Property Tax Limitation in Other States
(from Maine Townsman, December 1996)
By Michael Starn

During the 1990’s property tax limitation measures have appeared on the November election ballot in several of the 24 states that allow for initiatives and referendums. Only a few states have enacted property tax caps, however. While the voting results do not show a clear national trend toward adopting property tax limitation measures, the growing number of these mostly citizen-initiated referenda does indicate a widespread public discontent with property taxes.

A review of last month’s election finds three states - Oregon, Oklahoma and California - where property tax limitation measures were enacted by voters and two states - Idaho and Nebraska - where limitation measures were voted down. One state - Arkansas - went the other direction and established a statewide minimum on property taxes for education purposes of 25 mils.

[NOTE: Arkansas’s school districts have separate taxing authority from the local governments and the 25 mils is on property assessed at only 20% of its fair market value. This particular statewide minimum was directed at just a few school districts that were taxing below that level. It should also be noted that Oregon and California already had property tax limitation measures in their state constitutions and that in Oklahoma the three newly enacted questions were viewed as a moderate compromise to a recently defeated property tax limitation measure.].

The 1994 election, according to information from the National League of Cities, was more favorable to local governments with two states - Oregon and South Dakota - defeating property tax limitation measures and no state approving one.

According the National Conference of State Legislatures, the 1992 election witnessed the defeat of property tax rollbacks in Michigan and Idaho and the approval by Florida voters of a limit on the growth in property valuations to 3% annually.

This article looks at property tax limitation measures in three states - Oregon, California and Oklahoma.

Oregon Residents Tighten Grip

In 1990, the citizens of the State of Oregon passed a citizen-initiated property tax limitation measure that restricted the amount that could be raised by local governments to 1% of assessed valuation. Schools in Oregon are a separate taxing jurisdiction and they were limited to 1/2 % of valuation under this measure. Therefore, the combined property tax limitation placed by Oregon voters on local governments (cities, counties and special districts) and schools was 1.5% of assessed valuation (or 15 mils).

According to Phillip Fell, director of legislative relations for the League of Oregon Cities (MMA’s counterpart there), the 1990 limitation had varied consequences depending on the community. Fell says that cities with good industrial bases were unaffected or modestly impacted by the tax cap, while many low value, full-service communities were forced to made dramatic cutbacks in their services.

Fell admits that a lot of the pressure on local governments from the cap has been alleviated by the economic boom that has been taking place in Oregon for the past three to five years. New housing and commercial development have resulted in dramatic increases in assessed valuation, thereby making the 1% limit more flexible. "Growth helped bail us out," says Fell.

But, that same growth which gave local governments more flexibility in complying with the property tax cap also raised the ire of the citizen taxpayers’ group responsible for getting the 1990 measure on the ballot. This "citizens" taxpayers group is well-organized with the strong financial backing from some wealthy, conservative businesspeople in the state, according to Fell.

It is interesting to note that in this past election, Oregon voters faced the largest number of statewide ballot measures in the country, 23, of which 17 were citizen-initiated. One reason for this may be that signature gathers in Oregon are allowed to be paid for each signature obtained (a practice that has been prohibited by the Maine Legislature). According to Fell, you often find enterprising people willing to gather signatures for several petitions at the same time.

Tax policy issues have been hotly debated in Oregon since the 1990 election and voters have had several opportunities since then to enact tax reforms. In 1992 Oregon voters turned down a plan to raise property taxes on businesses. In 1994, voters defeated a measure that would have required voter approval of increases in state and local fees and taxes. In that same year, they also defeated a measure that would have constitutionally replaced the entire state and local tax system with a two percent "equal tax" on trade.

In 1996, the Oregon property taxpayers’ group were successful. With 52% of the vote, they got Measure 47, known as the "cut and cap" initiative, enacted. This constitutional amendment limits property taxes to 10% less than the FY 1995-96 taxes, or 100% of the FY 1994-95 taxes, whichever is less. It also limits future growth in property taxes to 3% per year.

This new property tax limit in Oregon is in addition to the constitutional amendment of 1990. Therefore, property taxes in Oregon are the lowest of three limits, the two contained in the 1996 measure and the 1% of assessed valuation cap from 1990.

The proponents of the "cut and cap" measure were able to throw another "control" element into Measure 47. Anticipating the necessity of state and local budget cuts resulting from the limitation measure, language was inserted into Measure 47 that if budget cuts are needed: the state will prioritize education and local governments will prioritize public safety.

The board of directors of the League of Oregon Cities recently voted to challenge the constitutionality of Measure 47 because it deals with more than one section of the state’s constitution. State law prohibits a single referendum question from amending more than one section of the constitution at a time.

