EMBARGOED UNTIL 10:30 PM FRIDAY
Thursday, September 29, 2005
RE: 50-State Property Tax Comparison
CONTACT: Mike Jerman, Vice President, 972-8814 or 808-8814 (cell)
Utah Property Tax Burdens Lower Than U.S. Average
Truth-in-Taxation protects property owners without harming local governments.
Utah ’s state and local tax burden is one of the highest in the nation, but Utah’s property taxes are lower than most other states, particularly for residential properties, according to a new study conducted by the Utah Taxpayers Association in cooperation with the National Taxpayers Conference.
The study looks at four types of properties: residential, commercial, industrial with 50% personal property, and industrial with 60% personal property. The study calculates effective tax rates for each type of property by accounting for fair market value, sales ratios, exemptions, classification rates, tax rates, and credits. Sales ratios account for varying assessment practices from state to state. Exemptions are usually fixed-dollar reductions of the taxable value of property. Classification rates are percent reductions to taxable value of property, usually based on type of property (such as Utah’s 45% primary residence deduction). Credits are reductions in taxes due.
Report Highlights
Highlights of the 50-state report include:
- Effective property tax rates for Utah urban residences with market value of $150,000 and $300,000 rank 43 rd highest in the nation. A typical $150,000 Utah home located in an urban area has an effective tax rate that is 60.2% of the national average (or 39.8% below the national average) while a $300,000 urban Utah home has an effective tax rate that is 57.8% of the national average (or 42.2% below the national average).
- Utah residential properties are significantly lower than the national average due to Utah’s 45% primary residential exemption. Utah’s 45% exemption for primary residences shifts $205 million in annual property taxes from homes to other types of property, primarily businesses.
- Effective property tax rates for Utah commercial and industrial properties are lower than the national average but rank closer to the national commercial/industrial average than Utah residential properties rank to the national residential average. Depending on the type of commercial and industrial property, effective property tax rates for Utah businesses generally rank 35 th highest in the nation and are typically 75.8% to 78.6% of the national business average (or 21.4% to 24.2% below the national average).
The following table summarizes Utah’s property tax rankings relative to the other 50 states.
Table 1: Utah Property Tax Rankings by Property Type
| Type of Property |
Urban 51 cities* |
Rural 50 cities |
||
|
Rank |
% of U.S. |
Rank |
% of U.S. |
|
| Residence | ||||
| $150,000 primary residence |
43 |
60.2% |
40 |
54.8% |
| $300,000 primary residence |
43 |
57.8% |
42 |
52.8% |
| Apartments |
48 |
49.1% |
43 |
51.2% |
| Commercial | ||||
| $100,000 land/buildings, $20,000 fixtures |
34 |
78.2% |
30 |
85.4% |
| $1 million land/buildings, $200,000 fixtures |
35 |
76.8% |
30 |
84.3% |
| $25 million land/building, $5 million fixtures |
35 |
76.4% |
30 |
84.0% |
| Industrial – 50% personal property | ||||
| $100,000 land/buildings, $50,000 machinery/equipment, $40,000 inventories, $10,000 fixtures |
34 |
78.6% |
27 |
85.9% |
| $1 million land/buildings, $500,000 machinery/equipment, $400,000 inventories, $100,000 fixtures |
35 |
76.3% |
27 |
84.2% |
| $25 million land/buildings, $12.5 million machinery/equipment, $10 million inventories, $2.5 million fixtures |
35 |
75.8% |
27 |
84.0% |
| Industrial – 60% personal property | ||||
| $100,000 land/buildings, $75,000 machinery/equipment, $60,000 inventories, $15,000 fixtures |
35 |
79.6% |
22 |
87.0% |
| $1 million land/buildings, $750,000 machinery/equipment, $600,000 inventories, $150,000 fixtures |
35 |
77.6% |
23 |
85.6% |
| $25 million land/buildings, $18.75 million machinery/equipment, $15 million inventories, $3.75 million fixtures |
35 |
77.2% |
23 |
85.4% |
*Urban ranking includes Washington D.C.
Source: Utah Taxpayers Association and National Taxpayers Conference
Utah’s Overall State and Local Tax Burden is High
Of the four major tax burdens – income, sales, property, and motor fuel – Utah’s property tax burden is the ONLY tax burden that is lower than the national average. Utah’s state/local tax and fee burden as a percent of income is the third highest in the nation. Utah’s general sales tax burden is tenth highest in the nation and is 37.4% higher than the national average.
Table 2: Utah State and Local Tax Burdens as Percent of Personal Income, 2002
|
Tax |
Utah Burden |
Utah as Percent U.S. Avg |
Utah Rank |
|
Taxes and Fees |
15.10% | 114.7% | 3 rd |
|
Taxes |
10.67% | 103.7% | 13 th |
|
General Sales Tax |
3.49% | 137.4% | 10 th |
|
Individual Income Tax |
2.84% | 122.9% | 15 th |
|
Motor Fuel Tax |
0.60% | 158.5% | 10 th |
|
Property Tax |
2.51% | 79.2% | 38 th |
Source: Utah Taxpayers Association How Utah Compares, based on 2002 Census Bureau data
Several legislators and political commentators have argued that Utah’s property tax burden needs to be increased to match the national average. However, if Utah’s property tax burden were increased to match the national average without reductions in Utah’s other tax burdens, Utah’s state and local tax burden as a percent of personal income would increase from 13 th highest to 6 th highest in the nation, and Utah’s state/local tax and fee burden would increase from 3 rd highest to 2 nd highest.
