PropTaxReport08

Missouri’s property tax is a complex subject. This report provides basic information and outlines some basic problems. Information is gathered from various sources including the Public Finance Initiative, University of Missouri–St. Louis Public Policy Research Center; Missouri National Education Association; Missouri Association for Social Welfare; the Institute on Taxation and Economic Policy (ITEP); and the Center for Budget and Policy Priorities. We especially thank Stephen Gardner and David Mariott of the UMSL Public Policy Research Center and Kelly Davis and Matt Gardner of ITEP for assistance in assembling this information.

The property tax is not based on the ability to pay. Residential property taxes are regressive, requiring low-income taxpayers to pay more of their income in tax than wealthier taxpayers. A analysis in January 2003 by the Institute on Taxation and Economic Policy (ITEP) found that “nationwide, the poorest 20% of Americans paid 3% of their income in property taxes, compared to 2.4% of income for middle-income taxpayers and .8% of income for the wealthiest one percent of Americans.”

ITEP says: “The main reason property taxes are regressive is that home values are much higher as a share of income for low-income families than for the wealthy. Because property taxes are based on home values rather than income, property taxes are disconnected from ‘ability to pay’ considerations in a way that income taxes are not: a taxpayer who suddenly becomes unemployed will find that her property tax bill is unchanged, even though her ability to pay has fallen.”

ITEP’s Guide to Fair State and Local Tax Policy points out that while sales taxes are our most regressive taxes, generally they are not as disliked as the property tax. One reason for the hostility toward property tax is that it is a large, very noticeable payment that is required once a year, while sales taxes are spread throughout the year on hundreds of purchases. It would be rare for a taxpayer to know the total he pays a year in sales taxes. ITEP’s Guide says, “…the property tax often seems more oppressive and more unfair than it actually is, simply because it’s more visible.”

But the property tax is generally regressive. Local governments and school districts who depend on dollars from the property tax need more equitable sources of revenue. A municipal income tax offers numerous advantages to property tax to meet needs. But that is not even being discussed in Missouri.

Personal Property is divided into two subcategories: tangible and intangible.

– Tangible personal property includes any physical property that isn’t real property (i.e., anything that isn’t a permanent part of a fixed building). Examples include mobile homes (mobile homes can be affixed or not, therefore residential or personal property), vehicles, computers, office furniture and production line equipment.

– Intangible personal property includes things like bank accounts, stock, bonds, etc. where the value does not reside in the physical property itself.

State-Assessed Property. The State Tax Commission (STC) assesses most utility and railroad property (and several other smaller categories of property) directly.

Taxable property is assigned an assessed value, which is based upon its estimated market value as adjusted by an assessment ratio established by state law. Assessment ratios are:

Property tax rates are applied to the assessed value for all rates levied by the taxing jurisdictions in which the property is located. In Missouri, tax rates are stated as an amount in dollars and cents per $100 assessed valuation. Thus, a $2.75 tax rate (per $100 assessed value) is a 2.75% tax on assessed value.

Commercial property is also subject to a surcharge. This was the means used to replace the merchants and manufacturer’s tax (inventory tax) that existed prior to 1985. The rates were established by county in 1985 to provide “breakeven” revenues. The average rate in Missouri is approximately 1.07% and is 1.70% in St. Louis County. These rates are not required to be reduced when rollback of other rates occur, though they may be reduced voluntarily. To our knowledge none of these rates have ever been reduced.

3. How is assessed value determined?

Personal Property is revalued (reassessed) annually. Real property is reassessed biennially, in odd numbered years. Other than the state-assessed property previously discussed, property is assessed by county assessors.

Agricultural property values are established based on the quality of the land and values established by the STC, subject to veto by the legislature. These agricultural land values have not changed since 1995 despite contrary recommendations from the University of Missouri Agricultural Economics reports commissioned by the STC.

This represents one clear problem with Missouri’s system. There is no specified definition for productive value. There is no clear definition for what land is primarily devoted to agricultural or horticultural purposes. The interconnections of the Governor/State Tax Commission/Legislature make it almost impossible to increase values regardless of supporting evidence. This barrier to establishing an objective value exists for no other property. The net result is that the total assessment of “agricultural” property today as a percent of the state total is about 1/3 of where it was before the current system was implemented in 1984. Most of this shift in tax burden has been off agricultural property and onto residential property.

