Download Property Tax Growth Limitation

Iowa’s Property Tax System
Basic Concepts Applied to Recent Reforms
ISFIS Summer Conference
June 7, 2017
Jon Muller, ISFIS Partner
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Understanding Property Taxes
• Basic Concepts Required to Evaluate System
• Economics of Property Tax
• Levies, Rates, and Valuations
• Taxing Authorities and Taxing Districts
• Applying Basic Concepts
• Changes imposed with 2013 reforms
• Short run impact vs. long run impact
• TIF (Time Permitting)
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Economics of Property Tax
• Relative to Income/Sales taxes,
Property taxes are:
•
•
•
•
Unavoidable
Regressive
Neutral
Predictable
• In General, property taxes impact wealth, income taxes impact wages
and returns, and sales taxes impact prices.
• In all cases, the REVENUE = TAX BASE X RATE
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Core Variables of Property Tax
L=VXR
Levy:
Valuation:
Rate:
Dollars
Collected by
the tax
The tax base to
which a rate is
applied
The amount of
tax that has to
be remitted on
$1,000 of
valuation
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LEVY = Valuation X Rate
•
Taxing Authorities Levy Taxes: Schools, Counties, Cities, Community Colleges,
Hospitals, and 11 other types of local authorities.
•
Property owners remit their taxes to the County Auditor, who then distributes to all the
Taxing Authorities within their County, $5.3 billion total.
• Schools: $2.2 billion
• Counties: $1.2 billion
• Cities:
$1.5 billion
• Other:
$0.4 billion
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LEVY = Valuation X Rate
Effective Rate Vs. Levy Rate
•Levy rate = the rate of tax applied to Taxable Value.
•Effective rate = Levy divided by market value times 1,000.
•Example:
•Farmer has 200 acres with a market value of $1.0 million. The farmer’s
consolidated rate (total combined levy rate) is $20 per $1,000 of taxable
value. The taxable value of the land is $200,000.
•The farmer pays. . . .$20/$1,000 X $200,000 = $4,000
•Levy rate = $20 per $1,000 of taxable value.
•Effective rate = Levy divided by market value
= $4,000 / $1.0 million X 1,000
= $4.00 per $1,000 of market value = 0.4% of wealth.
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Components of the Consolidated Rate
(Moving from Taxing Authority to Taxing District)
•Taxing Authorities have individual levy rates that roll up to the total
authority Tax Rate for each Taxing Authority (ie. School total rate = PPEL
+ Uniform Rate + Additional Rate + Debt Service Rate + Mgt. Rate + Cash
Reserve Rate etc.)
•Each Taxing Authority applies its rate to all the property in its boundary.
•Taxing District = The unique geographic area where all the properties in
the area share the same Taxing Authorities.
•Everyone in a Taxing District shares the same Consolidated Tax Rate.
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LEVY = Valuation X Rate
What Do Taxing Districts Look Like?
County A, School A, City A
County B, School A, City A
County C, School A, City A
333 School Districts
99 Counties
947 Cities
Approx. 10,000 Taxing Districts
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Rate Limitations
•State imposed limits can either be Rate limits or Levy limits.
(ie. additional levy for schools, county mental health levy are Levy limits)
•Rate limitations vary by taxing authority type (Examples)
•Cities: $8.10 general limit
•Counties:
•Rural (property in unincorporated areas): $3.95
•General (all property): $3.50
•School Districts:
•Uniform Levy: $5.40 (ceiling and floor – acts like a statewide
levy)
•PPEL
•Board Approved: $0.33
•Voted: $1.34
•GO Debt Service: $4.05
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LEVY = Valuation X Rate
Valuation Issues
•Assessment Calendar and Equalization Orders
•Classes of Property
•Determining Assessed Values – Ag Productivity Formula
•Assessment Limitations
•Rollback
•Credits
•TIF (Tax Increment Financing)
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Assessment Calendar and Equalization Orders
•Property is assessed on an assessment year calendar (January 1 to December 31)
•Taxes are paid on a fiscal year (July 1 to June 30, with payments in September and March)
•Results in 18 month lag from assessment to first payment
•Property first assessed in January 2017 won’t be taxed until September 2018 (FY 2019)
•Equalization Orders Occur in Odd-Numbered Years
•Department of Revenue reviews assessment data, and determines whether various classes
of property are assessed accurately (within 5% tolerance). State has a vested interest in
making sure valuations are accurate
•Equalization ordered by class of property within an assessment jurisdiction
•In some cases (particularly ag property), State re-values where assessor chooses not to revalue.
