The ‘homestead exemption’

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by Jessica Sabbath

The proposed “homestead exemption” passed both houses of the General Assembly last year with little dissent or media attention. After all, providing relief for property owners who have shouldered skyrocketing real estate bills hardly seems controversial.

This year promises to be different. The business community is lobbying hard against the proposed constitutional amendment. The legislation also comes at a time when local governments face multimillion shortfalls — not a probable time for tax cuts.

The amendment would allow local governments to exempt up to 20 percent of the value of residential property from real estate taxes. It passed the House of Delegates 97-0 and the Senate 38-1 last year. If the bill passes again this year, it will go to the voters in November.

This time around businesses are equating homeowner relief with a possible increased tax burden for them. And they wonder if lawmakers have considered the consequences of the bill. Hugh Keogh, president and CEO of the Virginia Chamber of Commerce, says there was some push against the bill last year, but it never received the attention it needed.

“It just didn’t reach the level of urgency it should have within the general business community,” says Keogh. “I know that now there is a general consensus in the business community that it’s a bad idea, and we’re trying to do what we can to slow it down.”

The Virginia Manufacturers Association and the Virginia Chamber of Commerce already have sent a letter to Gov. Timothy M. Kaine outlining their dissent. (Kaine proposed the bill in his 2005 campaign.) They question the proposal’s fairness, asking why the legislature hasn’t urged local government to reduce spending. The letter included a list of 19 business organizations around the state that are opposed to the exemption.

If local leaders are pressured into reducing homeowner’s share of the tax burden, the business lobby argues, they could turn to a myriad of taxing options on businesses, such as commercial and industrial, franchise license, consumer utility, bank stock or business licenses taxes.

“Local governments are not going to cut spending by 20 percent,” says Keogh. “The great bulk of revenue for local governments comes from real estate taxes.”

Virginia’s “Dillon rule” leaves local governments with powers limited to those granted by the state. That means real estate becomes localities’ most important revenue generator. Even if the amendment passes, homeowners might not see much relief. Slowing home sales have left local governments strapped for cash.

Northern Virginia localities, for example, are facing shortfalls of millions of dollars because home sales have slumped and the median property value of homes has declined. The estimated revenue shortfalls total $251 million in Loudoun County, $220 million in Fairfax County, and $51 million in Prince William County.

In addition, property taxes can be misleading. Homeowners may not actually see much relief under the bill. Too often, legislators proclaim they’ve cut taxes, while citizens’ tax bills rise. Rarely do property tax cuts keep pace with rising assessments.

In this case, local governments might keep the property tax rate higher than they would without the exemption. Commercial real estate owners would pay the

same rate, as required by state law, but at their property’s full assessment.

In fact, this is exactly what the bill is meant to do. One of the purposes of the bill is to shift some of the burden to commercial properties. Residential assessments faced a faster surge of assessment values during the real estate boom. That meant many homeowners were carrying larger tax bill increases than business. Since the boom, both residential and commercial real estate markets have slowed or even declined in some areas.

The exemption is flexible. Local governments could choose to exempt a percentage of a homeowner’s property after a year of rising assessments, but not offer
it the next.

Support from local government leaders has been mixed. While some say the legislation gives them an additional power, others are wary of political pressure they could receive from voters to offer the exemption. Local officials also are nervous about any plans to tweak their most powerful taxation tool.

The effect of the exemption — and whether local governments choose to use it — would vary widely by locality. 

One thing’s for sure. Even if lawmakers still don’t hear any dissension with their ranks on the issue this year, they’ll certainly hear it from the business community. 

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