FLORIDA S PROPERTY TAX REFORM LEGISLATION: AN ECONOMIC REVIEW

Transcription

1 FLORIDA S PROPERTY TAX REFORM LEGISLATION: AN ECONOMIC REVIEW For FLORIDA ASSOCIATION OF REALTORS PREPARED BY: Regional Economic Research Institute Lutgert College of Business Florida Gulf Coast University FGCU Blvd, S., Fort Myers, FL Phone: gjackson@fgcu.edu August 10, 2007

2 TABLE OF CONTENTS PAGE RESEARCH TEAM...ii EXECUTIVE SUMMARY... iii 1.0 INTRODUCTION HISTORICAL OVERVIEW OF FLORIDA S PROPERTY VALUES AND TAXES PROPERTY TAX RELIEF AND REFORM LEGISLATION A SUMMARY OF ECONOMIC STUDIES AND ANALYIS SUPER HOMESTEAD AND SAVE OUR HOMES TAX PAYMENT SIMULATIONS PROPERTY TAX REFORM LEGISLATION ISSUES AND CONCERNS...26 REFERENCES APPENDICES A. TaxWatch Study...32 B AND 2006 PER CAPITA TAXES AND ROLLBACK REQUIREMENTS FOR COUNTIES AND MUNICIPALITIES...33

3 RESEARCH TEAM Regional Economic Research Institute (RERI) is part of the Lutgert College of Business at Florida Gulf Coast University, and represents collaboration with local and regional governments to develop regional models and studies. Dr. Gary Jackson (Project Director) is currently the Director of the Regional Economic Research Institute at Florida Gulf Coast University. Dr. Jackson s specialty area is economic analysis and he has conducted extensive research and analysis of numerous industries and organizations. Dr. Jackson earned his Ph.D. in Economics from University of Massachusetts and has been an Assistant Professor of Economics for the University of Tennessee at Chattanooga and is a faculty member of the Lutgert School of Business at Florida Gulf Coast University. He also has over 23 years experience with the Tennessee Valley Authority in a number of capacities with experience ranging from market analysis and policy, economic forecasting, energy policy, trading and options, to planning and strategic development. Raymond L. Placid, Esq. is an assistant Professor of Accounting at the Lutgert College of Business where he teaches real estate law and tax law. He has a J.D. from the University of Miami Law School where he taught in LLM Real Estate Law Program. He holds a Florida CPA license. Dr. Arthur Rubens is an Associate Professor of Management in the Lutgert College of Business and former Director of Sponsored Projects and Programs for the Center for Leadership and Innovation, at Florida Gulf Coast University. Dr. Rubens has over 25 years experience as an educator, administrator and consultant having worked with both public and private organizations. Dr. Rubens is experienced in qualitative and quantitative research methods, strategic planning, and quality improvement techniques and practices. Regional Economic Research Institute ii

4 EXECUTIVE SUMMARY Florida s legislature passed what has been called the largest property tax cut in history. The new property tax reform law and a proposed Super Homestead constitutional amendment will fundamentally change the way property taxes are calculated in Florida. This is the initial report of an economic study sponsored by the and includes: A historical overview of Florida s property values and taxes; A description of the new property tax legislation and constitutional amendment; A summary of economic studies and analysis; Simulations of taxes owed under the Super Homestead and Save Our Homes; and Potential issues and concerns. In 1992, the citizens of Florida approved a constitutional amendment called Save Our Homes. Under this amendment, the annual growth in the assessed value of homestead property could not exceed three percent (or the Consumer price index if it was lower) of the prior year s assessment. Save Our Homes was successful in limiting the tax assessments against homestead property, but nonhomestead property owners (e.g., commercial, rental housing, and second homes) saw their tax bills increase substantially, especially during the years 2001 through The sponsored a 2005 study of the impacts of extending the Save Our Homes legislation to allow portability of the reduced assessment benefits for homes of Florida residents. The study showed that there would be a loss of potential revenue for cities and counties and that portability would help to relieve the impact of Lock-In where homeowners are unwilling to downsize or upsize to meet their family needs due to the loss of the Save Our Homes tax advantage. Historical Overview of Florida Property Values and Taxes A rapid increase in housing demand led to rapid increases in property values between 2001 and This increase in demand was caused by several factors: Historically low interest rates; Increased wealth resulted in greater demand for second homes; Retirement relocation demand for locations such as Florida; and Speculative demand. Regional Economic Research Institute iii

5 Florida s Median Sales Price Single-Family Existing Homes Median Sales Price $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 $117k $129k$147k $86k $90k $92k $97k$102k$112k $165k $205k $243k $239k January Value Source:, Statewide Median Sales Price Single-Family Existing Homes. The resulting large increases in property values led to significantly increased property tax payments. This, along with the increased costs of insurance associated with hurricane coverage, led to steep increases in the costs of owning a house in Florida. Rapid price increases and uncertain ownership costs are expected to reduce growth in housing and business in general. Source: The House-Senate Agreement for Property Tax Relief and Reform, Whip s Policy Brief, Office of the Majority Whip, Representative Ellyn Bogdanoff, June 12, 2007, page 5. Regional Economic Research Institute iv

6 The average annual increase in property tax revenues for 1995 to 2001 was 5.3 percent. The average annual growth rate for property tax revenues increased to 12.2 percent per year from 2001 to Average Annual Percentage Increases In Property Tax Revenues by Authority Type Taxing Authority 1995 to to 2007 Schools 4.5% 11.2% Counties 5.5% 12.1% Cities 8.0% 13.7% Special Districts 5.5% 15.4% Total 5.3% 12.2% PROPERTY TAX RELIEF AND REFORM LEGISLATION In June of 2007, the Florida Legislature passed a new law (HB 1-B) that limits increases in property taxes to the increases in Florida s per capita income. In addition, the new law attempts to provide immediate property tax relief by imposing a rolled-back millage rate, and reductions against the rolled-back rate for School districts are exempt from statutory rate rollbacks and currently account for approximately 40 percent of the property tax revenue collected. A proposed constitutional amendment to create a Super Homestead exemption and phase out Save Our Homes will be voted on in The Super Homestead exemptions will reduce the overall tax base if approved by voters, lowering all property tax collections (if the millage rates are held constant) including those of school districts. One possible solution to the reduction in school district property tax collections will be to have the state fund part or all of the reduction. Another would be to raise the school district millage rate to make up for some or all of the reduced property tax collections. The Florida Legislature s property tax reform includes three major components: Rolled-back Rate - A reduction in property tax collections by reducing the millage rate to the rolled-back rate. In addition, this rate for 2007 is reduced by a percentage based on the level of per capita tax increases between 2001 and 2006 (HB 1-B); Per Capita Limits - The new law restricts future increases in millage rates based on the growth in Florida s per capita income and an allowance for new construction (HB 1-B); and Proposed Constitutional Amendment for a Super Homestead Exemption that will significantly increase the homestead exemption values and phase out Save Our Homes. Regional Economic Research Institute v

7 The taxing authority must reduce the millage rate for fiscal years to the rolled-back rate. The rolled-back rate is the millage rate that will produce the same ad valorem or property tax revenue as was levied in the prior year, exclusive of new construction. Cities and counties are required to reduce the rolled-back millage rate an additional 0, 3, 5, 7, or 9 percent based on their past millage increases from 2001 to All independent districts, counties of special financial concern, and city services taxing units and dependent special districts whose primary function is to provide medical emergency and fire rescue services are required to reduce their millage rate three percent below the rolled-back rate regardless of the past millage increases. In addition to exemption for school districts, jurisdictions that have not levied property taxes for at least five years are not subject to the required tax reduction in order to give them time sufficient time to develop a secure financial plan. Property taxes levied for the payment of bonds, or short-term bonds (i.e., for periods not longer than two years) are exempt from the required tax reduction since they were authorized by voters. Additional Reduction in the Rolled-Back Millage Rate Required by Counties in FY % Reduction 15 Counties 22.4% 0% reduction 3 Counties 4.5% 7% Reduction 9 Counties 13.4% 3% Reduction 29 Counties 43.3% 5% Reduction 11 Counties 16.4% Regional Economic Research Institute vi

