State Sen. Howard Stephenson is pushing a major change in Utah's residential property tax system, a modification of California's tax-cutting Proposition 13. He says it would lead to senior citizens not being taxed out of their homes and "tax stability" for all.
But critics are already saying it could also pit first-time and new homebuyers against entrenched homeowners and fuel a battle between age groups and income levels. Plus, they point out, compared with surrounding states and individual tax burdens, Utah's property tax on homes is not bad. Nationally, it is the eighth lowest. As a percent of tax burden, it falls well behind sales and income taxes.Where's the need for such a drastic change? they ask.
Recognizing he has some spade work to do, Stephenson, R-Draper, is moving slowly.
This year and next the special Tax Review Commission will study his idea. He plans to introduce a constitutional amendment in the 1999 Legislature, now just four months away. But he doesn't expect it to pass on the first go-round. "We'll need to debate it, tweak it" in 1999. He'll look for passage in the 2000 session, which would allow it to be placed before voters in that November's election.
Basically, Stephenson would scrap the current real property assessment law in Utah as it applies to homes. That process has been in place since statehood.
As now written, the state constitution says all real property must be "taxed at a uniform and equal rate in proportion to its value."
That is, two houses of about the same value sitting next to each other must be taxed the same.
Stephenson's plan would have them taxed very differently, depending on when the houses were sold and how long the current owners have lived in them.
His goal is to have a house, once purchased, never be reassessed for tax purposes. When a house is sold, its existing fair market value would become the base line for its assessed valuation. While the house's assessment could rise through a set factoring, which would be capped in his law at 2 percent per year, no longer would county assessors be raising a home's assessment each year as real estate prices rise - for instance, 4 percent one year, 8 percent the next, whatever the market demands.
His idea, in practice, is complicated.
State Tax Commission officials are still trying to figure it out. And Stephenson himself has been making changes along the way.
But if implemented through a constitutional amendment, it would be a drastic change in how homes are taxed in Utah.
"It is a drastic change for the better," says Stephenson. "Because for once homeowners would have tax stability - they'd know for certainty what their property taxes would be as long as they owned the home" - and as long as tax rates didn't go up.
But critics are already saying it could lead to some kind of social engineering through tax policy.
As California officials found out after Proposition 13 passed there in the 1970s, capping - drastically slowing the impacts of real estate inflation - led to some senior homeowners staying in their houses longer than usual. If they sold or bought a condominium or smaller house, they paid higher property taxes on the smaller dwelling. (Stephenson says that result has been blown out of proportion.)
County governments and school districts in California fell short of funds. The state Legislature started sending state tax money back to the local taxing entities to help make up revenue shortfalls. Political power shifted from local governments to the Legislature and state officials.
Stephenson says that happened because Proposition 13 slashed existing property taxes in California. His proposal doesn't do that; local taxing entities would get the same amount of property tax after his change as they get now.
Stephenson is not interested in social engineering and says he's working hard to counteract the negative aspects of California's experience.
A conservative Republican whom Democrats hope to defeat in his re-election bid this year, Stephenson is president of the Utah Taxpayers Association, a business-funded lobbying and government watchdog group that routinely examines the tax structure in the state and lobbies lawmakers for changes. In fact, Stephenson is a registered lobbyist for his association.
One of his greatest political coups was the passage two years ago of a manufacturers sales-tax exemption on the purchase of new equipment.
Stephenson knows there will be opposition to his plan. He anticipates the homebuilding and real estate industries will be skittish, fearing a turn in the real estate market as new homebuyers gasp at "losing" the current 45 percent primary residence tax break.
"While they do give it (the 45 percent reduction) up when they first buy a house, if they stay in the home eight or nine years (and inflation pushes up home prices all the while) they not only get (the reduction) back, they pass it by" and actually begin to be taxed on 40 percent, 35 percent and even 30 percent of their home's real value, he said.
