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Commissioner Steve Novick

Official Website for Commissioner Steve Novick

Phone: 503-823-4682

fax: 503-823-4019

1221 SW 4th Ave. Suite 210, Portland, OR 97204

Our Goofy Property Tax System

City Property Tax Dollarsby Commissioner Steve Novick-- The novelist William Faulkner once wrote: "The past is never over. It's not even past." He could have been writing about Oregon's goofy, inequitable property tax system, which is governed by two ballot initiatives, Measure 5 passed in 1990 and Measure 47 passed in 1996. Since about 44 percent of Portland's General Fund (which pays for police, fire, parks, services for the homeless, and other vital services) comes from property taxes, the property tax system has a big impact on the City and the services it provides. Recently, I have gotten involved in discussions about whether and how to change the existing system, so I thought I'd take some space on my website to explain the basics as best I can.

Measure 5, passed in 1990, says that the tax on any piece of property cannot be more than $5 for every $1000 of the property's real market value for schools, and $10 for every $1000 of the property's real market value for all other local governments, such as cities and counties. If a piece of property is paying at least $10 for every $1000 in real market value for local governments and $5 for schools, the property is referred to as being "in compression." That means that even if a majority of voters in a district -- even including the owner of that property - vote to raise taxes for a specific purpose (like libraries, schools, or parks), the tax on that property cannot go up. So when there is such a vote, it raises taxes for some people but not others; it raises taxes for the people who are "not in compression," but not for the people who are "in compression."

But wait, you might ask, why isn't everyone either "in compression" or "not in compression" together? Why isn't everyone paying the same property tax rate per thousand dollars of real market value?

The answer lies in Measure 47, passed in 1996 (and slightly modified by Measure 50, a legislative referral passed by voters in 1997). Measure 47/50 said that the assessed value, for tax purposes, of a given piece of property cannot increase by more than 3% a year from its 1995 assessment, no matter how much the actual value of the property is going up. In Portland, property values in some recently gentrified areas, especially in North and Northeast Portland, have skyrocketed, far more than 3% a year on average since 1995. That means that property owners in those areas are paying very low tax rates - far lower than $10 per thousand real market value for cities and counties and $5 for schools. Meanwhile, property values in outer Southeast Portland, for example, generally have not gone up very much, so many property owners in that area are paying the maximum -- they are "in compression." In some cases, the differences are startling: you can literally have one property owner in the outer East Side paying $3,000 in taxes on a house that is actually worth $200,000, and someone in inner Northeast paying $600 in taxes on a house worth $300,000.

There is also a big difference in the tax rates that Multnomah County commercial property owners pay, compared to homeowners. Commercial property values, on average, have gone up faster than residential values since 1995. But their assessed values are tied to that 1995 assessment. According to the Multnomah County assessor, the average commercial property in the County is assessed at about 54% of real market value, and the average home is assessed at 74% of real market value. That means commercial owners are paying a much lower rate than homeowners.

Recently, the League Oregon of Cities proposed that the Legislature should ask Oregon voters to pass a change to Measure 5 that would say that voter-approved 'local option' taxes could be collected, in full, from property owners already 'in compression'; that if, for example, voters in a district voted to raise taxes for schools by $1 per thousand of assessed value, everyone should pay that amount, even if some of them are already paying the Measure 5 limit of $5 per thousand for schools. The Oregonian Editorial Board endorsed that idea, partly based on the argument that the current system is unfair because someone who is 'in compression' can vote for a tax increase without it affecting them; they can vote to raise other people's taxes but not their own.

I responded to the League and the Oregonian Editorial Board with the argument that if you allow local options to apply to people already paying the Measure 5 limit, and you continue to base tax rates on the goofy Measure 47 / 50 assessed value, you will make our existing inequities worse. If you have a $1 per thousand local option tax applied to assessed value, and you have two properties both actually worth $300,000, but one is assessed at $300,000 (and would be 'in compression' if not for the League's proposed change) and another is assessed at $60,000, the first property will pay $300 and the second will pay $60. I argued that if we're going to allow local options to be collected outside the Measure 5 limits, at least the tax rate should apply to real market value, not the goofy Measure 47 / 50 assessed value. That way everyone with the same property value would pay the same amount. The Oregonian Editorial Board has since said they think that idea is worth considering and the League is pondering it.

Making that change to 'local options' wouldn't eliminate the inequities in the taxes people pay through the 'permanent rates' for cities, counties, schools and local governments, which would still apply to assessed value. The League has another proposal, which I support, that would re-assess properties at their real market value when the property is sold - a concept called "reset at sale." Over time, that would reduce, although not eliminate, the geographic inequities caused by Measure 47 / 50.

We could ask the voters to simply eliminate Measure 47 / 50 and say that all property taxes should be based on real market value, effective immediately. One problem with that is that to some extent, the real estate market has probably adjusted the sales prices of houses to reflect the differing property taxes in each neighborhood; people in recently gentrified areas paid a premium for their low taxes, and it would be quite a shock to have their taxes suddenly go up by 500 percent (or whatever). I would like to see the relationship between assessed value and real market value restored, but I would be careful about doing it overnight. The League's "reset on sale" proposal, while not a cure-all, would move toward restoring that relationship without sudden huge increases in anyone's taxes. (I don't think the 'market adjustment' hypothesis is a good argument against my proposed change to local options, because the market could not anticipate all future local option taxes; there's no way they were baked into the sales price.)