March 16, 2016

"That's a Relief" - Lower Tax Rates Result from Tax Increase

At the end of last week, Capitol-ism outlined how the reduction of school general fund property tax levies was going to be calculated.  The description was incomplete because the law was not complete. 

We can now explain the total impact of the tax relief promised in the bill (HB 1182) that increased the sales tax and, hopefully, give readers enough basic information to calculate the taxes on their homes and businesses.

Overture – Understanding property taxes is like witnessing a car wreck.  No matter how hard one to tries to recall everything that just happened, invariably one only really grasps a portion of what occurred because there are too many things happening all at once.  You remember hearing the brakes squeal, the sound of glass breaking and metal contorting.  However, other details start to blur, was there something that flew out of one of the cars, was one of them turning, was the blue car really being driven by a dog?

It is same with property taxes and this report.  There are many variables that change each year that affect the total amount of any property’s tax bill.  These include:

·       Taxable values will likely increase – each county reassesses properties each year.

·       City and County mil levies will be adjusted – revenue from these levies is limited to 3% or inflation, whichever is the lower.  The adjusted levy is applied to newly constructed; remodeled property and increased valuations. 

·       Adjustments are made in debt levies to recognize newly constructed; remodeled property and increased valuations.

·       The state sets the tax levies for schools and makes adjustments each year to offset growth in values – this is known as the “Cutler-Gabriel” adjustment.

·       A government might sell bonds to build a new event center or a new school, thus a new levy will appear.

This report is focused on the changes in the school general fund only.  For the remainder of this report it will be assumed that no other changes are being made in the tax bills.  The goal of this report is to measure the magnitude of reforms passed for education funding during the 2016 legislative session. 

Standard Disclaimer – Capitol-ism is happy to explain the changes in the policy adopted by this most recent legislative session, but please be forewarned, explaining how this works in no way guarantees that readers will suddenly feel any increased euphoria when actually paying property taxes.

Step One - Repeat from last week – The tax levy decrease from the annual “Cutler-Gabriel” adjustment:

•   Classification  Payable this year         Payable in 2017
•   Commercial     $8.72/$1,000                 $8.29    (-4.93%)
•   Owner/Occ       $4.07/$1,000                 $3.87   (-4.91%)
•   Agriculture       $1.56/$1,000                 $1.51    (-3.2%)

Using the figures above, the school general fund taxes for a property with a taxable value of $500,000 (which is a large home, medium sized business and rather miniscule farm) would be:

·       Commercial  - $4,360 this year to $4,145 if taxable value stays the same. 

-   If value increases 4%, taxes will be the same.

·       Owner/Occupied - $2,035 this year to $1,935 if taxable value stays the same.

·       Agriculture - $780 this year to $755 if taxable value stays the same.

Now, Step Two – The reduction using funds from the sales tax increase. 

The half-cent increase in sales taxes will raise more revenue than is needed to increase average teacher pay to $48,500 and change the funding formula.  The final distribution of the money from the tax increase is:

·       63% for increasing teacher compensation (estimated to be $67 million)

·       34% for property tax relief (estimated to be $36 million)

·       3% for instructional salaries at technical institutes (estimated to be $3 million)

The money to be used for property tax relief (34% of the total raised by the half-cent increase) will be apportioned among the classes by the ratio each class contributes to the total revenue.  This reduction for taxes payable in 2017 amounts to the following:

·       Category           Amt of reduction         Payable 2017 (not final tax number)

·       Commercial -     $0.90/$1,000 taxable          $7.39/$1,000*

·       Owner/Occ -      $0.42/$1,000                    $3.45/$1,000*

·       Agriculture -      $0.18/$1,000                    $1.33/$1,000*

*The reductions were subtracted from the taxes payable for 2017 – after the Cutler/Gabriel adjustments above.  These reductions are approximately 10% from the Cutler/Gabriel adjusted 2017 numbers and 15% lower than current taxes payable this year (2016).

Applying these reduced levies to the mythical $500,000 property (again, large home, medium sized business and rather miniscule farm) the taxes for the school general fund (not the entire tax bill) would be:

·       Commercial - $3,695 (down from $4,360 this year)**

·       Owner/Occ - $1,725 (down from $2,035 this year)**

·       Agriculture - $665 (down from $780 this year)**

**This is the general fund only, it does not include the school levies for capital outlay, special education or retirement (which is being changed); nor does it include levies for other governments such as cities, counties and special districts.

Step Three – Move retirement levy into general fund levy. 

Years ago, school districts were allowed to assess a levy to help fund teacher retirement.  Teachers are part of the state’s retirement system which uses contributions from the teachers matched by contributions from each district taken from the general fund.  Since the new general education formula takes into consideration benefits on a per teacher basis, there is no longer a need for a segregated levy for teacher retirement. 

The final step in the property tax reforms adopted by the legislature includes moving the retirement levy into the general fund levy, which will end retirement as a separate tax levy.  This is easier said than done, and it’s not all that easily said.  Each school district has a different levy including ten districts that have not had a retirement levy at all. 

