Thursday, February 18, 2010
Standard Article by Brett Narloch
Issue: Taxes
The problem with the recently passed "property tax relief" bill is that it's just that: relief. The system needs reform.
In 2009, Gov. John Hoeven and legislative leaders pushed for and made law SB2199, also known as the Property Tax Relief Bill, which provided school districts with $295 million in additional state aid - over the top of what was going to be spent on K-12 education - for the 2009-11 biennium. The $295 million lowers mills an average of 75 mills per school district. The North Dakota Senate passed the bill 45-2, and the North Dakota House of Representatives passed it 86-6. Clearly, there was a bipartisan consensus.
At the end of 2009, media editorials from around the state appeared touting the relief plan. On November 26, 2009, the Grand Forks Herald editorialized,
In Grand Forks County, bills will be lower than they were last year by several hundred dollars.
This alone is cause for giving thanks.
But there is greater reason for gratitude.
These tax savings result from the most significant tax reform in North Dakota in more than half a century, and the upshot is that North Dakota will depend less on property taxes and more on sales and income taxes.
The Bismarck Tribune editorialized on December 17, 2009,
North Dakota tax statements have been arriving at homes and businesses in recent days. People should compare them to their 2008 statements. Homeowners should find their property taxes lighter by an average of 12 percent. And their state income tax will likely be lighter as well. In a world where taxes seem to inevitably increase, these tax reductions are worthy of note. Maybe even a little celebration is in order. Especially when you think about what people in the rest of the country are getting for Christmas from their local and state governments.
Indeed, property owners saw their tax bills drop - many significantly dropped. But was SB2199 the "most significant tax reform in more than half a century," as the Grand Forks Herald said it was, or was it simply a shuffling around of taxpayer dollars between different levels of government to make it look like a tax cut?
| Property Taxes 101 |
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First, it is important to understand how local budgeting works. Once the governing body sets its budget, it then calculates how many mills will be assessed to each property to ensure the governing body can generate revenue to meet the budget. In other words, the entire process is driven by how much money each local government wants to spend, rather than by setting a tax rate. What this means is that property taxes are directly related to how much each local government spends. If spending goes up, property taxes go up.
There are basically two ways to ensure that property owners have a smaller tax bill than the year before: cut local government spending or have the state buy down the amount of money property taxpayers would be required to pay. Having the state buy down the property owners' portion of local budgets can only be sustained if the state continues to generate the revenue needed to sustain it and has the will to maintain the program. In the case of SB2199, the price comes in at a whopping $295 million biennially.
If the state does not maintain the "relief" program, then property owners will be no better off than before. In fact, they will likely be shocked by what will be coming at them.
The following is a scenario that could very well play out in several years across North Dakota:
John Doe receives a tax statement from his city. He is happy to see that he will pay $500 less in property taxes in 2009 than in 2008, thanks to the property tax relief plan passed by the legislature. But a closer look at his statement reveals that his city, county, and park district taxes each went up 5%. However, since those increases were more than offset by the 75 mill decrease by his school district, his taxes are down $500.
In 2010, John Doe opens his tax statement to find out that his property taxes are a little higher for 2010 than they were for 2009, but still down from 2008. Again, he notices that his city, county, and park district taxes have all increased about 5%. His city, county, and park district taxes continue to go up annually at 5% for each entity. By now his tax bill has grown since that 2009 level, but it's still less than the 2008 level, so he's still ok with the relief plan.
Since the property tax relief plan only has funding for four years, in 2013 the state will no longer contribute $295 million per biennium to buy down the property owners' portion of school district revenue. The school districts, who have now gotten used to the increased levels of funding, find it impossible to make cuts; therefore, they need to increase revenue from property owners so they increase the mills to the pre-property tax relief year of 2008.
Property taxpayers would be hit with the increase in school district property taxes on top of the city, county, and park district taxes that have gone up year after year.
What this scenario shows is that either the state will have to continue the property tax relief plan indefinitely or local governments will have to trim budgets. At the same time, the property tax relief plan provides local governments with the perverse incentive to increase their mills because the state is forcing the schools to decrease theirs. Then when the property tax relief plan runs out, all taxes are higher.
This does not appear to be the "most significant tax reform in more than half a century." It appears to be little more than a shell game where money is shuffled from one government to another to make the appearance of a tax cut.
The relief property taxpayers saw in 2009 was real, but it will not offset the pain that will be felt when the plan runs out of money. Legislators might be kicking themselves for accepting responsibility for a problem they did not create - bloated local budgets - when they are forced to continue to divert money into the relief plan (and away from other priorities) or pull the program and take the heat from property taxpayers who have now identified the legislature as the place to lay blame when they don't like what their statements say.
There are several things that could be done to prevent the coming disaster: eliminate property taxes altogether, cap local spending, require all local government check registers to be online, or cap the amount of property taxes per property to 1.5% of the property's value.
Eliminating property taxes would provide North Dakotans with the most significant tax reform in recent history. Clearly, eliminating property taxes would eliminate the angst property owners have about the system. But how would local government be funded? According to Empower the Taxpayer, a website formed by those attempting to get a constitutional measure on the 2010 ballot to eliminate property taxes, the answer is simple: the state can pay for local government by reining in spending elsewhere. They list out-of-state student subsidization, K-12 education, and eliminating gifts to special interests as areas where the state can find savings. There will also be automatic savings when local governments will not need to fund the apparatus needed to collect property taxes.
They also suggest that if local governments, with permission from taxpayers, would like to enact local option sales taxes, that could be used to offset the "loss" of property tax revenue.
How would local government retain local control? Empower the Taxpayer's measure specifically states that "How counties, cities, townships, and other political subdivisions choose to allocate the... revenue is at the sole direction of the governing bodies of counties, cities, townships, and other political subdivisions."
Capping local spending, if done by itself, would reduce the burden of property taxpayers by eliminating excessive increases in spending. As has been shown, property taxes are directly related to local government spending. If spending is held in check, property taxes will be held in check.
Putting local government check registers online is a less dramatic reform that does not directly relate to property taxes, but could have a very positive impact for property taxpayers. By giving taxpayers easy access to every government expenditure, citizens can quickly investigate spending and determine whether or not their hard-earned dollars are paying for worthy things. Furthermore, it also shines disinfecting light into city halls. It could change the behavior of elected officials as they know that citizens can easily watch.
Finally, it allows citizens to thoroughly investigate spending without the fear of retribution. Many taxpayers do not request records because of intrusive questioning by government officials. The government will not know who is looking at the check register online, leaving taxpayers with the feeling that no one is out to get them.
On the other side, after examining government spending, taxpayers may conclude that their government is spending money efficiently and productively. They may conclude that they are paying the right amount in property taxes.
Limiting property taxes to 1.5% of the value of a property is an idea being pushed by State Representative Jim Kasper. In a recent interim Tax Committee meeting, he suggested that residential property taxes should be taxed at no more than 1.5% because they do not generate income and as property owners get older it may become harder for them to pay increases.
Debating these issues over the next couple of years will be key as fundamental reform is needed before SB2199 runs out of money. The range of debate on this issue should not be limited, and legislators need to come to the table with open minds. Taxpayers deserve nothing less.
