New Georgia property tax limits may strain school districts and counties

Property tax limits embedded in a new Georgia law and constitutional amendment may financially squeeze school districts, city governments and county governments over time, analysts say.

House Bill 581 and the related Amendment 1 to the state constitution restrict the increase in property tax bills for homestead properties in most counties to the rate of overall inflation. Homeowners will be allowed in some circumstances to use state-wide homestead exemptions if they are larger than the locality’s homestead exemption.

Thirty-six of the state’s 139 counties already freeze tax bills for homestead properties and are exempt from the new laws. Other counties, cities, and school districts can opt out of the property tax system under very restricted conditions.

To do so, they must hold three public hearings on the topic before March 1 and then government officials must vote to opt out.

“It is always concerning to credit analysts/bond holders when there are new restrictions placed on revenue raising flexibility as these limits may interfere with providing financial resources to cover debt service,” said Howard Cure, director of municipal bond research at Evercore Wealth Management.

“The starkest implications for these new limits would be for school districts because they already have a property tax cap that restricts their ability to raise local revenue,” Cure said. “Cities and counties have more diverse revenue streams and have unlimited legal authority to increase property tax rates regardless of tax base performance.”

Assessed values will not keep pace with actual housing values, with the gap becoming more pronounced ten or more years out, said John Hallacy, president at John Hallacy Consulting LLC.

“Ratings will be affected over time,” he said.

For local governments, “the opting out process is quite cumbersome and must be fulfilled in a very short time,” Hallacy said. “Chances are schools and other entities will miss out on upside in the tax base.”

Georgia voters approved the Amendment 1 referendum by 63% to 37%. This spring the Georgia House and Senate voted overwhelmingly for House Bill 581.

Republican Gov. Brian Kemp signed the bill into law in April. The bill was conditioned on voters approving Amendment 1.

The Georgia measures echo the Proposition 13 property tax limits that California voters passed in 1978.

A key feature of Prop. 13 is that the increase of assessed values is capped at no more than 2% per year.. Only changes in ownership or new construction bring new assessments.

“In California, after a period of time one neighbor would be paying very little and his or her neighbor might be paying three times more in property taxes on a recent purchase,” Hallacy said, adding that he expected the Georgia law will lead to similar distortions.

Unlike the Georgia homestead law, which applies to owner-occupied homes, California’s Prop. 13 limits apply to all property.

In October, Andrey Yushkov and Joseph Johns wrote on the Washington, D.C.-based Tax Foundation website the Georgia amendment would make it harder for new residents to find affordable housing.

“Assessment limits frequently create a lock-out effect for new entrants into the housing market,” they wrote. “Assessment limits cause this inequity by making it less advantageous for current homeowners to sell their homes and purchase new homes since the assessment limits reset to the new, current market value only upon purchase.”

The Georgia law allows local governments to add new 1% sales taxes, if their voters approve, but these might push some residents to travel to nearby Alabama and Florida to make purchases, because the sales tax rates would be lower, Yushkov and Johns said. This travel could reduce sales tax revenue for the border counties, they said.

“Georgia residents can do better than Amendment 1 and should focus on policies that restrict the overall growth of property taxes, not policies that functionally freeze property taxes for current owners by shifting costs onto new owners and into the sales tax,” they said.

“The floating homestead exemption gives the illusion of tax relief, but in reality, it only shifts the burden to millage rate increases and other forms of taxation,” conservative Elliot Pierce wrote on his Georgia- and Tennessee-focused blog. “Local governments will still need to fund essential services and when property tax revenue doesn’t keep pace, they’ll turn to millage rate hikes, sales taxes, and other fees to fill the gap.”

After Proposition 13 many California local governments turned to increasing taxes on businesses and Pierce said he expects Georgia governments to do something similar.

“School districts with declining enrollment could feel the impact of the limit even more acutely if their enrollment is declining as state aid, a major source of revenue, is tied to enrollment,” Cure said.

“There is some headroom for school districts under the 20-mill limit as taxable residential assessments have grown over the last five years for many areas of the state at more than the rate of inflation,” Cure said. “If residential assessments decline in Georgia, that will put another financial burden on school districts that opted into this change.”

In recent years Nevada, Nebraska and Wyoming are among states to pass laws reducing property taxes or reducing the amounts they can be increased.

Other observers were not as concerned about the measure’s credit impact. “The language is important in that the amendment allows but does not require a locality or school district to increase the exemption,” said Joseph Krist, publisher of Muni Credit News. “It makes it a local decision. In that sense, I see it as no different than a variety of schemes enacted all over to reduce property tax burdens.”

“S&P Global sees Amendment 1 as a continuation of the tax code change trend we’ve seen nationally,” said Geoff Buswick, sector lead for states at S&P Global Ratings. “With any code change, we view potential risks of revenue forecasting challenges and other unknown tax associated impacts (i.e. business siting decisions, home purchase decisions, etc.).”

Three dozen counties already freeze property tax assessments as long as homeowners continue to reside in their home, Buswick noted.

“We have not viewed these exemptions as credit negative given recently strong economic growth and home value appreciation and our view of counties’ generally conservative expenditure management and adjustment of tax rates to support operating flexibility,” he said.

“We will be monitoring to see if the changes occur as forecast, and if not, how governments will adjust their tax revenue growth expectations to account for this change,” Buswick said.

“It is too early to gauge the effects Amendment 1 might have on new construction activity, home sales and other influences on tax base values,” said Fitch Ratings Director Kevin Dolan. “Our understanding is that the amendment allows local governments to opt-out of their tax exemption, and that it would continue to preserve the ability of most Georgia local governments to establish their tax levy and rate without limitation, which is an important component to our view of a government’s financial resilience.”

Moody’s Ratings said the changes’ credit impacts are more concerning for school districts that don’t opt out of the system by March 1 than for school districts that do opt out or for cities and counties.

Georgia’s state government also has a schedule to reduce its own tax rates over time.