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Ad Valorem Tax System Presentation to the Revenue and Taxation Subcommittee of the House Appropriations and Budget Committee Interim Study No. 11-114 by.

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Presentation on theme: "Ad Valorem Tax System Presentation to the Revenue and Taxation Subcommittee of the House Appropriations and Budget Committee Interim Study No. 11-114 by."— Presentation transcript:

1 Ad Valorem Tax System Presentation to the Revenue and Taxation Subcommittee of the House Appropriations and Budget Committee Interim Study No by Rep. Brumbaugh October 4, 2011

2 Oklahoma Constitution: The Framework for the Property Tax System Article X Article X Fair cash value Fair cash value What a willing buyer would pay and what a willing seller would accept if both parties are knowledgeable about the property and neither party is under undue pressure to either buy or sell What a willing buyer would pay and what a willing seller would accept if both parties are knowledgeable about the property and neither party is under undue pressure to either buy or sell Fractional assessment Fractional assessment 11%-13.5% for real property 11%-13.5% for real property 10%-15% for personal property 10%-15% for personal property 22.85% for public service corporation property 22.85% for public service corporation property Exemptions Exemptions Gross assessed value minus exemption produces a net assessed value Gross assessed value minus exemption produces a net assessed value If property is not eligible for an exemption then it just has a net assessed value If property is not eligible for an exemption then it just has a net assessed value Millage rates Millage rates Millage rates are levied on the net assessed value of property Millage rates are levied on the net assessed value of property

3 Local Government Funding Source County government County government General fund General fund Sinking fund for a general obligation bond Sinking fund for a general obligation bond Municipal government Municipal government Usually not for the general fund Usually not for the general fund Sinking fund for a general obligation bond Sinking fund for a general obligation bond Common schools Common schools General fund General fund Building fund Building fund Sinking fund for a general obligation bond Sinking fund for a general obligation bond Career Tech Career Tech Emergency Medical Service Emergency Medical Service Libraries Libraries City-county health City-county health Solid Waste Management Solid Waste Management

4 100% Market Value and the Change to Fractional Assessment Oklahoma originally a 100% market value system Oklahoma originally a 100% market value system Assessment practices from statehood through the 1950s Assessment practices from statehood through the 1950s Effects from the Great Depression Effects from the Great Depression Effects from the Dust Bowl conditions Effects from the Dust Bowl conditions Change from 100% to fractional assessment in 1958 Change from 100% to fractional assessment in 1958 May have been a recognition that taxable values generally were only about 35% of market values May have been a recognition that taxable values generally were only about 35% of market values Maximum 35% until the 1996 amendment Maximum 35% until the 1996 amendment Assessment ratio was determined by each county assessor subject to equalization requirements Assessment ratio was determined by each county assessor subject to equalization requirements County board of equalization for “intracounty” County board of equalization for “intracounty” State Board of Equalization for “intercounty” State Board of Equalization for “intercounty” 1996 Amendment narrowed the range in the assessment ratio 1996 Amendment narrowed the range in the assessment ratio As a result of litigation, the range had been 12% plus or minus 3 percentage points (9%-15% range) As a result of litigation, the range had been 12% plus or minus 3 percentage points (9%-15% range) 1996 Amendment provided the range of 11%-13.5% for real property and the range of 10%-15% for personal property 1996 Amendment provided the range of 11%-13.5% for real property and the range of 10%-15% for personal property Public service corporation assessment ratio was frozen at the then current level of 22.85% Public service corporation assessment ratio was frozen at the then current level of 22.85%

5 Gradual Change in the Structure of the Property Tax System Originally, a 100% value system with relatively low millage rates Originally, a 100% value system with relatively low millage rates Millage rates were levied on the fair cash (market) value Millage rates were levied on the fair cash (market) value Change to fractional assessment meant lower taxable values Change to fractional assessment meant lower taxable values All other things equal, lower taxable values meant lower ad valorem revenues unless millage rates increased All other things equal, lower taxable values meant lower ad valorem revenues unless millage rates increased Over time millage rates have increased either because the voters have approved increases in the rates or because additional types of taxing jurisdictions have been approved Over time millage rates have increased either because the voters have approved increases in the rates or because additional types of taxing jurisdictions have been approved

