Less-bad property tax compromise is still bad

THE POINT-OF-SALE compromise that is on life-support in the Senate has several commendable goals:

-To jump start the state's laggard commercial real estate market.

- To reduce the inequity between taxes for commercial and owner-occupied property.

- To reduce the pressure the Legislature has put on local governments to raise taxes even when they don't need to.

The problem is that the legislation would actually do more harm than good.

At issue is the 2006 law that requires property to be taxed based on its value at the point of sale. Realtors want it repealed, arguing that it has ground sales to a halt by making taxes for the buyer much higher than they had been for the seller.

The compromise that nearly passed the Senate last week would have given a one-year exemption from point-of-sale taxation to commercial property and second homes, and it would have reduced but not eliminated the impact on such property sold in future years.

But while it could be true that a one-year exemption will help the economy by giving a jolt to the real estate market, this proposal would force cities, counties and schools to pay for that jolt; the 2010 exemption alone would cost $35 million this year, and would continue to rob local governments of tax revenue every year until all that property changes hands again. If the Legislature wants to hand out economic incentives, it needs to pay for them, rather than pushing the burden onto duly elected governments that have no say in the matter.

And we applaud Senate negotiators for recognizing the large disparity between taxes on owner-occupied homes, which are taxed on 4 percent of their value and are exempt from taxes that pay for school operating costs, and commercial and rental property and second homes, which are taxed on 6 percent of their value. But the proposal to exempt 20 percent of the value of non-residential property sold after this year from taxation does nothing to address the problem for new construction, or for all that property that isn't sold; instead, it creates yet another inequity in our tax system.

The one clearly good provision in the compromise softens the cap that has pushed local governments to raise taxes every year rather than risk losing the limited ability to increase taxes by the rate of inflation plus population growth. The Senate bill would let them use that "allowance" over a three-year period, making them less likely to raise taxes if they don't need to. But the Legislature never had any business meddling with local tax rates to begin with, so this provision merely makes a bad law less bad.

The reason the compromise doesn't work is that it ignores the underlying problem: the part of the 2006 law that stripped all pretense of fairness from our property tax system. Under that law, referred to as Act 388, the taxable value of property cannot be increased by more than 15 percent every five years, no matter how much more it's worth; so if your property appreciates at less than 15 percent - as most property does, even in a real estate bubble - you pay taxes on its full value, while those whose property appreciates more do not.

Yes, it's unfair that identical properties are subject to vastly different taxes. But the point-of-sale provision doesn't create that inequity. The 15 percent assessment cap creates that inequity. That's what needs to be eliminated. It was a bad idea when it was passed. It's a bad law today. It will be a bad law as long as it remains on the books. And no amount of tinkering around the edges will fix it. Like the convoluted proposal in the Senate, that will only make matters worse.