Wendy Johnson, Intergovernmental Relations Associate Property Tax Reform Wendy Johnson, Intergovernmental Relations Associate

Distribution of Property Taxes by Type of Taxing District This graph simply shows who receives property taxes. All local governments and schools. It’s the why we care about property taxes slide. Source: Oregon Department of Revenue, Oregon Property Tax Statistics- Fiscal Year 2014-2015 report

Property Tax Revenues Property tax revenues are vital to schools and local governments: Property taxes, on average, represent 60% or more of a city’s revenues. (Often not enough to cover public safety & fire.) $1.2 billion (actual property taxes for 2014-15) Property taxes, on average, represent 33% of the K-12 revenues (General Fund dollars make up the rest of the revenue). $3.7 billion (property taxes) + $7.4 billion (GF)= $11 billion budgeted for 2015-17 This is the how much revenue slide.

Broken Property Tax System League focus: 1) Restoring equity in taxes of similarly valued property in same taxing districts; 2) Revising property tax exemptions to make wise economic development investments and other policy choices; and 3) Restoring local choice for setting taxes (Meas. 5 limits and permanent rate issues) to assure services and infrastructure can be provided now and into future.

Measure 5 (1990) Capped property taxes for all general governments (cities, counties, special districts) at $10 per $1,000 total Capped schools at $5 per $1,000 Effectively limits property taxes to 1.5% of RMV What system do we have… quick basics. You all know that property tax calculations are governed mostly by Measure 5 and 50. Measure 5 put limits on RMV. $5 for schools and $10 for local government (per $1000 of real market value)

Compression If the property taxes on an individual property exceed the Measure 5 limits, the taxes are reduced until the limitations are reached, a process known as compression If hit limits… have to reduce… called compression.

Problems with Measure 5 Based on FY 2014-15, most taxing districts have reached or are close to the Measure 5 limits. Costs continue to increase– PERS, infrastructure, etc. For FY 2014-15: 60% of cities, 97% of counties and 89% of school districts are in compression (exceed limits) Revenue lost to compression: FY 2014-15 = $175 million FY 2013-14 = $212 million

Compression Losses for Cities, Schools and Counties This slide depicts the revenue loss to compression over time. Expect to be consistently over $150 million a year going forward. Schools losing most (grey), followed by cities (blue), then counties (orange)

Reform Needed: Address Measure 5 Limits Solution: We need Measure 5 limits that are-- a) Raised (potentially with a built-in cap adjustment for inflation); or b) Eliminated (back to rates or levies set locally by voters); or c) Replaced with some other type of limit (percentage growth limit, etc.)

Measure 50 (1997) Set a new assessed value (AV) level AV was set at 10% less than 1995 RMV Gap between RMV and AV has grown—now AV total is 25% less than RMV Capped annual growth in AV at 3%annually Set permanent rates for all taxing districts (froze at arbitrary 1997 rate calculations) Tax rate is applied to discounted AV, but assessors also have to apply tax rate to RMV Measure 50 is 18 years old and it created the inequities. Go through bullets. Graph shows gap between AV and RMV. Shows 3% limit in blue line. Gap is continuing to grow again.

Slide 11 Measure 50-based property tax system creates winners and losers (no link to RMV anymore) In September 2015, the Oregonian ran several articles on the problems with the property tax system. The Oregonian even created a database to search properties in the Portland area for winners and losers. There are now more losers than winners… due to Measure 5 and 50…. inequities have gotten worse over time. This map illustrates the problem by showing the difference between assessed values and market values. The folks in dark blue are paying taxes on 50% or less of their property’s real market values. Those in red are paying taxes on 100% of their property’s value. You can see that the areas of inner North, Northeast and Southeast Portland are the big beneficiaries from the current system. They are paying taxes on a much lower percentage of their property’s value compared to their neighbors to the east or west. Folks further out in east Portland and Gresham, despite often being lower income, are paying taxes on a higher percentage of their property values. Source: The Oregonian (Sept. 11, 2015)

Slide 10 7/26/2012 Due to Measure 50, Major property tax inequities exist between homeowners Under Oregon’s property tax system, similarly valued homes can often have significantly different property tax bills. The example in this slide shows two homes in Portland – same real market value, yet a difference in property taxes of more than $3,400. One is in SW and one is NE. The latter has the lower taxes because of how the market was in 1997! So how did this come to pass? In the mid-1990s, the tax system was changed to separate taxable, or assessed, value from market value. Because individual property values have grown at dramatically different rates since then, tax bills for similarly valued properties are often radically different. As you can see in this example, the two homes started out with drastically different real market values – almost $100,000 apart. Assessed values for homes were set in 1997 and based on 1995 real market values, and then limited to 3 percent growth. The house on the right is still paying taxes not far off from it’s 1990s RMV, even though the actual value of the home has increased significantly. Such discrepancies in taxes put those selling homes on an uneven playing field. A home with lower property taxes may enable a prospective seller to increase the asking price, putting other sellers at a disadvantage and distorting the real estate market. RMV in 1997: $178,300 RMV in 1997: $98,000 Data obtained from county assessor records 12

Inequities are not confined to the metro region Slide 12 7/26/2012 Inequities are not confined to the metro region The problem isn’t specific to Portland. Inequities are all over the state, as seen by this Salem example. The legislative revenue office took a look at the inequities in Multnomah, Deschutes, Jackson and Sherman counties in 2010 and found widespread inequities in all four. RMV in 1997: $135,050 RMV in 1997: $69,730 Data obtained from county assessor records 13

Permanent Rate of Oregon’s 242 Cities: Need to address the ongoing problems created by Measure 50’s freezing of permanent rates that were in effect in 1997. City rates are frozen all over the map. No basis in services provided.

Reform Needed: Address Measure 50 Problems SOLUTIONS: Address inequities caused by Measure 50 by eliminating the AV computation and going back to computation based on RMV only. (SJR 201) Use an RMV average over several years so there is less volatility and more predictability for taxpayers and taxing districts. (SJR 201) Provide a transition period to move existing properties to RMV as assessment basis. Adjust rate inequities: Either eliminate taxing jurisdiction’s permanent rates, adjust permanent rates, or permit local option levies outside of compression.

Property tax reform Paths: Slide 2 Property tax reform Paths: Multiple piecemeal initiative amendments; or Multiple piecemeal amendment referrals by the legislature (majority vote in each chamber); or Constitutional revision by legislature referred to voters (requires 2/3 vote in each chamber) (Can be comprehensive tax reform!) Keys to Success: Reform that recognizes that one size doesn’t fit all communities– need flexibility and local control Restore equity– between properties and between taxing districts Reform that maintains some assurance that taxes won’t escalate unreasonably over time (provide for some sort of limit) Carrots Education of the voters and legislature on present system Grow coalition of interest and participation Make property tax reform part of state revenue reform discussion