The retirement levy has been limited to $0.30/$1,000 of taxable value or 30-cents for each $1,000 value (the $500,000 property being used for this article would pay $150, if the district was at the maximum retirement levy).

Taking the amount of money raised by all school districts from their retirement levies, which was $19.2 million in FY2015, and dividing that total by that statewide taxable value, results in a statewide levy of $0.233/$1,000 of taxable value.  This $0.233 levy is now being added to the general fund levy reported above to determine the final general fund levy for 2017.  (Note – as explained below, this levy has not been subject to revenue limits and has been applied to all increased values, the reforms passed this year will put this levy under revenue limits in the future.) 

It is important to remember that all retirement levies will be discontinued.  The result is a tax break for all districts that currently have a retirement levy more than $0.23 (up to $0.30) and a slight levy increase for those districts that didn’t have any retirement levy, or had a levy that was less than $.23.  This move has the effect of limiting the amount of tax reductions; it does not result in any district actually increasing tax rates.    

Adding the statewide average retirement levy into the reduced general fund levy gives a final tax level that will be paid:

·       Category           2016 GF levy    Reduced Levy  Move Retirement     Gen Fund Levy 2017

·       Commercial       $8.72/$1,000      $7.39                  $0.23                         $7.63/$1,000

·       Owner/Occ       $4.07/$1,000        $3.45                  $0.23                        $3.68/$1,000

·       Agriculture       $1.56/$1,000        $1.33                  $0.23                        $1.56/$1,000

Applying the new levy to the $500,000 property gives us general fund payments for each category of:

·       Commercial - $3,815 (down from $4,360 + retirement levy this year; which is being removed in 2017)***

·       Owner/Occ - $1,840 (down from $2,035 + retirement levy this year; which is being removed in 2017)***

·       Agriculture - $780 (same as $780 this year + retirement levy; which is being removed in 2017)***

***Current retirement levies vary, some districts assess a retirement levy greater than the $0.23 that is now included in the “reduced levy” above; some districts assess a levy that is less. 

Last Step - Putting this in perspective; a look at the overall tax bill.

Below you will find the tax levies that comprise a typical tax bill including the school general fund levy discussed above and also including the rest of the school levies and the levies for the county and the city.  This chart is designed to show the difference in the school general fund and retirement levies.  The other levies will be left the same for both 2016 and 2017 for the purpose of highlighting this year’s changes – the local government levies is adjusted each year. 

Here is a list of property tax levies for businesses in South Dakota for 2016 and 2017:

·       Levy                    Amount 2016                Amount 2017                              

·       County                 $3.38/$1,000                 $3.38/$1,000

·       City                        3.61                               3.61

·       Sch gen fund          8.72                               7.63

·       Sch ret                    0.27                               0.00

·       Sch bond                1.01                               1.01

·       Sch cap outlay        3.00                               3.00

·       Sch Spcl Ed            1.40                               1.40 (this levy is being increased to 1.5 in 2017)

·       Total Levies         21.39                             20.03 – a reduction of 6% in the overall tax levies*

*this reduction is the result of both the Cutler/Gabriel adjustment and the money from the sales tax increase that is dedicated to property tax relief.

Applied to the $500,000 property used throughout this article shows a tax difference of:

                             Pay 2016                         Pay 2017

Property               $10,695                            $10,015 – a reduction of $680 or 6.3%*

*this reduction is the result of both the Cutler/Gabriel adjustment and the money from the sales tax increase that is dedicated to property tax relief.

Reminder - This example uses changes in the school general fund and retirement levy ONLY.  Several other factors will change these calculations including:

·       Property taxable value will likely increase – each county reassesses properties each year.

·       City and County mil levies will be adjusted – revenue from these levies is limited to 3% or inflation, whichever is lower.  The adjusted levy is applied to newly constructed; remodeled property and increased valuations. 

·       Adjustments are made in debt levies to recognize newly constructed; remodeled property and increased valuations.

Conclusion – Property tax rates will certainly be lower; actual taxes for most will be slightly lower or about the same for the next few years – and that’s a good thing.

School general fund levies will be reduced in 2017 more than they would have if the legislature had not dedicated $36 million to tax relief.  The school general fund levies will be decreased about 15% in 2017 and most of that is made possible by the extra revenue from the half-cent increase in sales tax.  The reduction in school general fund levies will reduce overall tax levies about 6%.  The tax savings for any given property will depend on whether it increases in value and by how much.  Property taxes will be lower for most properties in 2017 and there will be very little difference for the rest of the properties.  And that’s a good thing.  

Is this a pittance?  There is a funny thing about tax reforms that reduce taxes.  When taxes go down a few percent it often is dismissed as a trifle.  When those same taxes are increased by the same amount, it is universally condemned as a tragedy. 

This is as much part of being human as it is to witness a car wreck and wonder if one of the cars was being driven by a dog.