Georgia Property Tax Exemption Amendment 1
Georgia’s Local Option Homestead property Tax exemptionA tax exclusion excludes certain income or revenue, and even taxpayers, from taxation. The Internal Revenue Service (IRS) grants tax-exempt status to nonprofits that meet certain requirements. This allows them to avoid paying income tax.
This November, the Amendment is on the ballot. It may appear modest at first glance, but it would allow localities to opt-out of the exemption. Its scope is much wider and could have far reaching consequences for the property taxes. A property tax is levied primarily on immovable properties like land and buildings as well as tangible personal property which is movable like vehicles and equipment. Property taxes are the largest source of revenue for state and local governments in the U.S. They help fund schools, roads and police services, among other things.
The state has implemented the system. This is because the fate of HB 581 (an important bill) depends on the adoption of this constitutional amendment. This bill contains several major elements that we have briefly described elsewhere. This bill includes:
- A homestead exemption for the entire state that is similar to an assessment limit
- An overly complicated pathway for localities opting out of this exemption by March 1, 202
- An optional sales taxesales taxA tax on retail sales of goods or services should be applied to all final consumption and should have few exemptions. Many governments exempt items like groceries. Broadening the base, by including groceries, would allow rates to be lower. A sales tax should exclude business-to-business transfers that, when taxed cause tax pyramiding.
and taxA Tax is a mandatory payment that is collected by the local, state and national governments to cover costs for general government services, products and activities.
The passage of Amendment 1 could also result in increased sales tax differences among Georgia counties. The passage of Amendment 1 could also result in increased sales tax differences among Georgia counties.Consequences of the “Yes” Vote
First, Amendment 1 would allow HB 581 to implement what is functionally an assessment limit. Georgia residents’ assessments (for homestead properties) would not increase by any more than the rate of
inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck will cover less goods, bills, and services. It is sometimes called a “hidden” tax, as it makes taxpayers less wealthy due to increased costs and “bracket-creep”, while increasing government spending power.
at any time. This is good news for homeowners but it can also create a lockout for newcomers to the housing market. Assessment limits create this inequity because they make it less beneficial for current homeowners to buy new homes or sell their current homes. HB 581 would start this process by using a 2025 adjusted base year for all current homeowners. Therefore, if Amendment 1 is successful, there would be a significant disincentive for current homeowners to sell their homes since they will experience the full force of assessments based on higher prices in the real estate market.Likewise, prospective homebuyers in 2025 and beyond will have a harder time accessing housing that fits their current budgets due to the unwillingness of current homeowners to list their houses on the market, and the disincentives this policy creates for new construction. This makes it harder for new residents to access housing and could discourage homeownership or shift purchasing patterns to less attractive options among the next generation of Georgia residents who are incentivized to purchase homes that they otherwise would not have purchased.Amendment 1 also allows counties to opt out of the statewide homestead exemption. The process that counties and local governments must follow is cumbersome and time-consuming. Local governments must hold three public meetings and advertise them before March 1, 2020. Each meeting must last a specific amount of time, and only be held on working days. This makes it more difficult and expensive for smaller local governments without the capacity to comply with these requirements.
These smaller counties and municipalities may also experience lower levels of commercial activity if they fail to opt out of the statewide homestead property tax exemption. This is especially true for local government that borders larger counties and cities like Atlanta, Augusta, or Savannah, especially if they opt out. If higher sales taxes are imposed to offset revenue losses due to the new assessment limitations, then counties bordering South Carolina or Florida would also be more at risk of cross-border shoppers to those states. South Carolina has a combined rate of state and local tax of 7.49 percent while Florida has a rate of combined state and locally tax of 7.02 percent. Both rates are below the 8.39 percent upper limit that could be imposed on Georgia’s border county if residents approve Amendment 1 and HB581 along with it. These differences in border counties can induce consumers to make larger purchases in counties across state lines with lower tax burdens, translating to savings for consumers but lost sales tax revenue for border counties.
Additionally, when there is a cap on homestead-assessed values (through an assessment limit or homestead exemption), as time passes, an additional 1 percent sales tax will eventually be insufficient to cover lost property tax revenues. As a result, commercial property owners will likely face a higher tax burden. Renters may also be affected, as commercial property taxes are often passed on to them through higher rent prices.
Consequences of the “No” Vote
However, Georgia residents could preserve their current property tax system, imperfect as it may be, by rejecting Amendment 1 and, by extension, HB 581. Additionally, several alternative reforms could be considered by the legislature, including implementing an effective statewide levy limit and streamlining and unifying the state and local sales tax system by broadening the base and establishing a narrow, well-defined range of allowable local sales tax rates.
Property taxes adhere closely to the benefit principle, which states that those who benefit from the provision of public goods and services should be the ones to pay for those benefits. Property taxes are more effective at acting as a user fee. A user fee is a charge that the government imposes to cover the costs of providing a particular service. A user fee is different from a tax. Some taxes may even be called user fees or look similar.
is more beneficial for public goods and service (such as education, local roads and the criminal justice system), than local option sales tax. The state could also decide to reduce the allowed sales tax rate, further undermining local governments’ autonomy. Additionally, the autonomy of local governments could be further undermined, as the state could later decide to reduce the allowed sales tax rate.
Georgia’s existing experience with swapping property for sales taxes, moreover, has not been encouraging.Under current law, local option sales taxes (LOST) are intended to provide for property tax relief. One study found that, while an extra dollar of LOST revenues provides about 28 cents of property tax relief, this leads to a rise in total spending of approximately 48 cents. Therefore, the substitution was not complete. This means that counties who adopt local option taxes to reduce property tax burdens tend to increase their spending levels. This reduces the benefit for county residents, since it’s unclear if a 48 percent rise in spending will actually result in 48 percent better government. The results indicate that any swap will not be revenue neutral and that allowing for a 1 percent loss in revenue will likely result in increased spending at the county level and only marginally lower property tax burdens. Why Amendment 1 Should Not Be Ignored
Amendment 1 reaches far beyond the mere ballot question. By triggering HB 581’s implementation, it would drastically change Georgia’s tax system, modeling it on harmful assessment limits policies that started in California. Localities that were unable to opt out or chose not to do so would be forced to adopt a harmful tax structure which would discourage new entrants in the housing market, and keep the real estate market stagnant. Georgia residents should not be satisfied with Amendment 1, but instead focus on policies which limit the growth of property tax, and not those that freeze property taxes by shifting costs to new owners or into the sales taxes.
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