8 Additional Reduction in the Rolled-Back Millage Rate Required by Cities in FY % Reduction 138 Cities 37.0% 0% reduction 114 Cities 30.6% 7% Reduction 45 Cities 12.1% 5% Reduction 59 Cities 15.8% 3% Reduction 17 Cities 4.6% The new law also limits the increases in property tax revenue beginning in fiscal year and every year thereafter to the growth in Florida s personal per capita income. Florida s personal per capita income has grown at an average of 4.2 percent per year over the last 10 years. Florida s Per Capita Personal Income Increases 1990 to 2006 Percentage Increase 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 1.1% Average Annual Growth Rate 1996 to 2006 is 4.2% 3.2% 3.1% 2.9% 4.7% 4.2% 3.6% 6.1% 3.5% 6.0% 2.7% 2.0% 1.5% 7.4% 4.5% 5.3% 0.0% Year Source: Bureau of Economic Analysis, Regional Economic Accounts, State Personal income. Regional Economic Research Institute vii

9 A local governing authority may override the rolled-back limits if certain voting requirements are satisfied. The significance of this new property tax revenue limit is that: This new revenue limit applies to all property including residential, commercial, and industrial, and does not have a homestead preference; The new limit is a revenue limit and not an assessment limit like that used in the Save Our Homes constitutional amendment passed in The assessment limit protected only residential homesteads and resulted in large disparities in residential assessed values. A higher tax burden was placed on business and on non-homestead residential properties; and It does provide governing authorities a process to override the cap. The law limits the maximum millage rate increase within a county or city. A taxing authority within a county or city can exceed the maximum millage rate provided that the other taxing authorities located within said county or city reduce their millage rates so that the overall millage rate does not exceed the county or city limit. This gives the counties and cities the ability to shift resources within the county or city jurisdictions. On January 29, 2008, voters will be asked to approve an amendment to the constitution that will significantly increase the homestead exemption (Super Homestead Exemption). Under the Super Homestead Exemption, 75 percent of the first $200,000 of a home s value plus 15 percent of the value between $200,000 and $500,000 will be exempt from property taxation. The minimum exemption will be $50,000 and the maximum exemption will be $195,000. If the constitutional amendment is approved, current homesteaders will be given a choice to utilize the Save Our Homes limits or move to the Super Homestead exemption. Once a homestead under Save Our Homes is transferred to new ownership or elects to move to the Super Homestead exemption, the owner may not revert to the former Save Our Homes limitation system. This will eventually eliminate the Save Our Homes limitations as owners transfer ownership. Lowincome seniors (under $24,500 yearly) will receive a minimum exemption of $100,000 for their homestead. Businesses will receive a $25,000 tangible personal property tax exemption on business equipment such as computers and phone equipment resulting in an average saving of about $250 per business. It is estimated that one million of Florida s 1.3 million businesses will be completely exempt from the local tax and will not be required to file detailed tangible property tax forms in the future. The amendment also authorizes the legislature to make changes that allow lower than fair market value assessments for affordable housing and working waterfronts. The current law (HB-1B) makes affordable housing rental properties eligible if they are subject to rent restrictions imposed by a government agency and the amendment passes. This will likely be a topic in the next legislative session if the constitutional amendment passes. Regional Economic Research Institute viii

10 A SUMMARY OF ECONOMIC STUDIES AND ANALYSIS The property tax reforms (HB 1-B, the rolled-back rate system) and the Super Homestead Exemption (SJR 4-B) are predicted to reduce statewide property taxes by a maximum of $31.6 billion (no overrides) over the next five years. This analysis assumes homesteads with a lower first year tax bill under Super Homestead will move to the new system. This will overstate the number of homes that will move to the new Super Homestead option. Overrides of the rollbacks, reductions, and growth limits should be expected due to the reduction in property tax base resulting from the Super Homestead exemptions and the financial demands of counties, cities, and special districts. This makes the $31.6 billion reduction in property taxes unlikely, and therefore, the actual property savings to taxpayers will be significantly lower. Annual Property Tax Reductions Assuming no overrides (Billions of Dollars) Fiscal Year HB 1B SJR 4B Total FY $2.2 $0.0 $2.2 FY $2.6 $3.6 $6.2 FY $3.1 $3.9 $7.0 FY $3.6 $4.1 $7.7 FY $4.2 $4.3 $8.5 Total $15.7 $15.9 $31.6 Source: Florida Senate Professional Staff Analysis and Economic Impact Statement, SJR 4-B and House of Representatives Staff Analysis, June 13, 2007, h0001ba.pbc.doc and h0003bb.pbc.doc Regional Economic Research Institute ix

11 Reduced Property Taxes Assuming Taxing Authorities Do Not Exceed Limits $ Billions $9.0 $8.0 $7.0 $6.0 $5.0 $4.0 $3.0 $2.0 $1.0 $0.0 $4.3 $4.1 $3.9 $3.6 $2.2 $2.6 $3.1 $3.6 $4.2 FY FY FY FY FY Fiscal Year Tax Reduction (HB 1B) Super Homestead (SJR 4-B) Source: Florida Senate Professional Staff Analysis and Economic Impact Statement, SJR 4-B and House of Representatives Staff Analysis, June 13, 2007, h0001ba.pbc.doc and h0003bb.pbc.doc If the Super Homestead amendment is passed, the school boards will see a large reduction in the tax base and will need to consider making up for the loss of tax revenue from the state or raising the millage rate to compensate. Super Homestead Exemption (SJR 4-B) Estimated Property Tax Reduction Assuming Taxing Authorities Do Not Exceed Limits $ Billions $5.0 $4.5 $4.0 $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 $2.2 $2.2 $2.3 $2.0 $1.6 $1.7 $1.9 $2.0 FY FY FY FY FY Fiscal Year School Board Reductions Non School Board Reductions Source: Florida Senate Professional Staff Analysis and Economic Impact Statement, SJR 4-B and House of Representatives Staff Analysis, June 13, 2007, h0001ba.pbc.doc and h0003bb.pbc.doc Regional Economic Research Institute x

12 The estimated average reduction under the statutory component of the legislation in fiscal year property taxes is shown in the graph below for homestead, non-homestead residential, commercial property and tangible personal property. The average residential homestead will receive a reduction of $174. Non-homestead residential property would receive a reduction of approximately $199. Commercial and industrial property taxpayers would receive an average reduction of $941. Businesses would receive a reduction in tangible personal property tax of $92. Average Reduction Average Property Tax Reduction By Property Tax Party for Fiscal Year Assuming Taxing Authorities Do Not Exceed Limits $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 $174 (7%) Homestead $199 (7%) Non-Homestead Residential $941(6%) Commercial- Industrial Property Tax Party $92 (6%) Tangible Personal Property Source: The House-Senate Agreement for Property Tax Relief and Reform, Whip s Policy Brief, Office of the Majority Whip, Representative Ellyn Bogdanoff, June 12, 2007 page 22. If the Super Homestead constitutional amendment is approved by the voters, the maximum average decrease in property taxes for fiscal year will be $948 and $245 for homestead and non-homestead residential property, respectively. Commercial and industrial taxpayers would receive a maximum reduction of $1,240, and tangible property tax savings will be $262. Regional Economic Research Institute xi

13 Average Reduction Average Property Tax Reduction For Property Tax Party for Fiscal Year Assuming Taxing Authorities Do Not Exceed Limits $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 $948 Homestead (All) $1,306 (44%) Homestead (73% Benefiting) $245 (8%) Non- Homestead Residential Property Tax Party $1,240 (8%) Commercial- Industrial $262 (17%) Tangible Personal Property Source: House of Representatives Staff Analysis, June 13, 2007, h0001ba.pbc.doc and h0003bb.pbc.doc The staff analysis prepared for the House of Representatives provides information on the potential tax reductions by year and party (i.e., homestead, commercial, etc.) but does not address the overall economic impact on Florida s economy such as change in gross regional product, disposable income, investment, and population change. A summary of a TaxWatch study prepared before the legislative session is provided in Appendix A. The study prepared in cooperation with Florida State University provides several forecast scenarios of property tax reductions that assume almost equal percentage property tax reductions for residential homeowners, residential non-homeowners, and nonresidential/commercial. Regional Economic Research Institute xii