6 Taxable Values and Millage Rates Millage rates for general funds and building funds in Oklahoma are more or less constant (“fixed”) Millage rates for general funds and building funds in Oklahoma are more or less constant (“fixed”) Over the course of the economic cycle, increases in taxable value because of increases in market value will yield relatively higher revenue in a system that has fixed millage rates Over the course of the economic cycle, increases in taxable value because of increases in market value will yield relatively higher revenue in a system that has fixed millage rates Over the course of the economic cycle, decreases in taxable value because of decreases in market value will yield relatively lower revenue in a system that has fixed millage rates Over the course of the economic cycle, decreases in taxable value because of decreases in market value will yield relatively lower revenue in a system that has fixed millage rates

7 Budget Revenue for the Taxing Jurisdictions In the Oklahoma property tax system, the changes in revenue available to the local jurisdictions occur because of changes in taxable values In the Oklahoma property tax system, the changes in revenue available to the local jurisdictions occur because of changes in taxable values Revenue changes could occur if the assessment ratio increases or decreases Revenue changes could occur if the assessment ratio increases or decreases Revenue changes could occur if there are changes in millage rates Revenue changes could occur if there are changes in millage rates If property values increase, the jurisdictions have more revenue available If property values increase, the jurisdictions have more revenue available If property values decrease, the jurisdictions have less revenue available If property values decrease, the jurisdictions have less revenue available

8 Millage Rates and the Oklahoma Constitution Millage rates are authorized in the Oklahoma Constitution Millage rates are authorized in the Oklahoma Constitution If a taxing jurisdiction is levying at the maximum amount authorized in the Oklahoma Constitution, it requires a constitutional amendment to increase millage for general or building funds If a taxing jurisdiction is levying at the maximum amount authorized in the Oklahoma Constitution, it requires a constitutional amendment to increase millage for general or building funds If a taxing jurisdiction is not levying at the maximum amount it may be able to increase its millage rate based on approval of the governing board of the jurisdiction or pursuant to a vote within the taxing jurisdiction If a taxing jurisdiction is not levying at the maximum amount it may be able to increase its millage rate based on approval of the governing board of the jurisdiction or pursuant to a vote within the taxing jurisdiction Sinking fund millage rates vary from year to year but have been approved by a vote of some kind Sinking fund millage rates vary from year to year but have been approved by a vote of some kind General obligation bond debt requires the 3/5 approval of the voters (county, city/town, school district) pursuant to Article X, Section 26 of the Oklahoma Constitution General obligation bond debt requires the 3/5 approval of the voters (county, city/town, school district) pursuant to Article X, Section 26 of the Oklahoma Constitution

9 Sinking Fund Millage Voters approve the debt Voters approve the debt Debt is based on percentage of taxable valuation of the bond issuer Debt is based on percentage of taxable valuation of the bond issuer County County City or town City or town School district School district Amortization of the debt Amortization of the debt Divide dollar figure (debt service) by net assessed value Divide dollar figure (debt service) by net assessed value Sinking fund millage rate for that year Sinking fund millage rate for that year From year to year, if taxable value increases, sinking fund millage rate will decrease but if taxable value decreases, sinking fund millage rate will increase From year to year, if taxable value increases, sinking fund millage rate will decrease but if taxable value decreases, sinking fund millage rate will increase

10 Locally Assessed Property Real Property Real Property Land Land Fixtures Fixtures Personal property Personal property Household personal Household personal Business personal (inventory) Business personal (inventory) Tangible vs. intangible Tangible vs. intangible

