PROPERTY TAX LOSS REIMBURSEMENTS FOR SENATE BILLS 3 AND 287
Mike Sobul
Ohio Department of Taxation
August 2001
PROPERTY TAX LOSS REIMBURSEMENTS FOR SENATE BILLS 3 AND 287
Introduction
Beginning in Tax Year 2001, there will be significant reductions in the valuation of certain types of public utility property. Two bills enacted by the 123^{rd} General Assembly reduced the assessment rate for certain tangible personal property of electric utilities and all tangible personal property of gas utilities. For electric utilities, including rural electric utilities, all property except transmission and distribution property will have its assessment rate reduced to 25 percent. All natural gas personal property goes to 25 percent from 88 percent. The two changes combined have been estimated to reduce property taxes by about $300 million. To replace this money, new state consumption taxes have been enacted, a kilowatt-hour tax (KWH tax) on electricity and a thousand cubic foot tax on natural gas (MCF tax). All of the money from the MCF tax and 37 percent of the money from the KWH tax will be earmarked into two funds, the School District Property Tax Replacement Fund and the Local Government Property Tax Replacement Fund. The mechanisms for replacing the lost revenue from property tax changes are contained in four sections of Senate Bill 3, amended by Senate Bill 287, O.R.C. 5727.84 - 5727.87. Since the tax changes first occur for tax year 2001, the first reimbursements under these provisions take place in February 2002. Reimbursements are to be made twice a year, in February and August.
Calculation of Base Loss (O.R.C. 5727.84)
Prior to January 1, 2002, the Department of Taxation is to determine the tax losses due to the reduction in assessment rates. Using 1998 data for electric utilities and 1999 data for gas utilities, the department will calculate for each taxing district in the state the difference between actual valuation and what valuation would have been had the apportionment and assessment rate provisions in Senate Bills 3 and 287 been in effect. This is defined in the bill as the "Tax Value Loss." (The tax value loss is to be certified to the Department of Education prior to January 1, 2002.) Based on the calculated valuation losses, the Department of Taxation will determine for each local taxing unit in the state the estimated tax loss. For calculating the tax loss on electric property, the department will use the greater of the tax rates in effect in 1998 and 1999, except levies passed after June 30, 1999 will not be considered. For calculating the tax loss on natural gas property, the department will use the greater of the tax rates in effect in 1999 and 2000. For this determination, levies are categorized as one of two types-- either fixed-rate levies (the gross tax rate is constant) or fixed-sum levies (the gross tax rate is adjusted annually to raise a specified amount of money each year; these levies include bond, debt, and emergency levies).
The full amount of the fixed-rate levy loss will be eligible for reimbursements, subject to the reimbursement schedules in O.R.C. 5727.85 - 86. Reimbursement of fixed-sum levies is restricted. Under existing levy law, if the total valuation of a taxing unit declines, the tax rate charged all taxpayers would increase to offset the lower valuation, insuring that the appropriate fixed-sum is actually raised. To protect non-utility taxpayers from large rate increases, Senate Bills 3 and 287 provide a threshold, above which the state would absorb the costs. That threshold is 0.25 mills. In other words, if the reduction in electric utility and natural gas taxes results in adjustments to overall fixed-sum rates in a taxing unit of less than 0.25 mill, the tax rates will increase and no reimbursements will be made. If the overall fixed-sum rates would otherwise increase by more than 0.25 mill, the rates would increase by the 0.25 mill. The additional revenue needed to fill the gap between the amount of money brought in by the 0.25 mill and the amount of money that would have been brought in had the rate been allowed to increase to the necessary level would be reimbursed by the state. Bond levies are to be reimbursed for the life of the levy, regardless of the number of years.
School district emergency levies are to be reimbursed at least through 2006. If the emergency levy continues to be in effect beyond 2006 due to renewals, it will continue to be reimbursed as long as it remains in effect, up to a maximum of 10 additional years. Preliminary estimates of the fixed-sum levies have shown that fewer than 50 jurisdictions in no more than 34 counties will be eligible for these reimbursements.
Reimbursements to Schools (O.R.C. 5727.85)
The determination of the amount of money to be reimbursed for fixed-rate levies directly to city, exempted village, and local school districts from the property tax replacement fund is done in two steps, except for the first payment. The basis for reimbursement is the dollar loss calculated in O.R.C. 5727.84. In February 2002, direct payment is made for 50 percent of the annual loss. Beginning in August 2002, a school aid offset is calculated each year. The offset is equal to the additional state school foundation aid that districts will receive because of lower valuations resulting from S.B. 3 and S.B. 287. The amount directly reimbursed to schools is the amount determined in O.R.C. 5727.84 less the offset.
