeowners would save $767 and business owners $3,353.20 The
proposal provides some immediate property tax relief to homestead and non-homestead
property owners and injects greater stability into the property tax system. By limiting
future growth in property tax revenue, however, the proposal undermines allocative
efficiency by limiting local governments’ ability to respond to voter preferences and local
conditions. Moreover, the proposal gives local governments little time to adapt to the
sudden loss of property tax revenue, and many will be forced to drastically scale back
existing public service levels.

More controversially, House Republicans have also proposed a constitutional amendment
that would eliminate property taxes on homestead properties altogether and raise the sales
tax by 2.5% to recapture some of the lost revenue.21 Such tax shifting has become
increasingly popular; however, it makes for bad policy.22 The amendment greatly
rewards current resident homeowners who already benefit the most under the current
property tax system, and shifts even more of the tax burden onto non-homestead
properties, who must pay higher sales taxes in addition to high property taxes. The tax
price on homestead property owners will fall even further, leading to an increased
demand for public services, the cost of which will likely be born to a large extent by non-
homestead property owners. Additionally, the 2.5% increase in the sales tax will make
Florida’s the highest in the nation. This could lead to substantial efficiency losses; for
example, residents may travel to neighboring states or use the Internet to purchase good,
or they might consume more leisure and save their money instead of spending it within
the state. Finally, depending on the price elasticity of different goods, businesses may
have to increase prices and risk losing sales or curtail operations. Either way, the
potential losses from a property/sales tax switch may outweigh the proposed benefits and
generate an excess burden.

Instead, Florida should repeal the Save Our Homes amendment, but allow homeowners
who presently benefit from SOH to retain their current assessment reductions. Thus, a
home assessed at $40,000 below market value under SOH will continue to be assessed at
$40,000 below market value; over time, however, as property values rise, this benefit will
become less important, and eventually be lost once the home is sold. Repealing SOH
will eliminate the lock-in effect and substantially reduce horizontal inequities between
resident homeowners. Moreover, it will expand the taxable value of homestead property
by 74%; the resulting increase in the property tax base will allow local governments to
reduce tax rates on all property owners without sacrificing revenue.23 Finally,
eliminating SOH will shift some of the burden of property taxes back to homestead
property owners and increase their tax price for public services. This, in turn, will create
greater incentives for voters to participate in local spending and taxing decisions, and
indeed, homestead property owners will likely view the current level of services as
excessive and request that local governments provide some relief by cutting property tax
rates on all owners. Allowing current resident homeowners to retain their present
assessment reductions will make this proposal more feasible politically, and allow these
owners to spread out their losses over time.


There is intense public pressure on politicians to do something about property taxes in
Florida. Rather than attempt quick fixes which are more likely to aggravate the problem,
Florida should root out the underlying cause and repeal the Save Our Homes tax