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LEVY = Valuation X Rate
•Valuations by Class of Property – FY 2017 (AY 2015)
Taxable % of Taxable % of
Market
Residential
Commercial/Industrial
Agland
Gas/Electric
Other
Total
$
Assessed
Taxable
148,395,167,699
$ 148,395,167,699.00
$ 82,546,149,737.00
55.6%
55.6%
46,426,831,655
46,426,831,655
41,607,522,188
89.6%
89.6%
233,737,726,000
64,309,203,055
29,650,892,135
12.7%
46.1%
14,045,605,679
14,045,605,679
4,889,499,434
34.8%
34.8%
na
21,710,134,540
10,563,307,030
na
48.7%
169,257,370,524
na
57.4%
$
294,886,942,628
$
Market
Assessed
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Determining Assessed Values
Residential: Market Value
Agricultural: Productivity Value, based on price and quantity of crops.
Commercial: Market Value
Industrial: Market Value
Utilities: Centrally Assessed, based on stock and debt calculation.
Gas and Electric is assessed based on generation (ie. Kwh tax).
Converted into property value equivalent
(Taxes Paid / Rate = Valuation, where Valuation is the unknown).
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Agriculture Productivity Formula
“Capitalizes Income”
•
•
•
•
Determined County by County
Determine Net Income (Revenue Minus Expenses)
Divide by 7% (Capitalization Rate Defined in the Code of Iowa)
Spread out over all the ag property in the county, so that all identical
property IN THAT COUNTY has the same value.
Revenue=
+ Bushels of Corn X Avg. Price of Corn
+ Bushels of Beans X Avg. Price of Beans
+ (Repeat for all Crops)
Expenses= (BEA Expenses, Provided by ISU and others)
Property Taxes, Seed, Fertilizer, Petroleum products, labor, change in
inventory
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Agriculture Productivity Formula Example
Example – Net Income of $70 per acre equates to a productivity value (assessment value)
of: $70 / 7% = $1,000
Actual calculation is a rolling 5-year average.
FY 2017 taxes are based on 2015 assessment.
2015 assessment is an average of crop years 2009 to 2013.
Property tax values may change out of cycle with the ag economy.
That amount is spread over all the agricultural property, including livestock buildings.
Adding Livestock facilities results in a reduction in assessment for all other agricultural property.
Exempting livestock buildings from the property tax would result in a direct shift to landowners, and
would have no effect on owners of other classes of property (homeowners)
Curious Trend
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Quirk of the Agriculture Productivity Formula
•
The Productivity Formula reduces the impact of changes in tax burden for farmers.
•
Property taxes are in the expense calculation.
•
If property tax Rate increases by $1.00 per acre in a county, what happens?
Base Case
$1.00 Tax Increase
Revenue
$
70,000,000
$
70,000,000
Expenses
$
67,550,000
$
67,585,000 (Increased $35,000)
Net Income
$
2,450,000
$
Capitalization Rate
Productivity Value
7%
$
Acres
Value Per Acre
35,000,000
2,415,000
7%
$
35,000
34,500,000
35,000
$
1,000
$
986
Net Income Per Acre $
70.00
$
69.00
Change
Tax Rate
$
25.00
Taxes Per Acre
$
25.00
$
% Change
$26.00
$1.00
4.0%
25.63
$ 0.63
2.5%
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Assessment Limitations: Rollback
Rollback applies to all classes of property (not just residential)
Rollback Rules
Residential and Agricultural: Taxable valuation cannot grow more than
3% in a given year.
3% growth limitation is a statewide limitation - local differences can be dramatic
3% growth limitation is net of new construction.
$100K + $100K + $100K
= $300,000 Total Taxable Valuation
Year 1
$120K + $95K
+ $110K + $150K
= $325,000 (Revaluation) + $150,000 (New)
= $475,000 Total Taxable Valuation
Year 2
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Assessment Limitations: Rollback Application
Review of Rules
3% growth limitation statewide
3% growth limitation is net of new construction.
