Why Conservatives Should Oppose the Homestead Exemption: It Masks Out-of-Control Spending

Given the large rise in property tax levies during most of the new century, it is not surprising that taxpayer frustration has found its way into the proposed amendment. It is unfortunate that a simpler solution—restraint on spending by local government — was not adopted. Instead, market-driven increases in assessed values were used to bring in significant amounts of new revenue.

Exactly. To put it a bit less diplomatically, the Homestead exemption is a superficial, quick fix for out-of-control spending at the local level. The constitutional amendment would allow local governments to exempt up to 20 percent of the value of residential property from taxation. If it passes the General Assembly for a second time this year, it will go to the voters as a referendum, and it’s hard to imagine that the electorate will not vote itself a tax break. But there is less to the tax break than meets the eye.

There is no way to know which localities will avail themselves of the exemption and which will not, so in his essay, “Problems with the Proposed Homestead Constitutional Amendment,” Knapp calculates the impact if all local governments instituted the full 20 percent exemption. It’s an unlikely scenario, and the impact would vary from jurisdiction to jurisdiction spending upon the local mix of residential and commercial tax base. But the calculation shows how the logic of the amendment would play out.

In 2006, Virginia owners of owner-occupied, residential properties paid $4,943 million in taxes, and owners of all other real property — residential rental property, business property, commercial property, and farm property — paid $2,694 million in taxes. If all local governments passed the full Homestead exemption, homeowners would get a $988.6 million tax break! But wait… Local governments would have to make up that money somewhere, most likely by increasing the tax rate. This could be achieved, Knapp writes, by increasing the statewide average tax rate from $0.85 per $100 of assessed value to $0.97. “Homeowners then would have a tax bill of $4,552.5 million, an amount 7.9 percent less than before the exemption.”

Bottom line: The touted 20 percent exemption will net only 8 percent lower taxes. Think voters will know that figure when they’re standing in the voting booth?

Knapp points out, rightfully, that shifting the tax burden to business would have negative consequences: “There may be some existing businesses that would seek a lower tax jurisdiction and some potential businesses that would be deterred because of the higher taxes.”

To my mind, the worst part of the proposed amendment is that it is no more than a spackle-and-paint job over the underlying problem, which is out-of-control local government spending. As Knapp notes, revenues from the property tax levy have increased roughly 10 percent annually each year throughout the 2000s.

One more year with a 10 percent increase will more than overwhelm the 8 percent benefit from the Homestead exemption. Unless we figure out how to attack the underlying problem, homeowners will get one year of relief, them find the tax burden squeezing harder every year.