P.roperty Taxes are the most hated taxes in general, and for good reason. As they pay their property tax bills every year, owners are forced to write a check and take government expenses. From the small business owner struggling to get payrolls to the millennial attempt to buy their first home, everyone is hit by high property taxes. In some cases, fixed income retirees can tragically be taxed out of their homes as property tax continues to rise.
Dealing with the excessive property tax problem can be an extremely challenging task at the state level as most property taxes are collected at the local government level and are therefore based on the spending set by those local governments. We believe state lawmakers in Topeka, Kan., Have just perfected the recipe for states across America to address this problem.
After passing an overwhelming bipartisan majority in the Kansas House and Senate, Democratic Governor Laura Kelly recently signed the Truth in Taxation property tax reform. While Governor Kelly vetoed a similar bill during the COVID-cut session last year, she likely saw the writing on the wall, with massive margins in support of reform this year as well.
The new Kansas Truth About Tax Act reduces the mill levy, so new city, county, and school district real estate valuations will charge the same amount of property tax as last year in US dollars. If local officials want to increase the revenue-neutral milling tax, they must inform citizens of their intention to hold a public hearing to comment and vote on the overall tax increase. These new requirements close the honesty gap; Local officials can no longer pretend to be “adhering” to property tax rates while taking on large increases due to valuation changes.
This sound policy is based on the model policy of the American Legislative Exchange Council (ALEC) and the successes of Utah and Tennessee. Under Utah's Truth In Taxation Act, the effective property tax rate decreased 7.5 percent between 2000 and 2018. During the same period, the Kansas effective tax rate increased 22 percent. Diligent Kansas taxpayers can now expect lower effective property tax rates and a more honest discussion of future property tax charges.
The story goes on
Government decision-makers are often reminded by their constituents of the painful symptom of high property taxes, but often misdiagnose the underlying cause: urban and county spending growth. Due to decades of unintended consequences, many states originally introduced income taxes to “buy” local property tax charges with state revenues.
Lest we forget the history of New Jersey, which remarkably had no income tax or general sales tax in 1965. By 1976 it had both been introduced, at least in part, to lower local property taxes. Today, after failing to control local spending in cities across New Jersey, the Garden State has some of the highest income and sales tax rates in the nation – and the third highest property tax rate in America.
The status quo is indeed a big political issue for progressive local government units. Spend generously and then when the bills come due, send a portion of it along with your taxpayer-funded lobbyists to the state capital and request additional revenue sharing from state taxpayers to socialize the cost. If the tax and spending-inclined towns are not getting the state aid they are seeking, they can easily steer the anger of property taxpayers onto the state capital.
The consideration of principle and long-term strategies to reduce high property tax burdens is essential. When policy changes are successfully implemented, states can dramatically improve their economic competitiveness and relieve a burdensome burden on individuals and commercial property owners dealing with escalating their property tax bills.
Prior to the recent reforms in Kansas, Utah and Tennessee received the greatest attention for their property tax transparency measures. Since it went into effect in 1985, Utah's Truth In Taxation Act has helped Beehive State maintain a low property tax rate. Former Utah Senator Howard Stephenson, who led Utah Truth's tax effort, said, "Local governments shouldn't get an automatic 12% increase in revenue just because property valuations are up 12%."
When the bill was passed, Utah had the 24th lowest property tax in the country, but thanks in large part to the Truth In Taxation Act, the state has improved to the 14th lowest today. This was one of the policy reforms that led Utah to have the best economic prospects in America in all 13 editions of the annual Index of Economic Competitiveness of the Rich States and Poor States: ALEC-Laffer State Economic Competitiveness Index.
The annual Lincoln Institute of Land Policy poll puts this into perspective. A $ 1 million commercial property in Richfield, Utah with $ 200,000 in furnishings paid $ 16,177 in property tax in 2019. The same property in Iola, Kan., Paid $ 52,830. That is the power of Truth in Taxation's principles of transparency and honesty.
Other states are likely to follow suit as they see the incredible benefits of a more predictable and transparent property tax system that improves economic competitiveness. In particular, we are watching developments in Lincoln, Neb., Where the legislature is pursuing its own version of Truth in Taxation at this session.
Kansas is the youngest state to adopt the "gold standard" model to increase accountability, transparency and address escalating property tax burdens on behalf of its constituents. More states should follow the lead of Kansas and Utah so they can avoid the fate of New Jersey and other high-tax countries.
Jonathan Williams is Chief Economist and Executive Vice President of Policy at the American Legislative Exchange Council. Dave Trabert is the Chief Executive Officer at the Kansas Policy Institute.