Commercial and residential property are assessed based upon their market value. Depending on the nature of the property, the availability of information and the sophistication of the local assessor, any or all of the three recognized approaches to valuation may be used: cost approach, sales comparison approach, income approach. For income producing properties, the income approach is the professionally recognized best approach and the cost approach the least. For non-income producing residential properties the sales comparison approach is favored. Most of Missouri’s larger jurisdictions use all three approaches. However, only four jurisdictions (St. Louis City and County, St. Charles County and Jackson County) have full access to sales information through a certificate of value. Many smaller jurisdictions rely almost exclusively on the cost approach.

Personal property is assessed in accordance with a depreciation basis established by legislation that went into effect for the 2007 cycle. All counties are required to use the same value schedule for automobiles. The State Tax Commission sets values for farm animals. There is no requirement that assessors use common schedules for farm equipment.

Many problems with assessment quality are apparent. Some of these show up in the STC’s own studies. Others have been demonstrated by studies performed by the Public Policy Research Center at University of Missouri-St. Louis (UMSL). Private experts have also conducted studies. These studies demonstrate that:

a. Assessment levels are often not within a reasonable tolerance of those required by law.

b. Assessment levels differ between properties of equal value within counties to an extent that far exceeds professional standards.

c. Some assessment differences are systemic rather than just arising from poor quality. For example newer homes might be valued at a much higher percentage than older properties. Or, properties in one area of a county might be valued differently than in another for non-justifiable reasons, etc.

To date, the legislature has shown little interest in adopting the measures highly recommended for improvement in assessment quality. These include:

2. Providing access to a modern computer-assisted mass appraisal system to all counties.

4. Re-balancing the incentives for quality performance, both positive and negative.

4. How are county assessments equalized across the state?

The State Tax Commission (STC) is charged with accomplishing statewide equalization. A major tool used is a ratio study that is conducted to examine the accuracy of each county’s assessments. Since no system of obtaining sales information statewide exists, the STC has conducted appraisal ratio studies. Missouri is the only state that depends on appraisal studies (except for California whose valuation system is not based on market value). A recent analysis by the International Association of Assessing Officers pointed out many problems with the STC methodology. A previous study by the UMSL Public Policy Research Center also identified problems in design and outcomes.

Property assessment is not an exact science. Nevertheless, professional studies and significant anecdotal evidence suggest that the true level of assessments among Missouri counties varies significantly and that the STC studies fail to uncover the real results. Professional studies, however, have demonstrated that success is possible. For example, St. Charles County routinely shows assessments near the legal standard and good results against various equity measures. It is one of only two Missouri counties whose assessment changes exceeded the consumer price index during the recent run-up of real estate values over the last five reassessment years (the other was St. Louis County).

Many potential improvements to Missouri’s system have been suggested over the years, including: mandatory disclosure of sales prices, improved training and certification of assessors, modern computer assisted mass appraisal systems, etc. However, some Missouri experts believe that the single most important factor in achieving legally prescribed assessment levels is the will of the local assessor to do so. Failing that will locally, it is the STC’s responsibility to supply it via its supervision of local assessors and boards of equalization. However, some claim this supervision is essentially illusory, whether dealing with the macro or micro issues.

Testimony before the Joint Committee on Tax Policy by Mr. Sandy Rothschild, an expert in Missouri property assessment practices, documented wide ranging deficiencies in the operations of local boards, especially in conducting hearings on taxpayer appeals. The STC itself has numerous internal conflicts: it has the duty of overseeing itself and conducting the study to determine how well it has supervised the county assessors, with predictably optimistic results. The STC has also noted that it has insufficient funding to properly perform its duties and that a statewide certificate of value requirement is needed to help improve assessment accuracy. On the other hand the STC’s largest expenditure, by far, is to produce the appraisal ratio studies whose reliability and usefulness have been questioned.

5. What is a certificate of value?

Several counties (St. Charles, St. Louis, Jackson and St. Louis City) have adopted a certificate of value requirement. The certificate of value (COV) is a document provided to the county government upon the sale of any real property within the county, documenting the actual sale price of the property. This requirement ensures that the county assessor has direct access to actual sales data on all properties that are sold in the county so that market values can be estimated for all properties.

More than forty U.S. states use a certificate of value or some other means of identifying sales prices such as tax stamps. The Missouri STC has advocated adoption of a COV for 30 years. The primary opposition has come from the Missouri Association of Realtors and rural legislators. Some suggest that the rural opposition comes from an heightened sense of privacy, while other attribute it to a perception that the status quo gives an advantage to rural areas. Yet, the studies performed by the UMSL Public Policy Research Center did not find a correlation between assessment results and the nature of the county. Good results were found in urban, suburban, exurban and rural areas and poor results were also found in each type county.

