JOINT SUBCOMMITTEE ON PROPERTY TAX REFORM

1. JOINT SUBCOMMITTEE ON PROPERTY TAX REFORM August 2, 2005

2. A Guide to Property Taxes: An Overview National Conference on State Legislatures (NCSL) Fiscal Affairs Program May 2002 Tab 11

3. TYPES OF TAXABLE PROPERTY • Real Property – Defined as land and permanent improvements to that land. Usually labeled as residential, commercial or agriculture. • Personal Property – Usually defined as everything that is subject to ownership that is not real property. • Intangible Property – Includes intangible financial assets like stocks and bonds. Only a few states tax intangible property.

4. DETERMINING TAX BASE The tax base is reduced through Exemptions and Abatements. Government owned property, property owned by non-profit organizations, schools and religious institutions are almost always exempt from property taxes. Abatements differ from an exemption in that the property in question is subject to taxation, but it is taxed at a reduced rate.

5. WHO LEVIES PROPERTY TAXES? • 45 of 51 states have counties that levy property tax. • 49 of 51 states have cities or municipalities that levy property tax. • 42 of 51 states have school districts that levy property tax. (The District of Columbia is included as a state.)

6. HOW PROPERTY TAXES WORKDetermination of the Taxable Value Assessors typically employ one or more of the following methods to value real property: • The market data or comparable sales method under which value is determined by analyzing recent sales of similar properties in the vicinity. • The cost method under which the value is determined by analyzing the cost to construct or replace the subject property. • The income method under which the value is determined by capitalizing the anticipated annual income for the useful life of the subject property.

7. FREQUENCY OF ASSESSMENT

8. ASSESSMENT RATIOS Assessment ratios differ greatly among states. In some states there are numerous classes while in other states there are no classification distinctions. Homes and farms generally receive the most favored treatment under the classification system.

9. DETERMINING THE TAX • Determine the needs of the taxing authority through the budgeting process. • Divide the needs by the total taxable value of the property in the jurisdiction. • Calculate the millage rate.

10. OTHER VALUATIONS Agricultural Land - Agricultural land is usually taxed at a lower effective rate. Most states employ some form of use value rather than a market value for determining the value of agricultural land. Other Land - States often apply a use value standard to timberland, open space and historic buildings. Personal Property - Personal property is also valued differently than real property. Usually is is valued on the basis of depreciation.

11. Equalization - Equalization is the process states undertake to insure that assessments are uniform throughout the state. Most states use a state or local review board to compare the work of local assessors. If inconsistencies are found among jurisdictions or classes of property, the board can require that an adjustment be made.

12. Appeals - Each state has a formal process for appealing the assessed value of property. However, tax rates (mill levies) are not subject to appeal. In most states, taxpayers contact the assessor and provide evidence that the assessment is incorrect.

13. PROPERTY TAX BURDENSState & Local Property Taxes Per Capita FY 1999

14. State & Local Property as a Percentage of IncomeFY 1999

15. A Guide to Property Tax Relief National Conference of State Legislatures Fiscal Affairs Program November 2002 Tab 12

16. PROPERTY TAX RELIEF FOR RESIDENTIAL PROPERTY • Homestead Exemption and Credits (49 States) – This relief is usually based on categories like the disabled, the elderly or veterans. Some states also use homestead credit programs that involve direct rebates to taxpayers. The amount of relief varies tremendously from state to state. • Circuit Breakers (34 States) – Relief is based partially on income and was initially designed to address the issue of equity for renters. Relief is reduced or truncated based on income limits. • Property Tax Deferrals (25 States) – Deferrals are usually targeted toward elderly citizensand have some type of income cap element.

17. Property Tax Relief for Agricultural Property - The tax benefit for agricultural property is usually provided in the way the land is valued. Agricultural property is usually valued according to its current actual use which is typically a much lower value.

18. Property Tax Relief for Business Property Broad Based Relief - Some states fully or partially exempt land, buildings, machinery, equipment, inventories or other business personal property. Targeted Relief - With targeted relief, the goal is usually economic development rather than general property tax relief. In many cases, the relief is offered by local officials. Benefits usually come in the form of exemptions or abatements. Another twist on targeted relief is tax increment financing.

19. PROPERTY TAX LIMITS • Rate Limits– Usually limits the tax to a certain percentage of the assessed value. This is the most common form of limitation; 38 states employ some type of rate limit. Not all these rate limits are restrictive enough to significantly control property taxes. • Assessment Limits - Assessment limits restrict how much property values may increase in a year for tax purposes. Assessment limits are designed to address the specific problem of rapid escalation of property values in specific regions of a state that suddenly become desirable. Over time assessment limits have drawbacks because that can create disparities between long-time homeowners and new residents.

20. PROPERTY TAX LIMITS – CONTINUED • Revenue Rollbacks - Revenue rollbacks address the problem of rapidly growing property values by requiring local jurisdictions to “roll back” mill levies when assessments grow by more than a certain percentage. • Expenditure Limits - A handful of states place limits on the growth of local spending. The limit has been directed to school districts in at least eight states. The limits are tied to a growth factor, usually population growth and inflation. • Property Tax Freeze - Twelve states use tax freezes which typically bar increases in property taxes when certain conditions are met - usually when a homeowner reaches 65 years of age. Tax freezes are not used as often as circuit breakers and homestead exemption programs.

21. A GUIDE TO PROPERTY TAXES: THE ROLE OF PROPERTY TAX IN STATE AND LOCAL FINANCES National Conference of State Legislatures Fiscal Affairs Program August 2004 Tab 7

22. The property tax is an important component of a tax system for a number of reasons: • It is considered stable and predictable, especially in periods of slow economic growth. • The real property tax base - land and permanent improvements - is not portable, which helps with assessment and compliance. • It makes a connection between tax and service - such as fire and police protection, schools and streets - more obvious than do other taxes. • It demonstrates the benefit principle of taxation by financing services that provide benefit to property.

23. Important Points about Property Tax • Local governments and school districts still depend on local property taxes more than any other source of revenue. • Discontent about government and taxes often focuses on the property tax. • Property tax relief measures, particularly for the poor, the elderly and farmers, have reduced many complaints and helped lessen anti-tax fervor. • Caps and limitations approved by voters and adopted by legislatures and restricted the tax burden growth in some states.

24. Important Points about Property Tax - Continued • Assessment practices that receive considerable criticism in the past have greatly improved and, with technology, are likely to improve even more. • Court decisions about school financing and the property tax have occupied legislatures in a majority of states as they attempt to insure equitable and adequate education funding. • Legislatures in states such as Indiana, Minnesota, Vermont and Wisconsin have recently shifted more responsibility for school financing from local property taxes to state sources, much as Michigan did in 1994.

25. State – Local Reliance on 3 Major Sources

26. How Reliance on the Property Tax is Changing – At the turn of the last century (1902), property tax collections as a percent of total state and local collections was 82%. In 2002, that figure was 29%.

27. Most Significant Local Tax

28. RESPONSES TO PRESSURES ON THE PROPERTY TAX • Limits - Limits usually take the form of direct restrictions on local governments. • Procedural Improvements - These improvements are usually related to the frequency of assessment and statewide standards of assessment. • State Aid - This revenue sharing can be in the form of general aid or targeted aid. • Diversification - Some states allow local governments to include taxes other than property taxes (sales or income taxes) or fines and fees as additional sources of revenue.

29. PROPERTY TAXES & PUBLIC SCHOOL FUNDING