Most Utah property tax payers saw their taxable values increased dramatically this year and the natives are getting restless.  The Utah Legislature’s joint Revenue and Taxation Interim Committee held a public hearing last Wednesday to hear from local property tax administrators and the public regarding the current property tax increases.  As I listened to those who spoke it became clear that most citizens have only a vague understanding of how property taxes work.  In this week’s and next week’s column I will attempt to describe the ABCs of Utah property taxes.
How does Truth-in-Taxation (TNT) work?
Truth-in-Taxation is Utah’s most taxpayer-friendly law. It’s even better than California’s Prop 13.  The measure was enacted in 1985 at the request of your Utah Taxpayers Association and Tax Commissioner Gary Cornia.  While TNT does not technically limit property taxes, it makes local elected officials think twice about increasing property tax rates because they know all citizens will be notified of the increase and its potential impact on their property.  They also know that they will have to hold a public hearing where citizens can sound off about the proposed tax hike.
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.
If local governments want to exceed the CTR they must go through TNT notification and hearing process. This is a good opportunity to for local government officials to explain the proposed budget to their constituents.
For the record, the Utah Taxpayers Association does not oppose every proposed increase over the certified tax rate. In many cases, local governments are recouping inflationary losses. Certainly, that is not always the case.
So why did my taxes go up?
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 (CTR). 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 some property owners see a higher property tax bill while other property owners see a decrease. There are several reasons why.
Property valuations increase faster in one area than in other areas
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 previous 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.
Local governments issue or retire 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.
When a local government retires a GO bond, the debt service levy is reduced (unless the local government issues new debt or chooses to exceed the CTR).
Local government raises 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.
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.
Other factors: BOE adjustments, delinquent taxpayers, centrally assessed properties
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 successfully appeal current-year property taxes. This adjustment is called the board-of-equalization (BOE) adjustment. This increases the certified tax rate.
Every year, some property owners do not pay their property taxes, usually due to financial hardships. (Note: property owners are required to pay their taxes even when they appeal.) When this happens, tax rates increase to hold local governments harmless. Local governments actually benefit from delinquent property owners since the tax rate increases when taxes are delinquent but tax rates do not decrease when delinquent taxes are eventually paid (which is always the case since such properties are sold by the county and back taxes are collected at that point.)
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.
Next week I will show the effect TNT has had on Utah property taxes and how Utah property taxes compare with other states.
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 (as of 2007)
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.