Wednesday, June 11, 2008

Tax Policy in Utah #1- Property Tax

Property tax is a significant funding source for a wide variety of local government services. From your school district, to killing mosquitos, from building local roads, to providing meals on wheels, the property tax is a much used tax. One of the benefits of the property tax from a governmental level is that it is typically more stable than consumption taxes such as the sales tax, or the income tax, which quickly responds to economic conditions.

Utah's property tax faces what is actually something that works quite well. It is called "truth in taxation." What truth in taxation means is that, increases in property values cannot be used by the government as a windfall. New property tax revenues must come from "new growth", not merely a re-appraisal of the value of property. Property tax rates are based upon the budgets of local entities, not upon the values of property. If you receive an increase in property tax, it is more likely that it is based upon a reappraisal of the value of your property, not upon the tax rate charged to you.

Now there are some peculiarities to Utah's property tax structure. One of those is what is referred to as the "residential exemption." Every Utahn's primary residence is granted an exemption of 45% of the value of their residential property. This means that someone with more than modest means and owns a $20 million mansion will recieve a $900,000 exemption from property tax. Some states have decided upon a lump sum exemption for residential property which makes the property tax much more progressive, but Utah values it's mansions and those who occupy them.

Other interesting things about Utah's property tax, is that it is not gauged for inflation. The tax rate setting process allows no increase for the increases in cost. Local government is then required to provide the same services as last year with the same resources, but have to pay their staff additional wages to compensate for increases in the cost of living. The result is that local governments often have to resort in increasing various fees to make up the difference. And fees are inherently regressive.

Also of note is the fact that secondary residential properties receive no residential exemption. As a result, someone who owns a $150,000 home in Murray who also owns a $85,000 cabin east of Kamas, may find themselves paying more property tax for their cabin than for their primary residence.

Another interesting aspect of the property tax process is that small and large business, without any exemptions, pay full property tax on their personal property (equipment, furniture and fixtures, etc.) and are required to keep track of what equipment they keep, and what equipment they discard on "personal property affidavits" that they file with their country assessors. However, influential companies often approach their county assessors or the Tax Commission and seek special consideration. County Commissions, operating as the county's "board of equalization" is often likely to give special favors to businesses with "clout" in their county. In this regard, there are some significant inequities in Utah's property tax administration. Utahns are rarely aware of the degree to which their own county commissioners have the power to reduce the tax burden upon prominent businesses and push that burden upon the other property owners living in their county. And their local press is rarely aware of these decisions and provide adequate oversight.

There are exemptions from property tax that are significant and notable. Farmers pay virtually no property tax. Their equipment is exempt from property tax as is their livestock. The value of their land is appraised on the basis of it's agricultural production value, referred to as "greenbelt." Whenever I hear farmers or ranchers complain about taxes, I pretty much roll my eyes because they are exempt from just about every tax imaginable, and even receive federal subsidies. Pay taxes, and then you have a right to complain about the government. However, what the exemption farmers receive regarding greenbelt (land values) creates a situation where if that land is developed and used for non-agricultural purposes, back taxes are due and is a major irritant to developers and farmers seeking to cash in on the value of their land. It is referred to as roll-back taxes and it is a deterrent to development, but also keeps land ihn agricultural use long after it is feasible.

Property tax is a "constitutional tax" in Utah, which means that it is based upon Article XIII of the Utah State Constitution. Exemptions to the property tax therefore cannot be based upon statutory provision but must require an amendment to Utah's Constitution. The variance from this is an exemption given to the blind that is based upon statute. If that statute was ever challenged, it would certainly be viewed as unconstitutional. Howevand er, no one so far has seen property the most economical use of property. Holding property for mere speculative purposes becomes expensive. Hoardng land comes with a cost. Major corporations like Kennecott find it in their interests to lease their land to farmers adjacent to their operations and have them as buffer zones occupied in agriculture. This aspect of Utah's property tax laws encourages "green space" which many of us find valuable.

Anyway, these are some of my thoughts and analysis regarding Utah's property tax. I welcome the input of other bloggers.


