West Virginia Property Tax Briefing Paper. By Amy Higginbotham Arzu Sen Dr. Tami Gurley-Calvez

Transcription

1 West Virginia Property Tax Briefing Paper By Amy Higginbotham Arzu Sen Dr. Tami Gurley-Calvez Bureau of Business and Economic Research College of Business and Economics West Virginia University 2009

2 Table of Contents Page(s) Introduction...1 History of the West Virginia Property Tax Current State of the West Virginia Property Tax Property Tax Rates Assessed Valuations Taxes Levied Distribution of Property Tax Revenue...19 Real Property Sales Ratio Assessment West Virginia Property Tax Compared to the Nation West Virginia Property Tax Compared to Surrounding States West Virginia Property Tax Incidence...28 Literature Review of Local Property Taxation and Service Provision Future of the West Virginia Property Tax Works Cited i

3 List of Figures Figure 1: West Virginia Total Average Rate of Levy on Each $100 Assessed Valuation...6 Figure 2: West Virginia Average Rate of Levy on Each $100 Assessed Valuation By Purpose...8 Figure 3: West Virginia Per Capita Property Tax By Purpose...9 Figure 4: Assessed Valuations of Property: West Virginia...12 Figure 5: Inflation-Adjusted Assessed Valuations of Property by Class: West Virginia...13 Figure 6: Taxes Levied on Classified Assessed Valuations by Class: West Virginia...15 Page(s) Figure 7: Inflation-Adjusted Taxes Levied on Classified Assessed Valuations by Class: West Virginia...17 ii

4 List of Tables Table 1: 1932 Tax Limitation Amendment...2 Table 2: Current West Virginia Property Classifications...5 Table 3: West Virginia 2008 Property Tax Rates...6 Table 4: West Virginia Average Rate of Levy...7 Table 5: West Virginia Property Tax Rates By County and Class...10 Table 6: West Virginia Tax Rate Changes By County...11 Table 7: West Virginia Assessed Valuations of Property By County...14 Table 8: Current West Virginia Property Taxes Levied...16 Table 9: Taxes Levied on Classified Assessed Valuations by County...18 Table 10: Distribution of Taxes Levied: West Virginia...19 Table 11: West Virginia Real Property Sales-Ratio Study...21 Page(s) Table 12: Total State-Local Property Tax per Capita and per $100 of Personal Income, Table 13: General Property Tax Information for West Virginia and Surrounding States...25 Table 14: Circuit Breaker Programs for Homeowners and Renters: Table 15: Homestead Exemption Programs: Table 16: Tax Burden as a Share of Family Income for Non Elderly Families iii

5 Introduction Since its conception, the property tax has been the most scrutinized and misunderstood tax in the United States. Property taxes in localities across the nation are levied on both real and personal property and are ad valorem, meaning they are levied based on the value of the item being taxed. Even though it is often criticized and unpopular with taxpayers, the property tax remains one of the primary sources of revenue for local governments across the nation due to its dependability and stability. Compared to the income or sales tax, the property tax is difficult to avoid and thus provides adequate revenue for localities to offer the quantity and quality of public services local voters choose. The West Virginia property tax is not an exception to the scrutiny. Since its conception in 1863, the West Virginia property tax has been criticized, misunderstood, and modified but still remains the major source of revenue for counties, municipalities, and boards of education. While the property tax has been highly disliked and scrutinized in the state, West Virginia s property tax is one of the lowest per capita and per personal income in the nation. The purpose of this report is to first give insight into how the property tax has evolved over the course of West Virginia s history as well as show the current structure of the tax including rates, assessed valuations, and revenue disbursements. The report will also address policies in neighboring states, tax incidence or who ultimately pays the property tax, and options for legislative changes to the property tax. 1

