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F I S C A
L I M P A C T R E P O R T
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SPONSOR: |
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DATE
TYPED: |
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HB |
948 |
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SHORT
TITLE: |
Property
Tax Yield Control Provision |
SB |
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ANALYST: |
Smith |
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REVENUE
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Estimated Revenue |
Subsequent Years Impact |
Recurring or
Non-Rec |
Fund Affected |
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FY03 |
FY04 |
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NFI |
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State Revenues or Debt
Service |
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See Narrative |
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Local Governments |
(Parenthesis
( ) Indicate Revenue Decreases)
SOURCES
OF INFORMATION
Responses
Received From
TRD
SUMMARY
Synopsis
of Bill
House Bill 948 repeals
Section 7-37-7.1 NMSA 1978 of the Property Tax Code, commonly referred to as
the "yield control" limitation, for tax years beginning in 2004.
Section 1 of the proposal stipulates that for tax year 2003, the Department of
Finance and Administration (DFA) must calculate and set tax rates as if
Section 7-37-7.1 were in effect. Section 39 of the proposal, however, repeals
Section 7-37-7.1 of present law for the 2003 and subsequent tax years. Remaining
sections of the proposal simply strike references to Section 7-37-7.1 wherever
they appear in
FISCAL
IMPLICATIONS
TRD notes that the proposed measure would affect neither property tax
revenues imposed for state debt service purposes, nor any revenue sources not
subject to the yield control statute. The impact on various revenue sources
subject to yield control – primarily county and municipal operating revenues –
would depend on fiscal variables affecting each of the several hundred entities
whose rates are now subject to yield control, as well as how the measure is
implemented.
A major effect of eliminating yield control would be to subject
non-residential taxpayers to potentially large tax increases as rates remain
unchanged while reassessment occurs. Residential taxpayers would be relatively
unaffected due to the three percent limit on residential value increases
specified in Section 7-36-21.2 NMSA 1978.
Second, the current property tax system would lose its automatic
adjustment mechanism whereby rates change in the opposite direction of changes
in net taxable value. If, for example, the legislature provides a substantial
increase in the veterans’ exemption, the present system adjusts rates in a way
that prevents revenue recipients from losing revenue.[1] Without yield control, this would not occur
and revenue recipients would discover their income reduced. This is also true
in cases where base decreases occur in response to loss of a local business;
for example, a copper mine. The negative "valuation maintenance"
component in the yield control formula increases rates in response to the loss
of base, leaving revenues largely unchanged. Without this mechanism, revenue
recipients would be forced to increase tax rates to cover the loss in the tax
base.
TECHNICAL
ISSUES
TRD notes that the
bill's assumption in Section 1 that DFA sets all rates -- including rates applicable
to counties, school districts and other government units subject to the yield
control statute -- is incorrect. DFA does not, for example, determine school
district or community college rates that are subject to yield control. If the
intent is that all rates subject to yield control should be calculated in Tax
Year 2003 as if the yield control statute were in place, the proposed measure
should be changed to state “all entities will calculate rates currently subject
to yield control for purposes of Tax Year 2003 as if yield control were in
effect.”
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Table 1: County Operating Rates – 2002 Tax Year |
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Actual Operating Rate |
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County |
Rate |
Residential |
Non-residential |
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Bernalillo |
10.770 |
5.918 |
10.520 |
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Catron |
10.850 |
10.850 |
10.850 |
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Chaves |
10.350 |
6.769 |
10.350 |
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|
11.850 |
8.727 |
10.662 |
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Colfax |
10.350 |
10.350 |
10.350 |
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Curry |
9.850 |
9.850 |
9.850 |
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DeBaca |
11.850 |
11.850 |
11.850 |
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Dona Ana |
11.850 |
7.800 |
11.850 |
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Eddy |
7.500 |
6.285 |
7.500 |
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Grant |
11.850 |
6.734 |
6.864 |
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Guadalupe |
11.850 |
7.578 |
11.850 |
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Harding |
8.850 |
5.823 |
8.850 |
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|
11.850 |
10.559 |
11.850 |
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Lea |
8.600 |
6.679 |
8.600 |
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11.600 |
4.599 |
8.850 |
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|
8.850 |
4.682 |
6.814 |
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Luna |
11.850 |
7.610 |
11.850 |
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McKinley |
11.850 |
5.210 |
11.850 |
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Mora |
11.850 |
6.706 |
11.078 |
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Otero |
11.850 |
7.245 |
11.850 |
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Quay |
11.850 |
8.285 |
10.350 |
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|
11.850 |
4.506 |
9.215 |
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8.850 |
4.941 |
8.850 |
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8.000 |
6.285 |
8.000 |
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San Miguel |
11.850 |
5.262 |
10.331 |
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Sandoval |
10.350 |
5.189 |
8.269 |
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11.850 |
4.788 |
9.076 |
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Sierra |
11.850 |
8.091 |
11.850 |
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Socorro |
11.850 |
10.289 |
11.850 |
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11.850 |
5.206 |
10.460 |
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11.850 |
11.282 |
11.850 |
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9.150 |
6.703 |
9.150 |
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11.850 |
6.032 |
11.850 |
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2)
The proposal provides no guidance on the question of rates imposed when yield
control is repealed. One set of rates has been imposed, but these rates
have been reduced over time by the yield control mechanism. The imposed rates are substantially higher
than actual rates in many counties, as shown in Table 1. If the imposed rates were substituted for the
actual rates upon removal of the yield control statute, the result would be
rather substantial property tax increases in many jurisdictions – particularly
against residential properties. An alternative approach would be to require use
of actual operating rates resulting from yield control over the last 30 years.