California: Where It All Began

In 1978, voters in California passed Proposition 13, the grandfather of subsequent property tax limitation measures proposed in other states. Proposition 13 has also been the subject of numerous court cases, legislative actions and subsequent referendums in California over the past 14 years.

Proposition 13 limited local property tax rates in California to 1 percent on assessed property values for both residential and commercial properties. It also limited increases in assessed property values to no more than 2 percent per year, except when property is sold.

Under Proposition 13, real property in California is taxed on the basis of its acquisition value, and is reassessed when there is a change in ownership or when new construction occurs. Voters approved an amendment in 1986 that allowed the Legislature to exempt from reassessment property transfers between parents and children.

In addition to limiting property taxes and assessing property based on ownership, Proposition 13 placed a direct constraint on the ability of state and local lawmakers to raise taxes. The Proposition requires that any new state taxes that generate revenue increases must be passed by at least two-thirds of the legislature. In addition, any new local tax increases designated for a "specific" purpose must be approved by at least two-thirds of the people.

The ability of, at least some, California local governments to impose "general" local taxes, fees and charges without voter approval was legal under Proposition 13 until this year. A statewide citizens taxpayers’ group has tried to close the loophole ever since Proposition 13 was passed.

A state supreme court ruling in 1982 said "general tax increases" were not subject to voter approval under Proposition 13. That ruling prompted the statewide taxpayers’ group responsible for Prop 13 to initiate and help to get passed in 1986 Proposition 62 which required a majority popular vote for local "general" taxes.

What may have been a loophole in Prop 62 - at least from the taxpayer group’s viewpoint - was that local governments could enact user fees in lieu of new taxes. Also, Prop 62 only applied to "general law" cities leaving "charter" cities with the authority to enact new taxes or user fees, without voter approval.

This November, California voters may have finally closed all the loopholes of Prop 13. Californians tightened their grip on local taxing authority by passing Proposition 218 which requires voter approval in any "charter" cities, as well as "general law" cities which were already covered, on any new local tax, fee or charge.

Constitutional questions have been raised about two aspects of Proposition 13. One concerns taxes being assessed on the basis of property ownership as opposed to fair market value (or ad valorem); the other is placing a super majority requirement on the state legislature. While both of these provisions have been found to be legal under California’s constitution, MMA’s Legal Services attorneys say they would not be consistent with Maine’s state constitution.

Oklahoma Votes for Compromise Tax Cap

Three property tax limitation measures were passed this November in Oklahoma. Supported by several statewide business associations, these measures were a compromise property tax reform package that followed the defeat this past spring of a much more stringent tax limitation proposal.

The earlier, defeated measure, State Question (SQ) 669, was hotly contested with many of these business alliances that supported the recently approved measures mounting a fierce campaign against it on the ground that it would slow down economic development. SQ 669 would have rolled back and frozen property tax assessments to their 1993 levels. It would have also limited annual increases in those taxes to 3% with the condition that a super majority (60%) of the voters would have to approve any increase.

In Oklahoma, property taxes primarily fund education (not operating costs) and county government. Municipalities, however, depend on property taxes to fund bond indebtedness for capital projects.

The alternative measures passed this November were SQ 675, SQ 676 and SQ 677. They accomplished the following:

Question 675 caps locally assessed real property tax ratios at 13.5% with a floor of 11% and places a 10% to 15% ratio limit on personal property. [NOTE: In Oklahoma property is assessed at a very low percentage of fair market value. Counties, which are responsible for assessing property taxes, had major disparities in their tax ratios. Oklahoma state law sets a number of mil rate limits for schools, counties, and other governmental entities that get property tax dollars. Therefore, a cap on the assessment ratio has the effect of capping the amount of property tax dollars that can be raised.)

Question 676 limits the increase in the fair market value of individual tax assessments to 5% per year . The cap does not apply when property is transferred (the selling price is then used as the fair market value) or when improvements have been made on the property.

Question 677 freezes the tax value of homes owned by persons age 65 and over with gross incomes of $25,000 or less. The freeze remains in place until the owner dies, the owner’s income exceeds the qualifying amount, or the ownership of the property is changed. Improvements can be added to the assessed value.

Conclusion

A petition has been circulating for the past two years in Maine that, if enough signatures are gathered, would put to referendum vote a Prop 13 style property tax limitation measure here in Maine.

Maine Municipal Association feels this type of property tax reform is the wrong type of reform. The experiences of local governments in other states in dealing with property tax limitation measures, however, can be useful as MMA puts together a reform proposal that will hopefully appease the public's discontent with property taxes.