6. Who levies property taxes in Missouri?

Almost all property taxes are levied by local taxing entities, and roughly 60% of all property taxes are levied by school districts. Other local taxing entities include municipal governments, fire and ambulance districts, library districts, etc. The Hancock Amendment to our state constitution in conjunction with state statutes requires voter approval for all tax increases by local governments.

The Missouri Constitution limits state property taxes to ten cents per $100 AV (one tenth of one percent), but the only actual state property tax is the three cents levied for the Blind Pension Fund. As municipalities have shifted primarily to sales taxes, schools and other local governments have increasingly used property taxes.

7. How much in property tax do Missourians pay?

According to the American Community Survey, the median property tax for Missouri homeowners in 2006 was $1,121.00, ranking 38th nationally. This means that Missouri’s homeowner property tax burden is below the national average.

The average school tax rate is about $3.50 per $100 AV (Assessed Valuation) and the total tax rate is about $5 per $100 AV, or 5% of assessed value. This overall rate, combined with an average assessment ratio of about 20% averaged over all property classes yields a real, net tax rate in Missouri of a little over 1% of actual market value of property.

8. How much property tax is collected for schools and what is the impact?

The property tax is a significant tax in Missouri, with yearly net revenues of roughly $6 billion, and is similar in magnitude to the personal income tax. About $4 billion of this goes to public schools, and property taxes make up about 40% of local school district operating revenues.

Historically, property tax revenues were the main source of school funding, but state funding has increased greatly in the last four decades. State funds provide about 40% of school revenues, while 10% comes from Proposition C sales taxes and about 7% comes from federal sources.

Property is not uniformly distributed in every school district. Some rural districts have mainly low-valued agricultural property and low-valued residential property, while some suburban districts have high-valued residential and high-valued commercial property. On a per pupil basis, Missouri districts differ by a factor of about 20-to-1 from the highest to lowest assessed value. This unequal distribution presents the fundamental challenge in school finance equity: how to use limited state funds to best advantage to compensate for wide variances in local wealth and thus local school revenues.

9. How do reassessments and rollbacks work?

Missouri law requires reassessment every two years in an effort to keep assessed values connected to current (market) values. For many years following the general reassessment changes of the mid-1980s, many counties were lax in keeping assessments up-to-date. Assessors are required to comply with state laws on assessments, but since most county assessors are elected, it is possible that with some, political considerations may be involved.

Missouri also has a constitutional tax rate rollback provision (Art. X, Sect. 22). This provision requires all taxing jurisdictions to reduce their respective property tax rates after reassessment to the new tax rate that will produce the same total revenue on the new assessment (excluding new construction and improvements) as the previous tax rate applied on the previous assessments plus one year’s CPI growth. Because reassessment takes place only once in two years, growth for the first year of this two-year cycle is lost to the local taxing district.

As was highlighted in St. Louis County this year, exceptions to the rollback law can result in tax increases when assessment changes are very large. The legislature is considering a wide variety of proposals to tighten current requirements. Some proposals appear to be sincere efforts to maintain local autonomy while providing taxpayers some transparency and time to work with taxing authorities. Others are overly restrictive and punitive. Still others adopt approaches that most all experts oppose because they guarantee more and more inequity.

10. Why is the rollback more complicated in St. Louis County?

Residential property values tend to rise almost every year. Commercial property values are much more volatile. They fall, stabilize, rise rapidly, etc. Missouri’s system of valuing agricultural values makes them stagnant. Therefore, there can be a constant shifting of tax burdens – and most years the rising burdens fall on residential property. Every county has the option to avoid this constant shifting by setting tax ceilings separately on the three types of real property and one for personal property, then applying the rollback requirements to each rate (i.e. stabilizing the relative burdens of the tax). Missouri law required this change for St. Louis County but made it optional for all others. No other county has adopted the practice so far.

11. What are TIFs and tax abatements and how do they affect property taxes?

Cities and counties are authorized under various provisions in Missouri law to offer various tax reduction incentives. Generally, these incentives trade a promise of new development and new jobs for a reduction of property tax liability. Tax increment financing (TIF) is a tax incentive that redirects most or all of the incremental property taxes that would otherwise be paid based upon the increased assessed value created by a development project (typically the value of the buildings constructed) to fund the development of related infrastructure necessitated by the development, such as sewer, water, feeder roads and lighting. Other Missouri taxing jurisdictions can give input on such projects, but the decision is made by the city or county.

School, fire, library, road, junior college and other districts have no controlling voice on how much of these incentives are granted, though it is their potential revenues that suffer for as much as 25 years. A major complaint has been that these projects sometimes involve sales tax wars for retail developments between nearby municipalities, i.e. who will grant the largest TIF, knowing that the municipality will benefit from the increased sales taxes. The belief is that the total retail spending is not likely to change dramatically, only the location of its source. Especially grievous, from the schools’ viewpoint, is a tax abatement on new residential property certain to bring in new families and school students with attendant education costs for the district.

