3/17/97

KUFM/KGPR

T.M. Power

Purposeful Confusion on Property Tax Legislation

The discussion of Montanan’s property taxes both at the legislature as well as in the mass media has been grossly misleading in a way that lays no basis at all for the development of rational tax policy.

The biggest error is the constant repetition of the claim that if some major reform of property tax law is not carried out, the property taxes paid by households and businesses in the state will have to rise 35 to 45 percent, imposing a horrible, unpayable burden on the citizens of the state. The supposed cause of this crushing burden is the new property tax appraisal conducted by the Department of Revenue that found that property values, on average, across the state have risen considerably over the last four or five years. It is these higher property values that we are told will trigger massive tax increases.

That just isn’t true. Property tax revenues will go up only if the property tax levies applied to those values are not adjusted downward. But they will be. Neither the Democrats nor the Republicans in the state government intend to impose steep tax increases on citizens and pass on a windfall to government agencies who did not even ask for the increased revenues. Local school districts have their taxing authority capped on a dollar basis; they will be required to reduce their levies. State and local governments will respond to the increased property values the way they always have, by adjusting the level of the levies, reducing them, to keep actual tax revenues in line with intended government spending.

Keeping total property tax collections under control is not a complicated legislative or legal issue. The state legislature now is in the process of determining the number of state general fund dollars it thinks are appropriate for the support of our local schools. Once that dollar amount has been determined, it is a simple matter of arithmetic to determine the appropriate state-wide mil levy that needs to be imposed. With the higher appraised values, that mil levy will be significantly below the mil levy imposed by the legislature in the last biennium. There will be no windfall of dollars flowing to our schools; there will be no huge fly-up in the overall property taxes we pay in support of schools and local governments.

Why then all of the fuss about the need to throw out the new Department of Revenue property appraisals and completely overhaul our property tax system?

There are several explanations. First, sales tax advocates want us all to believe that the property tax system is broken beyond repair and that only a sales tax can save us from economic ruin. They do not want to fix the property tax system; they want to get rid of it. The phony threat of a 45 percent increase in taxes helps their sales tax cause.

Another plausible explanation is that the new property reappraisals show that property values in certain parts of the state have risen much faster than property values elsewhere. In particular, property values have skyrocketed in various Western Montana counties while remaining stable or declining slightly in many Eastern Montana counties. In this situation, the uniform state levy that funds the state’s contribution to public schools will raise more dollars in prosperous and growing Western Montana counties and fewer dollars in stable or declining Eastern Montana counties. Even though property taxes, overall, need not increase, there will be a shift in the collection of those taxes from the less prosperous to the more prosperous counties.

Given that the Republican leadership of the state legislature is centered in the Flathead Valley, it is not surprising to find it leading the fight to keep folks in the Flathead from having to pay a larger share of the state’s public school bill. What is surprising is that Republicans and Democrats elsewhere are willing to put up with this local effort to dodge part of the burden that goes with growing economic power, namely a larger share of the cost of public services.

The third explanation for the public hysteria about the property tax is that under the new appraisal there has been a substantial shift in the property tax base from commercial property toward residential property. If nothing is done about this, the property tax burden will shift significantly towards home owners. Although some business leaders may see this as appropriate, such an increased concentration of the tax burdens on home ownership almost certainly is in conflict with other public policy objectives. Changes in the taxable percentage applied to residential real property, an expanded homestead exemption, or a rebate on income taxes, or a combination of these could solve this problem.

The legislature faces a choice. It can levy the property tax on the basis of false appraisals, those of the past which we know are wrong, and collect the tax in an inequitable manner. Alternatively, it can collect exactly the same number of dollars in tax revenues overall, using accurate property appraisals and collect those tax dollars in a way that maintains the balance between business and household taxes. We can lie to ourselves and the courts and impose an inequitable tax or we can adjust the mil levies downward, use honest appraisal information, and adjust the tax collections to match both actual changes in the Montana economy and our public policy objectives. Guess which way the legislature is leaning?