  Property Tax Reform Committee, Preliminary Report and Recommendations, December 2006:
  Ibid. at 14; see Table 1.
  Ibid. at 15; see Table 1.
  Ibid. at 17. Aggregate millage rates declined from 21.85 mills in FY 1994-95 to 19.46 mills in FY 2005-
06, a 10.9% reduction. Compare this to the 109% growth in local government expenditures between FY
1994-95 and FY 2003-04; see also Florida TaxWatch, “Controlling Escalating Property Taxation and Local
Government Spending and Revenue,” December 2006, p. 2: Florida’s Truth-in-Millage
law recognizes that escalating property values can drive up property taxes, and requires local governments
to adopt a rolled-back millage rate that generates the same level of revenue as was collected in previous
years. Any tax rate in excess of the rolled-back rate must be advertised as a tax increase, ostensibly so
voters will be on notice and have the opportunity to protest such a tax increase.
  Property Tax Reform Committee, supra note 1, at 10; see Table 2.
  Ibid. at 27.
  Ibid. at 14.
   See Yinger, John, Housing and Commuting: The Theory of Urban Residential Structure, e-book, Chapter
5.4, p. 15:
   See Ibid. Unfortunately, I am not aware of any studies of capitalization of property taxes in Florida and
was unable to calculate the extent of capitalization under SOH. Indeed, none of the reports issued by
Florida’s government agencies or watchdog groups even discuss capitalization in this context. This may be
a fruitful avenue for further study.
   See The Affordable Housing Study Commission, Final Report, July 2006, p. 9:
B95E7F6CDE56/0/AHSCFinalReport2006.pdf. The Report explains that the intensity of the condominium
conversion trend has continued, resulting in the loss of thousands of affordable rental housing units in
Florida. In 2005, the Florida Department of Business and Professional Regulation approved the conversion
of 26,717 units to condominiums throughout Florida, up from 17,000 in 2005.
   Property Tax Reform Committee, supra note 1, at 22.
   Florida Department of Revenue, Florida’s Property Tax Structure: An Analysis of Save Our Homes and
Truth in Millage, January 2, 2007, p. 35-36: The turnover rate represents the
percentage of owners of homestead properties who move and buy another property in Florida which then
becomes their homestead.
   Property Tax Reform Committee, supra note 1, at 25-27; see Table 3.
   Bousquet, Steve, “Crist Call for Sweeping Property Tax Changes,” St. Petersburg Times, January 30,
   Governor’s Press Release, Governor Crist Proposes Tax Cut Plan to Keep Florida’s Economy Vibrant,
January 30, 2007. The Governor’s Office projects that doubling the homestead exemption will reduce
annual property tax levies by $1 billion and extending SOH will eliminate another $1 billion annually by
the fifth year. See also Florida Department of Revenue, supra note 14, at 38. The Florida Department of
Revenue estimates that allowing full portability of a homeowner’s assessment reduction under SOH will
further reduce property tax revenues by $1.3 billion in five years if millage rates are held constant.
   The Florida Constitution caps property tax rat rates for county, city, and school district purposes at 10
   Leary, Alex and Aaron Sharockman, “House: End Property Tax, Raise Sales,” St. Petersburg Times,
February 22, 2007.
   Miller, James and Jim Saunders, “Raising Sales Tax to Replace Some Property Tax Proposed,” Daytona
Beach News-Journal, February 22, 2007.
   Leary, Alex and Aaron Sharockman, supra note 19. Eliminating property taxes on homestead properties
would reduce local government revenues by $13.55 billion. The increased sales tax would bring in an
estimated $7.78 billion in additional revenue, making the net reduction in overall revenue for local
governments $5.77 billion.
   Dubay, Curtis S., “Florida Latest State Proposing Property Tax Cuts for Sales Tax Increase Swap,”
February 21, 2007: In 2006, New Jersey increased its
state sales tax from 6% to 7%, with $500 million of the new revenue earmarked for property tax reductions.
Idaho and South Carolina also raised their sales taxes from 5% to 6% last year in order to lower property
   Florida Department of Revenue, supra note 14, at p. 15. Eliminating SOH would expand the taxable
value of homestead property from $529 billion to $934.3 billion in 2006. Keeping the current property tax
revenue levels constant, eliminating SOH would increase property taxes on homestead property owners by
40%, but reduce taxes on non-homestead property owners by 20%.
                                                Table 1
                                      Florida Property Tax Levies







                                        Cumulative Growth Rates: FY 2000-06

                                                Cumulative Growth Rates: FY 2000-06
Counties                                                        80%
Cities                                                          98%
Special Districts                                              110%
Total Levies                                                    80%
Personal Income                                                 39%
Inflation + Population                                          32%

                                               Table 2
                 Value Removed From Tax Rolls: $25,000 Homestead Exemption and SOH


                400                                                                      Homestead
   $ Billions


                100                                                                      Value
                      1996 1997   1998 1999 2000 2001    2002 2003 2004 2005 2006 2007

                                             Fiscal Year Ending
                              Table 3
                      Just Value=$200k-$225k
               Taxable Value as percent of Just Value
                            FY 2005-06


Lowest     2       3       4       5       6       7       8       9   Highest
Benefit                                                                Benefit
 Equally Sized Groups of Taxpayers (24k parcels in each

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