Comparing Effective Tax Rates Within Utah
Commercial properties have the highest effective tax rates in Utah, and primary residences have the lowest effective property tax rates. Industrial properties have lower effective tax rates than commercial properties because Utah, like thirty-nine other states, does not tax inventories. Inventories are a sizeable portion of industrial property.
Table 3: Utah Effective Property Tax Rates
| Property Type | Location |
Effective Tax Rate |
Percent Less Than Urban Commercial |
| Commercial | Urban |
1.573% |
N/A |
| Commercial | Rural |
1.385% |
11.9% |
| Industrial 50% personal | Urban |
1.262% |
19.8% |
| Industrial 60% personal | Urban |
1.200% |
23.7% |
| Industrial 50% personal | Rural |
1.098% |
30.2% |
| Industrial 60% personal | Rural |
1.039% |
33.9% |
| Apartments | Urban |
0.898% |
42.9% |
| Primary Residence | Urban |
0.858% |
45.5% |
| Apartments | Rural |
0.794% |
50.5% |
| Primary Residence | Rural |
0.713% |
54.7% |
Note: Industrial property with 60% personal property has higher inventory percentage than industrial property with 50% personal property. Inventories are not subject to property taxes in Utah and thirty-nine other states.
Source: Utah Taxpayers Association and National Taxpayers Conference
The Role of Truth in Taxation
Utah ’s Truth-in-Taxation law is Utah’s most taxpayer-friendly law and plays a large role in keeping Utah property taxes under control. The Legislature enacted Truth-in-Taxation during the mid-1980s when escalating property valuations were forcing property taxes higher and higher. Under Truth-in-Taxation, property tax rates are reduced as valuations of existing homes and businesses increase. As a result, local governments do not receive an automatic revenue windfall due to increased valuations of existing homes and businesses.
Does Truth-in-Taxation Unnecessarily Restrict Property Tax Revenues?
Many local governments argue that local government revenues are unnecessarily reduced by Truth-in-Taxation since Truth-in-Taxation does not allow automatic revenue increases due to inflation. Opponents argue that property tax revenues as a percent of personal income have decreased in recent years. However, while this is true, this reduction cannot be attributed to Truth-in-Taxation. During the 1990s, the legislature reduced the statewide basic levy for education twice. Moreover, the Legislature allowed counties to impose a 0.25% sales tax in exchange for a dollar-for-dollar reduction in property taxes. These three property tax reductions were unrelated to Truth-in-Taxation.
The following graphs demonstrate that Truth-in-Taxation has not harmed local governments. The first graph shows property tax revenues for cities from 1993 to 2003, and the second graph shows school district property taxes from 1994 to 2004 excluding the statewide basic levy which is set by the Legislature. In both graphs, property tax revenues to pay for general obligation bonds are included, even though bond levies are not subject to Truth-in-Taxation. City property tax revenues are worth reviewing since legislative decisions did not reduce city property tax revenues.
City property tax revenues including fee-in-lieu as a percent of personal income increased from 0.361% in 1993 to 0.444% in 2003, an increase of 23%. As a percent of personal income, school district property tax revenues including fee-in-lieu but excluding the statewide basic levy increased from 0.89% in 1994 to 1.16% in 2004, a 30.3% increase. While some may attribute these increases to increases in property valuations, these valuation increases have marginal impact since valuation increases in existing homes and businesses force reductions in property tax rates. Moreover, even if the increases in property tax burdens are attributable to increased valuation of new construction, the graphs clearly demonstrate that local governments are able to increase tax burdens even under Truth-in-Taxation.
Even though local governments do not receive automatic inflation increases under Truth-in-Taxation, local governments have been able to increase tax rates and tax burdens by going through the Truth-in-Taxation notification process. Additionally, when valuations of centrally assessed properties increase for any reason, tax rates are not reduced, yielding a revenue windfall for local governments.
Taxpayers should ask opponents of Truth-in-Taxation how much more growth in property tax revenue would be needed before opponents would no longer object to Utah’s property tax system.
Conclusion
Utah ’s overall state and local tax burden is 13 th highest in the nation, 3 rd highest when fees are included, but Utah’s property tax burden is one of the lowest, especially for primary residences. The Task Reform Task Force has been meeting for several months and will be recommending changes to Utah’s state and local tax system in the next couple of weeks. Many of the proposals being considered by the task force are based on sound tax policy and will encourage economic growth. However, the task force should rejection some of the proposals, including adding automatic inflation adjustments to Truth-in-Taxation.