Mark Maxfield is a local real estate agent who studies tax issues for the Greater Salt Lake Board of Realtors. While the board takes no position on Stephenson's plan now, Maxfield says Realtors have two worries:
First, Utahns transferred by their employers in-state would be forced to pay higher property taxes when they sold their old homes and bought new ones. "And that didn't seem fair, just to keep your job," he said.
Secondly, "It could hurt the first-time homebuyer, who would have to pay the higher property taxes" that come because the current 45 percent homeowner tax break is junked.
What about that first-time buyer? And would children and grandchildren struggling to afford their first house be pitted against their parents and grandparents who would be enjoying the great tax benefits of Stephenson's plan?
"I'm considering adding a special 20 percent (tax break) for first-time buyers, and that can easily be done under federal law definitions of a first-time buyer," Stephenson says. "And parents and grandparents certainly can continue helping their children and grandchildren buy their first home, as they do now."
Salt Lake County Assessor Lee Gardner says one of his concerns about Stephenson's plan is that it assumes - for the sake of local government funding - that home prices will continue to rise.
Gardner was a private fee appraiser in the late 1980s "when I was appraising houses at even less than the mortgage, and that is a real problem" - how you fund local governments and schools in times of dropping real estate prices.
He also worries that, depending on how sales go in the county, Stephenson's plan (because it does away with the 45 percent homeowner discount on new purchases) could be a tax shift away from commercial and industrial properties to new homeowners.
Here are some of the major points of Stephenson's plan:
- Only residential homes would be affected. The "uniform and equal" tax practice in current Utah law would still apply to commercial and industrial properties.
- Once a home was bought, assessment levels would be set. They could increase only 2 percent a year if real estate inflation went up 2 percent or more and could actually remain the same or decrease if real estate prices stabilized or fell.
- The uncertainty of homeownership, via escalating property taxes, is taken away. While tax rates could be increased by local taxing authorities (counties, school districts, cities and special districts), assessments would be set and could only grow 2 percent a year. If citizens kept local officials from raising rates, their home property taxes wouldn't increase significantly. (Property taxes are figured by multiplying the overall tax rate against a property's assessed value.)
- The 45 percent homeowner discount now given under the state constitution would end. A new homeowner would lose that 45 percent discount and the first year would pay tax on 100 percent of the home's fair market value. But each additional year the home was owned - as market real estate prices rise - a homeowner would get farther and farther ahead of the real estate market curve. At some point, Stephenson estimates eight or nine years after buying a home, the homeowner's taxes actually would drop below a level that would equate to the current 45 percent homeowner discount.
- There is no automatic shift of home property taxes to commercial and industrial property taxes. The tax savings provided by the current 45 percent homeowner assessment discount would be spread out among new and old purchased homes (based on how long a homeowner has been in a house) to ensure local governments and school districts don't lose any property tax revenue.
"This is a win, win, win situation," Stephenson says. The homeowner buys a house and knows (except for rate increases voted by local governments) what the taxes will be for years to come. No longer is there the uncertainty of rising real estate prices pushing up assessments, he says.
Since property taxes rise slowly under his plan (at most, 2 percent a year), older homeowners drawing retirement wouldn't see their property taxes taking huge chunks out of their now-smaller incomes.
Local governments would win, he says. Expensive assessment procedures on homes would end. Local elected officials wouldn't face the wrath of homeowners upset over rising property taxes.
While all that may be correct, over time inequities between property taxes paid would grow.
If Stephenson's plan were in effect today, a couple who bought a $100,000 house would pay 100 percent assessment taxes next year. In 10 years (at 2 percent assessment growth a year) the house would be assessed for taxes at $120,000.
In 2008 a young couple could buy a similar house next door for $150,000, the higher price coming through real estate inflation. And they would pay tax based on the $150,000 fair market value while their older neighbors paid tax based on their $120,000 assessment level.
The younger couple would be paying a property tax 25 percent higher than their older neighbors.
And that will be the crux of the political debate over Stephenson's plan.