The most appropriate method of solving this problem would be to state that
rates subject to yield control in effect in Tax Year 2004 are to be the same
rates set in 2003, but that various property tax recipients would be allowed to
impose remaining rates in the same manner as currently
OTHER
SUBSTANTIVE ISSUES
TRD has provided the following primer on yield
control.
Background:
The yield control statute
was enacted in 1979 in an environment in which properties had not been reassessed
for many years in many counties. It was understood that reassessment would
generate very large increases in tax obligations in many counties. Assessors
were often reluctant to reappraise properties because they feared voters would
blame them for the resulting tax increases. The yield control mechanism was
therefore developed to limit revenue increases in response to reassessment by reducing
rates. It also works in reverse;
loss in aggregate value due to reassessment increases rates as a result
of the formula.
Yield Control -- An
Illustration
The yield control formula
moves rates in the opposite direction of value changes. Value increases due to
new construction do not affect rates, although the mechanism does allow new construction
and increases in the cost of goods and services provided by governments to
increase revenue yields. The formula applies
separately to residential and non-residential operating rates.[2]
Hence in a particular jurisdiction, residential and non-residential rates are
typically different, as shown in Table
1.
An example of yield
control’s effects appears in Figure 1. The chart illustrates the relationship
between valuation maintenance and
Figure 2 illustrates how the
rate changes translate into revenue changes. The horizontal line in Figure 2
represents revenues after valuation maintenance changes shown in Figure 1 are
made. Revenues do not change because rate changes shown in Figure 1 precisely
offset assessed value changes from changes in valuation maintenance. The
“dashed” line in Figure 2 illustrates what would occur without yield control in
response to changes in valuation maintenance. It assumes the operating rate
remains at its current 8.269 mill level. Hence changes in valuation maintenance
generate proportionate changes in revenues. Vertical differences between the
dashed and solid lines in Figure 2 represent revenue losses or gains to the
county that would occur without the yield
control formula.
Rationale for Retaining or
Eliminating Yield Control
Proponents of eliminating
the yield control mechanism favor elimination for one of several reasons. Some
of the revenue recipients simply do not like to see their rates reduced in
response to revaluation. They recognize that
without the yield control statute their revenues would typically
increase at a greater rate than when the formula is employed. Others dislike it
because they mistakenly believe the formula was designed primarily to stabilize
individual tax bills – an indirect effect of the mechanism. The mechanism does
tend to serve that purpose, but individual tax bills are also affected by
reassessment and rate changes. If a particular property is assessed at substantially
less than market value compared with other properties in a particular county
and reassessment occurs, its owner will, and probably should, experience an
increase in tax obligations. Hence when taxpayers receive tax increases due to
reassessment because their properties are severely underassessed,
they often incorrectly conclude that the mechanism does not work. Properties assessed at values much closer to
market value than average under similar conditions experience tax reductions
via rate decreases caused by yield control. The net result is elimination of
inequities that would happen without reassessment.
Current level of valuation maintenance Revenues under yield control – variable rates Revenues without yield control – constant rates
Several other factors
suggest that eliminating yield control may be a good idea. One factor is that it is probably less necessary
than in the past due to the recently enacted three percent limitation on
residential value increases mentioned above. Another is that without yield
control, rates would be much easier to calculate, and perhaps much more readily
understood, than rates that result from the yield control formula.
There are several reasons
why eliminating yield control may not be a good idea. First, if DFA and other
agencies ceased yield control, resuming its use would be difficult. Reemploying
the mechanism may be appropriate if the three percent valuation increase
limitation were eliminated. Secondly, use of yield control in setting
nonresidential rates is probably appropriate for the same reason the formula
was developed in the first place. Moreover, absence of the revenue limitations
produced by yield control might provide strong incentives for some
jurisdictions to aggressively reassess commercial properties with resulting tax
increases – assuming their assessors did not fear voter retaliation. Thirdly, as discussed above, changes in the
tax base under yield control produce automatic and offsetting changes in rates.
Without this mechanism, jurisdictions would be required to make literally
thousands of rate imposition decisions in response to changes in the tax base.
Some Limitations of Yield
Control
The mechanism is far from
perfect for several reasons. First, there is no obvious way for revenue recipients
to reduce rates under the yield control mechanism. This issue is very complex
and would probably require considerable effort to resolve.
The second issue may be
described as follows: In an ideal property tax system, county assessors would
maintain values at "current and correct" levels while rate
adjustments maintain revenues at approximately "revenue- neutral"
levels as if due to yield control. However, in many
SS/njw