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

John L. Knapp, senior economist at the University of Virginia’s Cooper Center for public policy, very nicely sums up the essence of the proposed Homestead exemption on property taxes:

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.

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  1. James Atticus Bowden Avatar
    James Atticus Bowden

    If real estate taxes are too high, then fire the city and county elected officials – council and board of supervisors.

    Hire new folks who will lower the rate.

  2. Larry Gross Avatar
    Larry Gross

    okay.. I’m trying to figure this out.

    The Conservatives that I know say that it is imperative for the country to continue the Bush Tax Cuts and that it is up to the President and Congress to deal with the aftermath of those cuts.

    That government needs to prioritize the money.

    At the Virginia level, we get a similar theme from the “no more taxes” folks in the GA – most of those guys.. Conservatives – right?

    How does forcing the government to only take a certain amount of money let them “hide” the waste?

    Isn’t the idea that if you put government on a diet.. that it will force them to prioritize and in the process.. cut the waste?

    but how can you claim that you are a fiscal conservative and NOT support tax cuts whether those cuts are imposed by legislators …OR citizens?

    Isn’t this sorta like saying that taxpayers are essentially stupid and will take a tax cut even if it causes them problems?

    Methinks the alarm bells are WAAAYYY too urgent here.

    First, the voters have to approve it and even if they do approve it, it ONLY enables their locality to do it.. and even then it does not require them to do a one-size-fits-all maximum cap.

    They can do only a 5% cut..

    similarly localities can incentivize jobs-producing businesses …. as opposed to businesses that basically sell products to citizens in which case.. those increased taxes could be viewed as a consumption tax.

    Localities also would know at election time for the Va-wide referenda their own jurisdiction-specific totals.

    At the same time, they could add to the ballot their own local referenda proposing specific cuts per the amount of the tax cut and let the voters decide..

    This law.. ONLY enables a conversation between elected officials and the folks who pay taxes.

    What are we afraid of?

    Are we afraid that the guys who run on the platform of cutting your taxes.. would, if elected, actually have to deliver on their promises?

    Is that the real reason why Conservatives should be against this? Passing this law would take away their ONLY idea about Government?


  3. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    What good is providing an exemption if the cities merely raise the rates on the remainder? Most conservatives I know aren’t anti-tax, but anti-spending. The fact is the taxpayers can’t keep providing money for all the council, states and the feds wishes.

    That’s been the heart of the anti-tax crowd here in Tidewater. Every year the assessments have been going up, with token reductions in the tax rate. While the coucils have been enjoying the windfall on unrealized gains, the homeowners who invested their money aren’t getting a return on their investment. And now that house prices are dumping, what does the city do? They increase the rates to maintain their bloated budgets instead of looking for cost savings.

    But that’s ok. A 30-50 percent drop in prices, along with an unprecedented avalanche of jingle mail foreclosures should get their attention. The middle class is beginning to not give a damn, and that is bad news for this nation.

  4. Anonymous Avatar

    The business community is down at the Assembly trying to kill this because they know that localities will just make up the revenue by hitting business taxpayers, one way or another. Ironically, the VEA was at the Assembly trying to kill it because they worry the localities will grant this big tax cut to homeowners and NOT make up the money with higher business taxes.

    The one thing they agree is the “optional” part of this is a sham. All localities will be under unrelenting pressure to grant the full 20 percent as rapidly as possible. (Surely by the next election.)

    Money and markets get their way. Pass this, and eventually 1) all homeowners will get their assessments reduced 2) the tax rate on the other hand will go up, meaning the 20 percent assessment discount will not translate into a 20 percent tax cut and 3) the higher rates will sock the non-eligible property and prices and rents will rise.

    All the public service companies (power, gas, telecom) pass huge taxes on their facilities and lines and all can automatically pass them on in their rates.

    Once the 20 percent discount is applied across the board, there will no relief when the next round of assessment increases hits.

    This really is just the car tax all over again, and when the promise isn’t kept, the voters will have a new cause for outrage.

  5. Larry Gross Avatar
    Larry Gross

    I am stunned. Truly stunned.

    Apparently even those that consider themselves fiscal conservatives believe that SPENDING cannot be reduced but instead will act like a balloon!

    The folks that actually believe in a smaller, more effective government have fled the scene.

    All this talk about cutting SPENDING – when push actually comes to shove – is TALK!

