When the Utah Legislature meets in January, there will be a very large and troublesome financial issue waiting for an answer. It will affect every taxpayer who owns any property, even a car.
A Utah Supreme Court decision this past summer has thrown the state's property tax situation into turmoil with the possible loss of tax revenue as much as $55 million a year.Some way has to be found out of this problem without causing havoc to the state treasury, to local government finances or to property owners. Everyone will be affected.
Some background information, compiled by the Utah Foundation, a non-profit public service agency, may help in understanding the issue.
1. The Utah Constitution provides that all tangible property not exempt under the law shall be taxed at a uniform and equal rate in proportion to its value. Despite this requirement, state-assessed property usually has been assessed and taxed at a higher rate than locally assessed property. State-assessed property includes utilities, mines, airlines, industries that cut across county lines, etc.
2. In 1982, Utahns approved a constitutional amendment that established a special exemption for residential property. The Legislature also authorized an added 20 percent exemption on locally assessed real property. The result is two exemptions, one in the Constitution, one by the Legislature.
In a legal ruling in July as a result of a lawsuit by the AMAX Magnesium Corp., the Utah Supreme Court held that if the state assesses property with essentially the same methods used by county assessors, it cannot deny the property owners the same 20 percent legislative exemption.
If applied to all state-assessed property, this ruling could reduce assessments in Utah by $2.4 billion, resulting in a $31 million tax loss. If applied to all state-assessed personal property as well, the loss of revenues could reach $55 million.
The Legislature is faced with some difficult options in trying to treat everyone equally.
- If the 20 percent exemption is expanded to all state-assessed property and personal property, the financial loss to the Utah treasury would be heavy. Local property taxes would have to increase to make up the loss.
- If the 20 percent exemption is removed from locally-assessed property, all this property would have a higher assessed value. A reduction in local tax rates would be necessary to hold the flow of revenue to about the same level. Yet the lower tax rates would mean that utilities, mines and other state-assessed properties would end up paying less tax. This has to be balanced against homeowners and local businesses whose share of the total tax load would rise, despite lower tax rates.
- If the constitutional exemption, as opposed to the 20 percent exemption approved by the Legislature, is raised to protect homeowners, the tax burden will fall on local business and motor vehicles.
There is no easy answer. Whatever option is chosen by the Legislature, there is going to be a shifting of tax burdens among different classes of property owners. Biggest losers may be those with residences, businesses, and other locally assessed properties.
That hardly seems fair, since even in the best of circumstances, a bigger burden falls on moderate and low-income people who spend a larger portion of their income on housing.
Under the difficult constraints imposed by the Utah Constitution, lawmakers must seek to be fair without imposing harsh new burdens on property owners, without causing serious revenue shortfalls, and without creating a tax windfall for taxing agencies.
All of this is going to amount to one of the more severe challenges the Legislature has faced in a long time.