Total property tax revenues in Utah reached $3.983 billion for 2020 (excluding motor vehicles), up from $3.758 billion in 2019, based on data from the Utah State Tax Commission. Considering property taxes are one of the most complex and often misunderstood taxes that the government levies, let’s investigate and learn all about why Utah’s property tax laws are the shining example of the entire country.
Effective Tax Rates and Taxes Charged by Local Governments
School districts receive about 57% of total property tax revenues, up from 54% ten years ago. School districts charged $2.92 billion in property taxes in 2020. View the associated table to see the remainder of the breakdown.
Local governments with large assessments of business and secondary residential property generally have lower property tax rates. At the city level, property taxes are impacted by cities’ decisions to impose utility franchise taxes. Most urban cities impose this tax while many rural towns do not.
City property tax rates are also impacted by city sales tax bases, which explains why so many mayors, council members, and city “economic development” directors like to subsidize retail businesses to draw those industries into their city. Often city leadership will “defer” property taxes to lure these developments to unfairly gain additional sales tax revenue on the backs of their property taxpayers. This is a gamble which the Association generally opposes.
Also impacting a city’s property tax rate is whether services such as library, water, and fire protection are provided by the city or by a special service district. In Salt Lake County, for example, some cities will ask the Unified Fire Authority to provide fire protection services in their cities. This way, the city’s property tax rate is kept lower, but the taxpayer still ends up paying for the service through a separate levy. Some cities claim their property tax rates are low by having a special district provide these services, but the additional levies must be taken into account as public safety is generally considered a city function.
In some cases, a city with municipal power charges electric rates higher than needed to cover power costs and uses the “profit” to bolster their general funds in order to avoid going through the Truth-in-Taxation process.
How Does Truth-in-Taxation Work?
Truth-in-Taxation (TNT) is a revenue-driven system, not a rate-driven system. Generally, as valuations of existing property increase, property tax rates decrease. This automatic reduction in property tax rates prevents local governments from getting a windfall simply because valuations have increased. For example, if valuations of existing property increase by 20%, the property tax rate decreases by 16.7% to maintain revenue neutrality as demonstrated by the following equation: (100% + 20%) * (100% – 16.7%) = 100% of original tax = no change.
The reduced property tax rate is known as the certified tax rate (CTR). This rate is then applied to all property, including “new growth.” While local governments receive increased revenues due to new growth, TNT includes no automatic adjustment for inflation, which is by design.
How can property tax revenues increase so much when local governments do not get automatic inflationary increases?
Under Truth-in-Taxation, property tax rates are reduced as valuations of existing properties increase. This reduced rate – called the certified tax rate (CTR) – is then applied to all properties, including new growth. However, under certain conditions, property tax revenues can increase much faster than combined inflation and population growth.
The first condition is that local governments adopt a tax rate that is higher than the certified tax rate. Local governments can adopt rates that are higher than the certified tax rate if they go through the Truth-in-Taxation notification process. Most local property tax rates have statutory maximum levels.
The second condition is that local governments issue bonds, which are exempt from CTR calculations. In some cases, local governments – particularly school districts — issue bonds to pay for capital expenses.
The third condition is that property valuations increase rapidly. Even though increased valuations of existing properties do not create additional revenues for local governments, rapid increases in “new growth” valuations can substantially increase property tax revenues. In 2008 and 2009, property valuations actually decreased in some areas, but in previous years rapid property valuation increases allowed local governments to increase revenues above inflation while not exceeding the certified tax rate.
Unfortunately, some government entities (including the state), put a “freeze” on their rates. This means that property tax revenue will automatically increase when there is an increase in property values. In 2018, the Legislature froze the statewide basic levy (which partially funds public education) for five years. This means the state will receive automatic increases, assuming property values continue to increase. Your Taxpayers Association strongly opposes any measures to “freeze” the rate and demands that all government entities follow the letter and the spirit of Truth-in-Taxation.
Does Truth-in-Taxation unnecessarily restrict property tax revenue growth?
Over the years, opponents of TNT have argued that TNT does not allow property tax revenues to grow fast enough, although they won’t be making that argument too loudly this year since property taxes are increasing across the board. TNT opponents argue that property tax revenues as a percent of total personal income have decreased since TNT’s enactment. However, most or all of this decrease is attributable to property tax reductions unrelated to TNT. During the 1990s, the Legislature reduced the statewide basic levy for education twice, and also allowed counties to impose a sales tax in return for reducing property taxes.
