Taxed to Death? Part 1 of 2

By Mike Warwick


It’s winter, a time for holiday cards and, less welcome, property tax bills. This time next year you may look back fondly at your tax bill as the Governor, Speaker of the House, and legislators from Beaverton and Hood River have all indicated they want to revisit our property tax system. Their public justification is that “gentrification” has resulted in “those homeowners” not “paying their fair share.” Of course, “gentrification” is a code word for homeowners in inner N/NE Portland; namely, us. To see how this might affect you and your neighbors, look at the difference between the “assessed value” and “market value” of your home. “Reform” will likely reset assessed value to market value so the difference (currently about 4 times for an older Eliot home), is how much taxes could increase; 400%!

The reason the Governor and Democrats are interested in changes to the property tax system is to increase funding for schools, mostly to pay for pension costs which now consume about a third of school funds and soon will demand about half their budget. Providing more money for teachers, technology, and buildings requires more taxes. Historically, the primary source of school funding was from local property taxes. Paying a “fair share,” especially to fund more teachers, is a reasonable policy. Readjustment of assessed values to market rates seems logical; however, the current rates are where they are for a reason, so a little history is necessary.

This article is expected to be the first of two. It will try to explain how property taxes are set and why so proposed reforms are more understandable. The next article will try to evaluate whatever the Legislature proposes, once it is known. If the Legislature does reform our property tax system, it will need to do so before it ends this summer, so the new system won’t be known until then. I suspect whatever it adopts will be challenged either in court or by ballot because the Democratic majority in the Legislature doesn’t need Republican votes to pass tax measures. Republicans are more focused on public pension reform to free up already available taxes. If the Legislature doesn’t reform both, Republicans will challenge all tax measures. We will see.

Take a Ride on the Wayback Machine

Funding local government and schools using property taxes, which are set at the county level, puts control over those expenses in the hands of local taxpayers rather than the State (as is the case in Washington). Historically, this was done by tying property taxes to “market” value as determined by each county tax assessor. When market value increased, so did taxable value and tax collections. The budget for local governments and schools established a baseline for calculating tax rates. Projected budgets were divided by the “tax base” or market value of all properties and each property was assessed a proportionate share. If projected budgets didn’t change, but property values increased, tax rates would go down. During recessions, property values tended to decrease and so did taxes (and funds for schools and government). So long as market values changed slowly this process was generally acceptable to the public. An exception was in rural counties, especially in Southern Oregon, hard hit by the shrinking forest products industry and falling farm prices.

The 1980s saw a rapid increase in property values and taxes. Anticipating more taxes to spend, government and school budgets increased to absorb the new funds. Unfortunately, back to back recessions hit Oregon’s economy particularly hard, squeezing household incomes. The newly increased property tax rates forced some homeowners out of their homes. A rise in anti-tax politicians resulted in a ballot initiative, Measure 5, to “cut and cap” property tax rates. Measure 5 was adopted by voters in 1990 as an amendment to the State Constitution, so it can only be changed by voters, not the Legislature. Measure 5 cut the maximum tax rate to $15 per $1,000 dollars of property value. (In the metro area that resulted in a tax cut of roughly 50%, forms a rate of $31.) It also split that amount into two pots, one specifically for schools ($5/$1,000) the other for governments. Ballot measures tend to be simplistic solutions to complex problems, and Measure 5 is an example.

One of the major flaws in Measure 5 was the tax rate cap was a maximum of $15/$100,00. The Metro area’s tax rate at the time was over $30/$1,000 so the “cut” forces a 50% reduction in tax revenues and pushed Metro area school budgets against the “cap.” Additional funding was needed. While there was general agreement continued escalation in property value and tax collections presented a hardship to homeowners, and an unneeded windfall to schools and governments, it was expected the Legislature would supplement any lost revenue with more progressive (read “income”) taxes. The Legislature was unable to agree on a new basis to fund schools and governments due to gridlock and the threat of additional anti-tax initiatives. Instead, it (and Portland City Council) voted for a series of annual supplemental funds for non-property tax sources. The property tax issue returned to the voters as Measure 47 in 1996. That measure was also flawed, and the Legislature referred fixes to the voters as Measure 50 in 1997. It limited property tax increases to 3% of assessed value based on Measure 5’s initial rate cap. These laws are the basis for our current property tax system.

Today’s Reality vs History

Essentially, property taxes for existing properties are based on an assessed value dating to the 1990s, and may only increase 3% per year over that rate. In other words, if you live in a house that hasn’t been improved since 1995, your property taxes are based on its value in 1995 plus 3% per year since. For a house with a market value of $100,000 in 1995, taxes after Measure 50 would have been $1,500. Today, twenty years later, the rate would be around $2,900. If your home value increased at our long-term average of 5% a year, it would be valued today at $280,000 and Measure 50 taxes, without the original cap on value, would be $4,200. The difference of $1,300 is the “gentrification savings” legislators are concerned about. This isn’t a huge amount, and these “savings” apply to all homes, including those that cost far more than $100,000 in 1995. For example, using the same calculations, a home in the West Hills (or even Beaverton) valued at $500,000 in 1995 would realize a “savings” of $7,500! In other words, those legislators are wrong to blame our neighborhood (and “gentrification”) for the current inequity in property taxes!

It’s Complicated

The previous discussion has been simplified. For one thing, if there were any improvements requiring permits to your house since 1995, that would allow the County Assessor to increase the value from the Measure 50 “cap” to current market value, so the “savings” would be significantly reduced. In addition, the discussion assumed only “average” market value increases. Properties in Inner N/NE aren’t valued for their homes, but for the land under them. That $100,000 property is probably worth $450,000, $200,000 for the house and $250,000 for the land. If the market value is $450,000, the “uncapped” taxes would be closer to $7,000 and “gentrification savings” over $4,000. Another thing, actual property tax bills include tax-based fees outside the limits of Measure 50, including bonds for schools, parks, housing, and economic development. Although those add to the tax bill, were not the focus of Measure 50, in fact, they were specifically exempted. It isn’t clear how a “fix” to Measure 50 would affect those fees. For example, a bond tax goes toward repayment of a fixed cost. If the tax rate is increased, more taxes are collected and the bond is simply repaid sooner.

Policy Issues

The comparison of “gentrification savings” to a West Hills home was provided to indicate how “tax reform” will affect homes outside Inner N/NE in ways legislators lusting after additional tax revenue may not fully appreciate. In addition, the reasons for Measure 5’s tax rate limits are still applicable to residents who have lived in their homes for many years, and that includes many N/NE residents; homeowners and renters alike. As noted, increasing taxes to current market values will increase taxes on many Eliot homes by thousands of dollars. Many long-time residents may be unable to pay that additional amount, once again forcing people on limited or fixed incomes out of their homes. It is no secret that the City Council would like to see Eliot and other Inner N/NE neighborhoods converted from single family to dense, multi-family neighborhoods. Increasing property taxes serves their purpose by forcing existing property owners to sell to developers and reaping much higher taxes on those new buildings. The unfortunate side effect will be to displace existing residents with limited or fixed incomes, adding to the current housing crisis. It will be interesting to see how the Legislature, especially our local representatives, trades off new housing units against further displacement of established residents. That trade-off is almost certain to be a topic in the second installment of this article.