Personal Property Tax Exemption Proposal Devastating To Idaho Public Schools
A proposal (RS22034) is circulating that would enact the much anticipated personal property tax exemption. In a nutshell, this proposal would be devastating to the funding of Idaho’s public schools. Other state programs (colleges and universities, health and human services, public safety, etc.) would be adversely impacted, but none to the degree of public schools.
RS22034 would completely exempt all business personal property from the property tax, yielding a property tax revenue loss estimated by the Idaho Tax Commission at $140.9 million in FY 2012 dollars (after full phase-in over 6 years). Existing property tax levies across all taxing districts (with the exception of urban renewal districts1) would be eligible for a combination of a) replacement funding from the state’s General Fund and b) property tax levy rate increases (i.e., a tax shift to real property).
The property tax levy rate increases (so-called “3% flooring”) would cover the loss of the first 3% of the total property tax in each district, and is estimated to shift up to $41.2 million of property taxes away from personal property, and on to real property. This shift would apply to all property tax districts (except urban renewal districts), and would result in higher property taxes on homeowners, farmers, timberland, and businesses with relatively small shares of personal property value.
Property tax replacement funding would apply to revenue loss exceeding 3% of a district’s total property tax, and is estimated to cost the state’s General Fund $90.5 million2 upon full phase-in. This replacement funding applies only to levies in place as of 2012, is fixed in perpetuity at the 2012 level (except in the case of voter approved levies), and is not available for levies enacted after 2012. In particular, any voter approved levies (school supplemental levies, bond levies, plant facility levies, etc.) that expire during or after the phase-in period lose their replacement funding, and any voter approved levies that are enacted in 2013 or beyond (school supplemental levies, bond levies, plant facility levies, etc.) are not eligible for replacement funding. This means that most non-school district levies (cities, counties, highway districts, etc.) are afforded perpetual replacement, while most school district levies (supplemental, bond, plant facility, etc.) will roll off and their replacement funding will be extinguished3.
Thus the design of RS22034 holds non-school taxing districts relatively harmless (in the near-term) by shifting up to $41.2 million of property tax from personal to real property, and removing up to $90.5 million from the state General Fund (that will not be available to fund education, health care, public safety, and other critical services provided by state programs) to replace revenue lost from the personal property exemption.
Public schools end up the big loser in what amounts to a three-pronged hit:
1) $90.5 million is removed from the state General Fund, half of which is used to fund public schools. Idaho’s public school funding effort has declined from 4.4% of Idaho personal income in the 1980’s and 1990’s to just 3.4% of Idaho personal income in the 2014 Executive Budget. That’s a 23% decline in a decade and a half, and represents a funding reduction of half a billion dollars. Losing another $90 million of General Fund revenue to fund tax cuts will virtually guarantee continued decline in Idaho’s public school funding effort.
2) Up to $41.2 million of additional property tax levies are shifted to real property, and will have a high probability of making voters less inclined to support voter approved levies such as school supplemental, school bond, and school plant facility levies. The 2006 swap of increased sales tax for reduced school property tax levies was supposed to shift the responsibility for paying for school operating expenses off the property tax and on to state appropriations, but the reality is Idaho’s school districts have been increasingly driven to raising property taxes to fund operating expenses. In the current school year (2012-13) voter-approved supplemental levies increased by 20%. Almost three-quarters of Idaho’s 115 public school districts now have voter approved supplemental levies for operating purposes. Most will expire in one to two years.
3) No replacement funding for voter approved levies enacted after 2012 will mean schools are on their own with the reduced property tax base. Property tax base losses will range from less than 2% to over 50% across Idaho’s public school districts (school district detail is shown in the attached Table 6, taken from Tax Commission report EPB0703_01-15-2013). When these districts go to their voters for property tax levies they will have to ask for higher levy rates to raise the same amount of revenue. For example, if a district losses 20% of its property tax base to the personal property tax exemption, it will have to ask for a levy rate that is 25% higher to raise the same amount of revenue. If the property tax base loss is 40%, the levy to raise the same amount of revenue would need to be 67% higher. The current wide disparities in property tax capacity across Idaho’s school districts will be exacerbated.
In summary, RS22034 is notable for the adverse impact it will have on Idaho’s ability to provide funds for public education. It does protect non-school local government from much of the revenue losses associated with full exemption of personal property taxes, but it does so with a significant amount of revenue diverted from the General Fund, and without any apparent analysis of the impact that diversion of funds will have on state programs.
1 Urban renewal districts are not eligible for replacement funds, but they can receive special shift levies if they can prove to the Idaho Tax Commission they are unable to make bond payments under the exemption of business personal property. Their shift levies would be applied only to the remaining increment values within the urban renewal district.
2 This figure does not take into account voter approved levies that lose their replacement funding when they expire.
3 As of the 2011-12 school year, school district property tax levies totaled $393.0 million. $139.6 million was in supplemental M&O levies, $111.0 was in bond levies, and $39.4 million was in plant facility levies. In the 2012-13 school year supplemental levies increased to $169 million.
For a PDF version of this document, click here.