Value of Primary Residence Exemption
Primary residences in Utah receive a 45% exemption on property taxes. This is one of the largest tax exemptions in Utah, even though sales tax exemptions for manufacturers receive much more publicity. The largest single exemption is probably the exclusion for items for resale. The value of the 45% exemption is currently over $1 billion annually.
Why did my property taxes increase so much this year?
Generally, when property valuations increase, property tax rates decrease to maintain revenue neutrality (excluding new growth). This revenue-neutral rate is called the certified tax rate. This rate is then applied to all properties, including new residential and commercial developments. Increased valuations due to new developments do not reduce the property tax rate.
Despite Truth-in-Taxation’s ratcheting down of property tax rates as valuations of existing properties increase, sometimes property owners see a higher property tax bill. Sometimes, property owners see a decrease. There are several reasons why.
1 – Property valuations increase faster in one area than in others.
If a given property’s valuation increases faster than the average property in a given tax entity, that property will experience a tax increase. Property valuations can increase faster in some areas than in other areas for two reasons.
First, properties are periodically reassessed. As a result, properties that were recently reassessed by the county will typically experience larger valuation increases than properties that were not reassessed recently. Second, real estate market demand may push up the value of some properties faster than others.
Using the above example, if existing property valuations increase 20% county-wide, the tax rate is reduced by 16.7% to maintain revenue neutrality (excluding new growth). However, properties that increased faster than the county (and/or school district/city/special service district) average will experience an increase in property taxes while others will experience a decrease. In the end, it all works out because other parts of the county and school district will be reassessed in following years and their taxes will increase while everyone else’s decreases. Properties that experience a large increase due to assessment were probably undervalued in previous years.
2 – Local governments issue voter approved general obligation bonds.
A local government’s property tax rate is a sum of several tax levies. In most cases, one of the property tax levies is used to pay off voter-approved general obligation (GO) bonds. These debt service levies are NOT subject to Truth-in-Taxation. Therefore, if a local government issues a voter approved bond, property taxes may increase even though the local government’s other levies were reduced by the Truth-in-Taxation process.
3 – Local government raises taxes
This is typically the largest driver of higher property taxes. Truth-in-Taxation does not prevent local governments from raising taxes. Once the certified tax rate has been calculated by the Utah State Tax Commission, local governments have the option of exceeding the certified tax rate. When local governments decide to exceed the certified tax rate, they must go through the Truth-in- Taxation notification and hearing process.
Annually, about half of school districts increase their rates above the certified tax rate, and about 20% of counties and 5% to 10% of cities increase their rates above the certified tax rate.
Certified tax rates do not include adjustments for inflation. Therefore, local governments occasionally increase property tax rates to recoup inflationary losses. Sometimes, the proposed increases do more than offset inflation, sometimes less.
4 – Local government imposes judgment levy
Occasionally, large taxpayers successfully appeal their property valuations, just as home owners successfully appeal their property valuations. In some cases, these large taxpayer appeals take several years to resolve. When that happens, the local governments must refund the property tax overpayment from previous years. In such situations, local governments have the option of imposing a one-time judgment levy to cover the costs of the tax refund. In these cases, property taxes may increase even though Truth-in-Taxation has reduced other levies. Residential appeals, on the other hand, are generally resolved quickly, which means that refunds of multi-year overpayments are not an issue for residences.
5 – Board of Equalization Adjustments
Just as local governments are allowed to impose one-time judgment levies to cover costs of refunding previous years’ overpayments to large taxpayers, tax rates are increased when any property owner (large and small) successfully appeals current-year property taxes. This adjustment is called the board-of equalization (BOE) adjustment. This increases the certified tax rate.
6 – Delinquent Taxpayers
Every year, some property owners do not pay their property taxes, usually due to financial hardships. (Property owners are required to pay their taxes even when they appeal.) When this happens, tax rates increase to hold local governments harmless.
BOE (3-year moving average) and collection (5-year moving average) adjustments do not change much from year to year, especially in large taxing entities like school districts and counties. However, in small cities/towns and special service districts, a couple of delinquent taxpayers or successful property tax appeals can increase the certified tax rate for all taxpayers.
6 – Centrally Assessed Properties
Centrally assessed properties, such as utilities and mines, are assessed by the Utah State Tax Commission, and their impact on certified tax rates is different from locally assessed properties. When valuations of centrally assessed properties increase, certified tax rates are not reduced. As a result, local governments receive a windfall. When valuations of centrally assessed valuations decrease, these decreases are subtracted from the increases in locally assessed new growth. If the reduction in centrally assessed valuation exceeds the increase in locally assessed new growth, then the certified tax rate is increased to ensure that local governments do not receive less revenue than in the previous year.