Tackling Tax Lighting
Sen. Mark Boitano, GAAR member since 1992The inequity of property tax lightning has created an uproar among thousands of homeowners statewide. Two District Courts have ruled sections of our property tax code unconstitutional and there are hundreds of additional lawsuits in progress, including a class action. The Bernalillo County assessor has stated she will roll back values. Gov. Bill Richardson reportedly wants to amend the Constitution and study the problem further.
Taxation and Revenue Secretary Rick Homans says, “We are in the middle of a minefield right now,” and he is absolutely right. In past legislative sessions lawmakers have been unable to agree on a solution but must act now to solve this exasperating, and growing, problem.
Some history. In 1998 voters were asked to “amend Article 8 (relating to taxation), Section 1, of the state Constitution to authorize the Legislature to limit increases in valuation of residential property for property tax purposes.” Short and sweet, it passed overwhelmingly. The change applied only to residential values, not commercial or vacant land which is considered non-residential.
Based on that voter sanction, the 2000 Legislature passed HB 366 which said the value of property shall not exceed 103 percent of the value in the previous tax year. This was a cap on value, not taxes.
But, there were exclusions to the cap (which was not reported to the voters in the amendment) that included new construction and changes in ownership. These exceptions have created the phenomena known as tax lightning, where an ever increasing number of property owners are paying steep property taxes even though they receive the same basic services as their lower paying neighbors.
An extremely important — but little reported — provision of HB 366 required all county assessors to increase values to a sales ratio of 85 percent or higher beginning in 2001 (a sales ratio is a relationship between actual sales prices and subjective valuations). Unfortunately that never happened and, seven years later, a 2008 report from the Property Tax Division estimated that, statewide, the sales ratio is around 65 percent.
So, property values and subsequent taxes in many counties are disproportionately low. Herein lays one of the problems with a statewide fix. Many homeowners, assessors, and legislators simply do not have a problem in their counties.
Coupling this underassessment with the opposite extreme when tax lightning strikes creates a recipe for legislative confusion and inaction. A recent Department of Finance report stated, “because of inequitable assessment practices state debt is unfairly paid by Bernalillo County,” yet assessors and legislators statewide are concerned that any change will “shift” the tax burden to properties in their counties.
In the larger counties, like Bernalillo, which have more new construction and change of ownership, the property tax rates for underassessed homeowners have been “subsidized” by those hit with tax lightning. Some proposed changes to the law would result in these homeowners — finally — paying the equitable property tax share that was originally required in 2001. This is one of the largest obstacles facing legislators when considering a fix. Naturally, they hesitate at raising taxes on their constituents who are “subsidized” homeowners.
A further dilemma facing lawmakers is a growing reliance on property taxes, a stable income steam, for government operating budgets. Historically, property taxes paid for debt service, and operations were financed, primarily, through gross receipts taxes. Tax lightning has been a revenue windfall in recent years. For instance, in 2008 Albuquerque spent $47 million in property taxes for operations. In 2009 that number was $73 million — a 35 percent increase!
When considering revenues, an additional hitch lies in “yield control” being applied to operations, but not debt service. This is where property tax law gets extremely confusing. Yield control is a mechanism (applied to the mill rate, not valuation) designed to limit revenue yields from property taxes. Most tax experts, and many assessors, say that if statewide values were equalized, the 3 percent cap temporarily removed, and yield control was applied to operating and debt service this is the best fix to the problem.
Finally, some property tax obligation is voter approved mill rate increases. So, voters can be part of the solution. The Legislature can modify law to equalize valuations but voters need to restrict the ferocious appetite of the taxing entities.
Lawmakers must fix this inequity by navigating out of the minefield now. Proposed solutions include a total rewrite of our laws, phasing in an equalization of valuations, and increasing low-income and household exemptions.
Further, any resolution must include tax increase controls for everyone including purchasers of new construction, revenue stability, a board of equalization for multi- jurisdictional entities like community colleges, and — possibly — a local option allowing counties to decide whether a solution is needed.
But, the larger questions are: Should legislators have the political courage to pass a solution that equalizes values statewide? Will the “subsidized” homeowners understand why we changed the status quo?
I hope so.