Ad Valorem Tax ReformPresentation to Orange County Board of County Commissioners

January 30, 2007

Sarah M. BleakleySpecial Counsel, Florida Association of Counties

sbleakley@ngnlaw.com850.224.4070 office

850.508.5816 mobile

Ad Valorem Tax Reform

• Constitutional Structure

• Fiscal Effects of Save Our Homes

• Tax Reform Proposals

• FAC Proposal

• Legal Issues

Ad Valorem Tax is Constitutionally Limited to Local Governments

• “No tax shall be levied except in pursuance of law. No state ad valorem taxes shall be levied upon real estate or tangible personal property. All other forms of taxation shall be preempted to the state except as provided by general law.” Art. VII, sec. 1, Fla. Const.

• “Counties, school districts, and municipalities shall, and special districts may, be authorized by law to levy ad valorem taxes and may be authorized by general law to levy other taxes, for their respective purposes . . . .” Art. VII, sec. 9, Fla. Const.

The Florida Constitution Defines the Ad Valorem Tax Base

• Just Valuation Required. – Gross fair market value minus cost of sale.

• Assessed Value is Just Value minus Differentials.– Save Our Homes.– Agriculture and other differentials authorized based on character

and use.

• Taxable Value is Assessed Value Minus Exemptions.– Homestead Exemptions. – Community and Economic Development – Historic Preservation. – Renewable Energy Source. – Seniors with low income

Ad Valorem Revenues

• Taxable Value times Millage Rate equals Taxes Levied.– Millage rate must be uniform through-out the

taxing unit.

• Taxes Levied minus Discounts equals Tax Receipts to Local Government Levying Authority.

Save Our Homes (“SOH”) Differential

• Defined by the Constitution– Enacted by Citizens Initiative in 1992.– SOH limits the increase in assessed value of

homestead property to the lesser of three percent or the change in the CPI.

– Upon sale of the homestead, the assessed value of the property becomes the just value.

Constitutionally Authorized Homestead Exemptions

• $25,000 homestead exemption

• $50,000 Save Our Seniors for city and county taxes.

• Granny Flats-additions for parents 62 years or older.

• Household goods.

• Widow/widowers.

• Blind or Totally Disabled.

Ad Valorem Tax Rates Constitutionally Limited

• 10 mills for county purposes• 10 mills for municipal purposes• 10 mills for school purposes• Special districts may levy a millage:

– When authorized by law (general or special) and– Approved by voters.

• County and municipal 10 mill limit may be exceeded when approved by voters:– For two years for general governmental purposes and– For payment of bonds.

State Interest in Property Taxes

• Public school funding statutorily tied to property taxes through the Required Local Effort (“RLE”) of School Boards. The legislature sets the RLE millage rate in the Appropropriatoins Act.

• State general revenue funds the remainder of public schools.

• The amount generated by the RLE has increased over the last five years by an average of 12 percent a year, with an 18.7 percent last year.

County/Municipality Reliance on Property Taxes

• County Revenues

• Property Taxes 31%

• Charges for Services 31%

• Sales Tax 8% • Utility Tax & Franchise Fee 1.6%• Comm. Service Tax 0.9%

• Federal & State-shared Revenue 16%• Other taxes & Miscellaneous sources 12.4%

• Total Revenues $16.9 Billion

• Counties have 50 percent more revenue than cities.

– 2004 Data as reported by LCIR

• Municipal Revenues

• Property Tax 17%

• Charges for Services 42%

• Sales Tax 4.4%• Utility Tax & Franchise Fee 7.5%• Comm. Service Tax 1.6%

• Federal & State-Shared Revenue 13.8%• Other taxes & Miscellaneous sources 15.3%

• Total Revenues $10.6 Billion

– Does NOT include Enterprise Funds

Effects of SOH

• People feel trapped in homes.– SOH is not portable. “Lock-in” effect.

• Inequitable taxes for similarly situated taxpayers.• First time homeowners pay on a higher valuation

than long time neighbors.• Commercial property owners and other non-

homestead property owners pay higher amounts to make up for the SOH differential.

• Renters pay more, too.• Second home owners squawking.

