Taxes, sweet taxes

Emily Richmond, Launce Rake and Kirsten Searer

Friday, Aug. 6, 2004 | 6:03 a.m.

A recent California exile who moved to Nevada to buy a bigger house, Steven Ewing could barely believe his property tax bill when it arrived last month.

The value of the land under his new house, which wasn't built in time to be appraised, went up 39 percent.

"I was stunned at what they were saying the land alone was worth," said Ewing, who bought a four-bedroom, 3,374-square-foot home in Henderson's Anthem Country Club this past spring. "All I could think was if my taxes ended up being two or three times what I had planned for, I was going to be in a lot of trouble."

That's a feeling shared by many other Southern Nevada property owners whose property valuations skyrocketed in the past year.

The valuation increases were fueled by a hot market, a housing crunch, the continued influx of new people and a thriving speculative market for investors. The increases have slowed but the values have remained high.

While owners are cheered by equity increases, they're facing property tax bills that in the next year could increase as much as 50 percent, some county officials say.

Clark County Assessor Mark Schofield says there will be a "tax revolt" if something isn't done and has proposed a plan to cap property tax increases at 6 percent, stirring up a political tempest. While Schofield's plan has become the front-runner, lawmakers are offering competing plans and calling, along with many homeowners, for some relief.

"Your property taxes should be based on the purchase price plus moderate increases along the way," Ewing said. "The home appreciation factor is a funny thing -- it's not real until you sell.

"My house may be worth 40 percent more than when I bought it, but that 40 percent isn't helping me pay my taxes."

State lawmakers have offered caps of varying percentages and other plans, including a rejected request for a special session and a plan for a constitutional amendment.

The Legislature next year will have to decide how to rein in taxes while funding government services, such as education, that rely largely on property taxes.

"If you destroy the property tax base, there is no funding to provide the services people are accustomed to, and all of a sudden these services are cut," Schofield said. "For every action, there is a reaction. There is no free lunch."

Proposition 13

Nowhere is that lesson clearer than in California, which has staged one of the nation's biggest experiments with property taxes with an initiative called Proposition 13.

Similar to the situation Nevada faces, property owners in California in the 1970s complained they were in danger of losing their homes because their tax bills were increasing anywhere from 50 to 100 percent over the course of a year.

Voters passed Prop. 13 in 1978. It rolled back property values to the 1975-76 level and then capped the amount a property's value can increase each year at 2 percent.

Under the law, property owners cannot pay more than 1 percent of their property's value in taxes, but the property will be reassessed at full market value when the owner sells.

The measure cut property tax rates by more than 50 percent and caused an upheaval in local government financing, which critics say hurt agencies that depended on property taxes, including schools, police, fire and libraries.

While property owners and tax opponents praised Prop. 13, it led to a host of unwanted and unanticipated effects.

Consequences

"Anybody who thinks that California's the model they'd like to follow should look a little more closely," said Jean Ross, executive director of the California Budget project, a nonprofit, nonpartisan organization in Sacramento.

While the group reports that "neither proponents' wildest promises nor the opponents' harshest fears have to come to pass" about Proposition 13, there were profound effects.

Ross said the most serious effects were in schools, which had a reliable source of funding cut off, and local governments, which saw the Legislature take more power because it received and disbursed the money.

In 1978, when the measure was passed, California ranked among the top 15 states in per-pupil spending, Ross said.

Now, she said, it ranks in the bottom 15 because property taxes were "the bread and butter for school operations in California."

"It paid for teachers, it paid for school buses, principals, you name it," she said.

Schools now rely on the Legislature and the state budget, which can go through dry spells such as the one that California is now suffering, she said.

In the recently passed California budget, per-pupil funding was was cut by $193.

"You take 28 students in a classroom times 193 -- that's $5,400 less in that classroom," Ross said.

She noted that in the absence of property taxes, cities have been increasingly relying on the sales tax. Ross said that's why a Costco or a Wal-Mart is more likely to receive government approval than affordable housing.

