Williams Parker Attorneys at Law Sarasota Attorneys

Property Tax Reform?

J. Michael Hartenstine

In June the Florida Legislature approved legislation intended to provide property tax relief to Florida taxpayers.  Senate Joint Resolution No. 4-B proposed amendments to the Florida Constitution, which the voters of Florida will be asked to approve at an election on January 29, 2008, if an appellate court overturns a Leon County Circuit Judge’s recent ruling that the ballot language summarizing the proposed amendments is legally deficient.  House Bill No. 1-B limited the millage rates that local governments may levy for the collection of ad valorem taxes and additionally implements the constitutional amendments should they be approved.  

The millage rate limitations prescribed by House Bill No. 1-B were intended to reduce local millage rates from three to nine percent, but those reductions are dependent on the cooperation of local governing bodies, which were given the option to exceed the millage rate limitations by a supermajority vote.  

Individual citizens have little to say about the millage rate limitations prescribed by the legislature or the decisions of local governments to comply with, or exceed, those limitations.  However, if the Circuit Judge’s ruling is overturned on appeal, each Florida voter will have a say on January 29, 2008, on whether the amendments are adopted.

It is likely the appeal of the Circuit Judge’s ruling will ultimately be decided by the Florida Supreme Court, although it is first being filed with the First District Court of Appeal.  If the courts overturn the ruling, the vote on the proposed amendments will proceed as originally scheduled.  If the courts uphold the ruling, then no vote on the proposed amendments will be held.  However, it is possible that the legislature will adopt revised ballot summary language to salvage the vote or even propose alternative amendments.  This article assumes that a vote on the amendments as proposed by Senate Joint Resolution No. 4-B will be held.

To be adopted, the amendments must be approved by 60 percent of the votes cast.  If the amendments are approved, the amendments will take effect retroactively to January 1, 2008.  The proposed amendments would modify the property tax exemption for homesteads, allow reduced assessments for property used for rent-restricted affordable housing, allow reduced assessments for waterfront property used for certain commercial or public access purposes, exempt tangible personal property valued at $25,000 or less from ad valorem taxes, and require the legislature to limit the authority of counties, municipalities, and special districts to increase ad valorem taxes.  

The existing constitutional provisions exempt from ad valorem taxation the first $25,000 of a homestead’s value and limit annual increases in the taxable value of a homestead to the increase in the Consumer Price Index or three percent, whichever is lower (the “three percent cap”).

If approved, the amendments would increase the homestead tax exemption from a flat $25,000 to 75 percent of the homestead’s value up to $200,000 and 15 percent of the value between $200,000 and $500,000.  The $500,000 threshold would increase annually by the percentage change in per capita personal income and could be further increased by a two-thirds vote of the legislature.  Existing homestead owners would be allowed to choose either to continue the $25,000 exemption and three percent cap or to take the higher exemption amounts in lieu of the three percent cap.

Much commentary has appeared in the press about the legislature’s failure to address the most significant property tax concern, namely, the disproportionate burden of the property tax on non-homestead properties.  The proposed amendments have been criticized as exacerbating this disparity by providing even more tax relief to homestead property.  It is not the case, however, that the proposed amendments offer nothing to non-homestead property owners.    

According to the Florida Senate Finance and Tax Committee, nearly 1.3 million tangible personal property tax returns were filed in 2006.  Of these, almost one million returns reported tangible personal property valued at less than $25,000.  The total taxable value of the personal property reported on these nearly one million returns was less than five percent of the total tangible personal property tax value reported on all 1.3 million returns.  Given the relatively small amount of revenue generated from returns of property valued at less than $25,000, eliminating the requirement of filing a return for tangible personal property valued less than $25,000 is a sensible step.  Even though the direct tax savings for owners of tangible personal property will not be great, the indirect savings of time and money devoted to completing and filing tangible personal property returns is worth noting.

More importantly, if the amendments are approved, the three percent cap on annual increases in assessments of homestead property will gradually disappear.  The three percent cap is the cornerstone of the Save Our Homes constitutional amendment approved in 1992.  It is also at the core of the disproportionate property tax burden presently borne by non-homestead properties. If the three percent cap were removed and homestead properties assessed at their fair market value, the resulting increase in tax revenue would likely cause substantial decreases in millage rates, thereby significantly reducing the property taxes paid by non-homestead properties.  