6 History of the West Virginia Property Tax Article ten of the West Virginia Constitution established the property tax in This tax was intended to be equal and uniform across the state and would be dependent on the value of real and personal property. Only property used for educational, literary, scientific, religious or charitable purposes, and public property, were exempted from property taxation. The Great Depression had a tremendous effect on property tax revenues collected in West Virginia. Due to the resulting revenue shortfalls, the Tax Limitation Amendment was created in 1932 to limit property tax rates and classify property into four categories, as shown in Table 1. This change reduced tax burdens for farmers and homeowners and increased taxes for businesses while insuring tax revenue for the state. These classifications remain today with only a few minor changes. This amendment also allowed for excess levies of up to 50 percent of the basic rates for counties, municipalities, and schools. Excess levies were subject to approval by 60 percent of the voters in the jurisdiction. Property tax bonds were also limited with this legislation to 5 percent of the total assessed valuation during the year preceding the bond issue. Table 1: 1932 Tax Limitation Amendment Class Description Maximum Rate I personal property used in agriculture; intangibles $0.50 for each $100 valuation II farm real estate; owner occupied residents $1.00 for each $100 valuation III all other property located outside a municipality $1.50 for each $100 valuation IV all other property located inside a municipality $2.00 for each $100 valuation Source: West Virginia Constitution Article 10-1 Exemptions to the West Virginia property tax began in Forest land owners were given an exemption if they were entered into a contract with the state for the planning, cultivation, protection and/or harvesting of forest. In 1957, the West Virginia Legislature provided exemptions from the property tax for some intangible properties. Items, such as household goods and personal effects, that are not held for profit were exempted from taxation in 1972 with Article 10-1a of the West Virginia Code. The largest exemption to the West Virginia property tax came about in The Homestead Exemption was created to reduce property taxes paid by individuals 65-years old and older. Exemptions continued to be passed in the early part of the 1980 s.the Homestead Exemption, which began at $5,000, was increased to $10,000 in 1980 and to today s level of $20,000 in Legislation in 1980 not only increased the exemption amount by also extended it to West Virginia residents that were totally and permanently disabled. In 1983, bank deposits, money, household goods, and personal effects were exempted from property taxation. Legislation passed in 1982 also changed how property was valued and assessed in West Virginia. Article 10-1b of West Virginia Code required real estate property to be assessed at 60 percent of its fair market value for property tax purposes. This meant that taxes would be levied not on the total value of a residential or commercial property but rather on 60 percent of that value. Farmland valuation for tax purposes was also adjusted. This legislation required that farmland be valued based on its use in farming instead of its actual market value. Legislation in

7 continued to change property assessment procedures. With the Appraisal Act of 1990, assessors were required to now assess property at the 60 percent of true market value in three-year cycles with annual adjustments. Since this complicated the assessors valuation process, this act also formed a property valuation training and procedures commission to provide assistance with the process. Legislation in 1991 began to limit growth in property tax revenue. With e of the West Virginia Code, legislators set a maximum limit of 1 percent for annual increases in property tax revenues for county commissions and municipalities. This 1 percent limit was expanded to tax revenues for boards of education in 2004 with f of the constitution. Legislation in 2007 increased the limit to 2 percent for boards of education only. This limitation is applied to tax revenue that would be collected on all classes of property minus the total assessed values of newly created property that were not assessed in the previous year s tax books. While this 1 percent maximum is intended to limit increases in total property tax payments, rates can be increased by more than the 1 percent limit. Governing bodies for each of the levying jurisdictions can hold public hearings and put the increase of property tax rates up to vote. However, rate increases that cause total collections to be above the 1 or 2 percent limit are not fully applied. The increased rate is only applied to the point where the revenue limit is reached. For example, a board of education might implement a 0.3 percentage point increase in the property tax rate but if the revenue limit is reached with a 0.1 percentage point increase, only the 0.1 percentage point increase will be applied in the current year. The full 0.3 percentage point increase would be applied in subsequent years provided that the revenue limit is not reached under the full increase. All intangible property was exempted from property taxation in 1997 with the passage of 11-1C-1b. These intangibles included, but were not limited to, notes, bonds, bills, stocks, and accounts receivable. Property tax relief to low income residents and senior citizens began in In that year, the first refundable property tax credit in West Virginia was created. Senate bill 541 provided for a refundable credit for individuals paying in excess of 4 percent of their household income. This credit began January 1, 2008 and provides refunds between $10 and $1,000 to qualifying residents. In 2008, the Senior Citizen Tax Deferral Act allowed for a new refundable tax credit to seniors, over the age of 65. Beginning in 2009, seniors will have the option of deferring payment of any residential property tax increase in excess of $300 until they either sell their home or when their estate is settled or if their income is less than $25,000 they can receive a refundable tax credit. In 2008, the Special Aircraft Property Valuation Act reduced personal property taxes on business use aircraft by up to 95 percent beginning in FY This legislation was established for all aircraft owned or leased by commercial airlines or private carriers. This legislation allows these aircraft to be assessed for property tax purposes by the county assessors or Board of Public Works according to their salvage value. This property tax assessment change was imposed in an effort to increase the number of aircraft locating in the stat and accrue the economic and fiscal benefits associated with additional services provided to operate and maintain such aircraft. 3

