Tax limitations are one of the most common responses to political pressure for property tax relief. These limits can constrain growth in property taxes, but they may also shift the revenue mix to less reliable sources, reduce the quality of local services, and impede local governments’ ability to respond to local preferences and changing circumstances. To avoid politically unacceptable tax increases without resorting to inflexible tax limitations, it is critical that local officials reduce tax rates during periods of rapid growth in property values.
Most property tax revolts are a response to dramatic increases in property taxes, particularly when these result from rising home values. These political reactions have led to some form of state-level property tax limitations in most jurisdictions. Tax increases are not an inherent feature of the property tax that requires across-the-board limits. Instead, they are typically caused by administrative and political shortcomings in the tax system. The main problems are long delays in revaluation and failure to reduce tax rates when values rise precipitously. The best protections against this are well-functioning assessment and rate-setting procedures, such as Tennessee’s Truth in Taxation law and more frequent, regular revaluation of property.
Truth in Taxation measures, also called “Full Disclosure”, require any increase in property tax revenues due to value increases to follow the same procedures as are required for an increase in the tax rate. This may involve advertisements, public hearings, and mailed individual notices identifying the impact on individual tax bills. These laws are designed to avoid “silent” tax increases that occur when rising values produce higher tax bills without any change in the official tax rate. In Tennessee it require a “revenue neutral” Certified Tax Rate to be calculated and published .
Truth in Taxation restrains growth in property taxes during periods of rising home values by encouraging more responsive rate setting. Although the public engagement required by Truth in Taxation measures is not in itself a tax limitation, it can be a significant hurdle for local governments. As the added transparency forces notification of the public by the government levying the tax.
Tennessee law does not allow property tax revenues to rise automatically when property values increase. After a revaluation, counties and municipalities must provide public notice and hold open hearings before adopting a tax rate that would generate more revenues than in the year before the reappraisal, even if the tax rate itself hasn’t changed. Nashville chose not to initiate this process after a 2017 reappraisal and instead reduced its tax rate by 30 percent to keep collections level—a dramatic step that led to controversy when city leaders sought to raise tax rates by approximately one-third in 2020!
Truth in Taxation can reduce growth in property taxes in areas of rising home values without imposing a single binding tax limit on all local governments. These laws promote voter engagement in debate on the appropriate level for property tax rates and help elected officials gauge the electorate’s views on tax burdens and service needs. The resulting publicity, accountability, and transparency can themselves serve to discourage marginal additional spending that might otherwise follow a “silent” tax increase.
Accurate assessments are essential for equity under a market-value property tax system. Without accurate valuation, the distribution of property taxes will be unfair and arbitrary. Assessment accuracy depends on regular revaluations, and is enhanced by modern valuation techniques, state oversight of local assessing offices, and effective appeals systems.
Regular revaluations should be paired with tax rate reductions during periods of rising values. New assessments after long-delayed revaluation may need to be phased in to moderate sharp changes in tax liabilities. The most common cause of inaccurate assessments is that too much time has passed since the last revaluation. Tax inequities grow as assessments become increasingly outdated. The longer a jurisdiction goes without reassessing property values, the greater tax inequities become. Properties with the slowest growth in values (or largest declines) become increasingly overtaxed. Properties with the fastest growth become increasingly undertaxed.
The best practice for Tennessee is to conduct regular revaluations. Frequency is crucial to maintaining accurate assessments. Without more frequent revaluation and equalization, taxpayers in areas of slow or declining growth will be overtaxed, subsidizing taxpayers in neighborhoods with the greatest property appreciation.
The greater the periods between revaluations increases the likelihood that taxpayers will face sharp year-to-year tax increases. These are a primary cause of political discontent and pressure for tax limitations that often result in detrimental unintended consequences. Between full revaluations, assessments can be kept current by statistical adjustments and mass appraisal techniques.
In fast growing communities revaluation cycles should be on a frequency of two years or annually in order to provide the revenue necessary for governments efficient operation and the transparency in the process which the public deserves and demands.