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Tax and Spin- Part 4: “Schooling” the Taxpayers”

This entry is part 4 of 11 in the series Understanding Property Tax Levies

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The simplest method is timing by local officials. The various government entities collaborate to put their many different levies on the ballot at different times because taxpayers would rebel were they to be presented with them all at once. Also, officials try to get new taxes passed right after the sexennial property reappraisals and triennial updates so as to get the most dollars for the millage. Other methods are more involved and are generally aimed at eating away at the benefit of H.B. 920.

Ohio law states that school districts may not have less than 20 effective mills of tax for current operating expenses for either class of property (ORC, 319.301[E]). This requirement is often called the “20-mill floor.” A school district might have, for example, 21 mills of voted taxes for current operation along with 3 inside mills that are also used for operation. While the 3 inside mills could not decrease in effective millage because the reduction factor does not apply to inside mills, the 21 voted mills could theoretically decrease over the years to perhaps, for example, 16.6 effective mills because of the aggregate increase in property values in the district and the reduction factor. Total effective mills for operation would then be only 19.6 mills (3 inside mills + 16.6 outside mills). To keep that from happening, taxes are adjusted upward by 0.4 mill, without a vote of the people, till the 20 effective mills are met (3 + 16.6 + 0.4 = 20). A similar non-voted increase continues year after year as long as the combined value of properties in the district increases and other current expense levies that count in the 20-mill floor are not passed. (Vocational schools have a 2-mill floor.)

Not all types of levies count in the 20-mill floor. School districts that are near the floor often purposely keep the millage from their levies that count in the floor low so those taxes automatically grow. They then levy other taxes that do not count in the floor, such as the income tax.

School districts also use certain kinds of property taxes, including “emergency levies” for the same purpose. Aside from a favorable vote that might be generated by the emotional term “emergency,” school districts use these levies in preference to regular levies because they are not counted in the 20-mill floor. The district benefits from the emergency levy while also benefiting from non-voted tax increases from other operating levies that do count in the floor. Emergency levies may be proposed to provide for an emergency or to prevent an operating deficit (ORC, 5705.194). However, that is often said to be the purpose of other kinds of levies, as well. School personnel have argued that emergency levies are for a fixed sum and not for a specific rate, or millage, and therefore they should not or could not be counted in the 20-mill floor. However, emergency levies are figured in mills for the ballot and for each year they are in effect, and at one time they were counted in the 20-mill floor by law. Their use is a strategy to get more tax money.

Schools use the “permanent improvement” property tax because that tax, like the emergency levy, does not count toward the 20-mill requirement for current operating expenses. The use of the permanent improvement tax is limited to assets and improvements that have at least a five-year life expectancy, but it frees up other taxes for current operations.

When a school district’s operating millage is at the 20-mill floor, another way the district can manipulate levies that might be advantageous to it and produce more revenue is to reallocate its
inside millage (a public hearing by the board is necessary for any such change [ORC, 5705.314]). With this action, current expense millage that had been inside millage would be changed to outside millage, and permanent improvement millage would be changed from outside millage to inside millage. The purpose of the swap is to get more of the millage for operations into outside millage where the reduction factor would work on it in order to provide even more automatic non-voted tax growth. Meanwhile, the permanent improvement mills that become inside millage would grow with property values (when they were outside mills, the reduction factor applied).

Yet another means to grow property taxes for schools came about with H.B. 530 in 2006. The law (ORC, 5705.211) authorizes an additional property tax for current operating expenses to be approved by the electors at such a rate that the total taxes charged by the levy each year are sufficient to offset any reduction in basic state funding caused by increases in real estate values. The rate of the tax could be set to cause revenue generated from the levy to increase by up to 4 percent, inclusive, each year, but it could be set at a lesser rate. The tax increase would occur each year for a minimum of five years, and may be continuing – year after year after year.

The legislature has also passed laws for real property tax increases that are not just for schools. With the gradual reduction of taxes on tangible personal property of electric companies (S.B. 3 in 1999) and natural gas companies (S.B. 287 in 2000), all fixed-sum levies that were in existence in 1998 and 1999, respectively, and continued to exist in the tax year preceding the distribution year, were automatically – and quietly – increased by up to ¼ mill, inclusive, to help compensate school districts and local taxing units for their “fixed-sum levy loss.” The fixed-sum levy loss is the gradual loss of tangible personal property taxes for emergency levies and levies for paying debts (ORC, 5727.84[H]). The state makes up any difference between the tax loss and ¼ mill. The added property tax and state payments began in 2002 and they even cover emergency levies that are continually renewed after 2002 through 2016 and debt levies beyond that if they are still in effect. (Details are located in ORC, 5727.84 to 5727.87.)

With H.B. 66 in 2005 (revised with H.B. 530 and S.B. 321 in 2006), the state is phasing out tangible property taxes on other businesses, and the property tax on qualifying fixed-sum levies is automatically increased by up to ½ mill, inclusive, to compensate local government units for the phased-out taxes on those businesses. State reimbursements for tax losses above ½ mill continue for levies that are in effect through 2017. Qualifying school district emergency levies include renewals through that time. Voted debt levies are reimbursed till they expire, regardless of when that is. (Details are located in ORC, 5751.20 to 5751.23.)

Questioning the legality of these non-voted, outside-millage add-on taxes, some people both in and out of government have voiced strong disapproval of them. Voters had not agreed to the extra millage when they originally voted for the emergency and debt levies. However, some legislators said that because the tangible property taxes would have been paid, it was all right to add non-voted taxes to fixed-sum levies.

The last tax to be addressed is the “replacement levy.” Because it is the most deceptive and confusing of all taxes, it is given separate treatment via Part 3.

Next: Part 5–The “place” where you raise your own taxes

Series NavigationTax and Spin- Part 3: The REAL Growth of GovernmentTax and Spin- Part 5: The “Place” Where You Raise Your Own Taxes

Posted in Commentary, Economics, Education, Private Property, Public Policy Principles News, Public Policy Radar, Taxation.