8 Also, in 2008, all personal property employed exclusively in agriculture was no longer subject to property taxation in West Virginia. Legislative action changed West Virginia Code to provide this exemption on agricultural personal property and thus eliminating any property from being subject to Class I property taxes. 4

9 Current State of the West Virginia Property Tax The current West Virginia property tax classification system consists of four distinct property categories. Exemptions exist for intangible property, managed timberlands, and not-for-profit items. Table 2: Current West Virginia Property Classifications Class Description Maximum Rate I personal property used in agriculture, intangibles* $0.50 for each $100 valuation II farm real estate; owner occupied residents $1.00 for each $100 valuation III all other property located outside a municipality $1.50 for each $100 valuation IV all other property located inside a municipality $2.00 for each $100 valuation * All Class I property was exempted in WV Code by tax year Source: West Virginia Constitution Article 10 Appointed county assessors appraise each piece of property in three-year cycles at 60 percent of its true market value. Taxes are then levied by the state, county, municipality and county board of education on the assessed valuation of the property. Taxes are collected the county s sheriff s department. The tax rates applied by each of the tax levying bodies are set in accordance with a 1 percent maximum tax revenue limit. Thus, the rate actually paid might be less than the statutory rate if the 1 percent limit has been reached. The rate actually paid (total tax payment divided by 60 percent of the assessed value) is referred to as the effective tax rate. West Virginia residents who are 65 years old or older or are totally and permanently disabled receive the West Virginia Homestead Exemption, which is applied to the first $20,000 of assessed value of the residence. Also, individuals who are paying in excess of 4 percent of their household income are eligible to receive a refundable property tax credit starting January 1, The three most important parts of the West Virginia property tax include the actual tax rate, the assessed valuation, and the taxes levied. All three have transformed dramatically over the past decades due to legislation and the changing West Virginia economy. The next sections will break these crucial parts down and show how they have shaped the current property tax system. Property Tax Rates West Virginia property tax rates applied to real and personal property are limited by West Virginia Code. Table 3 indicates the maximum rate (expressed as cents per $100 assessed valuation) allowed for each levying body. Note that the state current rate is at the maximum rate of 0.25 cents per $100 assessed valuation for Class I property. Counties and municipalities vary in property tax levy rates with 22 counties and 137 municipalities at the maximum rate for tax year School current rates are the only property tax rate that is not at the maximum of cents per $100 assessed valuation for Class I property. 5

10 Table 3: West Virginia 2008 Property Tax Rates Maximum Actual I II III & IV I II III & IV State Current County Current School Current Municipal Current Source: West Virginia Tax Department Since 1980, however, West Virginia s average property tax rates, listed as cents per $100 of assessed valuation, have fallen for all classes of property as shown in Figure 1. The largest decline in rates for all classes of property occurred between 1991 and This decline was the direct result of legislation passed in This legislation limited the growth in tax revenue collected by counties and municipalities. This limitation coupled with increasing property values ultimately decreased the average effective property tax rate for all classes of property. Another major downturn in effective property tax rates occurred between 2002 and Unlike the previous decline, this fall in average rates only occurred to Class I rates. This can be attributed to the phase out of the taxation of intangible and agricultural personal property. From 2007 to 2008, West Virginia Class I average property tax rate fell to zero due to the exemption of agricultural personal property. Tax Rate (cents per $100 assessed valuation) Figure 1: West Virginia Total Average Rate of Levy on Each $100 Assessed Valuation Source: West Virginia State Tax Department Class I Class II Class III Class IV 6

