AT&TState Question 766, which exempted businesses from paying taxes on their intangible property, will reduce local tax revenues by an estimated $60.2 million in 2013, according to figures provided by the Oklahoma Tax Commission (OTC). The biggest winners will be telecommunications companies and electric companies, which will receive an estimated $54.4 million tax cut. Nearly 40 percent of the tax cut could potentially go to a single company, AT&T.

Background

State Question 766, which passed with 65 percent of the vote in 2012, abolished property taxes on intangible personal property in Oklahoma. The state question was placed on the ballot in response to an Oklahoma Supreme Court decision in a case that challenged the Oklahoma Tax Commission’s method of determining property taxes for centrally-assessed industries, which includes railroads, airlines, pipelines, telecommunications, electric companies, and others. Unlike county tax assessors, the OTC has traditionally included intangible personal property (such things as trademarks, patents, copyrights, licenses, contracts, and more) in determining a company’s value. SQ 766 proponents raised the fear that the Supreme Court’s ruling paved the way for all businesses to be taxed on their intangible property.

Calculating the Cost

According to a summary provided by the OTC, of the 254 centrally-assessed companies in Oklahoma, 97 submitted claims of exempt intangible property, 69 of which were accepted in full or in part. The total fair cash value of the intangible property accepted by OTC was $2.713 billion. Of this total, $1.471 billion (54 percent), was claimed by telecommunications companies; $769 million (28 percent) by electric companies; $257 million by railroads (9 percent), and $160 million (6 percent) by distribution pipeline companies. The remaining centrally-assessed industries claimed just $55 million in intangible property, or 2 percent of the total.

While OTC provided a breakdown of the overall fair cash value of intangible property by industry, it would not do so by company, citing concerns that this would violate statutory confidentiality protections. However, in June, OTC reported the 2012 and 2013 annual fair cash value of every centrally-assessed company to the State Board of Equalization. Overall, the total fair cash value of most industries rose in 2013 compared to 2012, which suggests that the exemption of intangible property was largely or fully offset by growth in the value of tangible property. The major exception was for telecommunications companies, which saw their total fair cash value decline by $1.2 billion, or 38 percent. The lion’s share of this drop in fair cash value was due to just three companies: Cox Oklahoma Telecom, which saw its fair cash value drop $110 million; Southwestern Bell, which dropped by $170 million, and AT&T Mobility, which saw a whopping $824 million drop in fair cash value, from $977 million in 2012 to $153 million in 2013. Both Southwestern Bell and AT&T Mobility are subsidiaries of AT&T.

The nature of the property tax makes it impossible to calculate the precise revenue impact of the exemption of intangible personal property or determine who will be affected. After OTC determines the fair cash value of centrally-assessed companies, the actual amount of property taxes they owe depends on several factors: the assessment ratio for that kind of property (see note 1 below);  what county their property is located in, and the millage rate in effect in that county.  Using the statewide weighted average of 102.4 mills, OTC estimates the exemption for intangible property will cost $60.2 million. Assuming its millage levy is at the statewide average, AT&T may have received a tax break of at least $23.3 million in 2013 thanks to passage of SQ 766.

Some, including the Oklahoman and Senator Mike Mazzei, are contending that the cost of SQ 766 is actually subsubstantially less than $60 million because the state saw an increase in revenue from non-exempt tangible property in 2013. But since changes in the value of tangible property are distinct and unrelated to the issues involved in SQ 766, this is simply a red herring.

The Impact of SQ 766

The lost  revenue will have an impact on school districts, vocational education centers, libraries, health departments, and other local entities funded wholly or in part by property taxes. According to the statewide association representing school administrators, school districts receive 65 percent of all centrally-assessed property taxes, and will thus lose some $30.8 million in 2013. This amount exceeds the $21.5 million increase in state aid funding in the FY 2014 budget.

At the same time, because property tax revenues are needed to pay for local bond issues and other mandatory costs, the tax break on intangible companies will trigger automatic tax increases in millage rates paid by residents and businesses.  Local taxpayers will annually pay an additional $9.0 million to the sinking fund of local school districts, according to the Cooperative Council of School Administrators. Voters who thought they were passing a tax cut are likely to be unpleasantly surprised to learn their taxes are instead going up.

While the impact of SQ 766 is already significant, this impact is likely to grow in the future. It’s fair to assume, as CCOSA does, that the cost of SQ 766 will rise as more centrally-assessed companies claim the intangible property exemption and others try to follow AT&T’s lead in claiming the bulk of their value as intangible property. In addition, as Michelle Cantrell argued on our blog last year, as our economy has become more service- and technology-oriented, the value of companies are increasingly based upon intangible assets, and this trend is likely to continue.

(1): The assessment ratio for centrally-assessed companies is 22.85 percent, except for airlines and railroads (11.84 percent)  and video services (12 percent)