There’s More to the Story Than Tax Rates

This is the time of year when local governments finalize their budgets for the coming year (starting July 1). One of the first things people look at is what’s happening with the property tax rate. Often a city will proudly announce its property tax rate is staying the same for the upcoming year. Sounds good, doesn’t it? Holding the line on property taxes, right?

Well, it depends.

Property taxes are a combination of the property tax rate, applied to the portion of a property’s assessed value that is taxable. Even if a city keeps a constant rate, it may be collecting a lot more property tax revenue (with property owners paying a lot more, too), if there’s more valuation to tax.

Increases in taxable value can come from new construction and revaluation of property, and/or from the operation of state formulas that control property taxes. While for the past several years there wasn’t much movement in taxable values (with actual declines in some cases), this year’s budgets are once again reflecting growth, in some cases significant growth. When this happens, cities face the question of whether to hold on to the additional dollars generated from a constant rate, to reduce rates and return some of it to taxpayers, or use some combination of the two approaches.

The approach an individual city chooses to take will be based on the unique circumstances in that city. Often there are good reasons for keeping the revenue in the city budget. Perhaps the city wants to replenish reserves. Perhaps it has new debt for a recently completed building. Or maybe it’s held off on hiring during the downturn, and now wants to move forward. Whatever the case, a city should not hesitate to explain what it plans to do with an extraordinarily large increase in property-based revenue.

The chart below shows the revenue increase that each city will see from property taxes, and the increases they will see when combined with “backfill” revenue from the State. (As a part of the property tax reform that cut property taxes on commercial and industrial property, the State pledged to replace the property tax revenue that local governments would have otherwise collected.) Even without backfill, most cities (Des Moines a notable exception) would have seen an increase in property tax revenue. When backfill is considered, the increases are even more remarkable. In fact, even the four cities that are reducing rates will see an increase in property tax-based revenue when backfill is considered.

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With the Federal Reserve projecting inflation to be between 1 percent and 1.6 percent in 2015, every city but Windsor Heights will be working with property tax-based revenue growth that is above inflation. Some will be working with double-digit increases. Why is this level of growth needed in local budgets?

Next time your local elected official talks about holding the line on property taxes, make sure you get all the facts. You may need to ask why the rate wasn’t reduced, or why the rate wasn’t reduced even more. There’s usually more to the story.

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