11 While the total average effective property tax rate declined the fasted in the early 1990 s, the past seven years have resulted in major effective rate changes for some classes of property, as shown in Table 4. As previously mentioned, starting in 2003 effective rates for Class I property significantly decreased while effective rates for the other classes of property remained relatively consistent until From 2005 to 2006, effective tax rates for Class II and III property fell by 3 to 4 percent. This can be attributed to a more than 10.5 percent increase in assessed valuations coupled with property tax revenue limitations for counties, boards of education, and municipalities. In 2007, effective tax rates for Class I and II property fell slightly from 2006 while Class III and IV effective property rates rose for the first time in several years. For 2008, average property tax rates fell once again. Class I rates fell to zero with the exemption of all Class I property including agricultural personal property. Class II, III, and IV rates all fell by 0.01 cents per $100 assessed valuation. Table 4: West Virginia Average Rate of Levy (cents per $100 assessed valuation) Year Class I Class II Class III Class IV Source: West Virginia State Tax Department Even though total average effective property tax rates for all classes of property have fallen since 1980 not all rates for the four levying bodies have declined. County, school and municipal effective property tax rates declined since 1980, as shown in Figure 2. However, effective state property tax rates have remained consistent at 0.07 to 0.08 cents per $100 of assessed valuation. The first significant drop in effective rates, as mentioned previously, occurred between 1993 and During this three year span county and municipal effective rates fell by percent due to the 1 percent maximum tax revenue limitation imposed by the legislators in Since that decline, average effective rates have remained between 1.8 and 2.0 cents per $100 of assessed valuation with only one year s rates exceeding those levels. 7

12 3.0 Figure 2: West Virginia Average Rate of Levy On Each $100 Assessed Valuation By Purpose Tax Rate (cents per $100 assessed valuation) Source: West Virginia State Tax Department State County Schools Municipal While the effective property tax rate has declined over the years, the per capita property tax burden has increased, as shown in Figure 3. This can be attributed to two things: population decline and increased property values. Since 1980, per capita property taxes have increased by over $450 in West Virginia while population has fallen by 6.8 percent. Per capita property tax began to substantially increase beginning in From 1990 to 2006, per capita property tax payments increased by over $365 while total assessed valuations increased by more than 165 percent. School districts have been the major beneficiaries of these increased payments. As the Figure 3 illustrates, per resident tax payments for schools have increased dramatically since

13 Figure 3: West Virginia Per Capita Property Tax By Purpose $800 $700 $600 $500 $400 $300 $200 $100 $0 Source: West Virginia State Tax Department State County School Municipal A clear look at exactly how tax rates have changed in each of West Virginia s counties is shown in Tables 5 and 6. Table 5 shows the effective rates for each class of property in 1995 and The highest effective rate for both years was in Cabell County while the lowest rates could be found in Randolph County in 1995 and Pendleton County in This suggests that counties located in the more mountainous counties tend to have low effective property tax rates and, in fact, five of the top six counties with the lowest property tax rates are located in the mountainous portion of the state. Table 6 addresses how effective rates have changed from 1995 to 2000 and 2000 to From 1995 to 2000, 34 percent of West Virginia counties experienced a decrease in their effective property tax rate with the largest decline of 13.3 percent occurring in Wayne County. From 2000 to 2008, however, effective property tax rates fell by an average of 4 percent for West Virginia counties with the largest drop of 20.6 percent occurring in Hampshire County. 9