14 Super Homestead and Save Our Homes Tax Payment Simulations An important part of this study was to simulate the property tax payments under the new Super Homestead and the Save Our Homes systems since residents will be able to choose to move to the new system and will have to vote whether to approve the new Super Homestead constitutional amendment. A total of 180 cases were simulated to evaluate the expected tax payments under the Super Homestead and the Save Our Homes property tax systems. A range of simulations were based on: Current value of the homestead; Length of ownership; Expected real estate appreciation; and Expected tenure in the home. The simulations show that the lower the value of the house, the higher the Save Our Homes assessed value (less time in home), the slower the rate of real estate appreciation, the more likely that a homesteader would favor the new Super Homestead Exemption. In January 2007, the median price of existing singlefamily homes that were sold by Realtors in Florida was approximately $239,000, which implies that about one-half of the homes have a value below the median, and the other half have a value above the median. The cases were designed to span the range of housing values and include $150,000, $250,000, $500,000, $750,000 and $1,000,000. Cases were run for 0, 5, and 10 years of existing ownership. Real estate escalation was run for 3, 5, 7 and 10 percent per year although it is unlikely that high rates of escalation such as 10 percent annually can be supported over extended periods of time without seeing higher rates of overall inflation. Expected tenure cases were run for 5, 10, and 20 years. The following graphs provides estimates of tax payments for 30 select cases of the 180 simulations to illustrate the economic factors that drive the decision on whether to choose the Super Homestead exemption or remain on the Save Our Homes system. Present values of simulated taxes are provided in Tables 5 through 9 in the main body of the report. The simulations assume an 8 percent discount rate; 4.2 percent increases in Florida s per capita income; a 3 percent Save Our Homes escalation rate; 8 mills for schools; and an initial 11 mills for counties, cities, and special tax districts. The present value of taxes is used as a summary measure of the simulated taxes. The following graph shows that the Super Homestead will result in lower tax payments for new home purchasers that expect low real estate appreciation (3 percent) and do not expect to stay in the new home for more than 5 years. Regional Economic Research Institute xiii

15 Present Value of Taxes New Ownership, 3% Real Estate Appreciation, and a 5 Year Expected Tenure PV of Taxes $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 Super Homestead Save Our Homes $150,000 $250,000 $500,000 $750,000 $1,000,000 Current Value of Homestead The next set of cases is for a new homeowner but real estate escalates at 7 percent and the owner plans on living in the home for 20 years. Super Homestead results in lower taxes for homes under $250,000 but the Save Our Homes has a lower present value of taxes for homes form $500,000 to $1,000,000. Present Value of Taxes New Ownership, 7% Real Estate Appreciation, and a 20 Year Expected Tenure $300,000 $250,000 Super Homestead Save Our Homes PV of Taxes $200,000 $150,000 $100,000 $50,000 $0 $150,000 $250,000 $500,000 $750,000 $1,000,000 Current Value of Homestead Regional Economic Research Institute xiv

16 The next case set selected is for a homeowner who has lived in his or her home for five years and has an assessment value lower than market value under the existing Save Our Homes system. The expected real estate appreciation is three percent and expected tenure is only five years. The results are as expected, with those having lower home values finding Super Homestead to be optimal and homeowners that have values from $500,000 to $1,000,000 choosing to remain on Save Our Homes. Present Value of Taxes 5 years of Ownership, 3% Real Estate Appreciation, and a 5 Year Expected Tenure PV of Taxes $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 Super Homestead Save Our Homes $10,000 $0 $150,000 $250,000 $500,000 $750,000 $1,000,000 Current Value of Homestead The next set of cases is similar the last case set except that the real estate appreciation rate is increased to seven percent and the expected tenure in the home rises from five to twenty years. The Save Our Homes system is predicted to have lower property taxes due to lower growth cap placed on the assessed value. Regional Economic Research Institute xv

17 Present Value of Taxes 5 years of Ownership, 7% Real Estate Appreciation, and a 20 Year Expected Tenure $300,000 $250,000 Super Homestead Save Our Homes PV of Taxes $200,000 $150,000 $100,000 $50,000 $0 $150,000 $250,000 $500,000 $750,000 $1,000,000 Current Value of Homestead Property taxes under Super Homestead are lower for the $150,000 and $250,000 cases but as expected, those with higher value homes from $500,000 to $1,000,000 and higher would pay less taxes under the existing Save Our Homes system. Present Value of Taxes 10 Years of Ownership, 3% Real Estate Appreciation, and a 5 Year Expected Tenure PV of Taxes $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 Super Homestead Save Our Homes $10,000 $0 $150,000 $250,000 $500,000 $750,000 $1,000,000 Current Value of Homestead Again, the longer a homeowner has been under the Save Our Homes limits, the higher the expected real estate appreciation, and longer the expected tenure the more likely that Save Our Homes would remain as the optimal choice. Regional Economic Research Institute xvi

18 Present Value of Taxes 10 Years of Ownership, 7% Real Estate Appreciation, and a 20 Year Expected Tenure $300,000 $250,000 Super Homestead Save Our Homes PV of Taxes $200,000 $150,000 $100,000 $50,000 $0 $150,000 $250,000 $500,000 $750,000 $1,000,000 Current Value of Homestead Regional Economic Research Institute xvii

19 Property Tax Reform Legislation Issues and Concerns There are various concerns and issues related to the property tax reform legislation. The study searched newspapers, reviewed articles, and studies of the property tax reform to develop the following summary list of concerns that warrant further discussion: 1. The Super Homestead amendment could be rejected by the voters; 2. Super Homestead Constitutional Amendment Legal challenges; 3. Super Homestead exemption will not keep up with inflation; 4. Reduced funding of Cities, Counties, Special Districts, and Schools will reduce the level of service and infrastructure improvements and lead to increases in local fees and other charges; 5. School districts are not subject to the per capita income limits and account for over 40 percent of the property tax revenue in 2007; 6. The new tax reform does not do enough to help business owners, rental property owners, and non-homesteaders such as those with second homes, including snowbirds; 7. Continuation of Lock-In effect and push for portability of tax savings; and 8. Florida s per capita income growth can vary considerably, introducing volatility into the county, city, and special district budgets and property tax payment levels from year to year. This study has provided an economic review and analysis of Florida s property tax reform legislation passed in June 2007 and the proposed constitutional amendment. Although the property tax setting process is complex, it does tie property tax growth limits to increases in per capita income providing more predictable property tax increases for all property tax parties. Regional Economic Research Institute xviii

20 1.0 INTRODUCTION This is the initial part of a study of Florida s new property tax reform legislation that is funded by the. This part of the study reviews and summarizes the new property tax reform legislation passed at the 2007-B Special Session of the Florida Legislature including: Property Tax Reduction and Reform, HB 1-B; Property Tax Reform, SJR 4-B, which will take effect if approved by the voters in 2008; and Special Election, HB 5-B. In addition, the study describes the predicted economic impacts on the households, businesses, and local government. In 1992, the citizens of Florida approved a constitutional amendment called Save Our Homes. Under this amendment, the annual growth in the assessed value of homestead property could not exceed three percent of the prior year s assessment. Save Our Homes was successful in limiting the tax assessments against homestead property, but non-homestead property owners (e.g., commercial or second homes) saw their tax bills increase substantially, especially during the years 2001 through The sponsored a 2005 study of the impacts of extending the Save Our Homes legislation to allow portability of the benefits for homes of Florida residents. The study showed that there will be a loss of potential revenue for cities and counties and that portability should help to relieve the impact of Lock-In, where homeowners are unwilling to downsize or upsize to meet their family needs due to the loss of the Save Our Homes tax advantage. A rapid increase in housing demand, led to rapid increases in property values between 2001 and This increase in demand was caused by several factors: Historically low interest rates; Increased wealth resulted in increased demand for second homes; Retirement relocation demand for locations such as Florida; and Speculative demand. The large increases in property values led to significantly increased property tax payments. This, along with the increased costs of insurance associated with hurricane coverage, led to steep increases in the costs of owning a house in Florida. Many were concerned about the sustainability of the housing boom, which ended in late 2005 and The housing market is adjusting to the reduction in demand due to the rise in interest rates and concerns over Regional Economic Research Institute 1

21 affordability. This has resulted in increased foreclosures, tighter credit requirements and many speculators being forced to sell or rent existing houses. In June of 2007, the Florida Legislature passed a new law, which was signed by the Governor, that limits increases in property taxes to the increases in Florida s per capita income. In addition, the new law attempts to provide immediate property tax relief by imposing a rolled-back millage rate, and reductions against the rolled-back rate for A proposed constitutional amendment to create a Super Homestead exemption and phase out Save Our Homes will be voted on in HISTORICAL OVERVIEW OF FLORIDA S PROPERTY VALUES AND TAXES The statewide average annual increase in the median sales price of existing single-family homes was 10.0 percent per year for 1997 to The rate increased to an average of 13.1 percent for 2002 to The increases are due to price increases and to newer, more expensive homes being constructed. Figure 1 provides a graph of the increases based on the sales of existing singlefamily homes. Figure 1 Florida s Median January Sales Price Statewide Single-Family Existing Homes $300,000 Median Sales Price $250,000 $200,000 $150,000 $100,000 $50,000 $0 $117k $129k$147k $86k $90k $92k $97k$102k$112k $243k $239k $165k $205k January Value Source:, Statewide Median Sales Price Single-Family Existing Homes. The annual price increases varied from year to year and are shown in Figure 2. Traditionally, the price increases were in the 4 to 5 percent range but increased significantly between 2001 and Regional Economic Research Institute 2

