A Tax Increase Hidden in Your House

Some states have addressed the problem with what’s known as a “roll-back” rule, where current property tax rates are compared with an adjusted version of the property tax rates that account for the growth in property values. Instead of comparing the 2015 property tax rate to the rate posted in 2014, they recalculate what the rate would have been in 2014 by using the 2015 property values. This transparently gives voters context on the size of the property tax extraction from its base. Perhaps more revenue from property taxes is desirable, but it should be transparent to citizens, without misleading claims that politicians somehow managed to keep taxes flat and increase spending simultaneously.

In an episode from Season 1 of HBO’s “Veep,” the embattled vice president releases all of her office’s records simultaneously to feign transparency, hoping that the media will be distracted by meaningless nuggets of personal information. As one character put it, “By showing we have nothing to hide, we can hide something.” This resembles the current state of public finances in our country’s local governments. And although Virginia is typically a leader in fiscal transparency, the current situation also points to a problem with its property tax system.

The ease of releasing information digitally makes it more readily available than ever, but this also makes it easier to miss something. An extensive log of budget transactions reveals much but informs the average citizen of virtually nothing. The debate over public finance transparency has rapidly moved from “make data available” to “make data understandable,” much like nutrition labels in the grocery store identify nutrients as a percent of recommended daily intake rather than a mere listing of ingredients by quantity.

On these grounds, it is hard to find a state better than Virginia at providing meaningful forms of fiscal transparency. A quick trip to the local government reports section of the state’s Auditor of Public Accounts Web site will reveal comparative reports for all local governments that are seldom seen in other states.

There is room for improvement, however, with Virginia’s property taxes. Most citizens gauge them like they would any other tax — by monitoring the tax rate. This makes sense in theory: “Raising” or “lowering” a sales or income tax typically means adjusting the rate. There are usually estimates of how much revenue different tax rates will produce, but ultimately only time will tell.

For property taxes, however, there is very little uncertainty. The government determines the size of the tax base by conducting property value assessments. As any government finance textbook will explain, local governments decide how much revenue they would like to take from property taxes, and it is simple arithmetic from there to determine the property tax rate.

Sounds simple enough, right? But there is an X factor: When property values are rising, local governments can claim to “leave the property tax unchanged” or even decrease the rate by taking advantage of our mistaken focus on the tax rate. For example, a 1 percent tax on a property assessed at $300,000 would generate $250 more in taxes each year than a 1.1 percent tax on the same property assessed at $250,000.

Consider a recent headline in the Citizen, Arlington County’s government newsletter: “FY 2016 Budget Includes No Tax Rate Increase.” If you stopped reading there, you might expect your tax bill to stay the same. A little further into the article, a caveat appears: Despite no real estate tax increase, “due to an increase in residential assessments, the average Arlingtonian will see their tax and fee burden rise four percent — from $7,286 to $7,567.”

It sounds like homeowners’ property tax bills have gone down quite a bit in recent decades. But again, focusing only on the rate allows you to be misled.

Average property tax rates have been flat or have decreased over the past 15 years in Virginia counties, so why has property tax revenue grown by more than 50 percent since fiscal 2000? Because the average Virginia city or county has seen a doubling of the total value of taxable property. Homeowners are paying more in property taxes for more government spending, not because property tax rates have stayed flat but because local governments have chosen to spend enough to keep the rates unchanged.

Some states have addressed the problem with what’s known as a “roll-back” rule, where current property tax rates are compared with an adjusted version of the property tax rates that account for the growth in property values. Instead of comparing the 2015 property tax rate to the rate posted in 2014, they recalculate what the rate would have been in 2014 by using the 2015 property values. This transparently gives voters context on the size of the property tax extraction from its base.

Perhaps more revenue from property taxes is desirable, but it should be transparent to citizens, without misleading claims that politicians somehow managed to keep taxes flat and increase spending simultaneously.