Ad Valorem Tax SystemAd Valorem Tax System

Presentation to the Revenue and Presentation to the Revenue and Taxation Subcommittee of the Taxation Subcommittee of the

House Appropriations and Budget House Appropriations and Budget CommitteeCommittee

Interim Study No. 11-114 Interim Study No. 11-114 by Rep. Brumbaughby Rep. Brumbaugh

October 4, 2011October 4, 2011

Oklahoma Constitution: The Framework for Oklahoma Constitution: The Framework for the Property Tax Systemthe Property Tax System

Article XArticle X Fair cash valueFair cash value

What a willing buyer would pay and what a willing seller would What a willing buyer would pay and what a willing seller would accept if both parties are knowledgeable about the property accept if both parties are knowledgeable about the property and neither party is under undue pressure to either buy or selland neither party is under undue pressure to either buy or sell

Fractional assessmentFractional assessment 11%-13.5% for real property11%-13.5% for real property 10%-15% for personal property10%-15% for personal property 22.85% for public service corporation property22.85% for public service corporation property

ExemptionsExemptions Gross assessed value minus exemption produces a Gross assessed value minus exemption produces a net net

assessed valueassessed value If property is not eligible for an exemption then it just has a net If property is not eligible for an exemption then it just has a net

assessed valueassessed value Millage ratesMillage rates

Millage rates are levied on the net assessed value of propertyMillage rates are levied on the net assessed value of property

Local Government Funding Local Government Funding SourceSource

County governmentCounty government General fundGeneral fund Sinking fund for a general obligation bondSinking fund for a general obligation bond

Municipal governmentMunicipal government Usually not for the general fundUsually not for the general fund Sinking fund for a general obligation bondSinking fund for a general obligation bond

Common schoolsCommon schools General fundGeneral fund Building fundBuilding fund Sinking fund for a general obligation bondSinking fund for a general obligation bond

Career TechCareer Tech Emergency Medical ServiceEmergency Medical Service LibrariesLibraries City-county health City-county health Solid Waste ManagementSolid Waste Management

100% Market Value and the 100% Market Value and the Change to Fractional AssessmentChange to Fractional Assessment

Oklahoma originally a 100% market value systemOklahoma originally a 100% market value system Assessment practices from statehood through the 1950sAssessment practices from statehood through the 1950s

Effects from the Great DepressionEffects from the Great Depression Effects from the Dust Bowl conditionsEffects from the Dust Bowl conditions

Change from 100% to fractional assessment in 1958Change from 100% to fractional assessment in 1958 May have been a recognition that taxable values generally were May have been a recognition that taxable values generally were

only about 35% of market valuesonly about 35% of market values Maximum 35% until the 1996 amendmentMaximum 35% until the 1996 amendment

Assessment ratio was determined by each county assessor subject Assessment ratio was determined by each county assessor subject to equalization requirements to equalization requirements

County board of equalization for “intracounty”County board of equalization for “intracounty” State Board of Equalization for “intercounty”State Board of Equalization for “intercounty”

1996 Amendment narrowed the range in the assessment ratio1996 Amendment narrowed the range in the assessment ratio As a result of litigation, the range had been 12% plus or minus 3 percentage As a result of litigation, the range had been 12% plus or minus 3 percentage

points (9%-15% range)points (9%-15% range) 1996 Amendment provided the range of 11%-13.5% for real property and 1996 Amendment provided the range of 11%-13.5% for real property and

the range of 10%-15% for personal propertythe range of 10%-15% for personal property Public service corporation assessment ratio was frozen at the then current Public service corporation assessment ratio was frozen at the then current

level of 22.85%level of 22.85%

Gradual Change in the Structure of Gradual Change in the Structure of the Property Tax Systemthe Property Tax System

Originally, a 100% value system with Originally, a 100% value system with relatively low millage ratesrelatively low millage rates Millage rates were levied on the fair cash Millage rates were levied on the fair cash

(market) value(market) value Change to fractional assessment meant Change to fractional assessment meant

lowerlower taxable values taxable values All other things equal, lower taxable values All other things equal, lower taxable values

meant lower ad valorem revenues unless meant lower ad valorem revenues unless millage rates increasedmillage rates increased