$100K
+
$100K
+ $100K
Step 1: Year 1 Taxable Values - Count
Them All
$100K + $100K + $100K = $300,000
$120K
+
$95K
+
$110K + $150K
Step 4: Determine Maximum Year 2 Taxable Valuation for
Existing Property
Year 1 Value + Maximum Growth
$300,000 + $9,000 = $309,000
Step 2: Year 2 Assessed Values- Count Only Step 5: Determine Rollback Percentage - Divide the
Pre-existing (REVALUATION AMOUNT)
Maximum Growth Amount by the REVALUATION AMOUNT
$120K + $95K + $110K = $325,000
$309,000 / $325,000 = 0.95
Step 3: Determine Maximum Growth
(Year 1 X 3% growth)
$300,000 X 3% = $9,000 Growth
Step 6: Apply Rollback Percentage to ALL PROPERTY for Year 2
=0.95 X $475,000 = $451,000 Total Taxable Valuation for Year 2
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Assessment Limitations: Rollback Application
Apply the Rollback Percentage to EACH Property in existence in Year 2
Year 1 Taxable Value = $100,000
Year 2 Taxable Value = $120,000 X .95 = $114,000
Year 1 Taxable Value = $100,000
Year 2 Taxable Value = $95,000 X .95 = $ 90,250
Year 1 Taxable Value = $100,000
Year 2 Taxable Value = $110,000 X .95 = $104,500
Year 1 Taxable Value = 0
Year 2 Taxable Value = $150,000 X .95 = $142,500
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Assessment Limitations: Rolling back the Rollback
Ag-Residential Tie: Neither class grows faster than the other – The total taxable value of all preexisting parcels of one class cannot grow faster than the other. So, each class’s real limit is the lesser
of 3% or the taxable value growth in the other class.
The tie will be meaningless until most of us are retired. Even if assessed values of Agland fell 5% per
year for 10 straight years, Taxable Values will still increase 3% per year.
FY 2017
FY 2018
FY 2019
FY 2020
FY 2021
FY 2022
FY 2023
FY 2024
FY 2025
FY 2026
Assessed Value
64,319
61,103
58,048
55,145
52,388
49,769
47,280
44,916
42,670
40,537
Rollback Taxable Value
0.461
29,651 Solve for Taxable Value
0.500
30,541
0.542
31,457
0.588
32,400 TV Limit Grows 3% .
0.637
33,372
Assesed Value Assumed
0.691
34,374
0.749
35,405 to fall 5% per year. Solve
0.812
36,467 for Rollback %
0.880
37,561
0.954
38,688
Takeaway: If you run a rural district, your taxable valuations are going to be extraordinarily
predictable, to the extent Ag Values are a large share of your tax base. And Statewide, Residential and
Agricultural Taxable Values will be extraordinarily predictable for the foreseeable future
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Core Variables of Property Tax
L=VXR
Levy:
Valuation:
Rate:
Dollars
Collected by
the tax
The tax base to
which a rate is
applied
The amount of
tax that has to
be remitted on
$1,000 of
Taxable
Valuation
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Application of Basic Concepts
SF 195 From 2013 Caused Fairly Significant Shifts in Burden
• SF 195 changed a remarkable balance
• Rollback used to be 4% limit for all classes, including Commercial Property.
• Law reduced it to 3% for Ag and Res, and increased it to 10% for Commercial
and Industrial.
• Fixed Rollback percentage for C&I. NOT an annual limit.
• Under the old law, Commercial was guaranteed not to have Taxable Value growth greater
than 4% in a year.
• Under the new law, each year’s Assessed Valuation is rollback 10%. ERGO…..if Commercial
Assessed Valuation grows 10% in a year, then it’s taxable percentage will grow 10% as well.
Less stability
• Created Business Property Tax Credit. Funded at $125 million per year. It’s a
fixed valuation credit that works from the bottom up, exempting every owners
first dollar of valuation….then 2nd dollar….then 3rd dollar….and so on until the
cost reaches $125 million.
• Apartments are taxed as a new class of property, at 86.25% of value. That
number will fall 3.75% per year until it reaches the value of the Residential
Rollback of 55.6%.
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Application of Basic Concepts
SF 195 From 2013 Caused Fairly Significant Shifts in Burden
• Prior to 2013, the relative share of the tax burden was relatively stable
(aside from shocks).
