Note: An oral version of the following prepared remarks was presented, by invitation, to the Kansas Special Committee on Taxation during an informational hearing on October 9, 2023.
Chair Smith, Vice Chair Tyson, and Members of the Committee,
Thank you for the opportunity to speak with you today. My name is Katherine Loughead, and I am a Senior Policy Analyst at the 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. Foundation, where I specialize in state tax policy. The Tax Foundation is a nonprofit, nonpartisan tax policy research organization that has been around since 1937 to advance sound tax policy at the state, federal, and international levels. Our state tax policy team follows tax policy developments in all 50 states, and in 2019, we published a 140-page tax reform options guide for Kansas, so I appreciate the opportunity to speak with you again today.
As this special committee discusses the possibility of adopting a 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. assessment limit, I would like to take this opportunity to provide a brief overview of the various types of property tax limitations, share some research and analysis on the economic effects of assessment limits, and offer some alternative reform ideas that could help policymakers accomplish their property tax relief goals in a more targeted and less economically distortive manner.
Property Tax Limitations: An Overview
Currently, nearly every state has some form of statewide property tax limitation on the books, and many states have more than one. States’ property tax limitation regimes vary greatly in their design, but they all fall into one of three broad categories: levy limits, rate limits, and assessment limits.
Broadly speaking, levy limits function as a constraint on revenue, rate limits as a constraint on policy decisions, and assessment limits as a constraint on individual burdens. It is important to note, though, that across all three categories, property tax limitations vary greatly in terms of restrictiveness. There are strict levy limits, strict rate limits, and strict assessment limits, just as there are permissive levy limits, permissive rate limits, and permissive assessment limits. As such, it is important to keep in mind that just because a state has a property tax limitation on the books does not mean that limitation is effective in accomplishing the goals it was originally enacted to accomplish, either due to design flaws or limitations, exemptions that have been created over time, or due to increased reliance on other taxes that aren’t subject to limitations.
Since each of the three types of property tax limitations serves a unique purpose, I’d like to briefly mention the other two types, before discussing assessment limits in greater detail.
Firstly, levy limits, also known as revenue limits, limit the extent to which a local taxing jurisdiction’s total property tax collections can increase from one year to the next.
Under a levy limit, once the total assessed value of all taxable property in a taxing jurisdiction is added together, the taxing jurisdiction determines how much revenue would be collected if the current rate were applied. If that amount exceeds the allowable amount, property tax rates are rolled back to generate only as much revenue as is authorized under the levy limit.
Under a levy limit, individual property owners may experience increases or decreases in property tax liability due to changes in their property’s assessed value or changes in the property tax rate, but aggregate collections are constrained, meaning all taxpayers benefit when a lower rate is applied than would have been applied otherwise. For this reason, levy limits are widely viewed as the least distortive property tax limitation.
Meanwhile, rate limits cap the millage rates that can be set by local policymakers, usually by setting a maximum rate but sometimes by limiting the extent to which a rate can increase from year to year.
Rate limits are usually adopted with the goal of restricting local government officials’ ability to make conscious policy decisions to raise property taxes beyond certain levels, but they do not shield taxpayers from property tax increases attributable to rising home values.
Both levy limits and rate limits are oftentimes designed in a manner that allows them to be overridden in certain circumstances, such as when a majority of voters agree to a property tax increase that has been brought to the ballot.
Thirdly, assessment limits restrict the extent to which a homeowner’s property taxes can rise from one year to the next due to increases in assessed value.
However, they do not protect homeowners from property tax increases attributable to the conscious policy choices of local taxing officials or future state lawmakers. For example, an assessment limit would not prevent local taxing jurisdictions from increasing millage rates, and it would not prevent future state lawmakers from increasing assessment ratios or broadening the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. in other ways, such as by repealing or limiting various exemptions, credits, and refunds.
The assessment limit proposed in SCR 1611 would restrict the valuation growth of any parcel of real property to 4 percent per year, with certain exceptions, like when the title is transferred to a new owner or when the property includes new construction or improvements. In those instances, the property’s assessed value would be reset based on its market value.
Assessment limits substantially blunt the tax impact felt by homeowners when their home values appreciate beyond a certain level, so an assessment limit might initially be politically popular among current homeowners but could make Kansas substantially less attractive to future homebuyers because, over time, a 4 percent assessment limit would introduce highly unequal tax burdens across similarly situated properties.
