H.L. Menken is always apt: "For every complex problem there is a simple solution, and it is always wrong." Thus with the notion, reiterated by Stephanie Grace in The Times-Picayune on Aug. 2, that reassessing all property in Orleans Parish to "fair market value" overnight will produce a fair result. It will do no such thing. What it will produce is a legal result. I believe it was Flaubert who remarked, "The law in all its majesty makes it illegal for the rich as well as the poor to sleep under the bridges of Paris."
What in the world is tax fairness? Ad valorem taxes are the sledgehammer of public financing, unless they are carefully controlled. They tax passive wealth, i.e. wealth that the owner could realize if he sold the property, but which he does not have in hand to satisfy the tax collector. They are completely regressive in that the particular circumstances of the taxpayer are generally irrelevant. With few exceptions, the value of the property is multiplied by the tax rate and that is what is owed. The taxpayer usually has no control over the appreciation of the asset and the consequent tax increase, which makes future financial planning difficult.
Consider a few other forms of taxation. As a general rule, Americans subscribe to the idea that taxes should be progressive in that the wealthier segments of society should not only pay more, but should pay at a higher rate. Such taxes give consideration to old age, blindness, the number of dependants, reduced income, economic setbacks, unusual medical expenses and other individual situations. Federal and state income taxes are examples of this principle. Sales taxes, on the other hand, are regressive in that rich and poor pay at the same rate, but the taxpayer only pays sales taxes on what he spends.
Property taxes are the ultimate regressive tax in that they are imposed on the value of property with no consideration of what the owner may be capable of paying, what his current economic situation might be or how much money he has or spends. In theory, if the value of the property increases for whatever reason and by any amount, the tax burden also increases.
Because of this, California amended its constitution in 1977 to provide that the assessed value of property was what the homebuyer paid for it. That valuation now changes only when the property is sold. The state thus reined in the problem of ever-increasing property taxes due to inflation in home values. Other states have put caps on annual increases. In Texas, no homeowner's property taxes can increase by more that 8 percent in a given year. In Louisiana, any increase in total assessments that produces more revenue for the government than was collected the previous year must cause a rate rollback to produce the same amount of total taxes. With a two-thirds vote, however, the governing authority can roll back the tax to its previous level. In our system, no individual property owner is protected from exorbitant increases. Only the total universe of property owners is protected from a general increase on everyone. In our present situation, there are reports of individual taxes increasing from 300 percent to 1,600 percent.
Last year The Times-Picayune addressed property tax fairness with the following scenario: Ten years ago Buyer One bought a house for $100,000. Last week, Buyer Two bought an identical house across the street for $300,000. Assuming that Buyer One's assessment did not increase over 10 years and deducting the homestead exemption of $75,000, at the present rate of 175 mils, his tax would be $437.50. Buyer Two would pay $3,937.50 using the same formula. Is that unfair?
Buyer One's income, if it met a normal 4 precent cost-of-living increase, would have gone up 43 percent in 10 years. Let's assume the homeowner was a civil servant making $40,000 when she bought the house and is making $57,200 now. Is it fair to increase her property tax by 900 percent over the same period? Is it fair that the $75,000 homestead exemption (unchanged for 32 years), which has for a decade protected 75 percent of her home's value, now only protects 25 percent of that value?
What of Buyer Two? He went into his home purchase knowing that he was facing an annual tax bill of $3,937.50. Is it fair for him now to try to shift a portion of that bill onto Buyer One?
And what if Buyer One is a 50-year-old woman on a fixed income, caring for a disabled elderly parent and just making ends meet. Is the increase still fair? What if it's a young couple with children in parochial schools just eeking by, a mid-level corporate guy who just got downsized and has been out of work, an abandoned mom working two jobs to support her five children? The ad valorem tax man doesn't care. The law says "fair market value," and that is what he intends to get.
There are some for whom the 900 percent increase would pose no problem, but should we ignore the hardship cases because some could pay? Or should we ignore the rich, who would be unaffected, to protest those who would be devastated?
Let's not forget apartment rental properties, which also have been under-assessed. Is it fair to raise taxes on those properties when the result will be higher costs for renters? For that matter, is it fair that rental properties get no homestead exemption and are assessed at 15 percent of fair market value, rather than the 10 percent for homeowners, again causing renters to bear greater housing costs?
What too of freezing the assessments of the elderly and disabled who earn $60,000 per year. Is it fair that someone who turns 65 in January 2008 should be saddled with the proposed increases while his classmate two months his senior is not?
The point is that the notion of tax fairness, unlike tax law, is no cut-and-dried proposition. I suggest that tax fairness lies in the ideas of social justice held by the majority of us. It is also something that has evolved from policy decisions made by elected officials at all levels of government and usually over long periods of time.
Although there is a rollback provision in the law, it is not at all clear that provision will come into effect. Numerous properties in the city have been destroyed and therefore are no longer on the tax rolls. If the loss in assessed value of these properties balances out with increases in the remaining assessments, there will be no windfall for the taxing authorities and, therefore, no rollback. And if there is no rollback, the issue of rolling forward or not is moot.
There is now a demand in some quarters that this situation be immediately corrected, no matter what the human consequences. Those of my neighbors who so believe are entitled to their opinions. As for me, if I discover that Buyer One is forced to sell her house and move with her invalid mother to a trailer park because of these reassessments, I will at least be able to look in the mirror and say I tried for "fairness." The rest of you can proudly say we got "law."
Bryan Pedeaux is an attorney.