Senate Bills 3 and 287 Question and Answer Guide
What are Senate Bills 3 and 287?
Senate Bill 3 (enacted in June 1999) and Senate Bill 287 (enacted in December 2000) made both regulatory and tax changes for electric and gas utilities. This document addresses one part of the tax changes, the reduction in assessment rates for tangible personal property and the hold harmless payments for schools and local governments to reimburse them for the local tax losses due to these reductions in property taxes.
Prior to these bills, how were property taxes for these utilities determined?
Prior to enactment of these two bills, the tangible property of most public utilities was assessed at 88 percent of depreciated cost. Exceptions to this were production equipment of investor owned electric utilities, which was assessed at 100 percent of true value (defined as 50 percent of original cost) and all property of co-operative electric utilities, which was assessed at 50 percent of true value. All tangible property of non-utility businesses is assessed at 25 percent of depreciated value.
How did the bills change the property taxation?
Effective January 1, 2001, the assessment rates on all gas utility property and all electric utility property except property used for the transmission and distribution of electricity were reduced to 25 percent of true value. Because utilities pay taxes on the same schedule as real property taxpayers, this will first impact local tax revenues in the February 2002 settlement.
What does this mean for schools and local governments?
The reduction in assessment rates will reduce the property tax revenues for all jurisdictions with such tax levies. However, the state will fully reimburse schools and local governments for the losses.
What is the source of revenue for the reimbursement?
Two new taxes were created to replace the reduced taxes on tangible personal property. S.B. 3 created a kilowatt hour (KWH) tax on the consumption of electricity. S.B. 287 created a thousand cubic foot (MCF) tax on the consumption of natural gas. All of the MCF tax and 37 percent of the KWH tax are split between two permanent, dedicated funds, the school district property tax replacement fund and the local government property tax replacement fund (the remaining 63 percent of the KWH tax replaces the state gross receipts tax).
How are the property value losses determined?
The valuation losses used to calculate the reimbursements are based on taxable values from previous years. The electric valuation losses are based on values from 1998. The gas valuation losses are based on values from 1999. The methodology for calculating the value losses for both electric and gas property are the same. For electric utilities, the loss was determined by calculating the difference between the actual valuations for 1998 and what the valuations would have been in 1998 had the 2001 property tax structure been in effect. For gas utilities, the same calculation is done, but for 1999. The valuation losses can be found by school district and by taxing district in spreadsheet files on the Internet at: http://tax.ohio.gov/government/government_certified_tax_value_losses.html
What tax rates are used to calculate the tax losses?
The tax rates used are generally from the same years as the valuation losses, but with some adjustments. For electric property the tax rates in effect for 1998 are used, except that the 1999 rates are used if they are higher than the 1998 rates (not including levies passed after June 30, 1999). For gas property, the higher of the 1999 and 2000 tax rates are used, regardless of the dates of elections.
How are the reimbursement amounts calculated?
The amounts to be reimbursed are calculated in two different ways, depending whether the levy is a fixed-rate levy or a fixed-sum levy. A fixed-rate levy is one that has a set rate and produces whatever dollars it can. This would include all levies except voted bond levies and school emergency levies. Voted bond and emergency levies are fixed-sum levies, meaning the rate is set each year to generate a defined amount of money.
For a fixed-rate levy, the amount of the reimbursement is the levy rate multiplied by the tax value loss from the assessment rate changes.
Determination of the amount of a reimbursement for fixed-sum levies requires a two-step calculation. First, the aggregate tax loss for all fixed-sum levies is determined using the same method as is used for fixed-rate levies. Second, the 1999 total taxable value of the district less the tax value loss from the assessment rate changes is multiplied by 0.25 mill. The numbers from the two calculations are compared. If the second calculation is greater than the first, meaning that the fixed-sum loss is less than 0.25 mill times total valuation, there is no reimbursement for fixed-sum levies. Otherwise the reimbursement amount is the difference between the two calculations. Under existing property tax law, if valuation goes down, the tax rates on fixed-sum levies are increased to insure the levies produce the required dollar amount. The SB 3 and 287 language restricts the adjustment due to assessment reductions to no more than 0.25 mill.
The reimbursement amounts for both fixed-sum and fixed-rate levies are available in spreadsheets on the Internet here.
There are eight different spreadsheets, six for fixed-rate losses (one each for counties, schools, joint vocational schools, municipalities, townships, and special districts), and two for fixed-sum levies (one for schools and one for non-schools).
When do reimbursements begin and how often are they received?
The first reimbursements will be received in the last week of February, 2002. Direct payments will be received each February and August. Beginning in fiscal year 2003 (July 2002), schools and joint vocational schools may get a portion of their reimbursements through the school foundation program monthly disbursements because of lower property tax values being used to determine the local contribution to basic aid. Generally, any school district not on the foundation program guarantee will receive part of their reimbursements through the foundation program.
How long do reimbursements continue to be paid for fixed-rate levies?
For non-schools, the reimbursements continue for 15 years. For the first five years (2002-2006), the reimbursements are for 100 percent of the losses. For the next five years, the reimbursements are for 80 percent of the losses. For the final five years, the percentage declines steadily until it reaches zero in year 16.
For joint vocational schools, the losses are fully reimbursed for 15 years.
For schools, losses are guaranteed to be reimbursed for five years. After five years, the Department of Education makes a determination as to whether reimbursements should continue. The determination requires two calculations. First, the total fixed-rate tax loss is adjusted for inflation from 2002 to 2006. Second, the difference in state basic aid between fiscal year 2002 and fiscal year 2007 is determined. If the difference in basic aid is greater than the inflation adjusted fixed-rate loss, direct payments end after August 2006 (districts continue to receive additional aid through the foundation formula due to lower valuations because of the assessment rate changes). If the fixed-rate loss is greater, the reimbursement payments continue in full for another year. This comparison is made each year for the next 10 years to determine if direct payments are to continue.
How long do reimbursements continue to be paid for fixed-sum levies?
For bond levies, reimbursements continue for the life of the bonds.
For emergency levies, reimbursements are guaranteed for five years. They can continue for another 10 years as long as the original emergency levies that were used in the loss determinations continue to be renewed.
What happens to the dedicated funds once direct reimbursements are no longer made?
For schools and joint vocational schools, any excess money in the dedicated funds not needed to make direct reimbursements will be distributed on a per capita basis to be used for capital expenses.
For non-schools, one-half of the excess revenue is distributed to each county in proportion to each county's population. The other half is distributed to each county in the proportion that the tax losses from the utility property tax changes for all taxing units in the county is of the total amounts all local taxing units in the state.
Who distributes the reimbursement money?
The Department of Education distributes the money directly to schools and joint vocational schools. The Department of Taxation distributes the non-school reimbursements to the county auditors, who distribute it to the non-schools.