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Application of Basic Concepts
SF 195 From 2013 Caused Fairly Significant Shifts in Burden
• If there was a shift in burden, it wasn’t to Commercial Property
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Application of Basic Concepts
SF 195 From 2013 Caused Fairly Significant Shifts in Burden
• On the one hand, the reform looks to help everyone by lower
valuations.
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Application of Basic Concepts
SF 195 From 2013 Caused Fairly Significant Shifts in Burden
• Remember the balloons
• Take-away: No one likes to be told they USED to
have a good deal.
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Application of Basic Concepts
SF 195 From 2013 Caused Fairly Significant Shifts in Burden
• SF 195 and Your Budgets
• With Taxable Valuation growth suppressed (relative to
pre-SF 195), what happens to……
• Your General Fund Levies?
• Management Levies and Cash Reserve Levies?
• PPEL and Debt Service?
• Further pressure State funding diverted to paying tax
cuts. However, this amount is fixed at FY 2017 levels,
and should have a more mitigated impact on the change
in resources available each year.
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Tax Increment Financing
• TIF is financing tool cities use to make improvements to an area.
• The city borrows money to make the improvements.
• The city repays the loan with the taxes paid by the growth in
taxable valuation in the area.
• Taxpayers in a TIF district pay the same rate as those outside
the TIF. But their payments are intercepted before they ever
get to the local governments that would otherwise have
received the payment.
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TIF Allowable Purpose
• Original Focus: TIF was only allowed to finance improvements to slum and
blighted neighborhoods.
• Economic Development Tool: TIF was then allowed for economic development.
A city needs to install water and sewer lines so a company can locate in the city.
The company won’t locate without the infrastructure, and the infrastructure is
pointless without the company. The city TIF’s the company, so the company’s
future taxes repay the cost of development.
• “Economic Development” Has Evolved
• Malls and other retail
• Local Services
• Tax rebatement – allows circumvention of 5-year abatement limit.
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How TIFs Shift Burden
(Burden Shifted to Property Taxpayers)
• Freezes Taxable Valuation: TIF districts
freeze the valuation for all taxing
authorities in the district
• Schools, cities, counties, hospitals,
etc all require higher tax rates to
cover the lost valuation
Local Government Normal Growth
Local Government Growth With TIF
Levy = Rate X Valuation
Levy = Rate X Valuation
Levy = Rate X Valuation
Levy = Rate X Valuation
Levy = Rate X Valuation
Levy = Rate X Valuation
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How TIFs Shift Burden
(Burden Shifted to All Iowa Taxpayers)
• School Aid Formula is based on three factors:
• Taxable Valuation Per Student
• Cost Per Student
• Number of Students
• Uniform Levy = $5.40/$1,000 of Taxable Value
• As TIF Values increase, State Aid increases because the uniform levy brings in less revenue.
Creates the illusion of more State Aid.
• FY 2017: $58.5 million
• FY 2007: $37.1 million
• Increase of 57.8%, or 4.7% compounded annual growth rate
• Shift to all other taxpayers, as $750 Additional Effort/Student requires higher property tax rate.
Also goes for Mgt. Levy and Cash Reserve Levy. PPEL and Debt Service Exempt.
• Counties, Cities, and all other Taxing Authorities impact.
• Sometimes it’s a rate shift.
• Sometimes it’s a loss in local government resources.
• Growth has been staggering
•
•
•
$42 million in FY 1996
$192 million in FY 2006
$295 million in FY 2016
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Considerations
• Predictability – use modeling to forecast changes and think ahead about
using cash reserve levy and management levy to smooth things out.
• Use this information to explain to stakeholders why their taxes are going up,
even though your schools’ revenues are not. (Someone squeezed the
balloon).
• Understand other local governments’ plans: when is the best time to float
the bond issue or renew the PPEL? With election law changes, city and
school special election dates are the same.
• When it comes to more property tax relief, be careful what you wish
for. The state’s share of the formula is already significant, and the data
suggests there will be a cry for help from homeowners in the short run, and
a cry for help from commercial in the long run. We run the risk of a race to
the bottom.
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Contact Information
Jon Muller, Partner
ISFIS, Inc.
515-251-5970 Ext 7
[email protected]
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