Ad Valorem Property Taxes in Nevada

Deanna.Keirstead

Text Box

Assembly Committee: Taxation Exhibit: C Page 1 of 53 Date: 02/26/13 Submitted by: Jeremy Aguero

Background, Approach and Limitations

• Applied Analysis was retained to review and analyze Nevada’s ad valorem (property) tax system and to estimate the potential impacts of reducing the state’s depreciation factor. We were subsequently asked to provide a general overview of the ad valorem property tax system.

• Applied Analysis obtained and analyzed parcel-level data from the Clark County Assessor’s Office and developed an economic model to test tax collection sensitivity under various alternative scenarios.

• Hypothetical residential and commercial property analyses were also generated to estimate the impact of various scenarios on a typical property owner.

• Importantly, Nevada’s property tax system is highly complex; and, with the adoption of property tax abatements in 2005, an analysis of actual tax incidence would require a parcel-by-parcel assessment (beyond the scope of this analysis). The preliminary analysis summarized herein is designed to provide a preliminary, order-of-magnitude assessment of the potential fiscal impacts. It relies on a number of limiting assumptions. Additional study would be required to more accurately estimate the statewide impacts on any potential taxing authority or property owner.

C-2

Part I: Understanding Nevada’s

Ad Valorem (Property) Tax System

Part II: What Changes are Being

Proposed and Why?

Part III: What are the Impacts of

the Proposed Changes?

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Part I

Understanding

Nevada’s Ad Valorem

(Property) Tax System

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-- Nevada Constitution, Article X (1864)

The Nevada legislature is given the authority to provide

“[f]or a uniform and equal rate of assessment and

taxation…secure a just valuation for the taxation of all

property…exempting mines and mining claims, the

proceeds alone which shall be exempted by law for

municipal, education, literary, scientific, religious or

charitable purposes.”

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Property Tax Overview

• Determination of Taxable Value

– Land: Full cash value

– Improvements: Replacement cost less depreciation at 1.5 percent per year up to 50 years

• Assessment Rate: 35% of Taxable Value

• Tax Rates

– Varies by jurisdiction

– Legislatively imposed cap: $3.64 per $100 of assessed value*

– Constitutionally imposed cap: $5.00 per $100 of assessed value

*Note: The state imposes an additional $0.02 outside of the cap, making the effective cap $3.66.

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The Calculation C-7

A Typical Home ($150,000)

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Taxable Value $150,000

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Taxable Value ≠ Market Value

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Assessment Ratio 35%

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Assessed Value $52,500 C-12




Assessed Value $52,500

Taxable Rate / $100 $2.8969

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Assessed Value $52,500

Taxable Rate / $100 $2.8969

Property Taxes Due $1,521

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Year 1 Year 2 Year 3 Year 4 Year 5 Year 50

Cash Value of Land $50,000 $51,250 $52,531 $53,845 $55,191 $171,855

Repl. Cost of Improvements $100,000 $102,500 $105,063 $107,689 $110,381 $343,711

Less: Depreciation Factor $ - $(1,538) $(3,152) $(4,846) $(6,623) $(257,783)

Total Taxable Value $150,000 $152,213 $154,442 $156,688 $158,949 $ 257,783

Assessment Rate 35% 35% 35% 35% 35% 35%

Assessed Value $52,500 $53,274 $54,055 $54,841 $55,632 $90,224

Tax Rate (Per $100 of Value) $2.8969 $2.8969 $2.8969 $2.8969 $2.8969 $2.8969

Resulting Tax Liability $1,521 $1,543 $1,566 $1,589 $1,612 $2,614

Effective Tax Rate 1.01% 1.00% 0.99% 0.98% 0.97% 0.51%

Property Tax Calculation Summary Typical $150,000 Home

*Note: For illustrative purposes, assumes an annual growth rate of 2.5 percent for land and improvements.

