Property taxes are paid by residential homeowners and nonresidential property owners, including farmers, ranchers, oil and gas operators, and other businesses. Property taxes are paid on a portion of a property’s actual value. The actual value of property is determined by the county assessor or state property tax administrator. The portion of the actual value on which taxes are paid is known as taxable value. Taxable value is also known as assessed value.
Taxable value is calculated by multiplying the actual value by an assessment rate. The assessment rate is currently 7.15 percent for residential properties and is fixed at 29 percent for most nonresidential properties. Mines and lands that produce oil and gas are assessed at different rates than other nonresidential property.
Taxable value is then multiplied by the tax rate, called a mill levy, to determine the property taxes owed. One mill equals $1 for each $1,000 dollars of taxable value. For example, 100 mills is equal to a tax rate of 0.1 (100/1,000), or 10 percent. The tax rate varies for each property based on the local taxing districts in which it is located. Figure 2 provides an example of how property taxes are calculated.
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Amendment B removes provisions related to the residential and nonresidential assessment rates from the constitution, including the provisions commonly known as the Gallagher Amendment.
The Gallagher Amendment currently requires that residential and nonresidential property make up constant portions of total statewide taxable property over time. Since adoption in 1982, these provisions have required that the taxable value of residential property make up about 45 percent, and the taxable value of nonresidential property about 55 percent of statewide taxable property. Actual property values have not matched the required ratios over time because residential property values have generally grown faster than nonresidential property values. Since the taxable portion of most nonresidential property values is fixed at 29 percent, the state legislature adjusts the residential assessment rate to maintain the required ratio, as shown in Figure 1.
Amendment B removes these provisions from the constitution, leaving the residential and nonresidential assessment rates at their current rates in state statute. Under current law, the residential assessment rate is expected to decrease in future years, reducing the amount of property taxes paid by property owners and collected by local governments. Amendment B would eliminate automatic tax increases adopted by some local jurisdictions to offset revenue losses from the Gallagher Amendment. In jurisdictions that have not adopted automatic tax increases, Amendment B eliminates projected future decreases in the residential assessment rate, and any increase in nonresidential or residential assessment rates would require voter approval.
In most years, residential property values have grown faster than nonresidential values, causing the residential assessment rate to be lowered so that residential properties continue to make up about 45 percent of statewide taxable value. As shown in Figure 3, the residential assessment rate has been reduced from 21 percent when these provisions went into effect in 1983 to a current rate of 7.15 percent. With the fixed nonresidential assessment rate at 29 percent, and the current 7.15 percent residential assessment rate, nonresidential property owners pay an effective tax rate that is approximately four times higher than residential property owners. The downward shift of the residential assessment rate is expected to continue in future years.
When nonresidential property values grow faster than residential property values, the residential assessment rate must increase to maintain the constant ratio; however, other constitutional provisions require that voters approve such an increase. As a result, the state legislature may decrease, hold flat, or ask voters to approve an increase in the residential assessment rate. Since 1999, there have been six instances when the residential assessment rate would have increased, but the legislature did not refer a measure to voters and the rate instead stayed flat.
Property taxes paid by a property owner are dependent on three components: actual property value, the applicable assessment rate, and the mill levy. Changes to any of these components impact the amount of property taxes paid and thus, the amount of revenue collected by a local government. Amendment B concerns only residential and nonresidential assessment rates; however, other changes to property values or tax rates also impact the amount of property taxes owed.
In response to the shift between residential and nonresidential assessment rates, many local governments have adopted laws that automatically increase local mill levies to offset the revenue losses from the Gallagher Amendment. These automatic increases counteract the reduction in the residential assessment rate and result in a net property tax increase for nonresidential property owners. These automatic mill levy increases would not be triggered if Amendment B passes.
Under Amendment B, the residential assessment rate will remain at the current 7.15 percent for residential property. Without the measure, the residential assessment rate is projected to decrease in future years due to the relative growth of residential property values compared to nonresidential property values. As a result, Amendment B is expected to eliminate projected future reductions in the residential assessment rate, and thus, could result in higher property taxes paid by residential taxpayers, if property values increase and if automatic mill levy increases do not offset assessment rate reductions.
Under Amendment B, the assessment rate will remain in state law at 29 percent for most nonresidential property. Amendment B will have no impact on the amount of taxes paid by most nonresidential property owners.
In the local governments that have approved automatic mill levy increases to offset revenue reductions from the Gallagher Amendment, Amendment B will prevent property tax increases for businesses, farmers, and other nonresidential property owners, as the higher mill levies that would have been triggered by decreases in the residential assessment rate under the Gallagher Amendment will no longer be required.
Under the current system, the decline in the residential assessment rate has constrained property tax revenue to local governments. The impact varies across the state, with the largest impacts occurring in areas without much nonresidential property or with only slow growth in home prices. These areas are generally small and rural; however, metropolitan areas with slow growth in home values are also impacted. Amendment B prevents further decreases in the residential assessment rate, thus preventing declines in local government property tax revenue used to provide local services.
Schools are funded through a combination of state and local revenue, with the state making up the difference between an amount of school district funding identified through a formula in state law and the amount of local tax revenue generated. By preventing future decreases in the residential assessment rate, Amendment B increases local property tax collections for school districts and reduces the amount the state must pay to make up the difference.
Under Amendment B, the state legislature may decrease the assessment rates, but cannot increase them without voter approval. Currently, assessment rates are set in state law at 7.15 percent for residential property and 29 percent for most nonresidential property.