"Property taxes aren't enough to pay for schools, police and fire," she said.

And when cities approve housing, they prefer to see high-end homes built that provide enough property taxes to pay for services, she said.

Cities also require developers to put in more infrastructure, such as streets and parks. Developers fold that cost into the price of the house, which drives the housing prices up.

That creates a "really perverse" situation in which cities are edging out lower income families that are supposed to be protected by the measure, Ross said.

But the ultimate irony of Prop. 13, she said, is that homeowners now shoulder a higher tax burden than businesses do.

Property taxes are capped until a property is reassessed. Businesses, especially large ones, don't sell property as often, meaning they are locked into lower tax rates, Ross said.

"It actually benefited businesses disproportionately to homeowners," she said.

Taxes and caps

Looking West, Stephen Miller, chairman of the Economics Department at UNLV, isn't a fan of tax caps.

"We know pretty well with the California experience that you have to be careful with caps," he said.

He said that caps are used by some to change government.

"The conservative view of that would be that they want the cap to force policy makers to cut spending, to make government smaller," he said.

Sherry Bebitch Jeffe, a senior scholar at the University of Southern California and longtime California political observer, said states that cap property taxes need to either cut programs or find another funding source.

"The reality is, if you cut property taxes, you've got to find a way to substitute that lost revenue," she said.

Finding new tax revenue isn't easy in Nevada, a state proud of its low- or no-tax reputation and the tax restraints built into the constitution.

Nevada has regularly been ranked in the lower half of states in the amount of property tax revenue brought in per capita.

Growth and gaming have been the primary source for government revenue, and there has been little political appetite to even mention new taxes. Until the 2003 Legislature passed its first significant state tax increase since 1991, there was no corporate tax. Lawmakers have been very hesitant to tinker with taxes, but faced with a deficit last year, raised $833 million in new taxes.

The legislative plan avoided property taxes and the sales tax, two of the high-profile taxes, and instead included a new payroll tax on business, and raised tax rates on cigarettes, alcohol and real-estate transfers, among other things.

The last time the Nevada property tax was touched in any serious way was 25 years ago as Prop. 13 was going into effect in California. Nevada lawmakers reduced property tax rates to shift the tax burden to the sales tax.

The move has been criticized because sales tax revenue is not stable and because the tax is regressive, hitting the poor disproportionately because they spend a bigger percentage of their income on items that are taxed.

The Governor's Task Force on Tax Policy, which presented an overall look at the state's tax policy before the last Legislature, concluded that property taxes were among the best in terms of stability and growth.

Cap plans

But the rising valuations have created political fervor because, as Carole Vilardo, president of the Nevada Taxpayers Association, notes, property tax increases are a populist issue.

"Property taxes hit everybody, either directly because they get the bill or through potential rent increases," she said.

Her group has not endorsed a tax-cap plan but has worked with Schofield.

"Overall, I think (Schofield) has presented one of the cleanest versions of what amounts to a very difficult issue to wrap your arms around, and that is, how do you balance the needs of the government against almost potentially unfathomable increases in property taxes?" she asked.

Prop. 13 has been criticized because of the inequity it creates between neighboring properties. Because property isn't revalued until it sells, longtime owners have an advantage. The value of their property for tax purposes may be significantly less than similar property that has recently been sold.

Schofield's plan caps taxes by capping the assessed value of the property. Under his plan, the assessed value could increase by no more than 6 percent each year. Schofield said the percentage increase in assessed value is equal to the percentage increase in property taxes, assuming the property tax rate stays the same.

Unlike California, the property's assessed value would not change when it is sold, so the maximum property tax increase for a new owner would still be 6 percent.

The 6 percent cap would not apply to improvements made to a property, such as a swimming pool or a house built on vacant land. The owner would be paying full taxes on the improvement.