Tax increment financing (TIF) and other incentives designed to grant tax waivers as a means to generate property development and economic growth that would not otherwise occur are often inappropriately used in situations where development would occur without such incentives.

Missouri’s existing disclosure requirements do not allow for comprehensive public scrutiny of the use of TIFs and other incentives. Several states, including Minnesota, have enacted detailed disclosure requirements of the proposed benefits of TIFs and other incentives, to limit such incentives to instances where it is clearly shown that development would not occur without such incentives and to allow reclaiming the tax benefits awarded if the project fails to generate the employment or other benefits promised in the original proposal.

12. What is the “Circuit Breaker”?

The Senior Citizen’s Property Tax Credit, commonly known as the “circuit breaker” is actually a means-tested income tax credit based upon property taxes or gross rent paid and is available to qualifying seniors. This is the first-ever income tax credit in Missouri, established in 1974. Senior citizens over 65 years of age may apply to receive a tax credit equal to their property tax liability for their personal residence not to exceed $750. Qualifying taxpayers must receive income no greater than $13,000 for the full benefit. The benefit is pro-rated for incomes above $13,000 such that it is phased out for incomes in excess of $25,000 and $27,000 for combined incomes. The circuit breaker is designed to reduce the impact of residential property tax increases on seniors with a low, and possibly fixed, income and is available to people who are 100% disabled.

An advantage of the Circuit Breaker is that renters are also eligible for this help. People who rent their home pay property tax through the rent they pay to their landlord. In Missouri, 20% of rent is considered for determining the property tax credit.

The legislature is considering several bills to raise the property tax limit of $750 and/or the income limits.

13. What is a Homestead Exemption?

The so-called homestead exemption is a means-tested property tax credit for qualifying seniors and disabled persons. Unlike the circuit breaker, the homestead exemption is a credit against property taxes paid based upon growth in the previous year’s property taxes. Seniors who are 65 years of age or older and disabled persons (if married, at least one 65 years of age or older and the other at least 60 years of age or at least one spouse disabled) with incomes above the limits for the “circuit breaker,” but with an income under $70,000 are eligible for the exemption.

The homestead exemption is based upon state appropriations sufficient to reimburse political subdivisions and, if fully funded, offers a property tax credit to qualifying taxpayers during the following year when their residence’s property tax bill increases by more than 5% in a reassessment year or more than 2.5% in a non-reassessment year. The allowed increase percentages are higher before a credit is allowed if the program is not fully funded.

The homestead exemption as used in Missouri is very confusing to taxpayers. The circuit breaker offers a better way to provide help for those who need it.

Legislative Issues—2008 Session

Capping or Freezing rates

The experience of other states with this kind of effort to “control” property taxes should be sufficient warning to Missourians. Some have had major problems. Others have found capping rates is simply ineffective. It should be noted that the actual percentage of personal income that the typical Missouri homeowner pays in property tax is virtually identical to the percentage of personal income a typical California homeowner pays. Yet, California’s Proposition 13 cap on property tax rates in the state has been in effect for 30 years.

The International Association of Assessing Officers (IAAO ) is the recognized professional association for assessors. This is what they say about efforts to limit property tax rates. From the International Association of Assessing Officers, Official Standard on Property Tax Policy, 2004:

“Limits that constrain changes in assessed or appraised value of property may appear to provide control but actually distort the distribution of the property tax, destroying property tax equity and increasing public confusion and administrative complexity. Owners whose properties are increasing in value more rapidly than the permitted rate of increase (say, 5 percent) receive a windfall at the expense of those whose properties are decreasing in value or are increasing at lower rates.

"In effect, valuation increase limits result in lower effective property tax rates for owners of desirable property and higher effective property tax rates for owners of less desirable property. Similarly, when state funds are distributed to school districts or other taxing jurisdictions based on taxable property value (indirect equalization), funding will tend to shift from poorer areas to wealthier areas with rapid appreciation—an illogical and undesirable result. Legislators and the public should be made aware of the inequities resulting from valuation increase limits and be actively discouraged from pursuing such limitations. Any other control is preferable.”

In short, any limitation on assessments is certain to lock in current disparities and aggravate them over time. If revenues are to be controlled, it should be through rates or budget limitations. Given that many counties are likely to be significantly under-assessed, having a revenue control in place might make assessment correction (large increases) more likely.