For example, two homeowners, despite owning homes with identical fair market values, could wind up with very different property tax bills simply because one homeowner has remained in the same home for years, while another homeowner has had to move more frequently, with the assessed value resetting every time. This creates a “lock-in effect,” where homeowners experience a financial disincentive to relocate because relocating means they will lose the value of the preferential tax treatment they have accumulated over time due to years of undervaluation.
In some states, policymakers have responded to the lock-in effect by creating a portability provision, where the assessment limit remains with the homeowner even after they move. For example, in Florida, the difference between a home’s market value and the estimated assessed value under the assessment limit can be carried over to a different residence in the same county or in another county that elects to offer the same benefit. If the replacement residence is of lesser value, a proportional benefit can be applied to the new homestead value.
Portability reduces the disincentive to move that an assessment limit creates, but in the long run, portability exacerbates inequities and widens the tax differential between younger and older homeowners, making the tax code even more complex in the process.
Under an assessment limit, newer homeowners (who are oftentimes younger and have lower incomes and less accumulated wealth), usually end up facing higher effective property tax rates than residents who have owned their homes for longer (and who are oftentimes older and have higher incomes and more accumulated wealth).
There is very little economic justification for establishing such a nonneutral tax policy that shifts the tax burden from some property owners to others, especially since such tax shifting is not based on a home’s fair market value or on the extent to which a homeowner benefits from local services received, but rather based on something as arbitrary as how long they’ve lived in the same home or whether they’ve invested in improvements to their property.
For these reasons, it is easy to see how assessment limits are economically distortive and inequitable, but that raises the question: what should we make of the perceived benefits of assessment limits?
Many policymakers have introduced assessment limits with the goal of preventing individual homeowners from getting “taxed out of their homes,” and many people can sympathize with that goal. It is not uncommon for homebuyers to purchase a home they can afford, with a property tax bill they can initially afford, but to eventually find themselves struggling to pay the higher property tax bills that often accompany appreciation in home value.
Home value appreciation, is, of course, generally desirable, especially when viewing home ownership from an investment standpoint. But selling a home to realize the investment gain is not always a desirable option, especially when the home is a person’s primary residence, and they want to keep living there. So, assessment limits are often introduced to prevent people from having to move out of their homes due to rising valuations.
But if that is the primary goal, an assessment limit is an overly blunt instrument for achieving what ought to be a relatively targeted policy goal.
So, what are some alternatives?
Most states, including Kansas, already provide certain forms of targeted property tax relief for fixed- and lower-income individuals, and this can be done in a relatively streamlined manner.
Assessment Limit Alternatives
Instead of creating an assessment limit that applies broadly to all homeowners and creates widespread economic distortions, a better option would be to first evaluate the effectiveness of existing income-tested property tax relief provisions for those most at risk of having to move due to rising assessments.
In Kansas’ case, several of the structural issues that previously existed with the homestead property tax refundA tax refund is a reimbursement to taxpayers who have overpaid their taxes, often due to having employers withhold too much from paychecks. The U.S. Treasury estimates that nearly three-fourths of taxpayers are over-withheld, resulting in a tax refund for millions. Overpaying taxes can be viewed as an interest-free loan to the government. On the other hand, approximately one-fifth of taxpayers underwithhold; this can occur if a person works multiple jobs and does not appropriately adjust their W-4 to account for additional income, or if spousal income is not appropriately accounted for on W-4s. have recently been addressed with the enactment of H.B. 2239 in April 2022, which made the homestead property tax refund program substantially more generous.
Notably, eligible Kansans will now receive a refund for the amount by which their current property tax liability exceeds the amount of their property tax liability in their first year of eligibility for the program, which will essentially keep property tax liability constant for seniors with household incomes below $50,000, adjusted for 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. , if their home was appraised at $350,000 or less when they first became eligible for the program. H.B. 2239 also modified the law so that the $350,000 home value limitation applies only to a beneficiary’s first year of eligibility, meaning eligible seniors will be protected from losing eligibility for the program due to appreciation in their home value from below to above the $350,000 threshold, so H.B. 2239 remedied the tax cliff that previously existed.
Given the new law’s generous income and home value eligibility criteria, and given the fact that the new program essentially freezes property tax liability for low-income seniors (albeit in the form of a refund mechanism rather than direct property tax relief), Kansas now already offers a very generous property tax limitation for those most at risk of being unable to afford rising property tax bills, making an assessment limit that much less necessary. Since Kansas is now essentially freezing property taxes for low-income seniors, there is much less justification for artificially capping assessed values across the board.
