Florida Hones Plan to Overhaul
Escalating Property Taxes

When the nation's home prices were booming, Florida led the way. Now, with the housing market in a slump, the state is taking the lead in tackling one of the boom's more onerous legacies: sky-high property taxes.

In mid-June, the Florida legislature plans to convene a special session that could pave the way for more than $30 billion in property-tax relief over the next five years. That's by far the largest among the similar tax breaks some states are adopting amid a backlash by disgruntled property owners.

Reducing property-tax revenues would be painful for the cities and counties that depend on them to fill their coffers. But, by leaving taxpayers with more money to spend, a property-tax cut could stimulate the economy of a state that has become the epicenter of the housing bust.

"We can send a sonic boom through Florida's economy," Florida Gov. Charlie Crist, a Republican, said at a Miami town-hall meeting on property taxes earlier this month. "We must provide relief to Floridians."

Across the nation, the rise in home values in recent years has boosted property-tax bills sharply. The average annual property-tax burden in the U.S. stood at $1,132 per person in 2005, up 13% from 2000 in inflation-adjusted terms, according to data from the Commerce Department. Residents of Wyoming and Washington, D.C., saw the largest rises: Their tax bills went up by 49% and 42%, respectively. New Jersey had the nation's biggest property-tax bills, at $2,206 per capita, up 13% from 2000.

In many areas, housing prices in recent years rose too quickly for local tax assessors to keep pace with them. Now, tax assessments are catching up just as market prices are slumping.

Responding to an outcry from taxpayers, politicians in some states have come up with plans to ease the pain. This year alone, New Jersey, New York, Indiana and Montana have cut property taxes in one way or another, says David Brunori, professor of public policy at George Washington University and vice president of Tax Analysts, a nonprofit tax-information company in Falls Church, Va. Pennsylvania did the same last year. None of those measures, however, compares in size and scope to Florida's.

"This is the biggest tax break being considered anywhere since Proposition 13 in California," says Prof. Brunori, referring to the 1978 initiative that radically slashed property taxes in that state.

Florida's legislature is considering various plans that aim not only to cut taxes, but also to change a system that many regard as unfair. Much like California, Florida protects existing homeowners, effectively capping the amount that their property taxes can rise from year to year.

As house prices have more than doubled in Florida over the past five years, the system has shifted the tax burden onto people who don't enjoy the same protection: new homeowners, business owners, real-estate investors, people with second homes and "snowbirds," nonresidents who have vacation homes in the state.

As of 2006, such property owners accounted for about 68% of Florida's property-tax revenues. If all Florida property owners were taxed the same way, those who lack protection under the current system would account for less than 55%, according to data from the state legislature's Joint Select Committee on Property-Tax Reform.

In certain cases, homeowners' annual property-tax bills can be up to 10 times as high as those of neighbors in similar houses. "People are just getting hammered," say Miami Democrat Dan Gelber, minority leader in the Florida House of Representatives.

He estimates that if he moved into an almost identical home across the street in his Miami Beach neighborhood, his annual property-tax bill would jump to more than $20,000 from its current $7,000.

Among the most ardent proponents of reforming the tax system are Florida's real-estate agents, who have suffered a huge drop in business as home sales in the state have plummeted. They hope a big tax break will bring them business from longtime homeowners, who have avoided moving into new homes for fear of losing their protected tax status.

"I think it would cause a second boom," says Craig Beggins, president of Century 21 Beggins Enterprises, a real-estate agency based in Tampa Bay. "I know a lot of people who would like to sell their house and move up to another home." He said he had recently organized an email campaign to urge local politicians to support tax reform.

A bigger question is how the tax break would affect the broader Florida economy, which is still expanding but faces some strong headwinds. In addition to a drought threatening the state's agriculture and the risks posed by the impending hurricane season, Florida is far more exposed to the housing downturn than other states.

For one, builders put up many more homes in Florida during the housing boom than its families needed. That glut is now triggering a steep drop in construction, which accounts for about 7% of the state economy. As of the last quarter of 2006, housing starts were down almost by half from a year earlier, and economists are predicting sharp drops in construction activity and employment.

Beyond that, as Florida's house prices stagnate, and even decline, from extremely high levels, homeowners are likely to feel poorer and cut their spending accordingly. In a recent research report, economists at Goldman Sachs in New York estimated that homes in Florida still are more than 40% overvalued, and prices are likely to fall by 10% to 15% this year alone.

Economists doubt a tax break by itself would be enough to turn around the state's economy if the negative forces combine to tip it into recession. But it could make a difference at the margin, giving consumers some extra spending money to offset the effects of falling house prices.

"It definitely will help," says Amy Baker, chief economist at the Florida legislature. "But it's not likely to spur economic revival."

Though consumers would benefit, the flip side would be some severe belt-tightening for municipalities. Florida doesn't have a personal income tax, and its cities and counties depend heavily on property taxes to pay for services such as police and firefighters. Miami-Dade County Manager George Burgess called the proposed tax reform "potentially catastrophic for county and local governments."

Overall, though, the property-tax revenue of Florida's city and county governments has been rising at a rate much faster than the state's population, a trend that critics see as a sign of a bloated bureaucracy. In 2006, the state collected $30.5 billion in property taxes, almost double the level of 2000. Over the same period, the state's population grew by about 13%.

"It's as much a spending problem as it is a property-tax problem," said Dominic Calabro, president of Florida TaxWatch, a nonpartisan watchdog group in Tallahassee. "The idea is to put local governments on a healthy diet, so they can grow, but grow along with the economy."

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