Amendment One: Property Tax Reform or Tax Cut?

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Before I get into the gist of Amendment One, the proposed property tax amendment to the Florida Constitution that will go on the ballot for voters to decide this coming Tuesday, January 29, 2008, I would like to encourage all U.S citizens to exercise your fundamental right to vote – the simplest form of government participation. It won’t even get in the way of (un)American Idol and SportsCenter. I promise.

While no one will debate the fact that Florida’s property tax system needs serious reform, how to go about reforming the system remains a hotly contested issue throughout the state.

The following is what’s proposed by Amendment One:

  • doubles the Homestead Exemption from $25,000 to $50,000. The new exemption does not apply to school taxes (about 40% of property taxes). It applies fully to homesteads valued at more than $75,000 and partially for homesteads valued over $50,000.
  • provides a 10% cap on assessments for non-homestead property; not applicable to school taxes.
  • allows current homeowners to transfer up to $500,000 in Save Our Homes (Amendment 10) tax benefits from their current homestead to a newly purchased home. Applies to homes purchased in or after 2007.
  • creates a new $25,000 exemption for business property, including office furniture, computers, machinery and equipment.

At first look, voting yes on Amendment One sounds like a no brainer. Who doesn’t want lower property taxes and the freedom to move without being “unfairly taxed” (portability)?

Analyzed closely, however, Amendment One me huele a tumbe. It’s more politics than actual tax reform.

Allow me to analyze the facts. Let’s look at the three items on the amendment that affect current and prospective property owners. After all, we do make decisions based on facts. Es o no es?

DOUBLING THE HOMESTEAD EXEMPTION (HEX)

For those not in the know, Homestead Exemption is commonly referred to as HEX by the staff at the Miami-Dade Property Appraiser’s Office. It’s sexy like that. On second thought, it rhymes with _ex. It doesn’t get any sexier than that.

This one’s pretty straight forward. Or is it? The current $25,000 Homestead Exemption would be “doubled”. Homeowners would get to deduct an additional $25,000 from the assessed value of their primary residence if it is valued at $75,000 or more. However, the second Homestead Exemption does not apply to school district taxes.

The current $25,000 Homestead Exemption saves Florida property tax payers an estimated $500 in annual property tax the first year it is granted to a homeowner (it saves a lot more as the cap afforded by Save Our Homes increases the longer one stays put). The additional $25,000 Homestead Exemption proposed under Amendment One would save the average Florida tax payer an average of $240 more in annual property tax.

TEN PERCENT (10%) CAP ON NON-HOMESTEAD PROPERTY ASSESSMENTS

Under Amendment One, assessments of non-homestead properties (warehouses, retail locations, offices, raw land, multi-family apartments, second homes, vacation homes, etc.) would be capped at 10% a year. However, because school tax districts are not covered under the cap, the 10% cap would only apply to approximately 60% of the average tax bill.

As it currently stands, non-homestead properties don’t qualify for a HEX (and consequently don’t benefit from a cap on the assessed value). Therefore, market value and assessed value are always the same. As a result, the property’s market value is always equal to the property’s taxable value.

The following example, using the City of Miami millage rate for 2007 and assuming that it would remain steady for subsequent years, should help you understand this portion of the amendment better:

2007 Market Value (MV): $200,000
2007 Assessed Value (AV): $200,000
2007 Total Millage (TM): 0.0221551

2007 Tax Amount: $200,000 (AV) x 0.0221551 (TM) = $4,431.02

2008 Market Value: $240,000 (20% increase)
2008 Assessed Value: $220,000 (10% CAP)
2008 Total Millage: 0.0221551

$220,000 (AV) x .0142071 (Total Millage – School Millage) = $3,125.56
$240,000 (MV) x .007948 (School Millage) = $1,907.52

2008 Tax Amount: $3,125.56 + $1,907.52 = $5,033.08 (13.6% increase)

Had school tax districts applied, the total tax bill would have been:

$220,000 (AV) x .0221551 (TM) = $4,874.12 (10% increase)

Politicians and other advocates of Amendment One have made assertions that non-homestead properties’ taxes cannot go up by more than 10% annually. The example above proves this statement to be incorrect.