Florida Tax Roll Overview

• Early 1980’s and the last 6 years experienced just and taxable growth rates above 10%

• 1974 – 2002: FL personal income and property taxable value indices were relatively equal.– Personal income was slightly higher than taxable

value• Since 2002,

– Taxable value has increased 86.3%– Florida personal income increased 24.7%

• Since 1995, the average annual growth rate of SOH assessment differential has been 54.4%– Homestead exempt value has grown by only 2.5%

Homestead Exemption & Save Our Homes

85 94 97 100

102

105

107

109

28 48 80 118

165

246

404

87 89

92

9 14

21

6

5.9%

6.4%

6.9% 7.0%

6.4%

3.2%

5.0%

8.7%

5.9%

6.7%

3.6%

0

50

100

150

200

250

300

350

400

450

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Bil

lio

ns

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Homestead SOH diff Personal Income Growth Linear (Homestead) Expon. (SOH diff)

52.52 56.02% 46.86% 34.03% 71.41 68.50% 46.50 38.0%53.4% 64.1%

Components of Just Value on 2006 Florida Tax Roll

HX Value$1094%

Ag Differential$693%

SOH Value$40417%

Government$1536%

All Other Exemptions

$582%

Taxable Value$1,64968%

* Dollar values are in billions

Save Our Homes Effect on Affordable Housing, Evidenced by Property Tax Data

• Save Our Homes Affect on Property Taxes Based on Year Purchased

• With a 6.5% mortgage rate, the difference between purchasing a home in 1999 rather than 2005, equates to the ability to purchase a $20,000, or 13%, higher valued home.

• Without SOH, new homes’ property taxes would decrease by $387 per year, while previously purchased homes would see an increase of $561 per year.

Bought in: Just Value SOH Differential

Assessed Value

HX Taxable Value

Millage Rate

Ad Valorem Taxes

Monthly Taxes

2005 $150,000 $150,000 $25,000 $125,000 19.6 $2,450 $204

2004 $150,000 $27,281 $122,719 $25,000 $97,719 19.6 $1,915 $160

2003 $150,000 $44,643 $105,357 $25,000 $80,357 19.6 $1,575 $131

2002 $150,000 $55,594 $94,406 $25,000 $69,406 19.6 $1,360 $113

2001 $150,000 $63,236 $86,764 $25,000 $61,764 19.6 $1,211 $101

2000 $150,000 $70,087 $79,913 $25,000 $54,913 19.6 $1,076 $90

1999 $150,000 $73,712 $76,288 $25,000 $51,288 19.6 $1,005 $84

Distribution of Property Taxes

• Trend toward a greater proportion of residential property on tax roll.– 1974: 38.9% of tax roll was residential property

– 2006: 67.1% of tax roll was residential property

• Save Our Homes has shifted tax burden from homestead property to non-homestead residential and non-residential property

Effect of Save Our Homes on Tax Burden Proportions

With SOH Without SOH

Homestead 32.1% 45.5%

Non-homestead Residential 34.5% 28.4%

Non-Residential 32.5% 26.1%

Save Our Homes Impact on Counties

• Considerable variation among counties in taxable value reduction resulting from SOH growth limitation:– Brevard County: 37% – Hamilton County: 5.4% – Orange County:16.3%– Statewide: 24.5%

• Percentage Reduction in taxable value is higher when:– Ratio of residential to non-residential is higher– Ratio of residential to homestead property is higher– Ratio of non-homestead related tax preferences to non-

residential property is lower– Ratio of SOH differential to homestead JV is higher

2005 Local Government TRIM Analysis

• As a whole, local governments levied 11% above the rolled-back rate– Non-public school levies: 11.7%– Public school levies: 10%

Millage Rates Levied Compared to Previous Year and Rolled-Back Rate

Millage Levied Counties Cities School Districts

Less than previous year 32 117 62

Equal to previous year 33 211 0

Greater than previous year 2 46 5

Less than or equal to RBR 3 15 6

Greater than RBR, Less than 10% 27 145 27

Greater than 10% 37 214 34

Renters’ Relief

• Constitutionally authorized, but has been implemented only for residents of homes for the aged.