This method of reimbursement is used through August of 2006. At that point, a calculation is made to determine if further reimbursement is required. First, a determination is made of the increase in school aid between fiscal year 2002 and the current fiscal year. That amount is then compared with the school district loss calculated in O.R.C. 5727.84, adjusted for inflation from January 1, 2002 to June 30^{th} of the current year. If the school aid increase is greater than the inflation-adjusted loss, no further reimbursement payments are made. If the inflation-adjusted loss is greater, full reimbursements are made during the following tax year. For example, assume a school district has a tax loss of $500,000 from the utility reforms. If inflation is three percent per year, then the inflation adjusted loss in June 2006 would be $562,754. If school aid from fiscal year 2002 through fiscal year 2006 grows by more than $562,754 then payments would stop. Otherwise the district would get a payment of $500,000. This determination is repeated each year through 2016. No reimbursements are made after 2016.
The reimbursement mechanism for joint vocational school districts is not so cumbersome. Each JVS is reimbursed the full amount calculated in O.R.C. 5727.84 for a full 15 years. Beginning in August 2002, there is a calculated offset based on the 0.5 mill charge-off in the JVS foundation formula.
Each year through 2006, and twice per year thereafter, the Tax Commissioner is to determine if more money is available in the school district property tax replacement fund than is needed to make all payments. If there is a surplus of revenue, all of the surplus is to be allocated to school districts and joint vocational school districts on a per pupil basis. Once no direct payments for losses are required, all money in the fund is to be distributed in this manner. Money distributed under this provision can only be used for capital expenses.
By August 5, 2002, the Tax Commissioner is to determine if more money is available in the school district property tax replacement fund than is necessary to make the reimbursement in that month. If there is excess revenue, it may be used to make 4.5 years worth of reimbursement payments at once for fixed-rate levies, wiping those obligations off the books.
Reimbursements to Non-Schools (O.R.C. 5727.86)
The amounts to be reimbursed to non-schools are fairly straightforward. Each non-school is reimbursed the full amount calculated in O.R.C. 5727.84 for the first 5 years, with no calculated offset or reduction. For the next five years, all non-schools receive 80 percent of the calculated amount. Over years 11 through 15, payments are phased-out by about 13.3 percent per year. No direct payments are received beginning in year 16. There are two exceptions to this payments schedule. Non-schools with qualifying fixed-sum reimbursements are reimbursed for the life of the qualifying levies, whether those are more or less than the 15 years. Also, a special provision in the law allows one or two jurisdictions in Lake County to receive 100 percent reimbursement for 15 years, rather than being subject to the sliding scale beyond year five.
Each year through 2006, and twice per year thereafter, the Tax Commissioner is to determine if more money is available in the local government property tax replacement fund than is needed to make all payments. If there is a surplus of revenue, the full excess is to be allocated to counties. One-half of the excess is to be distributed based on county population. The other half is to be distributed proportionally based on each county's calculated loss according to O.R.C. 5727.84 to the overall loss. Each county must distribute these revenues to all non-schools based on each non-school's current property taxes as a proportion of all non-school property taxes in the county. Once no direct payments for losses are required, all money in the fund is to be distributed in this manner.
By February 5, 2002, the Tax Commissioner is to determine if more money is available in the property tax replacement fund than is necessary to make the reimbursement in that month. If there is excess revenue, it may be used to make 9.4 years worth of reimbursement payments at once for fixed-rate levies, wiping those obligations off the books.
Recoupment of Auditor and Treasurer Fees (O.R.C. 5727.87)
County auditors and treasurers are allowed to recoup their lost fees due to the lowering of assessment rates. For the first five years, the recoupment is the tax value loss times 0.9659 percent in counties with over $150 million in total tax collections or times 1.1159 percent in counties with under $150 million in total tax collections. For the next five years, the reimbursement is the difference between 1998 fees and fees in the current year. The fees are paid proportionally from the reimbursements that go to all schools and non-schools, as if the reimbursements had been property tax payments.
