The Pratt Tribune
320 South Main
Pratt, KS 67124
In their effort to publicize and promote interest in Proposition K (now Senate Bill #197 and House Bill #2150), the proponents highlighted the increased property valuations in Pratt County, Kansas (137% from 1997 to 2007) as an example of the problems with the Kansas ad valorem property tax system. This had the desired result by getting widespread coverage in the media, including an article in the Pratt Tribune. The implication was Pratt County and other local government taxing entities are somehow using the existing system to unfairly tax their citizens. Pratt County agrees with the notion that the current method for funding local government is ineffective, unfair and counterproductive but wholeheartedly disagrees with the idea that it is the fault of local government or that Proposition K is the answer to the problem. Before a real answer to the problem can be found, Kansas must understand the dilemma local elected officials face when trying to perform their duties under the present tax system.
SOURCES OF LOCAL GOVERNMENT REVENUE:
Every thinking citizen concedes that local government fulfills important and necessary functions in dealing with matters such as fire and police protection, roads and bridges, education, etc. They also concede it is necessary to pay for those services. Under Kansas law, however, the means and methods of obtaining local government funding are severely restricted.
Some taxing entities operate revenue generating organizations such as utilities which, when operated at a profit, provide at least part of the revenue to that taxing unit. Most of the taxing units in Kansas, however, either do not have that ability or generate very little of the necessary funding from revenue based entities. Sometimes local taxing entities incur indebtedness to fund their needs but the ability of local taxing entities to use debt as a method of paying for their needs is, as it should be, significantly limited by the Cash Basis Law. Local governments cannot raise money by income taxes. The only significant funding options for local government are ad valorem taxes, sales taxes, and federal and state funding.
Although counties and cities raise a portion of their needed funding through retail sales tax, their ability to use this source of funding is controlled by and severely restricted by current law. Kansas cities are limited to 2% for general purposes and 1% for special purposes and county-wide retailer sales taxes are limited to 1%. Cities and counties also receive a statutory controlled portion of the 5.3% state-wide retailers sales tax subject to the allocation rules of the state. Using sales tax as a funding mechanism is also unreliable because the State frequently enacts exemptions reducing its coverage and amount.
FEDERAL AND STATE FUNDING:
Over the last thirty years especially, many laws have been passed at the federal and state level which require action or impose duties upon local government that did not previously exist. Although some of these might be questioned, a great many of them have induced changes which are beneficial to local communities. The problem with all of these, however, is that they have not been followed by adequate funding by the governmental entity imposing the changes. These have been popularly called “unfunded mandates”. This is a misnomer because in most instances these policy directives were accompanied by some financial support usually in the form of stipends or grants. These for most part did not cover the additional requirements but the biggest problem was that although they started out with funding quite often the funding ended and it was left to the local government entities to continue funding these directives through local sources. School districts and county governments have been especially affected by these directives accompanied by inadequate funding. The issue is not really whether the programs were good or bad, as the local government entities have little to say in that matter, but the reality is that outside funding has been inadequate so the local government entities had to raise more taxes on its citizens. In addition, it is not realistic for local government entities to rely upon the federal or state government as funding sources as they too may be unable to meet their commitments as we have seen during the current financial crisis. A withdrawal or removal of funding from the federal and state level does not seem to come with a removal of the programs requiring that funding and the local government entities are left to deal with it.
AD VALOREM TAXES:
Unfortunately, because of Kansas’ limitations on local government funding, most of the funding must be derived from ad valorem (Latin for “according to value”) taxes on real and personal property. A common misconception is that local government controls ad valorem taxation; it is state controlled.
The value of all real and personal property in the state, not expressly exempt, is subject to taxation. The proponents of Proposition K would seem to suggest that county governments have some real say in how this value is determined. K.S.A. 79-1401 et seq. lets you know right away that it is the state that controls everything and the county’s role is to merely implement what the state tells them to do. In fact, in K.S.A. 79-1404, one of the duties of the State Property Valuation Director is to have and exercise general supervision over the county appraisers, and boards of county commissioners so that all property will be assessed at its true and full cash market value. County appraisers and county commissioners are subject to penalty and forfeiture and removal from office if they fail to comply with the dictates and requirements of the State Property Valuation Director. If there is a problem with valuation in the State of Kansas, sole responsibility for that problem must lie with the State Property Valuation Director or the law which the Director is obligated to enforce and not with local county government.
The State controls how county government appraises real property by assigning specific rules to the county appraiser and then reviewing the results to assure they are satisfactory. If they are not, action is taken by the state against the appraiser or the board of county commissioners. The county is required by statute to appoint a county appraiser and that appraiser must fulfill the requirements of the State Property Valuation Director and serves at the Director’s pleasure because if the county wants to terminate an appraiser, it cannot be done without the concurrence of the State Property Valuation Director. The Director, however, has the right to terminate the appraiser without county consent. Anyone complaining about the value of their property and how it is being treated under the current ad valorem tax code, should not complain to local government but to the State Property Valuation Director and their local legislator because they control everything.
If it were not enough that the state controls all aspects of property valuation, the state also controls the right to grant exemptions. Needless to say, the legislature has been very active in granting exemptions or exceptions to ad valorem taxation. Go to K.S.A. 79-201 et seq. and you can see page after page of exceptions from taxation. It is certainly the right of the Legislature to make exceptions where they believe it is in the best interest of the state but every exception or exemption erodes the tax value base and shifts the taxation burden to other people’s property.
