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Governor’s Property Tax Reappraisal Advisory Council
Meeting
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Dec. 20, 2002
MINUTES
Attendees:
Chairman Senator Bob Story
Vice Chairman Kurt Alme
Representative John Brueggemann
Representative Gary Branae
Ward Ernst
Nick Hogan
Senator Emily Stonington
Susan Humbolt
Department of Revenue Staff Present:
Judy Paynter, Tax Policy and Research Process Lead
Brad Simshaw, Principal Tax Policy Analyst
Larry Finch, Principal Tax Policy Analyst
Marla Tilton, Administrative Assistant
Information
The information base is the material prepared for the
Council. The only handouts referred to are those given in
addition to the basic Council materials.
The meeting was called to order at 9:00 am and roll call was
taken.
Chairman Bob Story opened the meeting and welcomed Susan Humble
to the Council. Chairman Story noted that the minutes would
be approved at a later date. Chairman Story reviewed the
Council Charge.
Brad Simshaw, Department of Revenue, presented the report on
Analysis of Preliminary Reappraisal Valuations. The Council
discussed points in the report.
Ward Ernst asked if businesses were to leave, would there be a
decrease in the reappraisal valuations? Brad Simshaw
responded no. The records used in this report represented
about 380,000 residential properties and less for commercial
property. This is a comparison of all property with a 2002
value to the new 2003 reappraisal value, so a business closing does
not affect the change in commercial property appraisal values.
Senator Emily Stonington asked if there was any idea of what is
going on in the small rural towns. Brad Simshaw responded
that there was no information on the small rural towns and that the
reappraisal not only will change from the old 1997 value to a new
2003 value, but there will be many changes, even corrections, to
errors that may have occurred in the prior reappraisal.
Chairman Bob Story noted that most of the counties have a low
base and asked how many parcels were excluded because they were
outliners. Brad Simshaw commented about 5-10%. Chairman
Story stated that residential, agriculture and timber are valued
every 6 years. Chairman Story asked if the other classes of
land were valued annually. Brad Simshaw responded that they
were valued annually. Brad gave an example of utility
property as natural growth. Natural growth mostly means new
construction, new property and buying new business equipment.
Utility property would have a change in valuation that is not only
new construction but also they would be reappraised each
year. Brad added that you could have the same piece of
property that actually changed in valuation each year because of
revaluing property each year.
Chairman Bob Story asked if the method of appraisal is related
more to income as opposed to market value. Brad Simshaw
responded that the appraisal method for residential property is
generally on market base and for commercial property; it is
generally an income approach.
Chairman Bob Story asked what the average mill levy was
currently in the state. Brad Simshaw responded that it is
about 500 mills for residential property.
The Council broke from 10:00 am to 1:00 pm as three members of
the Council were on the Rules Committee, which started to meet at
10:00 am.
Brad Simshaw, Department of Revenue, continued his report on
Analysis of Preliminary Reappraisal Valuations. The
Council asked questions and discussed points in the report.
Lee Heiman, Staff Attorney, Legislative Services Division,
presented information about Acquisition Value
Questions. The Council asked questions and discussed
points in the report.
Larry Finch, Department of Revenue, presented the report on
Acquisition Value Approach to Property Taxation. The
Council asked questions and discussed points in the report.
Chairman Bob Story asked for public comment.
A citizen, who did not introduce himself, commented that the
acquisition value report did not discuss whether the current system
is unfair or not. In order to relieve the inequities that are
inherent in the current system, tax reform should be
considered. We have to find a way to make the property tax a
fair and equitable system for our people.
Chairman Bob Story responded with some history about property
taxes. He noted that about ten years ago the economy of
Montana drove the property value. When money started coming
into the state from other places and resting here, it started
changing the values of our homes and that is what brought the issue
of higher property taxes to Montana.
The above referenced citizen also added that what we did in 1997
really was helpful because his personal taxes only increased about
20%. The citizen noted that the increase was tolerable; but
if that percentage goes higher, it will not be tolerable. He
ended by saying that tax reform is a requirement.