Studies by the Center for Budget and Policy Priorities have found that property tax revenue caps do nothing to change the rising costs facing local governments. They only make it harder for localities to provide the services residents demand and need. When localities have not been able to replace lost property tax revenue, the quantity and quality of services such as schools, public safety, and infrastructure has declined.

The fact is that the way Missouri’s system works, every taxing authority (absent a tax rate increase) experiences a tax cut after accounting for inflation every other year. And half the rest of the time the same thing occurs because the local assessor increases assessments by less than inflation. So all the attention is going to the case, such as St. Louis County in 2007, where assessments went up a lot. But that is a relatively rare occurrence. The norm is that assessments go up very little.

Certificate of Value

The Policy Brief 17 of the Public Finance Initiative at the Public Policy Research Center, UMSL presents an excellent summary of why Missouri urgently needs to enact a requirement for a Certificate of Value. (Link to the brief: http://pprc.umsl.edu/data/pbrief_017_PFI.pdf )

This Policy Brief is titled Acquiring Essential Sales Information is a State Responsibility. The PPRC notes:

“Assessments constitute one of the two ingredients for determining taxes (the other being the tax rate). An equitable and constitutionally compliant system requires accurate assessments, which require sufficient sales information. Sales disclosure alone does not guarantee assessment accuracy, but a lack of sales information virtually precludes accuracy. Missouri has denied this essential information to assessors and the STC. (State Tax Commission) If the Missouri Legislature is serious about property tax reform, it must take action to provide the necessary information. Continued inaction is not excusable.”

Giving assessors the information necessary to fully do their job would provide not only more accurate assessments, but also provide greater uniformity among counties because the STC could use the same information to ensure compliance with Missouri law. As it stands right now, only four jurisdictions in Missouri have access to this information which then is also used by the STC to evaluate their performance, while in other counties without sales disclosure, the STC uses appraisals.

Circuit Breaker

Three bills deal with changes in our present circuit breaker law:

SB 711 (Sen. Gibbons) – Increases the circuit breaker allowance to $1100 from $750 which helps lower-income taxpayers more than expanding the income qualification. This amount was calculated by determining how much the original circuit breaker amount would have increased if the Consumer Price Index/inflation increase has been built into it when it was first created.

This bill provides additional relief for those who already qualify.

HB 1321 (Rep. Sutherland)

(1) Increases from $27,500 to $32,500 the maximum income allowed in order to claim the credit for single, head of household, qualifying widow(er), or married filing separately;

(2) Increases from $27,500 to $36,500 the maximum income allowed in order to claim the credit for married filing combined;

(3) Increases from $14,300 to $15,000 the minimum income allowed in order to claim the full credit;

(4) Increases from $2,000 to $4,000 the amount of the exemption allowed for a married couple;

(5) Increases the maximum credit amount from $750 to $800.

This bill expands the program to provide relief to more people, and adds a token increase on the credit.

HB 1695 (Rep. Zweifel)

(1) Increases from $27,500 to $32,000 the maximum income allowed in order to claim the credit;

(2) Increases from $14,300 to $18,000 the minimum income allowed in order to claim the full credit;

(3) Increases from $2,000 to $20,000 the amount of the exemption allowed for a married couple;

(4) Increases the maximum credit amount from $750 to $1500.

Beginning January 1, 2010, the bill indexes the upper and lower income limits, spouse exemption, and maximum tax credit amount by the same percentage increase in the federal poverty income guidelines.

This bill expands the program to provide relief to more people, and adds a significant increase on the credit.

Note: Expanding the limits to qualify for the circuit breaker in HB 1321 and HB 1695 will cost much more than increasing the amount of the credit.

Property Tax Rate Rollback

Senate Bill 711, sponsored by Senate President pro tem Gibbons, is thought to be the most likely vehicle for changes in our property tax laws this session.

In addition to the circuit breaker provision, SCS SB 711 has these primary provisions:

– Requires taxing authorities to treat tax rates during assessment years as their tax ceiling and roll back accordingly or seek voter approval. During non-reassessment years, taxing authorities may roll up after conducting a public hearing and giving formal approval. Essentially limits operating fund increases in reassessment years in every instance (except school districts at the 2.75 minimum rate) to the Consumer Price Index increase for the previous year. To the extent that taxpayers have approved a higher rate, the taxing authority can take advantage of that only in the non-assessment (even-numbered) years.

– Makes a small change in the property tax calendar: assessments must be done by March 1; clerk gives this information to taxing authorities to determine non-binding tax levies, this is then given back to assessors to calculate tax liabilities; assessment notices and project tax liabilities are to be sent to taxpayers by May 31; Board of Equalization acts July 1 through end of August. This provides more time for the informal and formal appeals process.

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