The Low Tax Illusion

Florida has no state income tax.

There, that’s the good news—and about the only good news—when it comes to taxes in the Sunshine State.  So if you’re thinking of moving to Florida to reduce your tax burden, you might think again.  There are plenty of reasons for being here, but lowering your taxes probably should not be one of them.

Even supposedly tax-hostile state governments need revenue, so they get it in other ways.

There’s the sales tax, which in Florida state-wide is 6 percent—pretty much in the middle range of other states.  But local counties can impose a surtax on top of that, and many do. Broward doesn’t have a surtax, but Miami-Dade adds one percent, for a total of seven.  In the Keys, you’ll pay 7.5 percent.  Groceries and prescription drugs are exempt, but if you live on carry-out, you’ll be paying the 9 percent tax on prepared food.

The gasoline tax in Florida ranks among the top tier nationwide, and is a combination of taxes levied by both the state and counties.  The local rate varies from one county to another.  In Miami-Dade, the total of state and local gas taxes is 33.5 cents per gallon; in Broward, it’s a little higher at 35.5 cents per gallon.

But the biggest shock newcomers may face is the property tax on their homes.  Florida property taxes are very high, and Miami-Dade rates are a bit higher than Broward. And it varies further depending on which municipality you live in.  In my case, the tax on my home in Florida is more than 50 percent higher than what I was paying in Washington, DC, even though the value of the Florida home is only a bit more than half what my DC home was worth.

The whole subject gets pretty complicated, but here’s an attempt at a basic thumbnail explanation.

When you ask the realtor about taxes on a home you’ve fallen in love with, the listing sheet will show the amount that the current owner is paying.  The trouble is that number may not be anywhere close to the tax you will eventually be charged.  Your tax will be based on what you paid for the property, not what the current tax appraisal is.  If what you paid is significantly higher, then expect your taxes to be higher as well.

First a little background:  The current owner’s tax is a function of what he paid when he bought the place, which sets the basis for everything that follows.  Back in 1995 when the real estate bubble was expanding and prices had started zooming upwards, the “Save Our Homes” amendment to the Florida constitution capped annual increases in the property appraisal—i.e., the appraised value on which the tax rate (or “millage”) is applied–at no more than 3 percent annually to protect homeowners from huge tax bills based on the inflated value of their properties. This applied only to those properties which enjoyed the “homestead exemption” (about which more below), but for them even if a home’s market value had increased from, say, $100K in 1995 to $400K in 2005 at the top of the boom, the appraised value for tax purposes would have been no more than about $135-140K.

Then, of course, disaster struck, and the Florida housing market collapsed. Cash-strapped municipalities dependent on property taxes saw revenues plummet as real estate values dropped across the board.  While they couldn’t raise the appraisals, they could—and often did–raise the tax rates (millage) to make up for lost revenue.  End of digression.

The good thing is that for the first tax year, you get the benefit of the previous owner’s assessment. Taxes are billed retroactively, so you will get the bill for 2012 sometime this fall.  It’s in the following year that the sales price supersedes the previous tax appraisal and your bill will likely jump. Both Miami-Dade and Broward counties have a handy on-line tool for estimating property taxes.  I’d suggest that you use them to avoid any nasty surprises.

Also in the year after you purchase property, you can apply for your homestead exemption.  There are a number of qualifying conditions to be eligible, most importantly that the property must be your primary residence.  However, if you’re eligible, it’s definitely a good thing to have because in addition to reducing your tax bill, it will apply the 3 percent cap to future appraisal increases.

Oh, and then there are all the user fees for things like vehicle registration and permit fees for any conceivable thing you want to do at your property, which are often considerably higher than other places in the country.  State and local governments can get away with jacking up these rates more easily because they don’t call them taxes.  But that’s what they are.

So, factoring in all these things, I doubt if I’m better off tax-wise as a Floridian than as a Washingtonian.  But that wasn’t why I made the move.