22 Figure 2 Florida s Median Sales Price Single-Family Existing Homes 30.0% 25.0% 24.4% Growth 20.0% 15.0% 10.0% 5.0% 0.0% 5.0% 2.2% 5.4% 4.6% 10.0% 4.5% 13.5% 10.6% 12.6% 18.6% -5.0% % Year Source:, Statewide Median Sales Price Single-Family Existing Homes. Florida has seen tremendous growth in the overall value of real property. Figure 3 provides the percentage increases by year. The increases are a combination of increases in the value of existing property plus the just value of new construction. Unlike Figure 2, this graph provides the increases in existing and new construction. Figure 3 Statewide Real Property Just Values Percentage Increase by Year 35.0% Growth 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 5.9% 6.4% 7.2% 7.9% 13.5% 11.5% 12.2% 21.8% 15.8% 30.4% Year Source: Florida Property Valuation and Tax Data Books 1999 to 2006, Table 1, Florida Department of Revenue. Regional Economic Research Institute 3

23 An analysis of Florida property taxes levied and the percentage increases by year from 1995 to 2007 are provided in Figure 4. The average percentage increase in property taxes was 5.3 percent from 1995 to It increased to an average annual increase of 12.2 percent from 2001 to The increases in property values from 2000 to 2006 resulted in large increases in property tax revenues. Figure 4 Source: The House-Senate Agreement for Property Tax Relief and Reform, Whip s Policy Brief, Office of the Majority Whip, Representative Ellyn Bogdanoff, June 12, 2007, page 5. Figure 5 breaks down the increases in property taxes levied by counties, cities, school districts, and special districts. The school districts collected the largest share of property tax revenues, with 40.3 percent of the property tax revenues in Counties collected the next highest percentage at 37.7 percent. Cities collected 3.4 percent and special districts collected 8.5 percent. Regional Economic Research Institute 4

24 Figure 5 Source: The House-Senate Agreement for Property Tax Relief and Reform, Whip s Policy Brief, Office of the Majority Whip, Representative Ellyn Bogdanoff, June 12, 2007, page 5. The average annual percentage increases for the periods 1995 to 2001 and 2001 to 2007 are shown in Table 1. Special districts had the largest percentage increase with an average annual increase of 15.4 percent per year for the period 2001 to Schools, counties, and cities had average annual increases of 11.2 to 13.7 percent per year for the 2001 to 2007 time period. Table 1 Average Annual Percentage Increase In Property Tax Revenues by Authority Type Taxing Authority 1995 to to 2007 Schools 4.5% 11.2% Counties 5.5% 12.1% Cities 8.0% 13.7% Special Districts 5.5% 15.4% Total 5.3% 12.2% Regional Economic Research Institute 5

25 3.0 PROPERTY TAX RELIEF AND REFORM The Florida Legislature s property tax reform includes three major components: Rolled-back Rate - A reduction in property tax collections by reducing the millage rate to the rolled-back rate minus a percentage based on the level of per capita tax increases between 2001 and 2006 (HB 1-B); Per Capita Limits - The new law limits future increases in millage rates based on Florida s per capita income increases and an allowance for new construction (HB 1-B); and Proposed Constitutional Amendment for a Super Homestead Exemption A constitutional amendment is proposed that will significantly increase the homestead exemption values and phase out Save Our Homes. Property Tax Reduction (HB 1-B) Roll Back Rate and Roll Back Rate Reduction The new law requires a two-step process for determining the millage rate for fiscal years Step One Roll Back Rate First, the taxing body must reduce the millage rate for fiscal years to the rolled-back rate. The rolled-back rate is the millage rate that will produce the same ad valorem or property tax revenue as was levied in the prior year, exclusive of new construction and significant additions to structures. For example, in 2006 a city had a property tax base of $20,000,000 and a millage rate of ten mills. In 2006, the city collected $200,000 in property tax. In 2007, the current value of the prior year s tax base is $40,000,000. Assuming that the prior year s tax base remains unchanged in terms of new construction, additions, etc., the millage rate for 2007 will be five mills (which is the millage rate that will produce the same ad valorem tax revenue as was levied in the prior year). Step Two Roll Back Rate Reduction Cities and counties will be required to reduce the rolled-back millage rate an additional 0, 3, 5, 7, or 9 percent based on their past millage increases from 2001 to All independent districts, counties of special financial concern, and city services taxing units and dependent special districts whose primary function is to provide medical emergency and fire rescue services are required to reduce their millage rate three percent below the rolled-back rate regardless of the past millage increases. The table is established so that those counties and cities with Regional Economic Research Institute 6

26 the largest growth in per capita taxes over 2001 to 2006 will have the largest additional reduction. The Florida Department of Revenue provided the following tables for calculating the required rolled-back. Table 2 Calculation of the Reduction Beyond the Rolled-Back Rate for Municipalities Table 3 Calculation of the Reduction Beyond the Rolled-Back Rate for Counties Source: Florida Department of Revenue, July 17, Regional Economic Research Institute 7

27 Appendix B provides tables of the 2001 and 2006 per capita taxes levied, the growth rates in per capita taxes, whether the county or city is of special financial concern, and the reduction required beyond the rolled-back millage rate. The data contained in Appendix B is summarized in Figures 6 and 7, which show the number and percent of the counties and cities that have to reduce the rolled-back millage rate by 0, 3, 5, 7, and 9 percent, unless it is overridden by a voting requirement. In addition to the exemption for school districts, jurisdictions that have not levied property taxes for at least five years are not subject to the required tax reduction in order to give them time sufficient time to develop a secure financial plan. Property taxes levied for payment of bonds or for periods not longer than two years are exempt from the required tax reduction since they were authorized by voters. Figure 6 Additional Reduction in the Rolled-Back Millage Rate Required by Counties 9% Reduction 15 Counties 22.4% 0% reduction 3 Counties 4.5% 7% Reduction 9 Counties 13.4% 3% Reduction 29 Counties 43.3% 5% Reduction 11 Counties 16.4% Regional Economic Research Institute 8

28 Figure 7 Additional Reduction in the Rolled-Back Millage Rate Required by Cities 9% Reduction 138 Cities 37.0% 0% reduction 114 Cities 30.6% 7% Reduction 45 Cities 12.1% 5% Reduction 59 Cities 15.8% 3% Reduction 17 Cities 4.6% Future Property Tax Revenue Limits (HB 1-B) The new law also limits the increases in property tax revenue beginning in fiscal year and every year thereafter to the increases in Florida per capita income. Florida s personal per capita income has grown at an average of 4.2 percent per year over the last 10 years. Figure 8 provides the annual per capita income increases from 1990 to The recessions of 1990 and 2001 are responsible for the slow growth in those years. A local governing authority may override the limit if it meets certain voting requirements. The significance of this new property tax revenue limit is that: This new revenue limit applies to all property including residential, commercial, and industrial, and does not have a homestead preference; The new limit is a revenue limit and not an assessment limit like that used in the Save Our Homes constitutional amendment passed in The assessment limit protected only residential homesteads and resulted in large disparities in residential assessed values. A higher tax burden was placed on business and on non-homestead residential properties; and It does provide governing authorities a process to override the cap. Regional Economic Research Institute 9