    Just the mere thought of localities being able to CONSIDER this and to MAKE A CASE to their constituents for the money that they do spend is considered a THREAT.

    This is a lot like someone telling you that there is no way that they can cut back on their credit card purchases.. that if you put a limit on one card.. they’ll just have to get another card.

    Cut property taxes? No Problem, we’ll just make it up somewhere else.

    What happened to the fiscal conservatives?

    I understand the VEA.. the property taxes are their very own cash cow so yes.. they’re full of fear and loathing. God Forbid that we’d schools to model themselves after the ones identified as the most cost effective in the recent Clare Boothe Luce Policy Institute Study -“Rating the Cost Efficiency
    of Virginia’s
    Public School Districts”

    or the recommendations by JLARC or the Virginia Auditor of Public Accounts.

    What a total SHAM.

    What are we left with?

    Tax&Spenders and the hard social Right?

    Fiscal conservatives – the ones who actually believe that we can and must have a more cost-effective government have – as they say about Elvis – have left the room.

    What’s left is tax&spenders who make no bones about their advocacy and HYPOCRITES .. you know those who claim to be for fiscal responsibility but run and hide when confronted with the possibility.

    I don’t know why I’m so suprised… VPAP clearly documents this behavior…

  6. Anonymous Avatar

    What is everyone so upset about? doesn’t the graph show that actual levies have NOT gone up near as fast as assessments for the last five years?

    does anyone believe that the government can hold expenses the same indefinitely?

  7. Larry Gross Avatar
    Larry Gross

    Does anyone believe that the cost of government should go up every year

    or would it make sense that the increase would track population growth + inflation??

    and everything in excess of that.. becomes a conversation between those that advocate more money for more government and those that want to know what they will get for more money?

    Oh.. I know.. you elect these guys (and gals) to actually THINK for YOU.. it’s not fair to actually require them to listen to you after they are elected….

  8. Anonymous Avatar

    It makes no sense, whatsoever, that the increase would track population growth + inflation.

    The products government buys may not track the general inflation rate. Government may need to make expenditures that lead the population trends. Government may need to make up for previous inadequate expenditures. Government has an obligation to take a long term view that has little to do with current conditions. Government may need to invest in new technologies that cost more now, but save in the long run. government may need to invest to encourgae new business which will help the government coffers later.

    Population growth plus inflation may offer some marginal guidance, but to think that is the total answer is a guarantee of stagnation. It’s an idea that is mostly divorced from reality.


  9. Jim Bacon Avatar

    Anonymous 8:56, yes, the graph shows property tax levies increasing at a slower rate than assessments — but they’ve still been increasing at the rate of 10 percent annually since 2002. Taking into account the compounding effect, that’s almost 50 percent in four years. That’s enough to hurt a lot of homeowners.

  10. Anonymous Avatar

    It doesn’t appear that way on the graph. I looks like levies decreased from 02 to 03 and are now almost back to 02 levels.

  11. Jim Bacon Avatar

    Anonymous 12:14, Read the graph carefully. Levies did not increase from 02 to 02, the *rate of increase* slowed… but still went up. The graph is measuring the annual *change* in assessed values. The rate of change never dipped below zero.

  12. Larry Gross Avatar
    Larry Gross

    re: inflation + growth

    yes – a starting point… and what is acceptable for a baseline budget.

    everything beyond that – needs to be justified with specifics.

    I advocate this for schools also.

    In both cases – government is not automatically entitled … to increases without justification.

    This is what transparency and accountability mean… if we intend them to be something beyond buzz words.

  13. Anonymous Avatar

    Well yeah, but that doesn’t mean that each individual levy has gone up that much.

    How much of the increase in the amount levied is due to NEW CONSTRUCTION?

    We had better hope it never goes below zero.


  14. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    All I know is the levee broke down here in Tidewater. My tax BILL was going up by 30 to 50 percent a year. So this state wide graph, which includes places where assessments haven’t increased in the past 60 years is pretty much useless. About as worthless as those state sponsored ‘median income’ graphs they come out with to show how great Virginia is doing.

  15. Larry Gross Avatar
    Larry Gross

    For those with wonkish fetishes, I highly recommend the Virginia Auditor of Public Accounts website


    (look for per spending per capita)

    and comparing county and city budgets, here:


    then look for:

    2007 Draft Comparative Report of Local Government

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