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Property tax could be used to prevent or ease budget shortfalls — here’s what you can do about it

Jan 27, 2021

COVID-19 continues to wreak havoc on the economy, and state and local tax shortfalls continue to mount. As local governments face a shortfall in tax revenues due to less consumer spending during the COVID-19 pandemic, many state and local leaders have discussed boosting property taxes as a means to make up for the shortfall.

Why property tax?

When discussing state tax policy, people often make reference to the concept of the three-legged stool. The three “legs” are comprised of income tax, sales tax and property tax, and they are used to achieve a balanced mixture of revenue for meeting budget goals.

A mixture of these three tax types can range anywhere from 33.33% from each tax type to 0% for one tax type and a combination of percentages to get to 100% for the other two tax types. Examples of the latter are Florida, which has no income tax, and Oregon, which has no sales tax. In theory, balance is most easily achieved when there are three tax revenue streams from which to draw.

But if we consider the interplay of income tax and sales tax, we find that they have a positive correlation. When taxpayer income rises, so does revenue from sales tax, as there tends to be more discretionary income. Conversely, when the opposite happens and income falls, collections from income tax decrease along with collections from sales tax, due to less available income for buying “luxury” items. These two tax types working in concert result in the model looking more like a two-legged stool than a three-legged one.

How could the shift play out?

When decreases in income lead to lower income tax and sales tax collections, property tax is left to bear more of the revenue load than income tax and sales tax individually, or even combined. That shift in burden could be achieved in several ways:

  • An increase in assessed value of property — either real or personal
  • An increase in the mill rate or property tax rate

A decrease in property tax exemptions is a possibility, but not a strong one, as that change would need to go through some level of legislative process. As a matter of course, taxing jurisdictions are already tasked annually with the assessment of property and establishment of the mill rate.

In May of 2020, Nashville Mayor John Cooper told local TV station WTVF that he could see the city attempting to hike property taxes by 20% or more due to a budget shortfall estimated at $250 million. Cooper called the budget situation “the worst in Metro’s history.” As a result, Nashville’s City Council recently approved a significant property tax increase of 34% to make up for the tax losses brought about by COVID-19.

Similarly, local municipalities throughout the country will have to deal with revenue loss created by COVID-19. As such, property tax increases should be anticipated by property owners, as they provide the quickest short-term budget shortfall fix for municipalities.

In the event that a municipality or state agrees to leave unchanged the assessed value of property, or even to decrease it, do not automatically conclude that your end-of-year tax bill will be lower. If the total value of property in a jurisdiction goes down, the government can increase the mill rate to ensure that they receive the tax revenue necessary to cover projected expenses in the annual budget. If the mill rate is adjusted upward enough, a decrease in value could still result in increased tax due.

Historically, we saw an example of this in the North Dakota oil and gas boom of 2006-2012. In 2011, North Dakota surpassed California in oil production, and in March 2012, it overtook Alaska to become the number two oil-producing state in the country, exceeded only by Texas. The North Dakota oil boom fueled unbounded real estate development, drastically increasing property and assessment values.

However, the subsequent oil and gas “bust” of 2012, coupled with the immediate decline in North Dakota’s economy, facilitated a mass exodus of displaced oil and gas workers from the state. Real estate growth and development came to an unforeseen halt, with many real estate projects never even reaching completion. Property values crashed as owners and developers pleaded for immediate relief in property taxes from taxing authorities.

In the years to follow the oil and gas bust, local and national commercial property taxpayers proclaimed that property assessments were too high, resulting in excess property taxes. A round of property tax abatement claims from many of North Dakota’s largest commercial property owners pressured local assessors to reduce property assessments as much as 30% within specific property classifications. Regrettably, in most incidences, local taxing authorities quickly approved upward adjustments in the property tax rates, thus nullifying property tax relief to owners.

The effects of COVID-19 could play out in a similar manner, with property tax being ripe for the same type of adjustment.

Some state and local leaders have indicated that they will try to avoid any property tax increases but have also cautioned that, in the end, they may not have a choice but to fall back on such an increase.

How can you be proactive?

At this point in time, personal property tax returns are being prepared and filed and assessors are completing any review of real property values. Once the assessor issues a notice of assessment for the property, there is a limited window of opportunity to contest the value that has been proposed.

The first step to being proactive is to review immediately any notices of assessment received and evaluate whether or not the assessment is appropriate.

If you have questions about making that determination or are unsure of the best way to proceed with contesting value, now is the time to contact Wipfli for assistance. Our associates within our property tax practice have the ability to identify opportunities for adjustments within a particular industry, are connected to local property tax representatives and can provide insight into what they are seeing in terms of states’ and municipalities’ approaches across a broader range of taxpayers.

The second step to being proactive is simply being cognizant of the potential shift in tax burden, so that you are not caught unaware later in the year. Having time to put a contingency plan in place will make it easier to manage the tax bill when it arrives.


Related content:

COVID-19’s impact on property tax assessments

Four bipartisan bills you can expect to see in 2020 or early 2021

The state tax challenges of expanded telework


Tara T. Johnson
Senior Manager
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