29 The law limits the maximum rate increase within the county or city, but individual jurisdictions can increase rates above the limit as long as the aggregate limit for the various jurisdictions is not broken. This gives the counties and cities the ability to shift resources within the county or city jurisdictions. Figure 8 Florida s Per Capita Personal Income Increases 1990 to 2006 Percentage Increase 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 1.1% Average Annual Growth Rate 1996 to 2006 is 4.2% 3.2% 3.1% 2.9% 4.7% 4.2% 3.6% 6.1% 3.5% 6.0% 2.7% 2.0% 1.5% 7.4% 5.3% 4.5% 0.0% Year Source: Bureau of Economic Analysis, Regional Economic Accounts, State Personal Income. Override Rules for exceeding the reductions and millage limitations (HB 1-B) There are different rules for exceeding the reduction and millage rate limits for different years. A county, city, or special district governing authority can exceed the reduction and cap in fiscal year by: A two-thirds vote of the governing body to eliminate the 3, 5, 7, or 9 percent cut and simply institute the rolled-back rate; A unanimous vote of the governing body to maintain the same millage rate that was levied in fiscal year ; and Any higher millage rate will require voter approval by referendum. The override rules for fiscal year are designed to deal with the potential reduction in tax base due to the Super Homestead exemption. The county, city, or special district can exceed the required rate reduction by: A two-thirds vote of the governing body can recover up to two-thirds of the revenue lost due to the Super Homestead exemption base reduction; and Regional Economic Research Institute 10

30 A unanimous vote is needed to adopt an even higher rate allowing more recovery. The county, city, or special district can exceed the millage limitation in fiscal year and beyond by: A two-thirds vote of the governing body will allow collection up to 10 percent more than the rolled-back rate adjusted for personal income growth; and A unanimous vote or voter approval by referendum will allow the tax revenue to rise by more than 10 percent over the rolled-back rate plus adjustments for personal income growth. The penalty for not complying with the millage limitations and override provisions is the elimination of the sales tax revenue sharing for the local government for the fiscal year. The state shares approximately $2 billion in revenue annually with local governments. Super Homestead Constitutional Amendment (HB 1-B, SJR 4-B, HB 5-B) In fiscal year , if the constitutional amendment is approved by voters on January 29, 2008, the new constitutional amendment will raise the homestead exemption to a significantly higher value. The new homestead exemption is 75 percent of the first $200,000 of a home s value plus 15 percent of the value between $200,000 and $500,000. The minimum exemption is $50,000 and the maximum exemption will be $195,000. The amendment provides a choice for current homesteads as of January 1, They can retain Save Our Homes limits or move to the Super Homestead exemption. Once a homestead under Save Our Homes is transferred to new ownership or elects to move to the new Super Homestead exemption, the owner may not revert to the former Save Our Homes limitation. This will eventually eliminate the Save Our Homes limitation. Low-income seniors (under $24,500 yearly) will receive a minimum exemption of $100,000 for their homestead. Businesses will receive a $25,000 tangible personal property tax exemption on business equipment such as computers and phone equipment, resulting in an average savings of about $250 per business. It is estimated that one million of Florida s 1.3 million businesses will be completely exempt from the local tax and will not be required to file detailed tangible property tax forms in the future. The amendment also authorizes the legislature to make changes that allow lower than fair market value assessments for affordable housing and working waterfronts. This should be a topic in the next legislative session if the constitutional amendment passes. Regional Economic Research Institute 11

31 4.0 A SUMMARYOF ECONOMIC STUDIES AND ANALYSIS This section of the report reviews the legislative staff analysis of the property tax legislation including the constitutional amendment. The House and Senate Staff Analysis forecasts that if all taxing authorities do not exceed the limitations set forth in the property tax reform law, HB 1-B, and the Super Homestead exemption, SJR 4-B, is approved by the voters in January of 2008, that the statewide reduction in property taxes will be as high as $31.6 billion over five years as shown in Table 4. This analysis assumes homesteads with a lower first year tax bill under Super Homestead will move to the new system. This will overstate the number of homes that will move to the new Super Homestead option. Table 4 Annual Property Tax Reductions Assuming No Overrides of Tax Rollback or Reductions (Billions of Dollars) Fiscal Year HB 1-B SJR 4-B Total FY $2.2 $0.0 $2.2 FY $2.6 $3.6 $6.2 FY $3.1 $3.9 $7.0 FY $3.6 $4.1 $7.7 FY $4.2 $4.3 $8.5 Total $15.7 $15.9 $31.6 Source: Florida Senate Professional Staff Analysis and Economic Impact Statement, SJR 4-B and House of Representatives Staff Analysis, June 13, 2007, h0001ba.pbc.doc and h0003bb.pbc.doc These reductions are shown graphically in Figure 9 where the blue bars represent the tax reductions from HB 1-B that passed the legislature and was signed into law by the governor and the red bars represent the potential additional reductions due to the Super Homestead Exemption if approved by the voters. Regional Economic Research Institute 12

32 Figure 9 Reduced Property Taxes Assuming Taxing Authorities Do Not Exceed Limits $ Billions $9.0 $8.0 $7.0 $6.0 $5.0 $4.0 $3.0 $2.0 $1.0 $0.0 $4.3 $4.1 $3.9 $3.6 $2.2 $2.6 $3.1 $3.6 $4.2 FY FY FY FY FY Fiscal Year Tax Reduction (HB 1B) Super Homestead (SJR 4-B) Source: Florida Senate Professional Staff Analysis and Economic Impact Statement, SJR 4-B and House of Representatives Staff Analysis, June 13, 2007, h0001ba.pbc.doc and h0003bb.pbc.doc Figure 10 provides a further breakdown of the projected property tax reduction for the Super Homestead constitutional amendment, HJR 3B. School districts will find that their property tax revenues will be reduced by $1.6 to $2.0 billion for the years FY2008 to FY 2011, which is shown on the graph in blue. The counties, cities, and special districts will see a reduction in property tax revenue of between $2.0 billion in FY 2008 to $2.3 billion in FY 2011 which is shown in red on the graph. Regional Economic Research Institute 13

33 Figure 10 Super Homestead Exemption (SJR 4-B) Estimated Property Tax Reduction Assuming Taxing Authorities Do Not Exceed Limits $ Billions $5.0 $4.5 $4.0 $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 $2.2 $2.3 $2.2 $2.0 $1.6 $1.7 $1.9 $2.0 FY FY FY FY FY Fiscal Year School Board Reductions Non School Board Reductions Source: Florida Senate Professional Staff Analysis and Economic Impact Statement, SJR 4-B and House of Representatives Staff Analysis, June 13, 2007, h0001ba.pbc.doc and h0003bb.pbc.doc The estimated average reduction under the statutory component of the legislation in property taxes per property tax party is shown in Figure 11. The average residential homestead will receive a reduction of $174. Non-homestead residential property would receive a reduction of approximately $199. Commercial and industrial property taxpayers would receive an average reduction of $941. Businesses would receive a reduction in tangible personal property tax of $92. Regional Economic Research Institute 14

34 Average Reduction Property Tax Reform Study Figure 11 Average Property Tax Reduction By Property Tax Party for Fiscal Year Assuming Taxing Authorities Do Not Exceed Limits $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 $174 (7%) Homestead $199 (7%) Non-Homestead Residential $941(6%) Commercial- Industrial Property Tax Party $92 (6%) Tangible Personal Property Source: The House-Senate Agreement for Property Tax Relief and Reform, Whip s Policy Brief, Office of the Majority Whip, Representative Ellyn Bogdanoff, June 12, 2007, page 22. The house staff study also estimated the average property tax reduction for all All homesteaders; Homesteaders that are likely to switch to the Super Homestead Exemption; Non-homestead residential; Commercial & industrial; and Tangible personal property. The estimates for FY under the constitutional component of the legislation are shown in Figure 12. The average property tax savings for all homesteaders is estimated to be $948 assuming that the Super Homestead Exemption receives the necessary approval. Those benefiting from the Super Homestead exemption will save about $1,300 for FY2008. Non-homestead residential will receive a much smaller overall reduction of about $250 since they will not qualify for the homestead exemption. Commercial-industrial properties will receive on average about $1,200 dollars in property tax savings. Finally, business will receive an average of $262 in tangible personal property tax savings. In addition, businesses will not have to file in the future after a final filling if they have less than $25,000 in tangible personal property to report. Regional Economic Research Institute 15

35 Average Reduction Figure 12 Average Property Tax Reduction For Property Tax Party for Fiscal Year Assuming Taxing Authorities Do Not Exceed Limits $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 $948 Homestead (All) $1,306 (44%) Homestead (73% Benefiting) $245 (8%) Non- Homestead Residential Property Tax Party $1,240 (8%) Commercial- Industrial $262 (17%) Tangible Personal Property Source: Florida Senate Professional Staff Analysis and Economic Impact Statement, SJR 4-B and House of Representatives Staff Analysis, June 13, 2007, h0001ba.pbc.doc and h0003bb.pbc.doc Figure 13 provides a graph of Florida s property taxable value, the actual average millage rate, and a projection of what the millage rate will be if it allowed for new construction and was limited by inflation. Limiting the property tax revenue to per capita income increases (inflation) and allowing for new construction (population) would have required large reductions in the millage rate during the period 2001 to 2007, due to the rapid rise in property values. Regional Economic Research Institute 16

