Why won’t a tax cap work in Virginia?

The above is the title of an op-ed piece by 87th House district challenger Hank Giffin which appeared in The Virginian Pilot last week. In it, Giffin argues that a tax cap is in place in other areas and that Virginia doesn’t have the cap because it lacks the votes in the legislature to enact one. The very next day, Del. Paula Miller’s op-ed on the same subject appeared. In it, she says that the homestead exemption is a better option, citing a quote from the Connecticut Conference of Municipalities that says that such a cap is “look-good, feel-good public policy” that doesn’t work.

The idea of a cap was first floated in the 2005 gubernatorial campaign of Jerry Kilgore. Kilgore proposed a constitutional amendment to cap assessments at 5% a year.

Nick Rerras introduced SB899, which was a change to the charter of the City of Norfolk. The text of this bill:

Be it enacted by the General Assembly of Virginia:

1. That Chapter 34 of the Acts of Assembly of 1918 is amended by adding a section numbered 68(a) as follows:

§ 68(a). Limitation on increase in real property.

Notwithstanding any other provision of this charter or of general law, the council shall not approve a rate of levy on real property that would produce more than 105 percent of the previous year’s total real property tax levies for the city as determined in accordance with subsection A of § 58.1-3321 of the Code of Virginia.

Note that this bill essentially creates a cap on real estate taxes. It is important to point out in this discussion is that there is a difference between limiting the assessment increases and limiting the real estate tax increases. These two things are not interchangeable, although I often see them referred to as such. A limitation on assessment increases may or may not limit the amount of tax paid. This is the subject of the Lincoln Land Institute article I mentioned before, which can be found here. According to the article, limitations on assessments often result in higher taxes.

Kilgore properly recognized that capping of the assessments required a change to the Virginia constitution, which currently requires that assessments be made at fair market value.

At the current time, the Virginia code says that increases in assessments which cause the effective rate to increase by more than 1% require a reduction in the rate. In other words, if the amount of taxes, when the rate is applied to the assessments, results in tax revenues more than 101% of the prior year’s receipts, the rate must be lowered. That is, unless the locality complies with subsection B.

Subsection B basically says that the locality has to have a public hearing, after having given proper notice. And if they do that, the governing body can still collect the additional revenue if they determine that such additional revenue is necessary. This, of course, leaves the door wide open for the ridiculous increases we have been experiencing in Norfolk and across the commonwealth.

Given the mounting evidence that a cap on assessments has the unintended consequence of increasing real estate taxes, I doubt if anyone would seriously consider that as an option. But a cap on the real estate taxes sound enticing – at least as enticing as Jim Gilmore’s “No Car Tax.”

I’m not going to rehash the reasons previously given as to why the cap is a bad idea. Let me expound on the point made by Sen. Fred Quayle earlier: a cap, during times of increasing real estate assessments, may work, but doesn’t work when assessments are flat or declining.

If memory serves, the increases in real estate values experienced in Norfolk over the past few years hadn’t been seen since the late 1970s. (The original Norfolk Tea Party fought that battle.) So about once every 30 years, we have a 3 or 4 year window of rapidly increasing assessments. Then property assessment increases settle back down to a normal rate of 3% – 5% a year, the range being predicted for Norfolk for next year.

If a 5% cap is imposed, what is to stop Norfolk – or any locality – from simply raising the rate 5% every year, even if the underlying assessments don’t warrant it? The same thing that stops them from raising the rate now: nothing.

Do you honestly think that a locality is going to forego a 5% increase in real estate tax revenues simply because the assessments only went up 1%? How do you think the rate in Norfolk got so high to start with? As recently as 2004, the rate was $1.40 per $100 of assessed value, a rate that was set in 1996 and remained unchanged until 7/1/05, when the rate decreased to $1.35. (The rate dropped again 7/1/06 to $1.27 and to $1.11 effective 7/1/07.)

The Virginia code already requires a rate reduction. The answer is not a cap, but to force our local electeds to lower the rate when the receipts exceed a reasonable amount, as they did this year at the prodding of NTP2 and thousands of Norfolk residents.

And if they don’t – well, as Sen. Quayle said, we can replace some of them every two years.