Joshua Vincent said...

I enjoyed your comments on the property tax. Although I am not too familiar with Utah's property tax, I do know that in the final analysis, the property tax is not only a stable source of revenue it is also a fair source of revenue.

Not only that, other forms taxation such as taxes on wages, sales and other forms of labor and capital are much more cyclical and much more damaging to a productive economy.

I from the nonprofit foundation that believes that the current property tax could actually be much better. We've research and help towns and cities implement what is called land value taxation -- or LVT -- which is a shifting of the property tax from building values onto land values.

Currently, most property taxation comes from buildings. So, in a place where we want growth like cities that already have a physical infrastructure, putting up buildings or rehabilitating existing buildings becomes prohibitively expensive.

Think about it: a tax rate of 2% over the course of 10 years means that 20% of the value of the building is taxed. That's almost as high a rate as cigarettes or booze. why on earth should buildings be taxed like "sin?"

A land value tax makes building in urban areas make much more sense, and makes building in green, wild or agricultural areas less attractive.

Heck, we might even be able to wean farmers off the incredible menu of tax breaks that they already enjoy.
Thanks for posting, Josh

Jeremy said...

I agree with Josh...this is a great post.

I think your comment about the nature of the primary exemption is interesting. I'd support a flat defined exemption amount rather than the percentage we currently have. Great idea.

Josh's discussion of a land value based assessment process would be very difficult to implement in Utah. Determining the market value of land is far more difficult than valuing improved lots because there just aren't enough sales of vacant land to easily support a value opinion. There are various indirect methods of valuing land based on home sales but in a state like ours where the vast majority of residential land is improved with single family residences of various sizes and quality our current method seems to make more sense than your suggestion.

Thanks again Obi for this post. Great analysis.

Obi wan liberali said...

Thanks Josh and Jeremy. I forgot when I posted that I was taking a swim into Jeremy's pond.

Josh makes a point about a land only assessment. Where I usually go with that is that improvements to real estate as well as personalty create the needs for government services. Vacant land does not. Assessing the value of improvements and personalty better matches the need for revenue with the tax base.

Just a couple of other things to note, that from a property tax standpoint, single-family residential neighborhoods are money losing propositions for local entities. Because of the 45%exemption for primary residence, those cities and counties that don't court a healthy amount of commercial development do so to their peril.

Also, though the equipment that is used in agricultural production is exempt from the property tax, equipment used in "processing" what was produced in an agricultural operation is not. There can be some overlapping lines between these two. For example, a walk-in cooler used by greenhouse may or may not be exempt. If it is used just to preserve and store already picked plants, it is taxable, but if it is used to induce germination of plants, it would be exempt.

Joshua Vincent said...

the idea of taxing improvements separate from land is an old an honorable idea. If really think about it, a vacant lot gets as much in the way of services is a building. If the snowplow drives past a vacant lot they don't lift their blade, and if the undergrowth catches fire, the fire department doesn't fail to show. The same sidewalks, streets, sewers and other infrastructure serve that vacant lot even if it is not used.

The community pays for all of these services and infrastructure the expectation that people will build. Theoretically of course, it is more expensive to put out a fire on a 10 story building rather than a vacant lot. I admit that. But if we follow that logic to its conclusion, than the least expensive towns will be ones that have no buildings.

I submit that we should have thrown in our urban areas that already have the infrastructure. A good way to achieve that is to afford people's investment on their own dime in their own time. A tax on land, coupled with reducing or eliminating the tax on buildings can do that.

I work in Pennsylvania, where about 25 taxing jurisdictions use this program. US Mayor of the year 2006, Steve Reed of Harrisburg, credits the land value tax for turning his city around stabilizing decades of job and population loss.
in practice, this program reduces taxes for nearly all homeowners because most of their investment is in the actual structure and not the land underneath.

I understand that Utah's very different, and I respect that. There's lots of land for sure. But there's not that much water or built infrastructure; and I'm not even talking about land that is locked up by the Feds.

This is a very interesting blog, and I'm learning a lot. Thanks!