PROPERTY TAX EXEMPTION PROPOSAL
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Personal Property Tax Exemption Proposal Devastating To Idaho Public Schools
A proposal (RS22034) is circulating that would enact the much anticipated personal property tax exemption. In a nutshell, this proposal would be devastating to the funding of Idaho’s public schools. Other state programs (colleges and universities, health and human services, public safety, etc.) would be adversely impacted, but none to the degree of public schools.
RS22034 would completely exempt all business personal property from the property tax, yielding a property tax revenue loss estimated by the Idaho Tax Commission at $140.9 million in FY 2012 dollars (after full phase-in over 6 years). Existing property tax levies across all taxing districts (with the exception of urban renewal districts1) would be eligible for a combination of a) replacement funding from the state’s General Fund and b) property tax levy rate increases (i.e., a tax shift to real property).
The property tax levy rate increases (so-called “3% flooring”) would cover the loss of the first 3% of the total property tax in each district, and is estimated to shift up to $41.2 million of property taxes away from personal property, and on to real property. This shift would apply to all property tax districts (except urban renewal districts), and would result in higher property taxes on homeowners, farmers, timberland, and businesses with relatively small shares of personal property value.
Property tax replacement funding would apply to revenue loss exceeding 3% of a district’s total property tax, and is estimated to cost the state’s General Fund $90.5 million2 upon full phase-in. This replacement funding applies only to levies in place as of 2012, is fixed in perpetuity at the 2012 level (except in the case of voter approved levies), and is not available for levies enacted after 2012. In particular, any voter approved levies (school supplemental levies, bond levies, plant facility levies, etc.) that expire during or after the phase-in period lose their replacement funding, and any voter approved levies that are enacted in 2013 or beyond (school supplemental levies, bond levies, plant facility levies, etc.) are not eligible for replacement funding. This means that most non-school district levies (cities, counties, highway districts, etc.) are afforded perpetual replacement, while most school district levies (supplemental, bond, plant facility, etc.) will roll off and their replacement funding will be extinguished3.
Thus the design of RS22034 holds non-school taxing districts relatively harmless (in the near-term) by shifting up to $41.2 million of property tax from personal to real property, and removing up to $90.5 million from the state General Fund (that will not be available to fund education, health care, public safety, and other critical services provided by state programs) to replace revenue lost from the personal property exemption.
Public schools end up the big loser in what amounts to a three-pronged hit:
1) $90.5 million is removed from the state General Fund, half of which is used to fund public schools. Idaho’s public school funding effort has declined from 4.4% of Idaho personal income in the 1980’s and 1990’s to just 3.4% of Idaho personal income in the 2014 Executive Budget. That’s a 23% decline in a decade and a half, and represents a funding reduction of half a billion dollars. Losing another $90 million of General Fund revenue to fund tax cuts will virtually guarantee continued decline in Idaho’s public school funding effort.
2) Up to $41.2 million of additional property tax levies are shifted to real property, and will have a high probability of making voters less inclined to support voter approved levies such as school supplemental, school bond, and school plant facility levies. The 2006 swap of increased sales tax for reduced school property tax levies was supposed to shift the responsibility for paying for school operating expenses off the property tax and on to state appropriations, but the reality is Idaho’s school districts have been increasingly driven to raising property taxes to fund operating expenses. In the current school year (2012-13) voter-approved supplemental levies increased by 20%. Almost three-quarters of Idaho’s 115 public school districts now have voter approved supplemental levies for operating purposes. Most will expire in one to two years.
3) No replacement funding for voter approved levies enacted after 2012 will mean schools are on their own with the reduced property tax base. Property tax base losses will range from less than 2% to over 50% across Idaho’s public school districts (school district detail is shown in the attached Table 6, taken from Tax Commission report EPB0703_01-15-2013). When these districts go to their voters for property tax levies they will have to ask for higher levy rates to raise the same amount of revenue. For example, if a district losses 20% of its property tax base to the personal property tax exemption, it will have to ask for a levy rate that is 25% higher to raise the same amount of revenue. If the property tax base loss is 40%, the levy to raise the same amount of revenue would need to be 67% higher. The current wide disparities in property tax capacity across Idaho’s school districts will be exacerbated.
In summary, RS22034 is notable for the adverse impact it will have on Idaho’s ability to provide funds for public education. It does protect non-school local government from much of the revenue losses associated with full exemption of personal property taxes, but it does so with a significant amount of revenue diverted from the General Fund, and without any apparent analysis of the impact that diversion of funds will have on state programs.
1 Urban renewal districts are not eligible for replacement funds, but they can receive special shift levies if they can prove to the Idaho Tax Commission they are unable to make bond payments under the exemption of business personal property. Their shift levies would be applied only to the remaining increment values within the urban renewal district.
2 This figure does not take into account voter approved levies that lose their replacement funding when they expire.
3 As of the 2011-12 school year, school district property tax levies totaled $393.0 million. $139.6 million was in supplemental M&O levies, $111.0 was in bond levies, and $39.4 million was in plant facility levies. In the 2012-13 school year supplemental levies increased to $169 million.
For a PDF version of this document, click here.
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