MillageRate.com

(This article has been updated for the 2009-2010 legislative session.)

This session, the Georgia Legislature may approve HR-1, which is a bill to amend the constitution to limit increases in the assessed value of property to a maximum of 3% a year.

If passed by the Legislature and approved by the voters via a referendum in November, the assessment “freeze” will apply to all property in the state except where more restrictive “freezes” or value offset exemptions are already in place; in that case, the more restrictive law will still apply.

We believe that this proposal, if approved, will cause great harm to the owners of lower-valued and less desirable homes in the state’s more stable areas. Those homes tend to be occupied by the elderly and those on fixed or limited incomes. Below, we have included an illustration of the harm that this bill will cause.

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Two homes– a $100,000 home in an older part of the county, an established neighborhood with few home sales and no new construction… the other a $500,000 home in the fast-growing and highly desirable part of the county. Both are eligible for the exemption provided by HR162, which “freezes” the assessed value at a base year value plus a maximum of 3% annually, so long as the eligible owner stays in the home.

For the purposes of this example, both homes are purchased on the same day or, at least, within the same tax year.

Our smaller home in the older area is a great place to live, especially for a retired couple or individual. Sure, there’s some functional obsolescence– one bathroom for three bedrooms, for example. And it’s in a subdivision that is surrounded by several non-residential areas in need of revitalization. It’s not the “latest and greatest,” but all in all, the situation is fairly stable.

The older home appreciates at a steady 2% a year, at least for tax purposes.

The other area is where people, especially newcomers to the county, really want to live, however. The newer $500,000 home appreciates at a 12% clip every year. New homes are being snapped up right and left, and the developer/seller demands a premium for the limited housing supply.

Increasing at 2% a year, after three years the smaller home is now valued at $106,120, a 6.12% increase in value. It is also assessed at the same amount for tax purposes because, under HR162, increases in assessment of up to 3% annually are allowed.

The law requires that every property be taxed at 40% of its Fair Market Value. The owner of the smaller, slower-appreciating home is taxed on $42,448 (40% of $106,120). In other words, he receives no benefit from the limitation imposed by HR162.

The owner of the newer, more expensive home in the more desirable area is fairing much better. After three years, his home is now valued at $702,464. However, because his value is also subject to the 3%/year cap, his tax bill is based on an assessed value of $546,363. If you do the math, you find that the owner of the newer home is only paying taxes on 31.1% of his property’s actual Fair Market Value.

Actual FMV = $702,464 (40% = $280,985)
“Frozen” FMV = $546,363 (40% = $218,545)
$218,545 (40%) divided by $702,464 (actual FMV) = $31.1%

HR162 applies to both homes, but only the faster-appreciating home is receiving a benefit. The owner of the higher-dollar house is receiving a significant tax break while the owner of the older home continues to pay at the 40% of FMV level. And the situation only gets worse with time– after six years the one homeowner is still paying at 40% of FMV. Even if appreciation slows to 5% per year, after six years the owner of the faster-appreciating home is paying taxes on only 29.36% of his actual value.

Actual FMV after six years = $813,190 (40% = $325,275)
“Frozen” FMV = $597,025 (40% = $238,810)
$238,810 (40%) divided by $813,190 (actual FMV) = $29.36%

Rep. Lindsey, author of HR-1, may argue that this is the intent of the legislation, that homeowners should pay taxes on a figure closer to their actual initial investment in their home. In reality, the owner of the slower-appreciating home will continue to pay at a rate representing TODAY’s value of his property while the owner of the faster-appreciating home receives a significant benefit.

But the problem is even worse than that. The tax revenue to be generated by the adopted millage rate does not change; the government still needs its money. If the owner of the faster-appreciating home bears a smaller and smaller share of the tax burden, then somebody else must take up the slack. It is the owner of the older, slower-appreciating home who will pay the taxes his more affluent fellow taxpayer is not when the taxing authority increases the millage rate to make up for the loss of taxable value.

The state constitution requires that government treat its citizens equitably, except where the legislative creation of a special classification can be reasonably justified. In my opinion, it is difficult to justify the creation of a special classification of taxpayer based solely on whether his property is more desirable than that of another. HR-1 appears to be patently unconstitutional; amending the constitution may make it “constitutional,” but it doesn’t make it RIGHT.

Finally, you may or may not agree with my conclusion that the higher-valued and more desirable homes will be occupied, for the most part, by younger individuals and families, possibly new to the area, with greater earning capacity while the older, less desirable homes will be occupied by long-term residents, with many of them being childless, elderly and/or on fixed or limited incomes.

In other words, HR-1 will serve to unfairly shift the burden of the cost of government from those who have a greater earning capacity and place a greater burden on public services and facilities to those who are less able to pay and represent a lesser demand on public services. It will not encourage long-term ownership in older areas and may actually encourage gentrification.

HR-1 will hurt those whom it is intended to help.