Florida property tax repeal comes with economic trade-offs

Unless you live under a large, soundproof rock on a deserted island, you have probably heard about the constitutional amendment passed by the Florida Legislature that will appear on the Nov. 3 ballot. It proposes eliminating property taxes. By the time this article is in print, you will undoubtedly have had the opportunity to hear from a number of people regarding the proposal’s pros and cons. I believe it is important to consider the underlying economics that will ultimately determine the effect of this amendment.

The primary motivation provided for this amendment is the protection of housing affordability. Unfortunately, the reduction or elimination of property taxes is not likely to have a lasting influence on housing affordability in Florida. Instead, the amendment would likely produce immediate savings for current homeowners, accompanied by an increase in property values as the tax savings is capitalized into real property prices. Consider a Florida household with a fixed housing budget that must be allocated across the components of housing costs: payments of principal, interest, taxes and insurance, utilities and maintenance. Numerous studies have shown that changes in these costs are ultimately reflected in housing prices.

Passage of the amendment will force local governments to either find other sources of revenue, reduce services or adopt some combination of the two. There is no free lunch associated with this proposal. The question that has not been answered is one frequently asked by my favorite economist, Thomas Sowell: “At what cost?”

One option to replace the lost revenue is to increase the millage rate on other taxable properties. This involves the obvious cost to the owners of these properties in the form of higher taxes. It also includes the costs borne by society when these assets become less attractive, resulting in a reduction in the quantity supplied to our markets. Investors have options, and taxes are strong incentives with a proven track record of shaping the flow of funds into assets and markets.

Sales taxes provide a second alternative for replacing lost revenue. However, sales taxes are inherently regressive. They place a disproportionate burden on lower-income households, the same households the amendment intends to assist by protecting housing affordability. The discretionary sales surtax rate counties can impose is currently capped at 1.5%, so this represents only a partial answer for many local governments seeking to replace lost revenue.

The second course of action available to local governments is to reduce services. However, local services have value, and their elimination would impose costs on residents who derive benefits from them. For example, I believe the people at the local mosquito control district are doing a great job, and the value they deliver exceeds the cost of their services. Hence, eliminating this service would represent a significant cost to me.

Making informed decisions regarding the potential elimination of local services would require a cost-benefit analysis for each service. It should be noted that we have elected officials in place at the local level who should be doing this as part of the annual budgeting process. If they are not carrying out their obligations in a fiscally responsible manner, they should be voted out of office.

It has been suggested that state grants could be used to make up the lost revenue for local governments. However, this alternative carries significant costs that must be recognized. First, any grant program must be administered by the state and will require local governments to expend resources on a recurring basis as part of the application and reporting process. Bigger government is an unlikely path to efficiency. Second, and perhaps more importantly, it would impose costs on communities in the form of reduced control over local spending.

In summary, eliminating property taxes sounds great on the surface, but closer consideration reveals that it is a complicated issue. Passage of the amendment would result in the need for fundamental changes in how local governments do business. It is my hope that, in preparation for casting ballots in November, voters across the state will ask the question, “At what cost?”