14 Table 5: West Virginia Property Tax Rates By County and Class Rate (cents per $100 assessment) Rank (Lowest to Rate (cents per $100 assessment) Rank (Lowest to County I II III & IV Highest) I II III & IV Highest) Barbour Berkeley Boone Braxton Brooke Cabell Calhoun Clay Doddridge Fayette Gilmer Grant Greenbrier Hampshire Hancock Hardy Harrison Jackson Jefferson Kanawha Lewis Lincoln Logan McDowell Marion Marshall Mason Mercer Mineral Mingo Monongalia Monroe Morgan Nicholas Ohio Pendleton Pleasants Pocahontas Preston Putnam Raleigh Randolph Ritchie Roane Summers Taylor Tucker Tyler Upshur Wayne Webster Wetzel Wirt Wood Wyoming Source: West Virginia Tax Department 10

15 Table 6: West Virginia PropertyTax Rate Changes By County % Change from % Change from Total State, County, and School Rates Total State, County, and School Rates Total County Rates Total School Rates Total County Rates Total School Rates All Classes All Classes All Classes All Classes All Classes All Classes Average WV County Barbour Berkeley Boone Braxton Brooke Cabell Calhoun Clay Doddridge Fayette Gilmer Grant Greenbrier Hampshire Hancock Hardy Harrison Jackson Jefferson Kanawha Lewis Lincoln Logan McDowell Marion Marshall Mason Mercer Mineral Mingo Monongalia Monroe Morgan Nicholas Ohio Pendleton Pleasants Pocahontas Preston Putnam Raleigh Randolph Ritchie Roane Summers Taylor Tucker Tyler Upshur Wayne Webster Wetzel Wirt Wood Wyoming Source: West Virginia Tax Department 11

16 Assessed Valuations Since major legislation passed in 1982, property in West Virginia is assessed at 60 percent of its fair market value by county assessors. These assessed valuations are to be calculated by assessors in three-year cycles with annual adjustments. As shown in Figure 4, assessed valuations in West Virginia for all classes of property, except Class I, have increased dramatically since Class I property valuations have fallen to zero in the state due to legislation in 1997 and 2007, which exempted all intangible and agricultural personal property from taxation. Forms of this type of intangible personal property included notes, bonds, bills and accounts receivable. The highest amounts of assessed valuations are in Class II and III properties which include residential properties and all other properties located outside municipalities. While Class III valuations remain the highest, Class II valuations have increased dramatically since 1990 to a level almost equal to Class III. This increase of an average of 10.5 percent a year in assessed value for residential properties can be attributed to the housing boom in growing parts of the state and more accessible data on housing market prices. 32,500 Figure 4: Assessed Valuations of Property West Virginia 30,000 27,500 25,000 22,500 (Millions of Dollars) 20,000 17,500 15,000 12,500 10,000 7,500 5,000 2, Source: West Virginia State Tax Department Class I Class II Class III Class IV To eliminate the possibility that the rise in assessed valuations in 3 of the 4 classes of property in West Virginia is due to inflation, the assessed valuations were adjusted for inflation using the U.S. Consumer Price Index. Even after inflation is taken into account, assessed valuations have still increased since 1990 in West Virginia. In fact, Class II inflation-adjusted or real assessed 12

17 valuations have increased more than 230 percent to approximately $13.4 billion in 2008, as shown in Figure 5. While this shows that assessed valuations and thus market values increased over the past 17 years, Figure 5 also shows that inflation played a part in the increase. Class III assessed valuations were $29.9 billion in 2008 (Figure 4) but after being adjusted for inflation they were only $13.9 billion. 15,000 Figure 5: Inflation Adjusted Assessed Valuations of Property by Class West Virginia 14,000 13,000 12,000 11,000 10,000 (Millions of Dollars) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, Class I Class II Class III Class IV Source: West Virginia State Tax Department; U.S. Bureau of Labor Statistics Consumer Price Index On average, assessed valuations have increased in West Virginia since 1990 for 3 of the 4 classes of property, but each of West Virginia s 55 counties experienced different levels of change. Table 7 shows how assessed valuations in each of West Virginia s 55 counties have changed since Class I assessed valuations have declined dramatically in every county, as to be expected, since Since 1990, total assessed valuations have increased in every county with the highest increases occurring in counties in the Eastern Panhandle, which has been experiencing tremendous growth in population. The most dramatic increases have been for Class II assessed valuations. This class of property includes residential property. The highest level of increase from 1990 to 2008 for Class II assessed valuations occurred in Berkeley County. 13