Schofield tried to create a plan that wouldn't create the funding crunch local governments in California faced after Prop. 13. He said he thinks the amount of revenue that would come in with a 6 percent cap would be comparable to what the agencies that receive property taxes get now.

But in the Legislature, a 6 percent cap may not fly. Some lawmakers and candidates for office this year want a number between 1 and 2.5 percent.

Assembly members Sharron Angle, R-Reno, and Don Gustavson, R-Sun Valley, support a constitutional amendment similar to Prop. 13 with a 2 percent cap. Their effort to put the plan on the ballot just fell short this year.

The federal government says inflation has averaged 2.8 percent in the West over the last decade, which means if a cap of 2.5 percent or lower is imposed, governments could be facing a loss in inflation-adjusted revenue from property taxes.

That hit would be felt disproportionately by local governments, Schofield says.

California schools

In California Prop. 13 hit schools the hardest.

When the measure took effect in 1978, Clark County Schools Superintendent Carlos Garcia was a social studies teacher at Chaffey High School in Ontario, Calif.

"It devastated the schools -- I don't think public education in California has ever recovered," Garcia said. "Up until that time some of the best campuses in the country were in California. Then Prop. 13 took away the tax base to fund them. Year after year, all we saw were things being cut. It was never-ending. I remember losing librarians, supplies, special programs."

With local communities no longer the primary source of school funding, the state had to chip in more money and expected more oversight and control as a result, Garcia said.

"Prop. 13 created a lot of wars between the education community and the state and local governments," Garcia said. "We were battling over every single dollar and it got ugly."

As a taxpayer Garcia said he understands the reluctance people feel to pay any kind of increase while enjoying the equity being built in their homes.

"It's human nature to want it both ways, I don't blame them," Garcia said. "But everybody I talk to is so excited their home is worth so much more than what they paid for it. So if it's worth so much more, maybe we should be paying more in taxes."

The district receives $335 million a year from property taxes and is still trying to figure out what the various proposals would mean.

Walt Rulffes, the district's deputy superintendent of operations, said property tax revenues make up 24 percent of the district's $1.6 billion operating budget. Sales tax revenues make up 35 percent of the budget, with 36 percent coming from the state and 5 percent coming from the federal government.

As well, voters in 1998 approved a bond issue to pay for 88 new schools. The voters also voted to allow the district to extend a portion of the property tax that was due to sunset.

As the valuation of Clark County has expanded, that extra tax has helped the school district build a surplus in its building fund.

Over the past decade, the district's revenue from property taxes has grown at an average annual rate of 12 percent, growth driven not only by property values but also by the large amount of newly developed property.

The Legislature sets each Nevada public school district's funding level, with the state responsible for making up the difference between the minimum guaranteed per-pupil spending amount and the amount local districts collect in property and sales taxes.

If Clark County property tax revenues dropped after a cap was imposed and the money was no longer enough to cover the state-mandated minimum per-pupil funding level, the responsibility for covering the amount of the gap would shift to the state, Rulffes noted.

Local government

Officials with Clark County and the City of Las Vegas are questioning the need to speedily enact a cap.

The county's taxpayers' bill of rights prohibits the county from taking in more revenue than the growth in population and inflation can accommodate, Clark County Manager Thom Reilly said.

The county commission can adjust the tax rates after the impact of the property value increases are clear, he said.

Las Vegas receives 8.5 percent -- or $86 million -- of its budget from property taxes. Other cities receive from 5 to 16 percent of their budgets from property taxes.

Las Vegas City Councilman Gary Reese, a homeowner and longtime owner of a barber shop, said many residents of his ward aren't going to see the dramatic rise in home values that those in newer neighborhoods can expect.

Many residents in older valley neighborhoods bought homes for $20,000 or $30,000 that are now worth $120,000 or more. Despite the increase, the relatively low values aren't accelerating as quickly as those in newer, ritzier areas, he said.

"There are people who want to see a property cap, but I have yet to have someone show me why there is a need for one at this time," Reese said. "If you cap property taxes and you have no other revenue streams, where is the money going to come from to meet our basic needs?"

