Property-tax reappraisal could make recession worse

Unemployment in the Flathead Valley recently hit 12.2 percent, and a dozen other counties in the state are nearing or already in double-digit unemployment status. Contrary to what many believed, Montana was not immune to this downturn but just late in joining the recession — which next month will become the longest since the Great Depression.

A major reason for Montana’s tardiness is that our real estate boom peaked almost 18 months later than the national average. And unfortunately, the decisions made in Helena during the closing days of this legislative session could lengthen or deepen the current recession, depending on how legislators handle the statewide reappraisal and impact on property taxes.

This boom-to-bust cycle in housing is unprecedented on a national scale, and perhaps even more unprecedented in “hot beds” like the Flathead Valley where residential sales have fallen 68 percent since 2006.

Nationally, there is currently a 10-month supply of homes on the market. But according to data from Kelley Appraisal, the Flathead Valley’s inventory has soared to a 23-month supply. That means, based on the latest 12-month sales, it would require almost two years to work through the excess inventory of unsold homes on the market. For homes over $500,000, the news is far worse, with a 5.2-year supply of unsold homes.

The housing bust has caused unemployment to soar as construction jobs are lost, and businesses related to the housing industry are forced to retrench. It is affecting virtually every corner of the Flathead Valley economy. And according to newly released data, the median family-home price in the Flathead Valley is starting to come down — hard. In just the last 12 months, the median-home sales price has fallen 21.7 percent.

These are ugly numbers, but they could get a lot worse if the only property tax reappraisal bill alive in the Montana Legislature passes. Gov. Schweitzer is correct in having grave concerns about HB 658 and its impact on Montana’s residents and economy.

Property reappraisals are completed every six years in Montana, and then phased in over the next appraisal cycle. There have been many legislative attempts to find a long-term solution to mitigating the impact of this periodic reappraisal. In the meantime, most residents have learned to live in fear of their next reappraisal.

While other states, like Michigan and Oregon, have adopted upper limits (i.e. 5 percent) for phasing in new appraisals, the Montana Legislature has failed in every past attempt that would make property taxes “predictable” for Montana homeowners.

Ironically, HB 658 has turned out to be almost identical to a Band-Aid solution passed by the 1999 Legislature. It mitigates the statewide “average” increase (of 55 percent) in property values by adjusting the tax rate and exemption amount used to calculate the taxable value upon which each person’s property taxes are based.

Mitigating the average means that highly appreciated properties — most notably in western Montana — get hit with a large increase in their taxable value (and taxes) unless you happen to qualify for one of the income circuit-breakers in HB 658.

Here’s the crazy thing about this “mitigating-the-average” solution. The increase in taxable value of those higher-appreciated properties does not necessarily go into new tax revenue for the state, schools or local government. Instead, it is offset by lowering the taxable value of those properties that did not appreciate as much as the statewide average. (Remember, this ill-conceived solution gives everyone the same adjustment.) For example, under HB 658, a home in Eastern Montana that didn’t appreciate at all over the past six-year cycle, will receive almost a 35 percent reduction in its taxable value.

Sounds perfectly unfair, doesn’t it? Reduce taxable values on Eastern Montana properties while balancing the increase on the backs of other Montana residents who saw their property value increase more than the 55 percent statewide average.

Technically, HB 658 meets the governor’s mandate for a revenue neutral solution — meaning no overall statewide increase in property taxes. Tragically, however, it does this in a manner that could pull the rug out from already falling real estate markets throughout the state.

It makes far more sense, as Gov. Schweitzer proposed last week, to cap the phase-in of the current reappraisal at 5 percent over the next two years and let the dust settle from this boom-to-bust housing cycle.

And who knows, perhaps a fifth interim legislative committee can find a real solution that makes property taxes predictable and smoothes out these boom-to-bust cycles by the time the next Montana Legislature reconvenes in 2011.

Jim Stack, of Whitefish, is president of InvesTech Research.