18 Table 7: West Virginia Assessed Valuations of Property by County % Change from % Change from II III IV Total II III IV Total BARBOUR BERKELEY BOONE BRAXTON BROOKE CABELL CALHOUN CLAY DODDRIDGE FAYETTE GILMER GRANT GREENBRIER HAMPSHIRE HANCOCK HARDY HARRISON JACKSON JEFFERSON KANAWHA LEWIS LINCOLN LOGAN MARION MARSHALL MASON MCDOWELL MERCER MINERAL MINGO MONONGALIA MONROE MORGAN NICHOLAS OHIO PENDLETON PLEASANTS POCAHONTAS PRESTON PUTNAM RALEIGH RANDOLPH RITCHIE ROANE SUMMERS TAYLOR TUCKER TYLER UPSHUR WAYNE WEBSTER WETZEL WIRT WOOD WYOMING Source: Classified Assessed Valuations : Taxes Levied from the West Virginia Department of Tax and Revenue 14

19 Taxes Levied Once tax rates have been set and assessed valuations have been made, property taxes are levied on West Virginia property owners. Taxes are levied on all four classes of property for the state, counties, municipalities, and schools and are collected in each county by the sheriff. As shown in Figure 6, property taxes levied in West Virginia have increased by over 250 percent since This can be attributed to increased assessed valuation levels throughout the state. The only class of property that has not increased is Class I property which has fallen to zero. This decrease can be attributed mainly to legislation that exempted intangible and agricultural personal property from taxation, which in turn dropped the amount of Class I property taxes levied starting in The most growth in property taxes levied has occurred in Class II. From 1980 to 2008, taxes levied on Class II property increased from $39.9 million to $333 million, an increase of 734 percent. 700 Figure 6: Taxes Levied on Classifed Assessed Valuations By Class West Virginia (Millions of Dollars) Source: West Virginia State Tax Department Class I Class II Class III Class IV Taxes levied on Class I property have declined considerably since Declines have continued through the twenty-first century, as shown in Table 8. From 2000 to 2003, taxes imposed on Class I property fell by 88 percent with five counties no longer levying taxes on this classification of property. Starting in tax year 2008, no counties in West Virginia levied taxes on Class I property. From 2000 to 2008, Class II, III, and IV continued to experience increases in taxes levied. Taxes levied on all three classifications of property increased by 24.2 percentage points to 75.6 percent. 15

20 Table 8: Current West Virginia Property Taxes Levied Year Class I Class II Class III Class IV ,735, ,899, ,904, ,361, ,717, ,254, ,049, ,929, ,442, ,186, ,432, ,632, , ,299, ,295, ,615, , ,280, ,357, ,204, , ,691, ,307, ,979, , ,262, ,901, ,759, , ,623, ,195, ,377, ,380, ,808, ,318,922 Source: West Virginia State Tax Department To eliminate the possibility that the rise in taxes levied is due to inflation, the data were adjusted for inflation using the U.S. Consumer Price Index. After adjusting for inflation, the levels of taxes levied have increased since 1980 for Class II, III, and IV property. These increases, while not as large as before the inflation adjustment, show that increased assessed valuations have pushed the level of taxes levied upwards. In fact, from 1980 to 2008, the taxes levied on Class II property increased by 220 percent to a level of $155.5 million. From 1990 to 2008, all 55 West Virginia counties experienced total property tax levy increases, as shown in Table 9. Total taxes levied in West Virginia have changed dramatically in the past few decades for all classes of property. These increases occurred even with major declines in every county in taxes imposed on Class I property. The largest total increases occurred in the growing Eastern Panhandle counties of Berkeley, Jefferson, and Morgan. These counties increased their total taxes levied by more than 390 percent in the eighteen years. 16