11 Public Service Corporations State Board of Equalization performs the annual valuation with assistance from the Oklahoma Tax Commission State Board of Equalization performs the annual valuation with assistance from the Oklahoma Tax Commission Value for the company is determined using a “unit value” method Value for the company is determined using a “unit value” method Value is multiplied x 22.85% to arrive at the taxable value Value is multiplied x 22.85% to arrive at the taxable value Millage rate is imposed on this net assessed value Millage rate is imposed on this net assessed value Generally, if public service corporation property is located in a jurisdiction then the millage rate will produce about 2 times the amount of revenue from that property than the same millage rate on locally assessed real or personal property Generally, if public service corporation property is located in a jurisdiction then the millage rate will produce about 2 times the amount of revenue from that property than the same millage rate on locally assessed real or personal property

12 The 5% Limitation Oklahoma Constitution Article X, Section 8B Oklahoma Constitution Article X, Section 8B Adopted pursuant to amendment in 1996 and effective for the first time during the 1997 assessment year Adopted pursuant to amendment in 1996 and effective for the first time during the 1997 assessment year Applies to locally assessed real property only Applies to locally assessed real property only Prohibits increases of more than 5% each year in the fair cash (market) value Prohibits increases of more than 5% each year in the fair cash (market) value The 5% limitation does not apply to increases in tax liabilities strictly speaking The 5% limitation does not apply to increases in tax liabilities strictly speaking The 5% limitation is not a millage rate cap The 5% limitation is not a millage rate cap If all millage rates were completely “fixed” and never varied and there were never any changes in the assessment ratio, then the 5% limitation on valuation increases would effectively be the same thing as a 5% limit on increases in the actual tax liability If all millage rates were completely “fixed” and never varied and there were never any changes in the assessment ratio, then the 5% limitation on valuation increases would effectively be the same thing as a 5% limit on increases in the actual tax liability

13 “Senior Freeze” Oklahoma Constitution Article X, Section 8C Oklahoma Constitution Article X, Section 8C Limits increases in the fair cash value (market) value of certain types of real property Limits increases in the fair cash value (market) value of certain types of real property Homestead property Homestead property Owned by persons age 65 or older Owned by persons age 65 or older Median income maximums county by county Median income maximums county by county U.S. Department of Housing and Urban Development U.S. Department of Housing and Urban Development Maximum income amount could change from year to year Maximum income amount could change from year to year If the owner has income in excess of the applicable HUD median income amount for that county, then the limitation no longer applies If the owner has income in excess of the applicable HUD median income amount for that county, then the limitation no longer applies

14 Tax Liability and Millage Rates For any parcel of real property or any item of personal property: For any parcel of real property or any item of personal property: Determine total millage rate applicable Determine total millage rate applicable County, city/town, school district, career tech and all other taxing jurisdictions County, city/town, school district, career tech and all other taxing jurisdictions General fund(s) rate + Building fund(s) rate + Sinking fund(s) rate=Total millage rate General fund(s) rate + Building fund(s) rate + Sinking fund(s) rate=Total millage rate Total millage rate x Net Assessed Value=Tax Liability Total millage rate x Net Assessed Value=Tax Liability The millage rate x Net Assessed Value of Public Service Corporation property=Tax Liability for PSC property The millage rate x Net Assessed Value of Public Service Corporation property=Tax Liability for PSC property

15 Summary Oklahoma uses fractional assessment Oklahoma uses fractional assessment Millage rates have increased over time partly because of lower taxable values in a fractional assessment system Millage rates have increased over time partly because of lower taxable values in a fractional assessment system Millage rates are controlled through provisions of Article X of the Oklahoma Constitution Millage rates are controlled through provisions of Article X of the Oklahoma Constitution Millage rates are more or less “fixed” in the Oklahoma system (the rates remain relatively constant) Millage rates are more or less “fixed” in the Oklahoma system (the rates remain relatively constant) Increases or decreases in taxable values over the course of the real estate and economic cycles result in relatively more or less revenue for the jurisdictions Increases or decreases in taxable values over the course of the real estate and economic cycles result in relatively more or less revenue for the jurisdictions Modifications to the millage rate structure would require amendments to the Oklahoma Constitution Modifications to the millage rate structure would require amendments to the Oklahoma Constitution

16 Questions or Comments


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