Ad Valorem Tax System Presentation to the Revenue

Ad Valorem Tax System Presentation to the Revenue and Taxation Subcommittee of the House Appropriations and Budget Committee Interim Study No. 11 -114 by Rep. Brumbaugh October 4, 2011

Oklahoma Constitution: The Framework for the Property Tax System n n Article X Fair cash value n n Fractional assessment n n 11%-13. 5% for real property 10%-15% for personal property 22. 85% for public service corporation property Exemptions n n n 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 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 Millage rates n Millage rates are levied on the net assessed value of property

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

100% Market Value and the Change to Fractional Assessment n n n Oklahoma originally a 100% market value system Assessment practices from statehood through the 1950 s n Effects from the Great Depression n Effects from the Dust Bowl conditions Change from 100% to fractional assessment in 1958 n May have been a recognition that taxable values generally were only about 35% of market values n Maximum 35% until the 1996 amendment n n n n Assessment ratio was determined by each county assessor subject to equalization requirements County board of equalization for “intracounty” State Board of Equalization for “intercounty” 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) 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 then current level of 22. 85%

Gradual Change in the Structure of the Property Tax System n Originally, a 100% value system with relatively low millage rates n n Millage rates were levied on the fair cash (market) value Change to fractional assessment meant lower taxable values n n 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

Taxable Values and Millage Rates n n n 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, decreases in taxable value because of decreases in market value will yield relatively lower revenue in a system that has fixed millage rates

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

Millage Rates and the Oklahoma Constitution n n 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 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 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

Sinking Fund Millage n n Voters approve the debt Debt is based on percentage of taxable valuation of the bond issuer n n County City or town School district Amortization of the debt n n n Divide dollar figure (debt service) by net assessed value 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

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

Public Service Corporations n n n 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 is multiplied x 22. 85% to arrive at the taxable value Millage rate is imposed on this net assessed value Generally, if public service corporation property is located in a jurisdiction 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

The 5% Limitation n n Oklahoma Constitution Article X, Section 8 B Adopted pursuant to amendment in 1996 and effective for the first time during the 1997 assessment year Applies to locally assessed real property only 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 n n 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

“Senior Freeze” n n n Oklahoma Constitution Article X, Section 8 C Limits increases in the fair cash value (market) value of certain types of real property Homestead property Owned by persons age 65 or older Median income maximums county by county n n n U. S. Department of Housing and Urban Development 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

Tax Liability and Millage Rates n For any parcel of real property or any item of personal property: n n n Determine total millage rate applicable 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 x Net Assessed Value=Tax Liability The millage rate x Net Assessed Value of Public Service Corporation property=Tax Liability for PSC property

Summary n n n Oklahoma uses fractional assessment 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 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 Modifications to the millage rate structure would require amendments to the Oklahoma Constitution

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