The Effects of Truth-in-Taxation in Controlling Property Taxes

We discussed the theory and mechanics behind Utah’s property tax Truth-in-Taxation law last week. Now we’ll talk about the impact of this law in controlling property taxes since it was enacted in the mid 1980s.

Property tax revenue growth before and after Truth-in-Taxation
In the six years (1980 to 1986) prior to Truth-in-Taxation’s enactment, property tax revenue grew at a 10.8% annualized rate even though combined inflation and population growth was about 7%.

In the twenty years since Truth-in-Taxation, property tax revenues have grown at a 5.4% rate, equal to the combined inflation and population growth rate of 5.4%.

During that time period, there were three property tax cuts unrelated to Truth-in-Taxation – two reductions to the statewide basic levy for education and a reduction in county property taxes in exchange for a sales tax increase. All of these reductions occurred prior to 2000 so comparing property tax growth since 2000 would provide a more accurate impact of Truth-in-Taxation. Since 2000, property tax revenues have grown at about 5.9% annually, and combined inflation and population growth has been slightly lower at 5.5%. Relative to inflation and population growth, property taxes have grown at a much slower rate since Truth-in-Taxation’s enactment than before.

Utah’s property tax burdens compared to other states
Utah’s major sources of tax revenues are individual income, sales, property, motor fuel taxes, and fees. Of these, Utah is below the national average on property taxes only.

– Individual income taxes: Utah ranks 16th highest at 2.94% of total personal income (TPI) compared 2.41% for the U.S.

– General sales taxes: Utah ranks 13th highest at 3.33% of TPI compared to 2.63% for the U.S.

– Motor fuel taxes: Utah ranks 10th highest at 0.54% of TPI compared to 0.36% for the U.S.

– Property taxes: Utah ranks 36th highest at 2.73% of TPI compared to 3.36% for the U.S.

Is Truth-in-Taxation harmful to local governments?
Opponents of Truth-in-Taxation (TNT) argue that TNT harms local governments because the calculation of the certified tax rate does not include inflationary adjustments. To offset inflationary losses, local government must go through Truth-in-Taxation process of public notices and public hearings periodically.

As explained before, property tax revenue growth since TNT’s enactment has been nearly identical with inflation and population growth. When property tax reductions unrelated to TNT are accounted for — two legislative reductions in the statewide basic levy for education and a reduction in county property taxes in exchange for county authority to impose a 0.25% sales tax — property tax revenues have increased slightly faster than inflation and population growth.

Property tax revenues would be even higher (or property tax rates for everyone would be lower while local governments would be getting the same amount of revenue they are currently receiving) if cities would stop using Redevelopment agencies to subsidize locally-driven retail, recreation, and entertainment. Subsidizing economic activity that would occur on its own somewhere in Utah without a subsidy is poor fiscal policy. Hopefully, recent RDA reform will change this.

Should voter-approval be required for property tax increases?
Senator Wayne Niederhauser and Represenative John Dougall have proposed a new law to require that voter approval must be obtained before property taxes can be increased.  The two currently sit as chairs of the powerful Revenue and Taxation Committees in their respective bodies and as such held a public hearing two weeks ago to elicit citizen input and local taxing entity defense of the rapidly rising property tax assessments throughout the state.  Expect considerable debate about this proposal as it wends its way toward the legislative general session in January.