Property tax "cuts" create winners and losers

Two state questions related to property taxes will be on the November ballot. SQ 758 would reduce the maximum annual increase in assessments of homes and agricultural land from 5 percent to 3 percent. SQ 766 would exempt all intangible property owned by businesses from taxation.

Both measures will be presented as tax cuts by their proponents. However, the real result may be a tax cut for some and a tax hike on others.

That’s because the property tax bill that Oklahomans receive each year depends on several variables: taxable value, millage rate, and assessment rate. If assessments are capped so they cannot keep up with real property values, or if significant business properties become newly exempt from taxation, that creates pressure on other parts of the system.

To some extent, local governments may deal with the revenue loss by cutting services. As a major recipient of property tax dollars, Oklahoma’s public schools would be especially hard hit. We could also see cuts in maintenance of city streets and county roads, as well as police and fire protection.

But some areas cannot be cut. In particular, counties and municipalities are obligated to pay for bond issues that have been approved by voters, and they cannot default on these obligations without serious repercussions. That’s why the millage rate for property taxes rate is not constant, but is adjusted each year to meet budget needs. If the total value of property being taxed is held down by an assessment cap, or if major categories of property are exempted from taxation, local boards of equalization will compensate by raising the rates on the property value that remains taxable.

Assessment caps create a widening gap between taxable and fair market values. The below chart shows how this has worked out in Tulsa County since the 5 percent cap was put into place. Passage of SQ 758 would make this gap even wider.

So who wins and who loses? Under SQ 758, the big winners are Oklahomans who live in homes that are increasing the most in value, typically those in desirable suburban areas near good schools. Oklahomans living in less prosperous urban or rural neighborhoods would get little to no benefit, since their homes values will not increase nearly as much, and they could end up paying higher taxes as millage rates are raised to meet obligations. Renters could also pay more when landlords pass down some or all of the increased tax bill as higher rent. It’s a tax cut for some, paid for by a combination of budget cuts and tax hikes on others.

Tulsa County Assessor Ken Yazel, a Republican, has said as much:

“If I constrain a taxable value for a home in an area that is going up 14 or 15 percent a year, I no longer have as much value in that rising neighborhood,” so the millage rate – which affects the entire area – will have to be increased to raise the funds needed, Yazel said. “So we’re shifting the fair share, if you will, to the people who live in the neighborhoods that do not go up.”

Under SQ 766, the big winner is large railroad and utility companies like Southwestern Bell and AEP-PSO. Oklahoma has historically taxed the intangible property of these entities that “centrally assessed” by the State Board of Equalization, but not taxed intangible property of other businesses that are locally assessed by counties. A 2009 Oklahoma Supreme Court ruling opened the door to locally assessed entities being subject to this tax. However, rather than develop a Constitutional Amendment that would have restored the status quo, the Legislature put forward in SQ 766 a proposal to end all taxation of intangibles. The result would be a revenue loss to schools and local governments of about $65 million that would have to be made up for by a combination of budget cuts and hikes in the tax rate on the property that remains taxable.

As we explained in an earlier blog post, there are much better way to achieve property tax relief than creating more arbitrary caps and exemptions. During the income tax debate, we heard a lot about lawmakers’ desire to “expand the base and lower the rate.” State Questions 758 and 766 would do the opposite.