Tax shifts and other unintended consequences often accompany assessment caps and other attempts to “fix” property taxes, a University of Illinois-Chicago economist said Thursday.

If rapid valuation increases or other issues create a problem, the solution should target that problem and not the property tax itself in order to avoid unintended consequences, Dr. David Merriman said at an OpenSky webinar.

“Be careful,” Dr. Merriman said regarding the use of assessment caps. “The cure may be worse than the disease. You may create more problems than you’re fixing.

“My philosophy is to determine the problem you’re trying to solve and then target the solution directly at that problem.”

Assessment caps are particularly troublesome, as they often shift the responsibility of paying for local government services in unexpected ways, Dr. Merriman said. For example, an assessment cap implemented in his area resulted in renters paying more in property taxes while wealthier homeowners paid less, creating fairness issues.

Such caps also affect efficiency by reducing mobility, he said, as they can result in different effective tax rates for new property owners and long-time property owners. A recent study found that the average duration of property ownership increased by more than seven years following Michigan’s implementation of an assessment cap. Caps also make property taxes harder to understand and less predictable as a source of revenue for local governments.

There are, however, other ways to address property tax concerns, Dr. Merriman said. These include:

  • more targeted measures like expanding the homestead exemption;
  • implementing circuit breakers for those with high property taxes relative to their incomes;
  • allowing tax deferrals to help keep residents in their homes; and
  • increasing state aid to local governments or to property taxpayers themselves through credits.

These too, however, carry the risk of unintended consequences, he said, adding that legislators should think very carefully about how to address any particular issue.

A recording of the webinar can be found here. Download Dr. Merriman’s PowerPoint presentation here. Also, below are Dr. Merriman’s answers to audience questions that remained after the webinar ended.

A July 2021 PEW analysis of local government revenue generation ranked states according to their types of revenue generation in 2017. It listed Nebraska as 19th lowest — 31 states receive a higher percentage of local revenue from higher property taxes. Nebraska property tax is the primary source of local government revenue generation, with general sales tax at about 21% and income tax at 0.0%. Would you rebalance the tax revenue sources in Nebraska? How?

Statistics can be deceiving. It appears that the PEW study refers only to cities and counties and thus leaves out school districts in Nebraska and many other states. It also looks only at tax revenues and thus ignores fees and intergovernmental revenues, which can be important sources of funding in many states. I would not presume to tell Nebraska how to rebalance revenue sources but I would refer back to the general principles in my webinar for guidance. The revenue system as a whole must balance fairness, efficiency, administrative simplicity, stability and transparency. Nebraska should decide on these grounds. Fairness may be the most salient consideration and some may feel that the property and sales tax burdens are not distributed fairly.

Does research support the idea of Nebraska transferring state dollars to local governments for the express purpose of causing an equal reduction in local tax collections?

In most cases when state aid has been used explicitly to lower property tax it has also included redistribution across localities. For example in Michigan, state policy lowered local property taxes but explicitly aimed to redistribute resources to more needy areas. I am not aware of any research that suggests increases in state aid can successfully lower property taxes on a dollar-for-dollar basis.

If we “don’t make social policy through property tax,” how do we prevent the impacts of gentrification of historic or traditionally marginalized property that may become leveraged for development or desirability and force community displacement?

Objections to “gentrification” usually focus on displacement of lower income renters who cannot afford rising rents. As I suggested in the webinar, I believe this problem can be best addressed through circuit breakers that provide income tax preferences to renters whose rent has risen because of property tax increases. If homeowners are being displaced because property tax increases are leading to liquidity constraints I would set up a property tax deferral program that allows taxpayers to accumulate property tax debt and pay it off when the house is sold.

Do you have any thoughts about the short-term impact of the eviction moratorium on property taxes?

The moratorium is likely to reduce building owner’s ability to pay their property taxes.  In some cases, this could cause them to fall behind and might lead to a decline in property tax collections. I really don’t have a good idea of the potential magnitude of this problem. I am sure the effects will vary greatly by area.