36 Figure 13 Source: The House-Senate Agreement for Property Tax Relief and Reform, Whip s Policy Brief, Office of the Majority Whip, Representative Ellyn Bogdanoff, June 12, 2007, page 6. Florida s revenue cap or limit is compared to the actual taxes levied for the years 1983 to 2007 in Figure 14 provided in the June 12, 2007 The House-Senate Agreement for Property Tax Relief and Reform. The figure shows that the limit would have been effective in 1989 through 1991 and from 2004 through The limit or cap would take effect in years when property values rose faster than per capita income. The market forces driving up real estate property values have cooled so that it is unlikely that property values will climb faster than per capita personal income over the next couple of years. Figure 14 Regional Economic Research Institute 17

37 Source: The House-Senate Agreement for Property Tax Relief and Reform, Whip s Policy Brief, Office of the Majority Whip, Representative Ellyn Bogdanoff, June 12, 2007, page SUPER HOMESTEAD AND SAVE OUR HOMES TAX PAYMENT SIMULATIONS The public will vote on a new Super Homestead constitutional amendment in 2008 that will eventually replace the Save Our Homes limitations. If the constitutional amendment is approved, the Save Our Homes option will be grandfathered so that once a home is sold or transferred the house will go on the new Super Homestead Exemption System. An economic model was developed to simulate the taxes that will be paid under the existing Save Our Homes option and under the new Super Homestead option assuming that the taxing authorities do not override the rollback rates. The degree and frequency of overrides that increase the millage rate will increase the taxes paid under both systems. This model is used to predict the potential choices based on the assumptions discussed on this section. The results are simulations and are not expected to match actual year-to-year tax payments since per capita income changes will vary, overrides can be expected and other factors could affect the actual taxes paid. Four key factors and levels were used Regional Economic Research Institute 18

38 to develop 180 sensitivity cases or simulations to illustrate the differences in taxes paid by the two systems: 1) Current Value of the homestead Cases were run for houses valued at $150,000, $250,000, $500,000, $750,000, and $1,000,000. This should provide a wide range of housing values and provide insights into how the Super Homestead and Save Our Homes options are impacted by property values. 2) Length of Ownership The length of ownership is used to calculate the Save Our Homes Assessed value in Three alternatives were used for length of ownership. Cases were run with 0 years of ownership, 5 years, and 10 years. Historic property appreciation rates for Florida were used to calculate the market value of the property 5 and 10 years ago. Those values were increased by three percent per year to arrive at an estimated 2007 Save Our Homes assessment value for the home. Historically, real estate has appreciated by an annual percentage rate of approximately 13 percent for the last five years and by 10 percent for the last 10 years. 3) Expected Real Estate Appreciation Cases were run for a wide range of expected Real Estate Appreciation rates including 3, 5, 7, and 10 percent per year for the study. Real estate values in Florida s property values go through cycles so it is highly unlikely that over long periods of time that an annual appreciation rate of 10 percent can be sustained given that the overall inflation rate stays below 3 percent. Appreciation rates in the late 1990s before the housing boom were in the 5 percent range (See Figure 2). 4) Expected Tenure in the Home The future taxes to be paid are function of the expected tenure in the home. Cases were run for expected tenures of 5, 10, and 20 years. Other model assumptions In addition, the model assumes that the future growth Florida s per capita income rate is 4.2 percent, which is the same rate that was observed over the last ten years. The Save Our Homes limitation for growth in assessed value is three percent per year and the millage rate is 8 mills for schools and 11 mills for counties, cities, and special districts. The 8 mills for schools are assumed to be constant over the forecast horizon and the 11 mills are rolled-back based on the appreciation in values. The Super Homestead exemption level of $500,000 is Regional Economic Research Institute 19

39 assumed to rise at the per capita income rate of 4.2 percent. Finally, a discount rate of eight percent is assumed to calculate the present value of taxes paid over the expected tenure in the home. Results of Simulation Case Study Runs The present value of simulated taxes owed for 180 cases are provided in Tables 5 though 9 and illustrate the wide range of outcomes. The lower the value of the house, the higher the Save Our Homes assessed value (less time in home) and the slower the rate of real estate appreciation, the more likely that a case will favor the Super Homestead option. The median price of existing homes in Florida was approximately $239,000 in January This implies that about one-half of the homes have a value below this amount and the other one-half has a value above this amount. Table 5 provides the model cases for homes valued at $150,000 in Most cases favor the new Super Homestead option. The cases that favor the Save Our Homes option are those where the owner plans to stay in the home for a large number of years and the expected real estate appreciation is over seven percent. A similar set of simulations for a home valued at $250,000 is shown in Table 6. This case is close to the median home value for January The Super Homestead option is generally favored by those that are purchasing a new home where the expected rate of real estate appreciation is less than 10 percent and the expected tenure is less than 20 years. Generally, those that have been in their homes 10 years and built up a high exemption value under the Save Our Homes option will have lower property taxes under the existing Save Our Homes limitations. Table 7 provides simulated taxes under both options for a home value of $500,000. This is a fairly high property value and will be reflective of values found in high growth and coastal areas. The Super Homestead option is favored in those cases where the owners are buying a new home and have not built up a differential between the market and assessed value under Save Our Homes. Again, the table shows that the longer that the owner has owned the homestead property, the faster the expected appreciation of the homestead, and the longer the expected tenure, the more likely that the owner will select to remain under the Save Our Homes option. The $750,000 and $1,000,000 homestead value cases are shown in Tables 8 and 9. The results are similar to the $500,000 case where new owners, who expect low appreciation rates for homes, will select the Super Homestead option. Again, those that have been on the Save Our Homes System or expect high rates of real estate appreciation will be expected to select the Save Our Homes option. Regional Economic Research Institute 20

40 Table 5: Model Simulation Results Present Value of Property Taxes $150,000 Homestead I II III IV Results Results Expected Real Estate Appreciation Expected Tenure In Home Save Our Homes Present Value Taxes Super Homestead Present Value Taxes Length of Value Ownership $150,000 0 Years 3.0% 5 Years $10,529 $3, Years $19,128 $5, Years $31,902 $10,917 0 Years 5.0% 5 Years $10,193 $3, Years $18,062 $6, Years $28,834 $14,653 0 Years 7.0% 5 Years $9,885 $3, Years $17,141 $7, Years $26,454 $19,040 0 Years 10.0% 5 Years $9,469 $3, Years $15,980 $10, Years $23,792 $26,913 5 Years 3.0% 5 Years $5,844 $3, Years $10,617 $5, Years $17,707 $10,917 5 Years 5.0% 5 Years $5,658 $3, Years $10,025 $6, Years $16,004 $14,653 5 Years 7.0% 5 Years $5,487 $3, Years $9,514 $7, Years $14,683 $19,040 5 Years 10.0% 5 Years $5,256 $3, Years $8,870 $10, Years $13,206 $26, Years 3.0% 5 Years $4,441 $3, Years $8,067 $5, Years $13,455 $10, Years 5.0% 5 Years $4,299 $3, Years $7,618 $6, Years $12,161 $14, Years 7.0% 5 Years $4,169 $3, Years $7,230 $7, Years $11,157 $19, Years 10.0% 5 Years $3,994 $3, Years $6,740 $10, Years $10,035 $26,913 Regional Economic Research Institute 21