PORTABILITY

The portability provision is THE selling point of Amendment One.

Amendment One would allow homeowners to transfer a tax shelter of up to $500,000 of capped value accumulated under Save Our Homes to a different property.

Example:

Assume that you bought your home in 1994, the year that Save Our Homes took effect. In 1995, the first year you qualified for a Homestead Exemption (base year), the property’s market value was $100,000.

Let’s assume that the millage rate from 1995 – 2007 remained steady at .023 throughout those years (it usually goes down a little bit due to an increased tax base), that the market value increased at an annual rate of 5% from 1995 – 2003; 20% from 2004-2006; and remained stable in 2007, and that the assessed value was capped at exactly 3% each year.

As it currently stands, Save Our Homes caps the assessed value of a property with a Homestead Exemption at 3% or the Consumer Price Index (CPI aka inflation), whichever is lower. For purposes of this example, I used a flat 3% rate. However, there were years between 1995 & 2007 in which CPI was lower than 3%.

Using the example above, not only would you have saved $10,155.29 in property taxes from 1995 – 2007 as a result of having a Homestead Exemption, you would have also created a cap of $112,728.00 that Amendment One would allow you to transfer to a new, more expensive property.

Email me if you’d like to see the spreadsheet detailing what I describe above.

Let’s assume that you live in an unsightly cookie-cutter community and your neighbor, Mr. MeToo, has the same exact house as yours. However, Mr. MeToo bought during the housing boom in 2005 and paid $230,000 for his home. Now assume that the market value and assessed value of his home in 2006, the first year that he qualified for a HEX, was $230,000. If you subtract the $25,000 HEX from his assessed value, your neighbor’s house has a taxable value of $205,000. With a millage rate of .023, Mr. MeToo paid $4,715 in property taxes in 2006 for the same exact house as yours. You? $2,688.26.

Meanwhile, in late 2007 you decided that you no longer wanted to live next to Mr. MeToo and decided to buy a bigger property in a different community with large cookie-cutter homes. You paid $300,000 for the 2,200 SF 4/3 with a 2-car garage and an olympic size pool fronting an L-shaped lake that the developer, SeCaen Homes, man-made.

The first year that you qualify for the double HEX, 2008, the market value of your new castle is:

2008 Market Value (MV): $300,000
2008 Assessed Value (AV): $187,272 ($300,000 – $112,728 CAP from former home)
- $25,000 Homestead Ex: $25,000
- $25,000 Homestead Ex: $25,000

Taxable Value (non-school) = $137,272
Taxable Value (school district) = $162,272

2008 Total Millage: 0.0221551
2008 Non-school Millage: 0.0142071
2008 School Millage (SM): .007948

$137,272 x .0142071 = $1,950.24
$162,272 x .007948 = $1,289.74

2008 Tax Amount = $3,239.98

Your new neighbor, la SeƱora Yo(landa) Tambien, has the same exact house as yours with the same 2-car garage, the same olympic size pool, fronting the same exact L-shaped lake. She also paid $300,000 for her new crib. However, Yo(landa) Tambien, is a first time home buyer in Florida. Let’s take a look at how her situation differs:

2008 Market Value (MV): $300,000
2008 Assessed Value (AV): $300,000
- $25,000 Homestead Ex: $25,000
- $25,000 Homestead Ex: $25,000

Taxable Value (non-school) = $250,000
Taxable Value (school district) = $275,000

2008 Total Millage: 0.0221551
2008 Non-school Millage: 0.0142071
2008 School Millage (SM): .007948

$250,000 x .0142071 = $3,551.78
$275,000 x .007948 = $2,185.70

2008 Tax Amount = $5,737.48

Let’s look at the snowbird who purchased yet the same house at the same price and see how his situation differs:

2008 Market Value (MV): $300,000
2008 Assessed Value (AV): $300,000

Taxable Value (non-school) = $300,000
Taxable Value (school district) = $300,000

2008 Total Millage: 0.0221551

$300,000 x .0221551 = $6,645.30

2008 Tax Amount = $6,645.30

Sidebar: No one has even mentioned how inequities in market values will affect the portability cap. I’ve seen units in condominium buildings that are mirror images located side by side with two totally different market values.

Those with a HEX don’t tend to complain or even notice the inequities because the HEX caps their assessed value and as a result, their property taxes, anyways. However, if Amendment One is passed, the market value of a property (even when it has a HEX) becomes much more important due to the fact that it determines the cap that you will be able to “walk away” with if you decide to move.

CONCLUSION

While it’s hard to reject something that cuts taxes (no matter how small the cut), the long term effect that Amendment One will have on the local economy and our quality of life, far offsets any gains it will produce. This isn’t tax reform. It’s simply a tax cut directed at appeasing a powerful group of voters – current homeowners.

The additional $25,000 Homestead Exemption minus the school taxing district is like a bad Carrot Top joke. All this talk about property tax reform and the only thing someone like me (who has no plans to move in the near future) gets is an average of $240 in annual tax savings? That’s not even enough to buy a bottle of Grey Goose to impress my friends y la rubia that’s jocking my stainless steel Casio at a local nightclub!

The 10% cap on non-homestead properties, while a step in the right direction, is not nearly enough to provide much needed relief to those who own investment properties and second homes in Florida.

According to Florda TaxWatch, net migration into Florida has slowed considerably in the past few years. The high cost associated with owning property in Florida (property taxes and insurance) are likely to be a big cause of that. Snowbirds and other part-time residents, a segment of homeowners in Florida that we ALL depend on, are a great deal for Florida full-time residents. Part-time residents pay full-time taxes, but use only a fraction of the services that a full-time resident does.

While the current portability provision may stimulate the housing market at first, I think it’s overall effect on the local housing market is being overstated by proponents of the amendment. I think most people who stand to benefit from portability won’t take advantage of it. This is just my personal hunch. I have no empirical data to support this statement, but neither do proponents who confidently state that portability will resurrect the critical real estate market.

Time will tell if people will move out of their homes and purchase new ones as a result of portability. I’m willing to bet that a large percentage will not.

Besides, most move-up buyers and even those looking to downsize need to sell their current homes before they can buy a new home. Who’s going to buy your condo so that you can move into the single-family home you so desperately need when Amendment One does absolutely nothing for the first time home buyer – a very important segment of the housing market?

Amendment One creates an incentive to sell, but no incentive for those being penalized – first time buyers and part-time residents – to buy.

This property tax system would continue to shift the tax burden on those who need tax relief the most. Florida House Minority Leader, Dan Gelber, described it best when he compared portability to a pyramid scheme: “You’re in early, you get the best tax rates. You’re in late, you pay for everyone else’s service”.

Yo(landa) Tambien, Mr. MeToo, and those who own a second home in Florida shouldn’t have to pick up the slack for everybody else.

The portability provision, if passed (the amendment needs a 60% tally in order for it to pass), may very well prove to be unconstitutional. Expect lawsuits to surface and years of expensive litigation to follow.

Who fronts the bill for the expensive litigation? Florida taxpayers.

If you purchased a home prior to the housing boom and are looking to move in the near future and feel that the tax benefits offered by the portability provision far outweigh the long-term damages that Amendment One will most definitely produce, by all means feel free to vote YES on Tuesday.

If you demand a tax system that is fair and equitable and one that we, as citizens of this state, can be proud of and market to the rest of the world, vote NO on Tuesday. Don’t bail out most (not all) state lawmakers that are secretly praying and lighting candles to San Lazaro and his dogs in the hopes that they can slip this wolf in sheep’s clothing past us.

