With cost increases at rates not seen in decades, taxpayers need to be extremely vigilant as government entities begin to form their budgets.
Cities and school districts may use inflation and other cost increases to justify increasing property taxes through Utah’s Truth-in-Taxation system.
While we don’t want to claim that every single possible increase is unjustified, your Taxpayers Association thought it would be valuable to provide you with some tools you can use to learn more about the increase and make a determination to find out whether it is justified.
It is too early to determine which entities are likely to discuss imposing a tax increase at this time. But armed with a few questions and some tools, you can help policymakers at the local level remember that their taxpayers are also facing increasing costs, and perhaps government needs to absorb some of the costs.
Funding Sources and Utah’s Property Tax Law
First, let’s explain how local governments are funded. A city, for example, can receive any of the following revenue sources: property tax, sales tax, fees for services, and transfers from other governments.
Utah’s property tax law is a little bit different than other states, and even other taxes levied in Utah. The income tax, for example, is rate based. Regardless of whether a person makes $3,000 or $300,000, they pay the same rate of (currently) 4.85% in state income tax. There are lots of factors that play into this, but let’s just generally accept this concept.
On the other hand, Utah’s property tax law is revenue based, meaning the rate adjusts every single year. As property values increase, the rate decreases. This keeps the entity’s revenue from property tax the same, with some exceptions.
If a city collects $1 million in revenue from property taxes in 2021, then they cannot collect more than that $1 million in 2022, excluding new growth. This only applies to the property tax revenue, not other taxes, such as the sales tax.
Truth in Taxation (TnT) provides the needed sunshine and transparency into the process of proposing property tax hikes by keeping taxing entities accountable to their taxpayers. As a reminder, the governing body of each local taxing entity is required to go before their taxpayers through a dedicated public hearing and make their case to increase property taxes over what they received the previous year plus new growth (new rooftops).
Since the passage of TnT, Utah’s rank among the fifty states for highest property tax burden has dropped from 24th to 36th in the nation. Even still, Utah’s property tax revenue has grown faster than inflation and population combined over the last thirty years.
Because of these protections for taxpayers, TnT also protects government revenue during difficult economic times. Since property tax revenue is guaranteed for taxing entities, they do not suffer nearly as much as individuals, families, and businesses in tough economic times. While private industries are forced to lay off employees, government doesn’t feel the same crunch.
Often, governments keep departments fully staffed because property tax revenues are protected from economic downturns so they have little incentive or need to lower costs, trim budgets, or lay off employees.
Has the Entity Gone Through the Truth-in-Taxation Process Recently?
Generally, your Taxpayers Association accepts that cities, school districts, and other entities must recapture inflation as prices rise. Our recommendation to governmental entities is that this should be done every 5 – 8 years.
If the entity has not recaptured inflation in this period of time, it may be appropriate to do so, with the caution that does not mean a blank check is given. Perhaps the entity hasn’t needed it because of new growth, or an increase in other sources of revenue.
If the entity has gone through the TnT process in the past 5 or so years, taxpayers need to ask tough questions of their policymakers demanding specific reasons why more revenue needs to be collected. Taxpayers are also on the hook for cost increases and it is tone deaf to assume that citizens aren’t also feeling the financial pinch.
Can or Has the Entity Received Funding from Other Sources?
While we mentioned the property tax earlier, government entities do receive funding from other sources.
Cities, for example, receive sales tax as a part of their funding. While purchases do fluctuate, it is important to note that Utah’s sales tax grew significantly during the past two years, and some cities which are retail heavy received a windfall of new revenue. This money has been theirs to spend. Has the money been used in appropriate ways, or were ways invented to spend this?
In addition, cities, counties, and school districts received a massive amount of federal funding during COVID. While this money is somewhat restrictive in the ways it can be used, it is still a source of revenue that could free up other parts of the budget.
School districts also receive 48% of their revenue from the state. State income tax, which funds education, has grown year over year, to more than $6 billion in individual income tax collected and $742 million in corporate income tax collected.
In addition, Utah taxpayers have been paying an automatic increase in a statewide property tax that goes to education. Back in 2018, the Legislature passed HB 293, which made some pretty substantial changes to the way education is funded.
HB293 put in place an automatic, statewide increase in property taxes by “freezing” the tax rate for the statewide basic levy. By freezing the rate, as property values increase, the amount of revenue the state collects also increases.
This freeze was originally expected to generate $125 million over the five years it was in place. However, due to substantial and unprecedented property value increase, that amount will more than double, to $271 million.
Because of Utah’s lauded and unique property tax law, this means that even when the freeze ends, taxpayers will still be on the hook for the $271 million in perpetuity.
During this time, taxpayers need to be extra cautious of government entities during the budget process, which will go on until mid-May. Also, government officials need to remember where their funding comes from and to be extremely cognizant that their citizens are also suffering under increased prices.
Your Taxpayers Association will continue to be engaged during this budgeting process, and if there are any concerns about what your local officials are doing regarding tax increases, please email [email protected]