SCHOOL DISTRICT EXAMPLE ONE
DISTRICT WITH NO NEW LEVIES AFTER 1998
Total assessed value: $1,445,000,000
Electric Loss: ($122,000,000)
Gas Loss: ($3,000,000)
Assessed value after loss: $1,320,000,000
Millage Rates
Levy Type |
1998 Rate |
1999 Rate |
2000 Rate |
Current Expense |
37.3 |
37.3 |
37.3 |
Permanent Improvement |
1.3 |
1.3 |
1.3 |
Bond |
.27 |
.25 |
.24 |
Emergency |
7.84 |
7.58 |
7.0 |
Tax Losses*
Levy Type |
Gas Loss |
Gas Loss Formula** |
Electric Loss |
Electric Loss Formula*** |
Current Expense |
$111,900 |
$3,000,000 x 37.3 mills |
$4,550,600 |
$122,000,000 x 37.3 mills |
Permanent Improvement |
$3,900 |
$3,000,000 x 1.3 mills |
$158,600 |
$122,000,000 x 1.3 mills |
Bond |
$750 |
$3,000,000 x .25 mills |
$32,940 |
$122,000,000 x .27 mills |
Emergency |
$22,740 |
$3,000,000 x 7.58 mills |
$956,480 |
$122,000,000 x 7.84 mills |
* The losses shown in this table for current expense and permanent improvement levies are the actual amounts to be reimbursed as fixed-rate levies.
** Value loss times the greater of the 1999 and 2000 tax rate.
*** Value loss times the greater of the 1998 and 1999 tax rate.
CALCULATION OF FIXED-SUM LEVY REIMBURSMENT
Fixed-Sum Loss = Gas Bond Loss + Electric Bond Loss + Gas Emergency Loss + Electric Emergency Loss
which is:
Fixed-Sum Loss = $750 + $32,940 + $22,740 + $956,480 = $1,012,910
Fixed-Sum Reimbursement = Fixed-Sum Loss - (.25 mills x Assessed Value After Loss)
which is:
$1,012,910 - (.00025 x $1,320,000,000) = $682,910
TOTAL REIMBURSEMENTS
Total reimbursements are the sum of the bold numbers from the above two sections.
SCHOOL DISTRICT EXAMPLE TWO
DISTRICT WITH A NEW LEVY PASSED IN NOVEMBER 1999
Total assessed value: $95,000,000
Electric Loss: ($660,000)
Gas Loss: ($600,000)
Assessed value after loss: $93,740,000
Millage Rates
Levy Type |
1998 Rate |
1999 Rate* |
2000 Rate |
Current Expense |
33.5 |
38.4 |
38.4 |
Bond |
7.4 |
7.4 |
7.2 |
The new 4.9 mill levy in 1999 was passed in November.
Tax Losses*
Levy Type |
Gas Loss |
Gas Loss Formula** |
Electric Loss |
Electric Loss Formula*** |
Current Expense |
$23,040 |
$600,000 x 38.4 mills |
$22,110 |
$660,000 x 33.5 mills |
Bond |
$4,440 |
$600,000 x 7.4 mills |
$4,884 |
$660,000 x 7.4 mills |
* The losses shown in this table for current expense and permanent improvement levies are the actual amounts to be reimbursed as fixed-rate levies.
** Value loss times the greater of the 1999 and 2000 tax rate.
*** Value loss times the greater of the 1998 and 1999 tax rate, for all levies passed before 7/1/99. Since the district passed a new levy in November 1999, it is not reimbursed for the electric loss.
CALCULATION OF FIXED-SUM LEVY REIMBURSMENT
Fixed-Sum Loss = Gas Bond Loss + Electric Bond Loss
which is:
Fixed-Sum Loss = $4,400 + $4,884 = $9,284
Fixed-Sum Reimbursement = Fixed-Sum Loss - (.25 mills x Assessed Value After Loss)
which is:
$9,284 - (.00025 x $93,740,000) = -$14,151
Since the calculation of the fixed-sum levy reimbursement is negative, there is no reimbursement.
TOTAL REIMBURSEMENTS
Total reimbursements are the sum of the bold numbers from the above two sections.
Counties Estimated to Have One or More Jurisdictions Eligible
for Fixed-Sum Reimbursements
01 |
Adams |
02 |
Belmont |
03 |
Brown* |
04 |
Butler |
05 |
Clark* |
06 |
Clermont |
07 |
Crawford* |
08 |
Cuyahoga* |
09 |
Defiance |
10 |
Fairfield |
11 |
Fulton |
12 |
Gallia |
13 |
Guernsey |
14 |
Hamilton |
15 |
Hancock |
16 |
Harrison |
17 |
Highland |
18 |
Jefferson |
19 |
Lake |
20 |
Lawrence |
21 |
Logan* |
22 |
Lorain |
23 |
Mahoning |
24 |
Marion* |
25 |
Meigs |
26 |
Montgomery |
27 |
Ottawa |
28 |
Pike |
29 |
Shelby |
30 |
Stark |
31 |
Trumbull |
32 |
Tuscarawas |
33 |
Warren |
34 |
Washington |
* Has just one jurisdiction near the threshold. These counties could drop off the list.
Note: In all, fewer than 50 jurisdictions are estimated to receive fixed-sum reimbursements.
Ohio Department of Taxation
May 1, 2001