The legislature understandably did not propose an immediate termination of the three percent cap for fear of outright voter rejection.  Instead, the legislature chose to allow every taxpayer who presently has the three percent cap to retain the benefits of the cap for as long as the homestead remains in the ownership of the taxpayer.  If the homestead were sold, however, the three percent cap would disappear, and neither the new purchaser of the homestead nor the taxpayer upon buying a replacement homestead would thereafter be entitled to the benefits of the cap.  A majority of present Florida homesteads may be sold in the next five to ten years.  Perhaps in 20 years fewer than five percent of all existing homesteads will remain in the ownership of their present owners. Over time, as more and more existing homesteads were sold, the impact of the three percent cap would gradually diminish.  Eventually both homestead and non-homestead properties would be assessed at full value, thereby eliminating the disparity existing today.  

At least that would be the case if the legislature’s proposed amendments did not also dramatically increase the amount of the homestead exemption.  Due to the significantly higher exemption amounts, all homesteads not subject to the three percent cap will enjoy substantial tax savings.  Those savings will necessarily be translated into increased costs for owners of non-homestead properties.  This will tend to worsen the present tax disparity between owners of homestead and non-homestead properties.

We probably cannot know whether the gradual elimination of the three percent cap, coupled with the increased homestead exemptions, will, over time, reduce the tax disparity between homestead and non-homestead properties.  This is an area of considerable uncertainty.  It does seem reasonably clear, however, that in the poorest counties of Florida, where most homesteads are valued at less than $200,000, the impact of the increased homestead exemption will cause an abrupt and severe shift of the property tax burden to non-homestead properties (other than properties enjoying the agricultural exemption).  While the impact of the increased homestead exemptions will not likely be disruptive in Sarasota County, one must wonder how these rural counties will manage to fund their local governments with such a substantial portion of their homestead valuations being exempt from taxation.  

Some individuals presumably will vote on the proposed amendments based on their assessment of the overall impact of the amendments on the fiscal stability of local governments throughout the state.  It is safe to assume that most voters, however, are likely to be influenced on this question by the impact the amendments will have on their personal fiscal stability.  How does one assess this impact?  

First of all, if the amendments are not approved, everything is status quo.  If you enjoy the three percent cap now, you will continue to enjoy it.  If you sell your present homestead and buy a new homestead in 2008, you will be entitled to the three percent cap.  

If the amendments are approved, you will need to know whether you are entitled to the three percent cap.  If, as of December 31, 2007, you own and reside on property as your homestead, you are entitled to the continued benefit of the three percent cap; otherwise, you are not.  If you own a lot on which you are building a home into which you will move in 2008, you will not be entitled to the cap.  If you are leasing a Florida home now, but will not be acquiring ownership of the home until 2008, you will not be entitled to the cap.  If you will be closing the purchase of a new home on December 31, 2007, but will not be moving in to establish residency until January 1, 2008, you will not be entitled to the cap.  

If the amendments are approved and you are entitled to the three percent cap, the cap will automatically continue to apply to your homestead until such time as you elect to abandon the cap in favor of the higher homestead exemption amounts.  This election presumably will be filed with the property appraiser.  Once made, the election is irrevocable.  If you never make the election, the three percent cap will continue to apply for as long as you own your homestead.

If the three percent cap is more favorable to you than the higher homestead exemption amounts and you anticipate acquiring a new homestead after December 31, 2007, you probably will want to vote against the amendments.  

This is not to say that everyone will benefit more from the three percent cap than from the higher homestead exemption amounts. This is a function of a number of factors:  What is the value of your homestead?  How much has your homestead appreciated in value? How much longer will you own your homestead?  How often are you likely to purchase replacement homesteads in the future?  If you purchase a replacement homestead, will the value of the new homestead likely be much higher than the value of your present homestead?  How much do you think your present or future homestead will appreciate in value over time?  

Generally speaking, the longer you own your homestead and the more expensive your homestead is, both now and in the future, the more likely your property taxes over time will be lower with the three percent cap than with the higher exemption amounts.  

This can be illustrated through some examples, in which, for simplicity, it is assumed that your homestead is located in Sarasota County, that the total ad valorem tax rate remains constant at 13 mills (the actual 2006 millage rate was 13.1859), that the new $500,000 homestead exemption threshold remains constant, that you continue to own your homestead for the next 10 years, and that the fair market value of your homestead doubles during this 10-year period.

Example 1.  Suppose you purchase a new homestead in January 2008 for $200,000.  If the amendments are not approved, your homestead will be taxed at a value of $175,000 ($200,000 less the $25,000 homestead exemption).  Your 2008 taxes will be $2,275. At the end of 10 years, even though your homestead is worth $400,000, the annual three percent cap and $25,000 homestead exemption limit the taxable value to $244,000.  Your taxes at the end of 10 years will be $3,169, and your total taxes over this 10-year period will be $29,725.  