Furthermore, as most of us know from personal experience, the decision to purchase a home is a major financial decision and one that should not be entered into lightly. Just as prospective homeowners must evaluate their financial readiness to afford major unexpected home repairs, so should they evaluate whether they can afford to pay the associated property tax bill, keeping in mind that property tax liability typically increases—sometimes substantially—when home values rise.
At the same time, it is understandable why frequent property tax increases are upsetting to people. When property values rise, property tax increases do not need to be the default response; local taxing officials do have the option not to pocket the extra revenue.
Under a system in which elected officials are sufficiently attuned and responsive to the preferences of the electorate, property owners would be able to trust policymakers to raise property taxes only when the extra revenue is truly necessary or when the additional spending is truly desired by the electorate. And this level of responsiveness to voters’ opinions could negate the need for any kind of property tax limitation at all.
In many states, however, property tax limitations have become appealing because of the perception—whether warranted or not—that local taxing officials are not sufficiently responsive or accountable to the desires of the electorate.
One of the most effective ways to keep property tax burdens manageable for taxpayers without tying the hands of local governing authorities is to find ways to increase transparency and accountability so local taxing officials have an incentive to be more responsive to the tax and spending preferences of the electorate. Kansas has taken significant strides in this direction with the adoption of the “Truth in Taxation” law with the enactment of SB 13 in 2021.
As you know, under Kansas’ Truth in Taxation law, by default, local taxing jurisdictions must set their budgets using property tax collections that do not exceed the prior year’s levels. If a local taxing jurisdiction wants to raise more than that amount of revenue from property taxes, local taxing authorities must first send a mailer to their constituents informing them of the proposed increase and providing notice about the public hearing in which the matter will be considered. After going through those steps, there is nothing stopping the local taxing jurisdiction from adopting any property tax increase they want to adopt, but the idea here is that engaged and informed taxpayers will have sufficient opportunity to share their opinions with their elected representatives and inform their decisions on whether to increase taxes.
Kansas’ Truth in Taxation law is structured like a very soft levy limit, where local taxing jurisdictions can only increase the total property tax levy beyond certain levels after going through certain steps.
Some would argue the Truth in Taxation law is not restrictive enough, since there is nothing preventing local taxing jurisdictions from adopting any property tax increases they propose as long as they disclose the appropriate information in a mailer, hold a public hearing, and pass a resolution or ordinance to increase the tax.
Some would argue this law is too restrictive in that Truth in Taxation is triggered every time local taxing authorities want to exceed the prior year’s levy, with no adjustments for inflation or new construction.
At the very least, policymakers should allow the Truth in Taxation law to keep working to determine, after more time has passed, whether it is having the desired effect.
If a more restrictive property tax limitation is desired, policymakers could consider adopting a true levy limit, where a certain amount of revenue growth is allowed for inflation and new construction, but where growth beyond a certain level must be approved directly by voters.
If a levy limit were considered in the future, it would be important for policymakers to include all spending under the limit, rather than excluding major categories of spending as was the case under the previous property tax lid, where spending on debt and interest payments, law enforcement, fire protection, and emergency medical services was not subject to the lid.
Overly Restrictive Property Tax Limitations Often Lead to Tax Shifting to More Economically Harmful Taxes
One final point I would like to make today is that when property taxes are subjected to strict property tax limitations, state and local policymakers often eventually resort to raising revenue through other means, such as through increased income taxes, sales taxes, excise taxes, or fees. Even under the strictest property tax levy limit, there is little stopping localities from increasing their sales taxes and other fees or pressuring the state to increase state aid to localities, which could mean higher state income or sales taxes in the future.
Of all the revenue tools available to fund local government services, real property taxes are the simplest to administer and comply with, generate the most stable source of revenue, and adhere best to the benefit principle in public finance, which holds that taxes paid should relate closely to benefits received. As such, policymakers should be cautious to avoid overly restricting property taxes only to have to resort to increasing other, more economically harmful taxes in the future.
To conclude, while it is reasonable for taxpayers to want to prevent their property tax bills from rising too rapidly, ultimately, the best way to keep property taxes in check is to keep local spending in check. Instead of adopting a highly distortive assessment limit, policymakers should consider how similar goals could be met through other means, such as through the targeted, income-tested property tax relief programs that already exist, through the Truth in Taxation law, or through the reinstatement of a better-structured property tax lid.
Thank you again for the opportunity to testify today, and I am happy to answer any questions.
Stay informed on the tax policies impacting you.
Subscribe to get insights from our trusted experts delivered straight to your inbox.Subscribe