Georgia Amendment 1 Threatens the State’s Housing Market

Georgia’s Local Option Homestead Property Tax ExemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. Amendment (also known as Amendment 1) is on the ballot this November. At face value, it may seem like a modest constitutional amendment that would authorize a statewide local option homestead exemption from property taxes, while allowing localities to opt out of using the exemption. However, its scope is much broader and could have far-reaching consequences for the property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. system in the state. The reason is that the fate of an important bill, HB 581, depends on the passage of this constitutional amendment. This bill includes several major elements, which we briefly described elsewhere. They include:

• A statewide homestead exemption that effectively resembles an assessment limit
• An overly complex pathway for localities to opt out of this homestead exemption by March 1, 2025
• An option for localities to impose an additional sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. and use taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. of up to 1 percent for property tax relief, subject to approval by local referendum

If Georgia voters choose to enact the provisions of HB 581, property taxes in the state could become more administratively complex due to structural inequities and disincentives for new entrants into the real estate market. The passage of Amendment 1 could also result in increased sales tax differences among Georgia counties.

Consequences of the “Yes” Vote

First, Amendment 1 would allow HB 581 to implement what is functionally an assessment limit. Georgia residents’ assessments (for homestead properties) would not increase by any more than the rate of inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. in any given year. While this is welcome news for current homeowners, assessment limits frequently create a lock-out effect for new entrants into the housing market. Assessment limits cause this inequity by making it less advantageous for current homeowners to sell their homes and purchase new homes since the assessment limits reset to the new, current market value only upon purchase. HB 581 would begin this process by using an adjusted base year of 2025 for all current homeowners. Therefore, if Amendment 1 is successful, there would be a significant disincentive for current homeowners to sell their homes since they will experience the full force of assessments based on higher prices in the real estate market.

Likewise, prospective homebuyers in 2025 and beyond will have a harder time accessing housing that fits their current budgets due to the unwillingness of current homeowners to list their houses on the market, and the disincentives this policy creates for new construction. This makes it harder for new residents to access housing and could discourage homeownership or shift purchasing patterns to less attractive options among the next generation of Georgia residents who are incentivized to purchase homes that they otherwise would not have purchased.

Amendment 1 also allows counties to opt out of the statewide homestead exemption. However, the process counties and other local governments must go through is arduous and overly burdensome. Local governments must advertise and conduct three public meetings before March 1, 2025. Each meeting must be held for a certain period of time and only on workdays. This makes it more difficult and expensive for smaller local governments without the capacity to comply with these requirements.

These smaller counties and municipalities may also experience lower levels of commercial activity if they fail to opt out of the statewide homestead property tax exemption. This could be especially true for local governments that border larger counties and cities such as Atlanta, Augusta, and Savannah, especially if any of those jurisdictions opt out. Should higher sales taxes be imposed to offset revenue lost to the new assessment limits, then counties bordering South Carolina and Florida would also be at higher risk of cross-border shopping to those states since South Carolina has a combined state and local sales tax rate of 7.49 percent, while Florida has a combined state and local sales tax rate of 7.02 percent. Both rates are lower than the potential upper limit of 8.39 percent that could be imposed in Georgia’s border counties if residents in these counties approve Amendment 1 and HB 581 along with it. These differences in border counties can induce consumers to make larger purchases in counties across state lines with lower tax burdens, translating to savings for consumers but lost sales tax revenue for border counties.

Additionally, when there is a cap on homestead-assessed values (through an assessment limit or homestead exemption), as time passes, an additional 1 percent sales tax will eventually be insufficient to cover lost property tax revenues. Commercial property owners are likely to face an increased tax burden as a result. Renters may also be affected, as commercial property taxes are often passed on to them through higher rent prices.

Consequences of the “No” Vote

However, Georgia residents could preserve their current property tax system, imperfect as it may be, by rejecting Amendment 1 and, by extension, HB 581. Additionally, several alternative reforms could be considered by the legislature, including implementing an effective statewide levy limit and streamlining and unifying the state and local sales tax system by broadening the base and establishing a narrow, well-defined range of allowable local sales tax rates.

Property taxes adhere closely to the benefit principle, which states that those who benefit from the provision of public goods and services should be the ones to pay for those benefits. Property taxes do a better job of acting as a user feeA user fee is a charge imposed by the government for the primary purpose of covering the cost of providing a service, directly raising funds from the people who benefit from the particular public good or service being provided. A user fee is not a tax, though some taxes may be labeled as user fees or closely resemble them. for public goods and services (including education, local roads, and the criminal justice system) than local option sales taxes. Therefore, shifting part of the revenue from property taxes to sales taxes may result in a less neutral and transparent system, and one that has a more adverse impact on local economies. Additionally, the autonomy of local governments could be further undermined, as the state could later decide to reduce the allowed sales tax rate.

Georgia’s existing experience with swapping property for sales taxes, moreover, has not been encouraging.

Under current law, local option sales taxes (LOST) are intended to provide for property tax relief. However, one study found that while “an extra dollar of LOST revenue provides about 28 cents in property tax relief, it leads to an increase in total spending of about 48 cents.” Therefore, the substitution is not full. This implies that as counties adopt local option sales taxes to lower property tax burdens, they concurrently tend to increase spending levels. This offsets the benefit to county residents since it is unclear whether a 48 percent increase in spending would actually provide 48 percent more or better government. The results suggest that any swap is unlikely to be revenue neutral, and that allowing a 1 percent LOST will most likely result in increased county-level public spending and only marginally reduce property tax burdens.

Why Amendment 1 Should Not Be Ignored

Amendment 1 reaches far beyond the mere ballot question. By triggering the implementation of HB 581, it would change Georgia’s property tax system dramatically, modeling it after harmful assessment limit policies that began in California. To the extent that localities were unable—or chose not—to opt out, they would be required to adopt a harmful property tax structure that disincentivizes new entrants into the housing market and keeps the real estate market more stagnant than it would be otherwise. Georgia residents can do better than Amendment 1 and should focus on policies that restrict the overall growth of property taxes, not policies that functionally freeze property taxes for current owners by shifting costs onto new owners and into the sales tax.

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