Pratt County’s ad valorem experience over the past ten years reflects some of the issues described above and probably represents the experience of a great many counties. From 1999 to 2008 which is a more recent period than the period considered by the Proposition K proponents, the Pratt County property assessed value went from $75.6 million to $144.9 million. That sounds like an horrific increase unless you understand what caused it. During the ten year period, new construction in Pratt County amounted to $26.6 million in increased value. That number was driven substantially by the construction of a multi-million dollar ethanol plant in Pratt which was completed in 2007. The addition of these new construction values to the ad valorem tax base is required by state law.
In addition to the new construction increase, a substantial portion of the increase was due to increases in valuation for oil, gas and utilities. Oil valuations increased from $1.5 million in 1999 to $10.5 million in 2008 and for gas from approximately $800,000 to approximate $5.8 million 2008 and for utilities, $25.3 million in 1999 to just under $40 million for 2008. These increases to the ad valorem tax base were mandated through the Kansas Property Valuation Division either deciding the valuation criteria or making the actual valuation itself. During the same period, agriculture properties went up from $14.3 million in 1999 to $16.5 million in 2008. Again, it is the State of Kansas that sets the valuation base for agricultural properties and not the county. All totaled, 38% of the $69.3 million assessment tax increase in the last 10 years comes from new construction
and 45% comes from valuations directly made or controlled by the State. Only 17% of the increase, or $11.8 million, comes from other properties such as residences and commercial properties. That is less than the 2% per year cap in the Proposition K legislation. Therefore, the actual tax increase on properties made by the county were insignificant in relation to the increases made by the State. That is not to say the State was wrong in making those increases, as it is mandated to value property at its fair market value and the State was complying with its own rules and regulations.
The valuation process is only one step in computing ad valorem taxes and the other is the setting of mill rates. Each taxing district within the county sets its own mill rate and Pratt County set its mill rate in 1999 at 50.077 mills and in 2008 it was 62.998 mills. These increased mill levies were due to increased costs incurred by the county in performing its functions, meeting State dictated funding requirements and to make up for lost revenues due to reduced State funding or State enacted exemptions to ad valorem taxes. In 2004, Pratt County lost almost $740,000.00 in LAVTR, revenue sharing, and City/County highway funds due to cuts from the State. Between 2005 to 2007 the county was forced to re-pay out-of-state utilities $486,000.00 as a refund of ad valorem taxes when the State exempted natural gas inventories temporarily stored in underground storage fields from taxation. Other exemptions cost the County many more dollars and the demands of the State continue to increase. There have been so many State enacted exemptions to personal property that the author of Proposition “K” notes that Kansas is essentially just a real property tax state and personal property taxes have become irrelevant.
Pratt County believes the funding system for local governments is out of whack but the Proposition K attempt to resolve the issues facing state and local government regarding funding is merely a band aid that doesn’t come close to addressing the real issues. Pratt County would urge the Legislature to work closely with local government entities to develop a funding base that is flexible and fair and can provide for the local needs and also permit the implementation and continuation of appropriate State initiatives when required.
Proposition K author, Art Hall, states his proposal has as one of its policy goals maintenance of local autonomy by placing no limits on property tax revenue or tax rates (mills). He acknowledges Proposition K will save no taxes. It will, however, create a new set of State dictated guidelines for valuations, that being a flat 2% annual increase after 2010. That will be great for owners whose real estate increases rapidly in value but will do little for areas with flat or decreasing values (i.e. rural and poor areas). The net result will be fast appreciating areas will pay a much smaller percentage of their property values for taxes than flat or depreciating areas and this gap will continue to widen over time. To raise the revenue needed to meet local needs and unfunded mandates, local government units will have to raise mill rates dramatically. The only thing gained from Proposition K will be a new layer of state government oversight. Taxpayers will still be burdened with excessive taxes at the local level because of the misplaced reliance on property taxes.
Some legislators must have recognized this deficiency in Proposition K. It is not possible to look at or examine the impact of Proposition K without also looking at Senate Bill #111. This proposed legislation negates the policy of Proposition K to maintain local government autonomy. By this legislation, every budget of a city or county which requires the levying of an ad valorem tax increase over the previous year will be subject to a special election if a petition containing sufficient number of signatures is filed with the County Election Officer. Other taxing entities like schools, community colleges, fire districts, hospital districts, townships, and cemeteries are not included in the process. If the electorate votes against the revised budget, the previous year’s budget applies and all the budgetary planning of the city or county for the next calendar year will go out the window A city or county then will be faced with reducing or eliminating services and programs. Will the State dictate what goes and what stays? Can cities and counties take care of local needs and ignore state mandates? What do you think? If this is practical, would election challenges to the state budget work?
Art Hall wrote one of the other policy goals of Proposition K was to “improve predictability for taxpayers and government budgeters”. If Proposition K is adopted along with Senate Bill #111, predictability goes out the window. All of your elected
officials in every taxing entity are doing their level best to cut costs and make ends meet. Unfortunately, they don’t control very much of what they have to pay for. Contact your local legislators and let them know we need real and practical tax reform for local governments not gimmicks, experiments by economists, or window dressing.
Board of County Commissioners
Pratt County, Kansas
xc: Representative Mitch Holmes
Senator Ruth Teichman
Kansas Association of Counties