If Amendment One passes, you can kiss real property tax reform goodbye. This is what we get – a $240 tax cut and an even larger headache in the future. That’s it.

Prove to the rest of the Union that this is Florida, not Flori-duh.

The opinion expressed in the preceding post is the opinion of Adrian Salgado and is not intended to malign any group, club, organization, company, or individual. The views of the writer are his own and do not, in any way, reflect the views of the broker, principals, or other associates at RED I Realty or RED I Mortgage.

Adrian Salgado is a Realtor Associate with RED I Realty in Miami, FL and can be reached at 305-491-7179 or SalgadoA@gmail.com.

7 Comments

Filed under Property Taxes

7 responses to “Amendment One: Property Tax Reform or Tax Cut?

  1. Raisa

    Adrian, thank you for taking the time researching all this information, you don’t know how clear you have made this for me.

    thanks again for educating me..LOL

  2. I feel that this amendment really will slow the growth of the housing market considerably; given the deterrents the legislature would like to be enacted.

  3. Juan

    Tax Reform ?? What f..ing joke.

    These are the proponents:
    “Behind Crist stands the Yes on 1 political action committee with a $2.8 million war chest. Major contributors include the Florida Association of Realtors, Florida Power & Light, the Florida Home Builders, the Florida Medical Association and the Florida Outdoor Advertising Association.”

    These are the opponents:
    “Lined up in opposition is the Florida League of Cities and Florida is Our Home PAC, a coalition that includes the Florida Education Association, the American Federation of State, County and Municipal Employees, the Florida AFL-CIO, and the Florida Alliance of Retired Americans.

    Their initial campaign finance report, released late last week, suggests they are seriously outgunned, with just $373,000 in contributions. A final accounting won’t come out until after the election.”

    Source: http://www.flatoday.com/apps/pbcs.dll/article?AID=/CD/20080113/CAPITOLNEWS/801130316/0/capitolnews

  4. Adrian Salgado

    According to an article in today’s Miami Herald (that I can’t find online), it’s looking more and more like it will pass.

    Get used to Charlie Crist’s face. It will be all over the television airwaves from now until Tuesday.

    What’s sad is that people hear “tax cut” and immediately favor whatever they put out there instead of researching the subject.

    I don’t care if people vote yes, as long as they know what they’re voting for. Unfortunately, very large percentage of those who will vote yes have no idea how it will affect them in the long run.

  5. Gabriel Mendoza

    Great job Adrian.
    I voted NO, 245.00 will not make
    or break the bank for the majority.
    I can already see Crist in 2012 telling
    the Republican party to elect him to be the
    Republican nominee. ” I was governor of Florida when the largest cuts in property taxes where proposed and passed.”

  6. Exactly.

    “The single largest tax cut in the history of Florida. I allowed people who were once trapped in their homes to achieve their American dream of living in a condo on the ocean…”

    It’s funny. FPL pumped $500,000 into this Amendment One campaign and I wondered “why is FPL getting involved in a property tax thing ? It has to be more than just more homes sold = more FPL customers”.

    Turns out that FPL is trying to get in good with Charlie Crist after strongly supporting his challenger, Tom Gallagher, in the gubernatorial race.

    These are the things they don’t teach you in Civics class back in 7th grade.

  7. leo strapp

    I own a woodland park mobile home with a 10×40 room addition and am taxed AdValorum for the addition. Do I qualify for the $25000 exemption? I was paying around $70 a year and then the tax man reappraised the addition and now I pay $170. which was more than 100 percent increase. I didn’t think that was right but the tax man said it was his duty since the appraiser re-valued the property. I rent the land and pay the landlord so I guess in a way I pay also for the land value. Can you help explain this as I just received a letter from the tax dept. saying I could apply for the $25000 exemption?

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