• Senate looking at renter relief for mobile homes in parks.

• House considering renter relief for affordable housing.

Save Our Homes Portability

• “Full” Portability– Allows the transfer of the entire SOH differential to a

new homestead, with greater or lesser value– Preliminary Fiscal Impact ranges from a 0.7%

reduction in the tax roll in 2008 to a 2.4% reduction in 2012.

• “Mixed” Portability– Allows the transfer of the entire SOH differential if the

new homestead is “upsized,” but only a percentage if “downsizing.”

– Preliminary Fiscal Impact ranges from a 0.6% reduction in 2008 tax roll to a 2.0% reduction in 2012.

Effects of SOH: Reform Sought

• Two Legislative Studies:– Department of Revenue: myflorida.com/dor– Office of Economic & Demographic Research: due to

be published February 15th.

• Governor Bush’s Committee on Property Tax Reform-Dec.15 Report. More meetings?

• Governor Crist Proposals:– Double Homestead Exemption– Make SOH Portable

Property Tax Reform Sought

• House Speaker’s 100 Ideas:– #93 Florida should adopt a constitutional amendment

that prohibits a government from growing faster than the incomes of its taxpaying citizens.

– #94 Florida should require a supermajority vote for any tax increases.

– #96: Florida will amend the constitution to either place caps on all property taxes or, alternatively, abolish the property tax in whole or in part.

• Senate President has said reform must take place in 2007 Session.

Effects of SOH: Reform Sought

• SOH Father’s Proposal: Ken Wilkinson Property Appraiser of Lee County: Portability of SOH.

• Tax Watch & James Madison Institute– Says SOH is bad for Fla.

– Support revenue cap..

Florida Association of Counties

• Ad Valorem Tax Workgroup—FAC legislative policy adoption process requires FAC Board approval.

• Guidelines for Tax Rebalancing – Oppose expenditure caps– Protect existing tax base– Address tax reform for these groups

• Businesses and others non-homestead properties• First time homebuyers• Renters and owners of affordable housing• Empty nesters seeking to downsize• Owners of homestead property seeking to move

Reform Challenges

• Constitutional amendment. Most solutions require a constitutional amendment approved by the voters (60 percent)

• Broad Appeal. Avoid helping only homesteaders because doing so may preclude ability to address the broader issues of equity and fairness.

FAC Program: 5 or 6 Steps to a Balanced Florida

1. Require Property Appraisers to use actual rental income for affordable rental housing.

2. Exempt businesses with personal property worth less than $25,000.

3. Cap growth of all non-homestead property at 10 percent.

4. Assess Working Commercial & Recreational Working Waterfront on use value.

5. Reform TRIM to include better information. 6. ??? Provide limited portability for SOH

homesteads???

Tax & Budget Reform Commission (“TBRC”)

• 25 member body appointed by the Governor (11), Speaker (7) and President (7), including 4 other non-voting members of the Legislature.

• Can propose constitutional amendments or statutory changes.

• Begins meeting in 2007. • Must file proposed amendments at least

180 days prior to the general election.

Unresolved Constitutional Issues

• Existing Save Our Homes Provision

• Portability of SOH.

• EDR contracted legal analysis of Portability due in EDR report February 15th.

House/Senate

• Sen.Haridopolos and Rep. Attkisson and others will hold town hall meetings in various communities prior to session.

• Town Hall meetings intended to give taxpayers a forum for voicing their objections to property taxes. Orange County Meeting: Thursday, February 22, 2007 6:00 p.m.—9:00 p.m. at Valencia Community College.West Campus

• Senate Website: flsenate.gov• FAC presentation to Senate F&T on February 8th.• House State Affairs discussed caps this week.

FAC Efforts

• Partner with School Board Association and League of Cities

• Meet with Business Interests.• Contract for an Expenditure Study by Hank

Fishkind. All County Surveys due Jan. 25. • Consult and Inform Membership and Encourage

Commissioners to Attend Town Hall Meetings.• Discuss Issue at Editorial Board Visits.• Partner with Legislators and Governor’s staff.