41 Table 6: Model Simulation Results Present Value of Property Taxes $250,000 Homestead I II III IV Results Results Expected Real Estate Appreciation Expected Tenure In Home Save Our Homes Present Value Taxes Super Homestead Present Value Taxes Length of Value Ownership $250,000 0 Years 3.0% 5 Years $18,953 $8, Years $34,430 $16, Years $57,424 $30,556 0 Years 5.0% 5 Years $18,347 $9, Years $32,512 $18, Years $51,902 $36,790 0 Years 7.0% 5 Years $17,793 $10, Years $30,854 $21, Years $47,616 $43,660 0 Years 10.0% 5 Years $17,043 $11, Years $28,765 $24, Years $42,826 $56,968 5 Years 3.0% 5 Years $11,145 $8, Years $20,245 $16, Years $33,766 $30,556 5 Years 5.0% 5 Years $10,788 $9, Years $19,117 $18, Years $30,519 $36,790 5 Years 7.0% 5 Years $10,462 $10, Years $18,142 $21, Years $27,999 $43,660 5 Years 10.0% 5 Years $10,022 $11, Years $16,914 $24, Years $25,182 $56, Years 3.0% 5 Years $8,806 $8, Years $15,996 $16, Years $26,679 $30, Years 5.0% 5 Years $8,524 $9, Years $15,105 $18, Years $24,113 $36, Years 7.0% 5 Years $8,266 $10, Years $14,335 $21, Years $22,122 $43, Years 10.0% 5 Years $7,918 $11, Years $13,364 $24, Years $19,897 $56,968 Regional Economic Research Institute 22

42 Table 7: Model Simulation Results Present Value of Property Taxes $500,000 Homestead I II III IV Results Results Expected Real Estate Appreciation Expected Tenure In Home Save Our Homes Present Value Taxes Super Homestead Present Value Taxes Length of Value Ownership $500,000 0 Years 3.0% 5 Years $40,012 $26, Years $72,686 $49, Years $121,229 $84,790 0 Years 5.0% 5 Years $38,734 $27, Years $68,636 $53, Years $109,570 $96,620 0 Years 7.0% 5 Years $37,562 $29, Years $65,136 $58, Years $100,523 $112,240 0 Years 10.0% 5 Years $35,981 $31, Years $60,726 $66, Years $90,411 $140,791 5 Years 3.0% 5 Years $24,395 $26, Years $44,316 $49, Years $73,913 $84,790 5 Years 5.0% 5 Years $23,616 $27, Years $41,847 $53, Years $66,804 $96,620 5 Years 7.0% 5 Years $22,901 $29, Years $39,713 $58, Years $61,288 $112,240 5 Years 10.0% 5 Years $21,937 $31, Years $37,024 $66, Years $55,123 $140, Years 3.0% 5 Years $19,717 $26, Years $35,818 $49, Years $59,739 $84, Years 5.0% 5 Years $19,087 $27, Years $33,822 $53, Years $53,994 $96, Years 7.0% 5 Years $18,510 $29, Years $32,098 $58, Years $49,536 $112, Years 10.0% 5 Years $17,730 $31, Years $29,924 $66, Years $44,552 $140,791 Regional Economic Research Institute 23

43 Table 8: Model Simulation Results Present Value of Property Taxes $750,000 Homestead I II III IV Results Results Expected Real Estate Appreciation Expected Tenure In Home Save Our Homes Present Value Taxes Super Homestead Present Value Taxes Length of Value Ownership $750,000 0 Years 3.0% 5 Years $61,071 $47, Years $110,941 $86, Years $185,034 $146,403 0 Years 5.0% 5 Years $59,120 $49, Years $104,760 $93, Years $167,238 $165,341 0 Years 7.0% 5 Years $57,331 $51, Years $99,418 $99, Years $153,430 $187,140 0 Years 10.0% 5 Years $54,918 $54, Years $92,686 $111, Years $137,995 $228,132 5 Years 3.0% 5 Years $37,645 $47, Years $68,387 $86, Years $114,059 $146,403 5 Years 5.0% 5 Years $36,443 $49, Years $64,576 $93, Years $103,089 $165,341 5 Years 7.0% 5 Years $35,340 $51, Years $61,284 $99, Years $94,578 $187,140 5 Years 10.0% 5 Years $33,853 $54, Years $57,134 $111, Years $85,063 $228, Years 3.0% 5 Years $30,628 $47, Years $55,639 $86, Years $92,799 $146, Years 5.0% 5 Years $29,650 $49, Years $52,540 $93, Years $83,874 $165, Years 7.0% 5 Years $28,753 $51, Years $49,860 $99, Years $76,949 $187, Years 10.0% 5 Years $27,543 $54, Years $46,484 $111, Years $69,208 $228,132 Regional Economic Research Institute 24

44 Table 9: Model Simulation Results Present Value of Property Taxes $1,000,000 Homestead I II III IV Results Results Expected Real Estate Appreciation Expected Tenure In Home Save Our Homes Present Value Taxes Super Homestead Present Value Taxes Length of Value Ownership $1,000,000 0 Years 3.0% 5 Years $82,130 $68, Years $149,197 $125, Years $248,839 $210,208 0 Years 5.0% 5 Years $79,506 $70, Years $140,884 $133, Years $224,907 $234,063 0 Years 7.0% 5 Years $77,101 $73, Years $133,701 $141, Years $206,338 $262,040 0 Years 10.0% 5 Years $73,855 $77, Years $124,647 $155, Years $185,580 $315,473 5 Years 3.0% 5 Years $50,896 $68, Years $92,457 $125, Years $154,206 $210,208 5 Years 5.0% 5 Years $49,270 $70, Years $87,306 $133, Years $139,375 $234,063 5 Years 7.0% 5 Years $47,779 $73, Years $82,854 $141, Years $127,867 $262,040 5 Years 10.0% 5 Years $45,768 $77, Years $77,244 $155, Years $115,004 $315, Years 3.0% 5 Years $41,540 $68, Years $75,461 $125, Years $125,859 $210, Years 5.0% 5 Years $40,213 $70, Years $71,257 $133, Years $113,754 $234, Years 7.0% 5 Years $38,996 $73, Years $67,623 $141, Years $104,362 $262, Years 10.0% 5 Years $37,355 $77, Years $63,044 $155, Years $93,863 $315,473 Regional Economic Research Institute 25

45 6.0 PROPERTY TAX REFORM LEGISLATION ISSUES AND CONCERNS There are various concerns and issues related to the property tax reform legislation. The study searched newspapers, reviewed articles, and studies of the property tax reform to develop the following summary list of concerns. 1. The Super Homestead amendment could be rejected by the voters. This would lead to a number of alternatives being proposed to address the Lock- In issues of Save Our Homes, assessments at current use instead of highest and best use, and increases in the homestead exemptions. 2. Super Homestead Constitutional Amendment Legal challenges The vote on the constitutional amendment could be delayed and major changes could be required to the proposed constitutional amendment. 3. Super Homestead exemption will not keep up with inflation The law states that the $500,000 ceiling will increase at the rate of Florida s per capita income. Most of the value of the exemption is in the $200,000 exemption tier which does not appear to rise with per capita income or inflation. The real value of the Super Homestead exemption will fall over time. 4. Reduced funding of Cities, Counties, Special Districts, and Schools will reduce the level of service and infrastructure improvements and lead to increases in local fees and other charges. Reduced funding and limits on the property tax revenue will impact service levels and funds for supporting and expanding infrastructure. Alternative funding methods may be utilized to fund services and improvements. The Super Homestead exemption if approved by voters could substantially reduce school district funding requiring more state funds or an increase in school district millage rates. 5. School districts are not subject to the per capita income limits and account for over 40 percent of the property tax revenue in School districts account for approximately 40 percent of the overall Florida property tax and are not subject to the rollback and voting requirements to override the rollback and the per capita income limitation. Regional Economic Research Institute 26

46 6. The new tax reform does not do enough to help business owners, rental property owners, and non-homesteaders such as those with second homes including snowbirds. The new property tax reform legislation does help non-homestead property owners by initially rolling back and reducing the millage rate subject to the override vote of the governing authority. In addition, the new per capita income limit will protect all property owners from having property tax collections rise faster than Florida s average per capita income. Average property tax revenue rose at an average annual rate of 12.2 percent from 2001 to The limit will most likely limit the average annual property tax increase to around four to five percent. Property taxes rising at 12.2 percent per year will double the tax revenue collected from a particular land parcel in about 6 years. Increases in property taxes at 5 percent per year will double the tax revenue in about 14 years. The property tax limit based on Florida s per capita income growth should make owners of property more certain about future property tax payments. This should make property more desirable in Florida. The new legislation also includes a $25,000 exemption from tangible property tax which will help businesses and especially small businesses that will be exempt from filling after the initial return if they have less than $25,000 in tangible property at their business location. In addition, there is language in the legislation to assist working waterfronts and affordable housing so that the property will be taxed on a value less that the highest and best use, reducing the overall property tax burden. One concern that has been voiced concerns the new Super Homestead constitutional amendment. If the Super Homestead is passed by voters in January, 2008, there are recovery provisions in the new law to allow governing authorities to raise the millage rate to recover part or all of the lost property tax revenue. Working waterfronts and affordable housing may get the benefit of having their assessments based on current use and not the highest and best use. Are there other businesses or homes that should receive similar treatment? Regional Economic Research Institute 27

