Executive Summary - Proposition K
From the Flint Hills Institute for Public Policy.
A Better Property Tax System for Kansas
Fact: Appraised values and taxes are growing much faster than Kansans’ income.
Fact: Property taxes have increased nearly three times the rate of inflation.
Fact: Unpredictable growth in property taxes can have a negative impact on jobs.
Conclusion: Kansas desperately needs property tax reform.
The property tax is a wealth tax, which is inferior tax policy because it taxes assets instead of income. The appraised value of an asset may rise and cause a tax increase, but the taxpayer’s income may not have risen sufficiently to pay the increased tax. Also, the appraisal of assets is imprecise and the practical need for mass appraisal can amplify the imprecision.
Most Kansas homeowners have experienced these harmful effects. Over the last decade, the appraised value of homes has grown faster than income in counties representing 98% of the population; in fact, 84% of Kansans live in counties where residential values have grown at least 30% faster than their income.1
The current Kansas property tax system has two moving parts: (1) the appraised value of property and (2) tax rates. Property tax increases are driven by the changes in these two parts.
Total property taxes have increased 83% over the last ten years; tax rates have gone up slightly but most of the damage has been caused by a 66% escalation in appraised values. The changes are even worse for Residential property, where runaway appraisals drove a 119% tax increase.
Elected officials should have lowered property tax rates to at least keep tax revenue from exceeding inflationary growth; instead, they raised rates slightly and allowed the ‘stealth’ effect of escalating appraisals to push tax collections up 83%.
There simply is no justification for these huge property tax increases over the last decade. It’s not driven by a need to provide services to more people; our population is only up 7%. It’s not driven by inflation: property taxes overall have increased by nearly 3 times the rate of inflation.
This has to change. We need a property tax system that prevents appraisals from growing faster than income. Tax increases should primarily come from rate increases proposed by elected officials, not from the ‘stealth’ effect of runaway appraisals. And we need a system that is predictable so that businesses can expand and create jobs, especially in rural parts of Kansas.
Proposition K offers a simple plan for ending the appraisal system on real estate. No more appraisal-driven tax increases for Kansans. It is intended to apply to all classes of real property except agricultural, which follows a separate administrative procedure in Kansas.
- Stops appraisal-driven tax increases by creating a simple and predictable formula to set values.
- Maintains local government autonomy by placing no limits on property tax revenue or rates (mills).
- Improves transparency and accountability of local government budgeting process.
- Creates a more stable business climate to improve the economic development potential of the state.
The plan has three key elements:
- Establish a baseline for all current properties.
- Implement a fixed formula to set future property values.
- Adopt a cost-based standard for new construction.
Proposition K proposes that all properties adopt their current appraised valuations as their new property tax baseline. Property owners who have already submitted appeals on their valuation at the time Proposition K becomes law will be allowed to continue the process to conclusion. The valuation determined in the appeals process will become the new property tax baseline. Following current property tax administrative practice in Kansas, the value of land and the value of improvements will be tracked separately; each component will have its own baseline. This separate baseline tracking will make it relatively simple to deal with future changes to the development or re-development of specific parcels of land.
Every reform requires a transition plan. The Proposition K transition plan strives to be fair to both local governments and taxpayers. From a local government perspective, the transition should be essentially revenue-neutral. From a taxpayer perspective, those property owners who have not appealed their most recent valuation are presumed to think those valuations acceptable for property tax purposes. This baseline proposal also ensures that there is no shifting of tax burden from one class of property to another; i.e., homeowners will pay the same share of total property tax under Proposition K as they do under the current system.
Once a property obtains a baseline value, the baseline value will grow according to a fixed formula – two percent (2%) per year. Property will never be re-valued for property tax purposes (unless the improved parts of the property are substantially altered) or a parcel of land is further subdivided for development. If a home or commercial property is sold to a new owner, the new owner will inherit the annually-adjusted baseline value of the previous owner.
The 2% annual growth rate on existing properties helps to protect government budgets from the effect of inflation. The fixed valuations provide certainty to taxpayers with regard to the tax base portion of their property tax liabilities; and, except for new construction, the fixed valuations provide government budgeters with certainty regarding the property tax base. Consequently, the only moving part becomes the property tax rates. Elected officials in each community are still able to set rates under Proposition K, but they will need to make the case for higher rates instead of primarily relying on tax increases resulting from appraisals.
The final step to eliminate the appraisal system is to adopt a cost-based standard for new construction. Proposition K handles each type of new construction in a simple, straightforward manner:
- A new improvement to vacant land shall adopt the cost of construction of the improvement as its new baseline. (The land will have its own annually-adjusted baseline value for property tax purposes, classified in the same manner as the improvement).
- A new improvement to already-improved land shall add the cost of constructing the additional improvement to the existing annually-adjusted baseline for the improvement.
- A new improvement that results from the re-development of one or more parcels of land shall adopt as its new baseline the cost of construction of the new improvement less the cost of demolition of the former improvement. (The land will have its own annually-adjusted baseline value for property tax purposes, classified in the same manner as the improvement).
- A new improvement project that aggregate together existing parcels of land shall aggregate the parcels’ existing annually-adjusted baseline values as determined per (e) and (f) below.
- Any parcel of agricultural land that undergoes re-classification (per Article 11 of the Kansas Constitution) shall adopt as its new baseline value the higher of (1) the agriculture valuation or (2) the sales price at the time of the transaction that motivates the re-classification. (Any parcel of land that is vacant and classified as other than agricultural land at the time Proposition K becomes law shall inherit its current value for its new baseline value, as per the transition rules).
- Any parcel of land classified as other than agricultural land which is subdivided from a larger parcel shall adopt as its new baseline value the higher of (1) the subdivided parcel’s pro rata share of the annually-adjusted baseline value of the larger parcel or (2) the sales price of the subdivided parcel.
The cost-based standard for new construction eliminates the need for tax-related property appraisal and establishes an objective accounting standard for determining a property tax base. The cost-based standard will not deviate much from current practices, especially as it concerns the buyers of newly constructed homes, which typically come onto the tax rolls at levels approximating the cost of the land plus the cost of construction.
Proposition K will stop the trend of appraised values rising faster than homeowners’ income and will prevent it from happening again. Homeowners will gain a sense of control. Businesses will perceive a more stable business climate, and that will help improve the economic development potential of the state – especially in the more rural areas of Kansas.
Yet Proposition K will preserve the autonomy of local governments and their capacity to budget by placing no limits on property tax revenue or rates. It will provide a higher degree of consistency and predictability for both taxpayers and tax collectors. It will maintain – or improve – the fairness of the Kansas property tax system. And it holds the promise of improving the transparency and accountability of the local government budgeting process.
Note: “Proposition K: A Better Property Tax System for Kansas” was written by Arthur P. Hall, Ph.D., Executive Director, Center for Applied Economics, University of Kansas School of Business. This executive summary was prepared with his permission. It includes material that is either verbatim or paraphrased from his work.
1Comparison of residential values (excluding growth from new construction for the prior year) from the Kansas Dept. of Revenue, Adjusted Gross Income from the IRS and the July 2007 population estimate from the U.S. Census Bureau.