Should Oklahoma expand its property tax caps and exemptions?

Once again this session, property tax cuts are on the table in Oklahoma. Although curtailing Oklahoma’s already low property taxes with additional freezes and caps may sound appealing, a better approach would target help to people who need it without sacrificing important investments in education and safe communities.

Oklahomans pay less in property taxes than the residents of almost any other state.  The average Oklahoman pays less than half the national average in property taxes: $535 per capita in 2007,  compared to $1,270 for the nation as a whole.  A number of constitutional provisions serve to keep Oklahoma property taxes low, including a 5 percent cap on the annual increase in property values upon which taxes are assessed, unless the property is sold, and a permanent freeze on assessed property values for all seniors with incomes below the median of their county or metropolitan area. Additional exemptions are provided for low-income seniors and disabled veterans. (See our new fact sheet on the property tax for a fuller discussion).

Legislative committees this session have approved several bills which now await further legislative action that would further limit property taxes:

• HJR 1001, by Representative David Dank, would send to a vote of the people a proposal to permanently freeze property valuations for all seniors regardless of income;
• HJR 1002 by Rep. Dank and SJR 5 by Senator Jim Reynolds would, if approved by referendum, lower the maximum annual increase for homestead properties and agricultural land to the lesser of 3 percent or the inflation rate.

These proposals raise troubling issues about both the adequacy and fairness of how we pay for public services. Limiting growth in property tax revenues will hinder the ability of local governments and school districts to fund local services. 2007 data from the U.S. Census Bureau shows that property taxes in Oklahoma pay for:

• more than one-fourth of school district budgets. That’s money that provides students with textbooks, supplies, smaller classrooms and more teaching time;
• more than one-fifth of funding  for county governments that is spent on public safety and criminal justice, keeping our communities safe;
• seventy percent of funding for Oklahoma’s career technology centers that help Oklahomans develop the skills and training needed for today’s workforce.

Lowering the cap on maximum allowable increases for homestead properties and freezing the values of properties owned by all seniors would further squeeze the funding that supports these important investments at a time when they are already severely pressured by the drop in revenues brought about the longest, deepest recession of a lifetime.

Imposing a more restrictive cap on the allowable annual increase in property values would also benefit wealthy, suburban communities the most while providing little or no help to poorer communities, rural areas and small towns. The benefits of any cap or freeze in property value assessments go only to those properties whose market values are rising at rates above the cap. This primarily occurs for the most valuable homes and in the most affluent neighborhoods and counties. The value of homes in less affluent areas tend to increase only modestly if at all. These discrepancies will snowball over time, which means that one homeowner in an area of rising property values may be assessed at 50 percent of a home’s real market value, while the homeowner a few miles away (or even next door, if the home has recently been sold) is being assessed at 100 percent.

Extending the permanent freeze in property valuations to include all seniors, regardless of income, is of special concern. Is it fair that a retired millionaire or billionaire living in Nichols Hills or South Tulsa should never be asked to contribute more to the rising cost of local services?  The rules we already have in place, which protect seniors with modest incomes, could be adjusted to help some additional middle-income seniors without exempting those with the highest incomes.

An additional critique of the property tax cap bills has been raised by Ken Yazel, the Tulsa County assessor, which relates to the measures’ possible unintended consequences: that counties would get around the limit on property values by raising the tax rate.  Yazel explains how raising the tax rate to make up for revenue lost because of the cap on values would disproportionately hit poor and middle-class homeowners:

“If I constrain a taxable value for a home in an area that is going up 14 or 15 percent a year, I no longer have as much value in that rising neighborhood,” so the millage rate – which affects the entire area – will have to be increased to raise the funds needed, Yazel said. “So we’re shifting the fair share, if you will, to the people who live in the neighborhoods that do not go up.”

Fortunately, there is a better alternative. If legislators were looking for a more equitable way  to limit property taxes, they could increase the homestead exemption, which reduces by $1,000 the assessed value of a taxpayer’s actual residence. Over time, the value of the homestead exemption has eroded significantly as housing values have risen – increasing the exemption would lower the property tax bill to more homeowners than would capping or freezing increases in property valuations.

Ultimately, we depend on the property tax to help fund the vital local services our communities depend on, like schools, community technology centers and public safety. Basing the tax on the properly appraised value of people’s properties, with some targeted help for those most in need, is a fairer and more honest approach than arbitrary caps and freezes.

Update:  For a final update on these bills, see Where Are They Now? Bills we kept our eye on