47 7. Continuation of Lock-In effect and push for portability of tax savings The Super Homestead constitutional amendment will make it easier for some homesteaders to move to a new home. A significant number of higher priced homes where the assessed value is significantly below market will still lose tax benefits under the Super Homestead exemption and be less likely to move to a new homestead. 8. Florida s per capita income growth can vary considerably, introducing volatility into the county, city, and special district budgets and property tax payment levels from year to year. The increases and decreases from year to year in per capita income will make cash flow and budget planning more difficult. The per capita annual increases had a low value of 1.1 percent and a high value of 7.4 percent for the period 1990 to 2006 (see Figure 8). Summary This study has reviewed the history of Florida s property values and taxes, described the new property tax relief and reform legislation including the new proposed Super Homestead constitutional amendment, provided a summary of the economic studies and analysis, provided economic model simulations of taxes under the Super Homestead and Save Our Homes systems, and provided a list of issues and concerns. The legislature has worked to provide a more predictable and accountable process for property taxes. The new per capita limits on increased property taxes are a bold step providing a more balanced and predictable property tax system for all groups that pay property taxes. There are a number of issues and concerns that will most likely need to be addressed. One of the more important is the funding for school districts if the tax base is reduced due to the passage of the Super Homestead amendment. Additional study will be needed to fully appreciate the overall economic impacts of Florida s property tax reform legislation. Regional Economic Research Institute 28

48 REFERENCES Anderson, Tom (State Representative), Here is What Tax Reform Means to you, St. Petersburg Times, June 26, Associated Press, Broward County mayor wants property tax vote dropped, Sarasota Herald Tribune, July 10, Associated Press, Property Tax Legislation at a Glance, Palm Beach Post, June 14, Aydin, Necati, Model Predicts Florida Economy Will Gain By Property Tax Cut Without Changing Sales Tax, Florida TaxWatch Research Institute, May 2007 Bender, Michael, Four Towns Spared From Making Property Tax Cuts, Palm Beach Post.com, July 13, Bleakly, Sarah, Summary of Property Tax Reform as Adopted by the Legislature in the 2007 Special Session B, Florida Association of Counties, June 29, Business Wire, Fitch Comments on Florida s Property Tax Relief and Reform Package, June 15, Caputo, Marc and Gary Fineout Lawmakers Cut Property Taxes: More May Come, Miami Herald, June 15, 2007 Caputo, Marc Legislature Passes Property Tax Cut Proposal, Miami Herald, June 14, Caputo, Marc, Tax-fix Plan Offers Pains, Gains, Miami Herald, June 17, Cravey, Beth, Tax Reform: The impact legislators say benefits will vary among communities, Florida Times Union, June 29, Florida, Senate Joint Resolution, Ad Val Tax/ Tax Assessments/ Homestead Exemption, SJR 4-B, June 21, Florida, The Florida Senate Professional Staff, The Florida Senate Professional staff Analysis and Economic Impact Statement, SRJ 4-B, June 11, Florida, House of Representatives, Ad Valorem Taxation, HB 1-B, June 21, Florida, House of Representatives, Special Election, HB 5-B, June 21, Florida, House of Representatives Staff, House of Representatives Staff Analysis, Bill HB 1-B, Ad Valorem Taxation, Florida House, h0001ba.pbc.doc. Regional Economic Research Institute 29

49 Florida, House of Representatives Staff, House of Representatives Staff Analysis, Bill HJR 3B, Ad Valorem Property Taxation, Exemptions, Assessments, Limitations, Florida House, h0003bb.pbc.doc. Florida, Legislative Office of Economic and Demographic Research, Florida s Property Tax Study Interim Report, February 15, Florida, The Office of the Majority Whip, Florida House, The House-Senate Agreement for Property Tax Relief and Reform, Whip s Policy Brief, Representative Ellyn Bogdanoff, June 12, Florida, Property Tax Reform Committee, Preliminary Report and Recommendations, State of Florida, December, Kaczor, Bill Legislature Passes Property Tax-cutting Package, Miami Herald, June 14, Kennedy, John and Jason Garcia, Property Tax Plan Gathers Naysayers Near Vote, Orlando Sentinel. Kennedy, John and Jason Garcia Taxes cut; new fight looms, Orlando Sentinel, June 15, Kleindienst, Linda and Mark Hollis Lawmakers Approve Property Tax Plan, Sun-Sentinel, June 14, Kleindienst, Linda and Mark Hollis Potential Cuts Average $1,300 as Lawmakers OK Historic Property Tax Reform, Sun-Sentinel.com, June 15, Miami Herald Common Property-tax Cut Questions, June 16, 2007, Miami Herald, How Taxes Would Be Cut, June 15, 2007, Miami Herald, Prescription for Tax Relief, June 17, Palm Beach Post How Tax Reform is Affecting Municipalities,June 16, 2007, Pollick, Michael, A Brewing Revolt: Tax Revolutionaries Say if the Legislature Won t Do Real Reform, They Will Take The Lead, Sarasota Herald Tribune, June 17, Pollick, Michael, Michael Braga, and Dog Sword Non-homesteaders bear the brunt of tax reform, Sarasota Herald Tribune, June 15, Regional Economic Research Institute 30

50 PR Newswire Association, Quality of Life Programs Face Severe Funding Cuts in Proposed Property Tax Reform Plan, New Economic Study Shows, June 12, Rawls, Linda, Tax Reform Stirs Optimism for Real Estate, Palm Beach Post, June 16, Regional Economic Research Institute, Florida Gulf Coast University, Economic Analysis of Save Our Homes Portability, January Shanklin, Mary, Property-Tax Reform: What the Tax Plans Would Mean to YOU, Orlando Sentinel, April 22, South Florida Sun-Sentinel, Property Taxes Issue: Lawmakers Put Reform On Ballot, June 16, Tampa Tribune, Fairness Missing in this Property Tax Deal, Commentary, Joseph Brown,, June 17, Weber, Vicki, Final Special Session Property Tax Summary, Florida Chamber of Commerce, Hopping Green & Sams P.A., June 14, Whitehouse, Mark, Florida Hones Plan to Overhaul Escalating Property Taxes, The Wall Street Journal Online, Real Estate Journal.com, May 30, Whitehouse, Mark, Florida Tackles Task of Cutting Property Taxes; Breaks Aimed at Easing Pain of Housing Slump Could Give State a Boost, Wall Street Journal, May 29, Regional Economic Research Institute 31

51 APPENDIX A Florida TaxWatch Research Report No studies were found that directly forecast the overall economic impacts on gross regional product, disposable income, employment and population of the recent property tax legislation. A study was completed before the legislative session and included several scenarios where property taxes are cut relatively equally for residential owners, residential non-owners, and non-residential/ commercial. A research report, Model Predicts Florida Economy Will Gain by Property Tax Cut without Changing Sales Tax, was released by Florida TaxWatch in May Florida State University s Center for Economic Forecasting and Analysis (CEFA) used the Regional Economic Model, Inc. (REMI) to examine the economic impacts of various levels of property tax reductions. The study assumes that the tax reduction is relatively uniform with a reduction of about 32 percent for residential homeowners, 35 percent for residential non-homeowners, and 32 percent for non-residential/commercial. The rollback and reductions to the millage rates are relatively uniform but if the Super Homestead constitutional amendment is approved by voters, it will result in a larger tax reduction for homestead properties. The model was run for five scenarios including a $1 billion, $2 billion, $3 billion, $4 billion, and $5.5 billion reduction in property taxes. The model found that the reduction in property taxes lowers the overall housing costs and reduces the cost of doing business. This results in an increase in gross regional product and disposable personal income. Overall employment falls as the economy adjusts to less public and more private employment. The increase in real disposable income was found to spur investment activity in real estate. Population increases due to the lower cost of living and business costs. Regional Economic Research Institute 32

52 APPENDIX B 2001 AND 2006 PER CAPITA TAXES AND ROLLBACK REQUIREMENTS FOR COUNTIES AND MUNICIPALITIES Regional Economic Research Institute 33

53 Regional Economic Research Institute 34

54 Regional Economic Research Institute 35

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56 Regional Economic Research Institute 37

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60 Source: Florida Department of Revenue, July 16, 2007 Regional Economic Research Institute 41