Commercial Property Tax Reform: The Impact on Property Owners and Local Governments

Jeff Robinson – Legislative Services Agency, Fiscal DivisionJune 6, 2013

Rollback History – Assessed value subject to tax

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Right now, a commercial property pays almost twice the property tax of a residential property of the same market value (FY 2014)

Market Value

Rollack Factor

Taxed Value

Tax Rate Per $1,000 of T.V. Tax Owed

Commercial 100,000$ 100.0000% 100,000$ 35.00$ 3,500$

Residential 100,000$ 52.8166% 52,817$ 35.00$ 1,849$

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Over the past 24 years, the tax gap widened but now is closing

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But……Over those 24 years, revaluation of existing property has differed considerably between the two classes – Residential property has appreciated far more than commercial property

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A $100,000 residential property in 1988 is now worth considerably more than a $100,000 commercial property

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During the most recent five years, the taxable value gap between residential and commercial has narrowed substantially

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City Property Taxable Value Share – History and Projection (prior to SF 295)

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Property Tax Provisions of SF 295

Division I: Creates a new property tax credit available to properties classified as commercial, industrial, or railroad. A standing State General Fund appropriation is created to fund the new credit. The appropriation is equal to $50.0 million for FY 2015, $100.0 million for FY 2016, and $125.0 million for FY 2017 and after. Projected “Credit Base”:

FY 2015 = $ 33,000 FY 2016 = $105,000 FY 2017 = $144,000 FY 2018 = $154,000

The Credit Base is applied on a “unit” basis. Contiguous properties with the same or similar owners are included as a “unit” when calculating the property tax credit.

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Property Tax Provisions of SF 295

Division II: Commercial, industrial, and railroad property is assigned a “rollback” of 95.0% for assessment year (AY) 2013 and 90.0% for AY 2014 and after. A rollback is the percent of a property’s value that is subject to tax. Division II: Creates a standing General Fund appropriation, beginning FY 2015, to reimburse local governments for the property tax reductions resulting from the new rollback for commercial and industrial property. Prior to FY 2018, the appropriation is a standing unlimited appropriation. Beginning FY 2018, the standing appropriation cannot exceed the actual FY 2017 appropriation amount.

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Property Tax Provisions of SF 295

Division III: Creates a new property tax classification for human habitat commercial property (apartments, nursing homes, assisted living facilities, etc.). The new classification begins AY 2015. Property included in the new classification is assigned a rollback percentage of 86.25% for AY 2015, and that percentage declines 3.75 percentage points each year through AY 2021. Beginning in AY 2022, the multi-residential classification is assigned a rollback equal to the residential rollback each assessment year. Multi-residential property does not benefit from the Business Property Tax Credit.

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Impact on a $250,000 commercial property with a statewide average commercial tax rate ($36.98 in FY 2014)

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Impact on a $25 million commercial property with a statewide average commercial tax rate ($36.98 in FY 2014)

Current Law Taxed Owed

SF 295 Tax Owed

Minus SF 295 Tax Credit

$ Tax Reduction

% Reduction

FY 2014 924,490$ 924,490$ 0$ 0$ FY 2015 924,895 883,938 513 41,470 4.5%FY 2016 923,553 840,259 1,385 84,679 9.2%FY 2017 918,352 841,531 1,930 78,751 8.6%FY 2018 916,282 843,964 1,989 74,307 8.1%FY 2019 908,142 840,626 1,883 69,399 7.6%FY 2020 905,756 842,510 1,908 65,154 7.2%FY 2021 896,123 836,531 1,960 61,552 6.9%

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Impact on a $250,000 commercial apartment building with a statewide average commercial tax rate ($36.98 in FY 2014)

Current Law Tax

New Rollback

SF 295 Tax

$ Tax Reduction

% Tax Reduction

FY 2014 9,245$ 100.00% 9,245$ 0$ FY 2015 9,249 95.00% 8,839 410 4.4%FY 2016 9,236 90.00% 8,403 833 9.0%FY 2017 9,184 86.25% 8,065 1,119 12.2%FY 2018 9,163 82.50% 7,736 1,426 15.6%FY 2019 9,081 78.75% 7,355 1,726 19.0%FY 2020 9,058 75.00% 7,021 2,037 22.5%FY 2021 8,961 71.25% 6,623 2,339 26.1%FY 2022 8,922 67.50% 6,277 2,645 29.6%FY 2023 8,814 63.75% 5,883 2,932 33.3%FY 2024 8,763 55.30% 5,094 3,669 41.9%

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Impact on local government revenue (assumes SOME of the revenue is recovered through tax rates)

Local Government Revenue Reductions * FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024City $2.5 $4.4 $7.6 $12.0 $17.6 $22.7 $33.8 $40.4 $47.5 $64.7County Urban 1.2 2.1 3.6 5.8 8.7 11.3 16.9 20.3 24.0 32.7County Rural 0.8 2.3 3.6 5.0 6.5 10.0 12.1 17.0 19.8 23.0School 2.5 5.3 8.8 11.8 15.0 18.6 22.5 26.7 31.5 37.1Other Authorities 0.6 1.2 2.3 3.7 5.4 8.2 10.4 12.5 16.9 20.2Total All Prop Tax $ $7.6 $15.3 $25.9 $38.3 $53.2 $70.8 $95.7 $116.9 $139.7 $177.7

* Revenue reductions equal property tax reductions minus State reimbursements.

Dollars in millionsStatewide Revenue Reduction by Local Government Category

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Impact on local government revenue (assumes NONE of the revenue is recovered through tax rates)

Local Government Revenue Reductions * FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024City $12.6 $21.9 $38.1 $52.1 $68.1 $84.6 $103.2 $122.6 $142.9 $169.8County Urban 5.9 10.4 18.1 25.0 32.9 41.2 50.5 60.3 70.7 84.4County Rural 4.1 11.6 18.0 24.2 31.0 38.1 45.9 54.0 62.8 72.8School 2.5 5.3 8.8 11.8 15.0 18.6 22.5 26.7 31.5 37.1Other Authorities 2.8 5.9 11.4 16.5 21.7 27.1 33.3 39.8 46.7 55.5Total All Prop Tax $ $27.9 $55.1 $94.4 $129.6 $168.7 $209.6 $255.4 $303.4 $354.6 $419.6

* Revenue reductions equal property tax reductions minus State reimbursements.

Dollars in millionsStatewide Revenue Reduction by Local Government Category

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Even if cities recover none of the reduced revenue resulting from SF 295 through setting higher tax rates, they will still see property tax revenue growth.

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Things to note:

The rollback to 90% for commercial and industrial is permanent and does not require any future law change or appropriation for owners to continue to benefit.The same is true for the multiresidential rollback.If the Legislature fails to fund the reimbursement to local governments, then the local governments will experience reduced revenue and they may set higher property tax rates or raise other revenue sources. The new Business Property Tax Credit will have an application process. You will only have to apply once and that will last until the property is sold. If the Legislature does not fully fund the Business Property tax Credit, the owner will not fully benefit from the credit.

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