Taxing districts have a tax rate ceiling and a tax rate levy. The tax rate ceiling is the maximum authorized voter approved levy. However, taxing districts may levy a rate below their tax rate ceiling. During a reassessment year, if the taxing district levies a rate below their tax rate ceiling, the taxing entity could leave the rate the same on the sometimes higher assessments. The Hancock Amendment requires that the tax rate ceiling roll back, not necessarily the tax rate levy. Senator Gibbons and other legislators are trying to close this loophole by requiring taxing districts, in a reassessment year, to roll back their prior year’s tax rate levy regardless if the taxing district levied a rate the same as the ceiling. In a non-reassessment year, the taxing district could increase their tax rate levy to their tax rate ceiling. The intention behind this change is to prevent the process of reassessment, which is the equalization of the tax burden of the property owners in taxing districts, from causing tax increases.
An example is as follows:
Tax district X has a 2006 assessed valuation of $100,000,000, a tax rate of $1.00, and a tax rate ceiling of $1.50.
Tax Rate: ($100,000,000/100) X $1.00 = $1,000,000
In 2006, tax district X collected $1,000,000.
Tax Ceiling: ($100,000,000/100) X $1.50 = $1,500,000
In 2006, the taxing district could have collected $1,500,000 if they levied a rate equal to their tax rate ceiling.
In 2007, the properties in taxing district X were reassessed at a value of $125,000,000. $5,000,000 of the increase is new construction and improvements, which is not factored into the rollback, and $20,000,000 of the increase is due to the value of the properties increasing in value. The growth in the consumer price index in 2007 was 2.6%.
Under current law, only the tax ceiling is required to rollback in accordance with the Hancock Amendment and tax district X’s ceiling would rollback as follows:
$1,500,000 X 1.026 = $1,539,000
$125,000,000 – $5,000,000 = $120,000,000
$1,539,000/$120,000,000 = .01285
.01285 X 100 = $1.285
The tax rate ceiling for tax district X would be $1.285. Tax district X could legally keep the tax rate $1.00 and receive a windfall from reassessment.
Senate Bill 711, however, would require the taxing district to rollback its 2006 tax rate as if it were its tax rate ceiling in a reassessment year.
$1,000,000 X 1.026 = $1,026,000
$125,000,000 – $5,000,000 = $120,000,000
$1,026,000/$120,000,000 = .00855
.00855 X100 = $.855
Under Senate Bill 711, tax district X could have levied a maximum of $.855 in 2007.
The taxing district would be able to levy up to its tax rate ceiling in the non-reassessment year.
Another loophole that Senator Gibbons is trying to close relates to the manner in which taxing districts apply tax increases.
Currently, taxing districts can apply new voter approved levies to future and unknown assessments, many times reaping an unaccounted tax increase in addition to the newly approved tax increase. Senate Bill 711 closes this loophole by requiring taxing districts to apply the new approved levy to the assessments most recently certified by the State Tax Commission.
An example of how this works is as follows:
In 2006, tax district Y had an assessed valuation of $500,000,000, a tax rate of $1.00 and a tax rate ceiling of $1.00.
In November of 2006, tax district Y submits a tax increase to its voters which passes, increasing its tax rate ceiling to $1.25 for the 2007 tax year.
$500,000,000/100 = $5,000,000
$5,000,000 X $1.00
$5,000,000 X $1.25 = $6,250,000
Residents of tax district Y approved a tax increase of $1,250,000 for a total of $6,250,000.
In 2007, the properties in tax district Y are reassessed producing a total assessed valuation of $625,000,000. $25,000,000 of the increase in assessed value is due to new construction and improvements and $100,000,000 of the increase in assessed valuation is due to the value of the properties in the district increasing in value.
Legally, however, because of how state law is currently written, taxing districts can apply the new approved $1.25 levy to 2007 assessments. The $1.25 tax rate ceiling does not rollback in 2007 to account for the changes in assessed valuation.
$625,000,000 -$25,000,000 = $600,000,000
$600,000,000/100 = $6,000,000
$6,000,000 X $1.25 = $7,500,000
The voters of tax district Y have unsuspectingly approved a tax increase of $2,500,000, $1,250,000 more than they thought they had approved.
Senate Bill 711 would require the $1.25 tax rate for tax district Y to rollback according to the increases in assessed valuation in 2007.
$6,250,000 X 1.026 = $6,412,500
$6,412,500/$600,000,000 = .0106875
.0106875 X 100 = $1.0688
Under SB 711, the most the tax district Y could levy in 2007 would be $1.0688, not $1.25.
This loophole has been in effect since 2003 (when the interpretation of the law was changed, the result of an Attorney General memo, 107-2003). Taxing districts have taken advantage of the loophole in the past, but SB 711 closes this loophole and ensures that taxing districts will not gain windfalls from reassessment.