Over time millage rates have increased either Over time millage rates have increased either because the voters have approved increases in because the voters have approved increases in the rates or because additional types of taxing the rates or because additional types of taxing jurisdictions have been approvedjurisdictions have been approved

Taxable Values and Millage RatesTaxable Values and Millage Rates

Millage rates for general funds and building Millage rates for general funds and building funds in Oklahoma are more or less constant funds in Oklahoma are more or less constant (“fixed”)(“fixed”)

Over the course of the economic cycle, Over the course of the economic cycle, increasesincreases in taxable value because of increases in taxable value because of increases in market value will yield relatively higher in market value will yield relatively higher revenue in a system that has fixed millage ratesrevenue in a system that has fixed millage rates

Over the course of the economic cycle, Over the course of the economic cycle, decreasesdecreases in taxable value because of in taxable value because of decreases in market value will yield relatively decreases in market value will yield relatively lower revenue in a system that has fixed lower revenue in a system that has fixed millage ratesmillage rates

Budget Revenue for the Taxing Budget Revenue for the Taxing JurisdictionsJurisdictions

In the Oklahoma property tax system, the In the Oklahoma property tax system, the changes in revenue available to the local changes in revenue available to the local jurisdictions occur because of changes in jurisdictions occur because of changes in taxable valuestaxable values Revenue changes could occur if the assessment ratio Revenue changes could occur if the assessment ratio

increases or decreasesincreases or decreases Revenue changes could occur if there are changes in Revenue changes could occur if there are changes in

millage ratesmillage rates If property values increase, the jurisdictions If property values increase, the jurisdictions

have more revenue availablehave more revenue available If property values decrease, the jurisdictions If property values decrease, the jurisdictions

have less revenue availablehave less revenue available

Millage Rates and the Oklahoma Millage Rates and the Oklahoma ConstitutionConstitution

Millage rates are authorized in the Oklahoma Millage rates are authorized in the Oklahoma ConstitutionConstitution

If a taxing jurisdiction is levying at the maximum amount If a taxing jurisdiction is levying at the maximum amount authorized in the Oklahoma Constitution, it requires a authorized in the Oklahoma Constitution, it requires a constitutional amendment to increase millage for constitutional amendment to increase millage for general or building funds general or building funds

If a taxing jurisdiction is not levying at the maximum If a taxing jurisdiction is not levying at the maximum amount it may be able to increase its millage rate based amount it may be able to increase its millage rate based on approval of the governing board of the jurisdiction or on approval of the governing board of the jurisdiction or pursuant to a vote within the taxing jurisdictionpursuant to a vote within the taxing jurisdiction

Sinking fund millage rates vary from year to year but Sinking fund millage rates vary from year to year but have been approved by a vote of some kindhave been approved by a vote of some kind

General obligation bond debt requires the 3/5 approval General obligation bond debt requires the 3/5 approval of the voters (county, city/town, school district) pursuant of the voters (county, city/town, school district) pursuant to Article X, Section 26 of the Oklahoma Constitutionto Article X, Section 26 of the Oklahoma Constitution

Sinking Fund MillageSinking Fund Millage Voters approve the debtVoters approve the debt Debt is based on percentage of taxable Debt is based on percentage of taxable

valuation of the bond issuervaluation of the bond issuer CountyCounty City or townCity or town School districtSchool district

Amortization of the debtAmortization of the debt Divide dollar figure (debt service) by net assessed Divide dollar figure (debt service) by net assessed

valuevalue Sinking fund millage rate for that yearSinking fund millage rate for that year From year to year, if taxable value increases, sinking From year to year, if taxable value increases, sinking

fund millage rate will decrease but if taxable value fund millage rate will decrease but if taxable value decreases, sinking fund millage rate will increasedecreases, sinking fund millage rate will increase

Locally Assessed PropertyLocally Assessed Property

Real PropertyReal Property LandLand FixturesFixtures

Personal propertyPersonal property Household personalHousehold personal Business personal (inventory)Business personal (inventory) Tangible vs. intangibleTangible vs. intangible

Public Service CorporationsPublic Service Corporations State Board of Equalization performs the annual State Board of Equalization performs the annual

valuation with assistance from the Oklahoma Tax valuation with assistance from the Oklahoma Tax CommissionCommission

Value for the company is determined using a Value for the company is determined using a “unit value” method“unit value” method