On the other hand, if the amendments are approved, the three percent cap will not be available, and the increased homestead exemption amounts will apply.  For 2008, your taxes will be based on $50,000 ($200,000 minus 75%).  This yields a 2008 tax bill of $650.  In 10 years, even though the homestead has increased in value to $400,000, the exemption amounts limit the taxable value to $220,000 ($50,000 plus 85 percent x $200,000).  Your taxes 10 years from now on this value will be $2,860 and your total taxes over this 10-year period will be $19,305.  For the first 10 years, you would pay approximately $10,000 less in taxes under the higher homestead exemption amounts than under the three percent cap. Eventually, there would be a crossover point where your annual taxes would actually be higher with the higher exemption amounts than with the three percent cap, but since you would have had years of tax savings with the higher exemption amounts, you would likely want to vote in favor of the amendments.  

Example 2.  Suppose you are building a home into which you will move in 2008.  Suppose your completed home and lot value will be $2 million.  If the amendments are not approved, your homestead will be taxed at a value of $1,975,000 ($2,000,000 less the $25,000 homestead exemption).  Your 2008 taxes will be $25,675.  At the end of 10 years, even though your homestead is worth $4 million, the annual three percent cap and $25,000 homestead exemption limit the taxable value to $2,688,000.  Your taxes at the end of 10 years will be $34,617, and your total taxes over this 10-year period will be $329,428.  

On the other hand, if the amendments are approved, the three percent cap will not be available, and the increased homestead exemption amounts will apply.  For 2008, your taxes will be based on $1,805,000 ($50,000 on the first $200,000, plus $255,000 on the next $300,000 + $1,500,000).  This yields a 2008 tax bill of $23,465.  In 10 years, even though the homestead has increased in value to $4,000,000, the exemption amounts limit the taxable value to $3,805,000 ($50,000 on the first $200,000, plus $255,000 on the next $300,000 + $3,500,000).  Your taxes 10 years from now on this value will be $49,465 and your total taxes over this 10-year period will be $401,115.  For the first 10 years, you would pay approximately $72,000 more in taxes under the higher homestead exemption amounts than under the three percent cap.  Even though your annual taxes are less initially with the higher exemption amounts than with the three percent cap, they quickly exceed the taxes due with the cap.  Unless you were planning to sell your homestead in the near future, you would certainly want the advantage of the three percent cap.  Therefore, you would likely want to vote against the amendments.  

Example 3
.  Suppose you presently have a homestead with a fair market value of $1 million, but which, due to the three percent cap, is presently valued at only $900,000.  If the amendments are approved, should you elect to take advantage of the higher exemption amounts in lieu of the three percent cap?  If you make the election, your taxes for 2008 will be based on $805,000 ($50,000 on the first $200,000, plus $255,000 on the next $300,000 + $500,000).  This yields a 2008 tax bill of $10,465.  In 10 years, even though the homestead has increased in value to $2,000,000, the exemption amounts limit the taxable value to $1,805,000 ($50,000 on the first $200,000, plus $255,000 on the next $300,000 + $1,500,000).  Your taxes 10 years from now on this value will be $23,465 and your total taxes over this 10-year period will be $186,615.

On the other hand, if you do not make the election, your homestead will be taxed in 2008 at a value of $875,000 ($900,000 less the $25,000 homestead exemption).  Your 2008 taxes will be $11,375.  At the end of 10 years, even though your homestead is worth $2 million, the annual three percent cap and $25,000 homestead exemption limit the taxable value to $1,210,000.  Your taxes at the end of 10 years will be $15,399, and your total taxes over this 10-year period will be $146,276.  

For the first 10 years, you would pay approximately $40,000 more in taxes under the higher homestead exemption amounts than under the three percent cap.  Even though your annual taxes are less initially with the higher exemption amounts than with the three percent cap, they quickly exceed the taxes due with the cap.  Unless you were planning to sell your homestead in the near future, you would certainly want the advantage of the three percent cap. Therefore, you would not elect to have the higher exemption amounts apply in lieu of the cap.  

Will the amendments if approved provide the intended tax relief? They will certainly provide tax relief to some and not to others. Whether the overall impact of the amendments on taxpayers and local governments will be positive is uncertain.  Property owners, however, should be able to evaluate the likely impact of the amendments on their individual property tax liabilities.

For more information on this article, please contact Michael Hartenstine at (941) 329-6610.  You may also email him at mhartenstine@williamsparker.com.
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