Senator Emily Stonington thanked the audience for coming to the
meeting and added that her personal property taxes increased about
37%. She commented that the system is very complex and if we
look at the taxing side, we have a limited number of variables that
we can deal with regardless of whether we go to acquisition value
or stay with an appraisal system. Senator Stonington said
basically we have the value of the home, the option to phase in any
value increase or not, the tax rate, and the number of mills that
can be applied by schools or local governments. In 1986,
Initiative 105 was passed. This limited local
governments’ ability to apply more mills, but the schools
continue to be able to apply greater and greater mills to fund the
students in their schools. The mill is the bottom line
because the state has pulled back on its share of school support
and those taxes have been shifted to the property tax payers
through the mills. If we can address that issue, we can get
at this basic problem without having to look for a whole new way to
tax properties. Senator Stonington pointed out that the task
this committee has, is really to address the property tax increases
within the system of taxing the property. Is there a better
way of looking at those limited variables to address the problem of
increased values and the potential problem of increasing taxes?
Chairman Bob Story asked Senator Stonington if she knew what
caused the 37% increase in her taxes. Senator Emily
Stonington responded that her mills had increased from 362 to
443. The mill increases were mostly voted mills.
Senator Emily Stonington asked Lee Heiman, Legislative Services
Division, if other states were able to tax residential property
differently if property was owned by non-residents versus
residents. Lee Heiman responded that this would be
unconstitutional and was not aware of any states being able to tax
residents differently. Lee added that our homestead exemption
terminology used in the tax code could include a specific
definition for being a resident.
Chairman Bob Story asked Lee Heiman for further explanation of
the homestead exemption.
Lee Heiman, Legislative Services Division, responded that the
Montana Constitution recognizes the homestead exemption. He
added that many states have a homestead exemption for their
residents. He noted that some of the guidelines with other
states are that if you live in a place for six months of the year,
then you are allowed the homestead exemption. This guideline
is not saying that a person is a resident of the state, but that
they lived in the residence for six months of the year. The
exemption would not cover a second or third home. This is a
simple homestead exemption; you could make it more complex by
factoring in the value of the land and the value of the house with
some kind of ratio and also the person’s age and
person’s income as another ratio. You can include the
number of months of the year a person lives in the home.
Chairman Bob Story asked Lee Heiman how we avoid the United
States challenge of Equal Protection? Lee Heiman responded
that the United States Equal Protection is broad regarding
taxes. The state needs to have a rational basis and then the
federal constitution gives the legislature considerable freedom in
how they approach taxes.
Chairman Bob Story asked the Council to review the questions
Larry Finch, Department of Revenue, had presented at the end of his
report:
- Are identified problems with the current system widespread
(statewide), or are they isolated?
- If isolated, how many instances or occurrences of the problem
actually arise in the isolated areas? Does the problem really
require a solution that impacts all property taxpayers?
- Does this type of solution provide answers that may be worse
than the problem by complicating and confounding an existing system
of taxation that generally works well? Or is the solution one
of specificity?
- If the solution is one of specificity, can there be a specific
solution designed to target and alleviate the socially acknowledged
burdens on selected segments of taxpayers before implementing
wide-ranging and long-term reform?
Chairman Bob Story asked the Council if we should look at our
charge as recommending a long-term fix or a short-term patch.
Kurt Alme also asked the Council what the scope should be for
this group’s accomplishment and should we consider another
meeting. Kurt suggested that maybe the group should focus on
working within the current system and, if the group thinks the
acquisition value is worth a further look, then that should be
noted as well.
Representative John Brueggemann commented that the problem is
that the phase-in still leave 6% with a property tax increase
greater than 25%. John noted that even with dropping the
mills and adjusting the rates, the rest of the state would be out
of proportion. Representative Brueggemann recommended a
long-term commitment, but felt the Council should consider a
band-aid.
Ward Ernst agreed that the phase-in of reappraisal was important
and expressed concern about how to address the outliers.
Representative John Brueggemann added that the group might want
to look at taxing by the square foot instead of the value of the
property.
Chairman Bob Story responded that in 1999 some of the ideas were
to look at square footage or like the European way, the number of
doors or windows. Basically, the purpose of property tax is
to raise money for those services related to property and we
currently use property taxes to fund a big chunk of schools.
