The Institute for Principled Policy is pleased to be able to share with you a significant and important discussion on the realities of local tax levies. This series, written by Ohio researcher Carolyn J. Blow, is from a document entitled “Ohio’s Property Taxes”. We will keep our editorial comments to a minimum, but I do encourage you to read each entry in this series very closely and carefully, and prepare to share this information with those in your family, community and spheres of influence.
Ohio’s property tax system is beyond the comprehension of most citizens only because most citizens would rather just pay their taxes than try to understand it. With time and study, the tax system is understandable. If the reader is new to this subject, he should not be discouraged if he doesn’t “get it” after having read the paper only once.
With a grasp of taxation, individuals are more able to influence government officials and to vote in a knowledgeable manner. In general, whoever controls the money controls the programs.
PART 1:THE BASICS OF PROPERTY TAXATION
This treatise deals predominantly with the taxation of “real” property, that is, real estate. In Ohio, for tax purposes, real property is divided into two categories, or classes, one being residential and agricultural and the other being commercial and industrial (also referred to as “other real property” or “nonresidential/agricultural”). Properties in both classes are “assessed” at 35 percent of the appraised market value, which is determined by the county auditor; for example, a $100,000 property is assessed at, and taxed on, $35,000. (For some types of properties, such as farms, current use is considered in determining their value for taxation purposes.)
The monetary unit of taxation is the mill, which is one-tenth of one cent ($.001). A levy, or tax, is for a certain number of mills for each dollar of assessed valuation. (One mill of tax is equal to $1.00 for each $1,000 of assessed valuation.) Each levy is for the duration of a certain number of years or for an indefinite number of years; in the latter case it is said to be “continuing.”
The tax on a property for any particular levy is not computed with the originally voted millage. Rather, it is computed with what is known as the “taxable” millage, or “effective” millage, which is generally less than the voted millage. This can best be made understandable with an explanation of the very important House Bill 920.
To replace an earlier law, in 1976 the Ohio General Assembly passed H.B. 920, which is found in the Ohio Revised Code, Section 319.301. Unlike most laws, it is still generally known by its bill name, House Bill 920, because it is so important. The purpose of the law is to keep a lid on what would otherwise be run-away property taxes on homes and businesses. The law also has the effect of keeping government programs and spending from running amuck. (School and other government officials dislike H.B. 920 because they would like to have an ever-increasing stream of revenue without voter approval.)
Here’s how H.B. 920 works: Property values generally increase at a faster rate than do the funds needed to operate any school or other government agency in an appropriate manner. Therefore, to control taxes, as the total value of all properties combined in a school district, county, or other taxing entity’s district goes up because of updated property values and new construction added to the mix, the millage on which property taxes are figured is reduced so that the total revenue generated by a particular levy remains fairly constant. This revenue-stabilizing millage that decreases every year as aggregate property values rise is the effective millage. It is what is in effect, so it determines the tax that property owners pay. The voted millage is not “in effect,” so it is not used to figure the tax.
To accomplish this stabilization of revenue, the state tax commissioner determines a tax reduction factor from property value information that the county auditor gives him. This factor is derived by comparing the total value of “carryover property” in each class in a taxing district from one year to the next. Carryover property is property that is on the current year’s tax list and that was also on the previous year’s tax list in the same class. Obviously, then, new construction is not immediately included in the total valuation of any district, but it is taxed nevertheless. Consequently, each new construction provides extra tax revenue for a taxing district till it is included in the carryover property.
The tax reduction factor is used to determine the taxable, or effective, millage that would keep the revenue fairly constant year to year for each particular levy. The effective millage is carried to six decimal places, for example, 2.406458 mills. If the numeral in the sixth decimal place is a zero, such as with 5.341980 mills, the millage might be stated with only five decimal places, 5.34198 mills, because the zero at the end has zero value.
A levy that has a taxable millage of 5.341980 could conceivably have been voted at 6.5 mills twenty years ago. The effective millage is closest in value to the voted millage when a tax is new. The gap between the voted and effective millage widens each year the levy is in effect as the value of all the properties, combined, in a taxing district continues to increase. The gap widens most dramatically with the six-year property reappraisals and the midterm updates because the auditor-appraised value of the totality of properties in a taxing district generally increases the most at those times. (Factors such as location, building additions, and damage affect the value of – and tax increase or decrease on – individual properties.)
The voted millage on both classes of property is the same. However, for the purpose of figuring the effective millage during the years a levy is operative, the two classes of property are considered separately because there is usually a difference between the rate of growth of the residential-agriculture properties and that of the commercial-industrial properties. The effective millage, then, is usually different for the two classes. (A tax for businesses on tangible personal property [machinery, equipment, fixtures, furniture, and inventory] is figured with a different assessed rate and does not receive a reduction factor.).
Next: part 2: Exemptions, exemptions…