Value is multiplied x 22.85% to arrive at the Value is multiplied x 22.85% to arrive at the taxable valuetaxable value

Millage rate is imposed on this net assessed valueMillage rate is imposed on this net assessed value Generally, if public service corporation property is Generally, if public service corporation property is

located in a jurisdiction then the millage rate will located in a jurisdiction then the millage rate will produce about 2 times the amount of revenue produce about 2 times the amount of revenue from that property than the same millage rate on from that property than the same millage rate on locally assessed real or personal propertylocally assessed real or personal property

The 5% LimitationThe 5% Limitation

Oklahoma Constitution Article X, Section 8BOklahoma Constitution Article X, Section 8B Adopted pursuant to amendment in 1996 and effective Adopted pursuant to amendment in 1996 and effective

for the first time during the 1997 assessment yearfor the first time during the 1997 assessment year Applies to locally assessed real property onlyApplies to locally assessed real property only Prohibits increases of more than 5% each year in the Prohibits increases of more than 5% each year in the

fair cash (market) valuefair cash (market) value The 5% limitation does not apply to increases in tax The 5% limitation does not apply to increases in tax

liabilities strictly speakingliabilities strictly speaking The 5% limitation is not a millage rate capThe 5% limitation is not a millage rate cap If all millage rates were completely “fixed” and never varied If all millage rates were completely “fixed” and never varied

and there were never any changes in the assessment ratio, and there were never any changes in the assessment ratio, then the 5% limitation on valuation increases would effectively then the 5% limitation on valuation increases would effectively be the same thing as a 5% limit on increases in the actual tax be the same thing as a 5% limit on increases in the actual tax liabilityliability

““Senior Freeze”Senior Freeze” Oklahoma Constitution Article X, Section 8COklahoma Constitution Article X, Section 8C Limits increases in the fair cash value (market) Limits increases in the fair cash value (market)

value of certain types of real propertyvalue of certain types of real property Homestead propertyHomestead property Owned by persons age 65 or olderOwned by persons age 65 or older Median income maximums county by countyMedian income maximums county by county

U.S. Department of Housing and Urban DevelopmentU.S. Department of Housing and Urban Development Maximum income amount could change from year to Maximum income amount could change from year to

yearyear If the owner has income in excess of the If the owner has income in excess of the

applicable HUD median income amount for that applicable HUD median income amount for that county, then the limitation no longer applies county, then the limitation no longer applies

Tax Liability and Millage RatesTax Liability and Millage Rates

For any parcel of real property or any item For any parcel of real property or any item of personal property:of personal property: Determine total millage rate applicableDetermine total millage rate applicable County, city/town, school district, career tech County, city/town, school district, career tech

and all other taxing jurisdictionsand all other taxing jurisdictions General fund(s) rate + Building fund(s) rate + General fund(s) rate + Building fund(s) rate +

Sinking fund(s) rate=Total millage rateSinking fund(s) rate=Total millage rate Total millage rate x Net Assessed Value=Tax Total millage rate x Net Assessed Value=Tax

LiabilityLiability The millage rate x Net Assessed Value of The millage rate x Net Assessed Value of

Public Service Corporation property=Tax Public Service Corporation property=Tax Liability for PSC propertyLiability for PSC property

SummarySummary Oklahoma uses fractional assessmentOklahoma uses fractional assessment Millage rates have increased over time partly because Millage rates have increased over time partly because

of lower taxable values in a fractional assessment of lower taxable values in a fractional assessment systemsystem

Millage rates are controlled through provisions of Millage rates are controlled through provisions of Article X of the Oklahoma ConstitutionArticle X of the Oklahoma Constitution

Millage rates are more or less “fixed” in the Oklahoma Millage rates are more or less “fixed” in the Oklahoma system (the rates remain relatively constant)system (the rates remain relatively constant)

Increases or decreases in taxable values over the Increases or decreases in taxable values over the course of the real estate and economic cycles result in course of the real estate and economic cycles result in relatively more or less revenue for the jurisdictionsrelatively more or less revenue for the jurisdictions

Modifications to the millage rate structure would Modifications to the millage rate structure would require amendments to the Oklahoma Constitutionrequire amendments to the Oklahoma Constitution

Questions or CommentsQuestions or Comments