Chairman Story added that we need to fund what services property
ownership demands, for example, fire protection, police protection,
roads, sewage, water and those things more related to
property. Back in 1999, the head of the Montana Taxpayers
Association gave the members of the Council some thought with his
statement, “You guys spend a whole lot of time worrying about
whether the system is fair or not. The system isn’t designed
to be fair, it is designed to raise revenue.”
Senator Emily Stonington commented that fairness could mean so
many different things. Is it fair to see your property tax
increase just because the person next door paid a huge amount of
money for their property? On the other hand is it fair to tax
on a square foot basis because I might build a home that costs $70
per square foot and you might build a home that costs $200 per
square foot? Is it fair to have people’s taxes go up
when they live on fixed income?
Chairman Bob Story asked the Council for their comments on the
following different options they could recommend:
- Band-aid
- Band-aid and alternative
- Band-aid, alternative and long term
- Band-aid and something to help the outliers
Senator Emily Stonington moved that the Council recommend to the
Governor an adjustment in the tax rate, an adjustment in the
homestead exemption, and continuation of the phase-in of developing
new property values in both residential and commercial properties
(as shown in Table 3) and applying those to the new appraisal
values. Motion was seconded and passed unanimously.
Representative John Brueggemann commented that this motion would
be the band-aid and that the long-term problem remains.
Senator Emily Stonington added that this recommendation would be
a change to the existing tax policy.
Chairman Bob Story reminded Council members of Montana’s
reappraisal history (reappraise / reduce the rate / reappraise /
reduce the rate / in 1993, reappraise but don’t reduce the
rate, which caused a tax revolt / in 1997, reappraise, reduce the
rate and create homestead exemption). The reappraisal worked
well in that environment because we weren’t able to analyze
the tax completely. There were still 6% of the people that
were going to pay 25% more tax. It has been recently that we
have seen the change.
After the Council’s discussion, Judy Paynter, Department
of Revenue, suggested her staff could do additional research on the
outliers that would include locations, characteristics of the
property, land values and any commonality that the database
contains.
Chairman Bob Story asked how much of the 20% increase was land
and how much was growth in value. Judy Paynter responded that
residential property is somewhere around 45-58% increase in land
value and a 12-15% increase in structural value.
Chairman Bob Story suggested that the Council should look at
backing off the homestead exemption as such, taking more of the
land and improvement split and putting the homestead exemption into
the land. The tax then should work out rather evenly for the
average property owner.
Senator Emily Stonington expressed concern about dealing with
the discrepancy in the 120-acre problem versus the 20-acre plus
problem. She commented that she receives many calls where
someone lives on a 14 acre site and is paying $1,800 on the land
and someone else right next door on a 21 acre site is paying
$46. That is a real discrepancy. With this issue of
reappraisal values going up so much on land, we need to look at the
exemption policy we have and apply it to land so that it somehow
equalizes. Senator Stonington added that she would feel more
comfortable if the Council had another meeting to make additional
recommendations.
Judy Paynter, Department of Revenue, commented that the
department has broken out both the land for residential and
commercial properties and there is a comparable difference going on
between the land growth versus the improvements growth.
Chairman Bob Story added that the land has increased 100%, which
means that it went from $100 a lot to $200 a lot.
Judy Paynter, Department of Revenue, suggested that they could
take a look at presenting some of the data in dollars instead of
percentages. Chairman Bob Story agreed with Judy’s
suggestion because it might give the Council another option to
review. Representative John Brueggemann asked if the
Department of Revenue could present data by county.
Senator Emily Stonington asked when do the individual notices go
out to taxpayers? Kurt Alme responded in June.
Kurt Alme asked the Council to give some thought to the
following questions:
- What exactly are we trying to do? Are we trying to keep
people’s property taxes from changing or is it only certain
people we are concerned about?
- Are we concerned about the folks with fixed income, are we
concerned about people as long as they stay put, are we concerned
about residents only as opposed to non-residents?
Chairman Senator Bob Story adjourned the meeting at 4:10 pm.
The next meeting date was set for Saturday, January 11,
2003.
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