Las Vegas City Manager Doug Selby declined to say whether he supported a cap, but said a cap's impact on the city wouldn't necessarily be significant.

"We never anticipate any windfall in property taxes -- our budgets are based on modest property tax increases," Selby said. "Therefore a cap might not adversely affect us, or the effects might be negligible."

Is it needed?

"One question I keep throwing out: Are we dealing with a short-term aberration or a long-term, systemic problem?" said Guy Hobbs, a Las Vegas financial analyst and government finance expert who led the Governor's Task Force on Tax Policy. "If it's a long term problem, I personally don't think a cap is the best way to go."

Hobbs says adjusting the tax rates or another tweak of the methodology of calculating the final bill might be a better way to go. He says he doesn't want to go on the record endorsing a particular method, but he is concerned that not all the alternatives have been thoroughly examined.

"Any time you look at one of these fiscal problems, then you run the risk of mismanaging the situation," he says. "You have to understand what the alternatives are.

"There's nobody that would disagree that we have to mitigate these huge increases in valuation. How we're going to do it is the question... Government shouldn't have any more than it needs, period. At least at 6 percent, there's more potential to be consistent with what it has been in the past."

Is it fair?

One observer, Paul Brown of the Progressive Leadership Alliance of Nevada, is concerned that a flat 6 percent cap would benefit some property owners, residential and commercial, more than others.

The problem is that property owners who in some cases have seen their land and improvements multiply in value the most would also benefit the most from the cap. Those property owners aren't necessarily the young families and people with low incomes who most need the relief, Brown says.

Brown and Schofield agree that something needs to be done to blunt the impact of the property tax increases, especially on the most vulnerable home owners.

"There is a real problem for some folks and it needs to be addressed," Brown says. "This can be a real burden, especially for retirees."

Brown suggests some sort of test be applied to property-tax relief to weed out, for example, land speculators who would profit handsomely from skyrocketing land values.

"I don't think we should just say a 6 percent cap across the board," he says. "We need to protect the folks that are getting hurt, but at the same time we want to make sure that nobody is lining their pockets either."

"He's right," Schofield said. "The guy that gets the 20 percent increase in value is going to benefit a lot less than the guy who's had a 50 percent increase.

"The problem is, you can't get around it constitutionally."

Under state law, he says, any change to the property tax system "has to be applied equitably across the board."

Schofield says he would like to see a constitutional amendment for a homestead exemption that would treat commercial property differently from residential property, but an amendment would take years to pass.

The assessor's office doesn't have maps showing where the biggest increases in value have occurred, but Schofield believes based on his experience that the fastest-appreciating homes are mostly in the newest developments, such as Summerlin.

"If anybody can come up with an idea that works better, but accomplishes the same thing, then we should look at it," he says.

Paying taxes

Some Las Vegas Valley residents say they don't need the protection of a tax cap.

Ed Baba, a Las Vegas caterer, says he has seen his home property taxes climb, but not yet to the point of hurting.

"Our home and property that we bought in the early 1970s have grown in value from $32,500 to more than $150,000," Baba said. "We enjoy that. We want to keep our state healthy. And, to do so, we are willing to pay our fair share to help pay for services.

"Estimates of (a) 20 percent (increase) are a little high for my taste. I would think a 6 percent cap would be reasonable."

Baba says he does not believe there will be a tax revolt, as Schofield has suggested.

"People want a good, wholesome community with their garbage picked up regularly, plenty of police protection and things running smoothly," Baba said. "People realize there is a cost for those things."

Ewing, owner of Outdoor Lighting Perspectives, said he and his wife fell in love with the model home they eventually bought and spent long hours figuring out whether the purchase was realistic.

"We stretched to get into it and thousands of other people have probably stretched even more," said Ewing, who moved with his wife and two children. "If I had known property taxes could potentially go up as much as people are saying right now, there's no way I would have bought this house."