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Overlapping Tax Rates C-16

CLARK COUNTY CAPITAL 0.0500

CLARK COUNTY DEBT 0.0129

CLARK COUNTY FAMILY COURT 0.0192

CLARK COUNTY GENERAL OPERATING 0.4470

COUNTY SCHOOL DEBT (BONDS) 0.5534

COUNTY SCHOOL MAINTENANCE & OPERATION 0.7500

HENDERSON CITY 0.5608

HENDERSON CITY DEBT 0.1500

HENDERSON CITY LIBRARY 0.0586

INDIGENT ACCIDENT FUND 0.0150

MEDICAL ASST TO INDIGENT PERSONS 0.1000

STATE COOPERATIVE EXTENSION 0.0100

STATE OF NEVADA 0.1700

COMBINED RATE 2.8969

Overlapping Tax Rates

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Counties

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Schools C-19
















Cities

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Special

Purpose

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Higher Ed

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State

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State

State C-24

The Abatements C-25

3% Annually 8% Annually

C-26

Parcels Receiving Abatements Clark County, Residential and Commercial

FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Commercial

Residential

599,431 618,356 589,508

224,301

20,704

158,121

69,671

500,805

270,931

C-27

Property Taxes Abated Clark County, Residential and Commercial

$354

$985 $937

$902

$397

$68 $33 $42

$100

FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

in m

illio

ns

Clark County alone has abated $3.7 billion in property taxes since FY 2006

In millions

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Other Important Concepts

• Real vs. Personal Property

• Centrally Assessed Property

• Net Proceeds of Mines

• Redevelopment

• Property Tax Appeals

• Property Tax Collection Allowances

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Part II

What Changes

are Being Proposed

and Why?

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Proposed Changes

• Reduce the property tax depreciation factor applied to

improvement value from 1.5 percent per year to 1.0

percent year

1983

2.0%

1985

1.5%

2013

1.0%

Historical and Proposed Property Tax Depreciation Timeline

C-31

Proposed Changes Important Considerations

• Proposal extends the time period to reach full depreciation, no property owner would experience previously depreciated value being added back for assessment purposes

• Proposal is forward-looking, no property owner would experience a year-over-year increase in assessed value unless their property appreciated more than the depreciation amount or the tax rate increased

• Proposal does not impact the existing property tax abatements, generally speaking, property tax bills cannot increase by more than 3 percent for owner-occupied residential property and 8 percent for all other types of property

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Policy Underpinnings Nevada is the only state in the United States that applies a depreciation

factor to residential buildings (improvements) for property tax calculations

States With a Depreciation Deduction for Real Property Improvements

States Without a Depreciation Deduction for Real Property Improvements

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Policy Underpinnings

Nevada’s taxable property values have dropped by 42.7 percent during the past

five years; recovery will be slow and limited by the property tax abatements.

$63 $70

$86

$114

$134 $144

$120

$93 $86 $82

Nevada’s Total Assessed Value (Commercial and Residential Properties, in Billions)

42.7 Percent Decline

Peak to Present

Residential Property

Appreciation Rankings

Since 1991 Rank Last 5 Years Rank

Nevada 16.9% 51 -55.2% 51

Michigan 49.2% 50 -20.5% 39

Georgia 52.4% 49 -24.4% 45

Ohio 53.7% 48 -11.6% 30

California 58.9% 47 -40.1% 48

Indiana 59.6% 46 -5.8% 17

Connecticut 61.9% 45 -18.0% 35

Delaware 69.4% 44 -22.7% 43

Illinois 71.8% 43 -19.3% 38

Mississippi 74.6% 42 -9.9% 23

Nevada has lost more residential property value than

any state in the U.S. and has reported the slowest rate

of residential appreciation during the past 20 years,

due to sharp declines since 2008.

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Nevada schools are the single largest beneficiary of the property tax and

a reduction in the depreciation factor would help stabilize both operating

and capital revenue streams well into the future.

$1,009

$733

$288

$65

$339

$140

Projected Property Tax Revenues Statewide, FY 2012-13, in millions

Schools Counties Cities

Towns Special Districts State

After Abatements:

2008-09: $1.4B

2012-13: $942M

State of Nevada $0.1700

Other: $0.0350

School District Operations: $0.7500

Henderson Operations: $0.5608

Henderson Libraries $0.0586

Distribution of Property Tax Rates for a Single Entity (City of Henderson @ $2.8969/$100 of Assessed Value)

Clark County Capital: $0.0500

Clark County Debt: $0.0129

Clark County Family Court: $0.0192

School District Debt: $0.5534

County Operations: $0.4470

Henderson Debt: $0.1500

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Nevada schools are the single largest beneficiary of the property tax and

a reduction in the depreciation factor would help stabilize both operating

and capital revenue streams well into the future.

39%

28%

11%

3% 13%

5%

Projected Property Tax Revenues Statewide, FY 2012-13, in millions

Schools Counties Cities

Towns Special Districts State

State of Nevada $0.1700

Other: $0.0350

School District Operations: $0.7500

Henderson Operations: $0.5608

Henderson Libraries $0.0586

Distribution of Property Tax Rates for a Single Entity (City of Henderson @ $2.8969/$100 of Assessed Value)

Clark County Capital: $0.0500

Clark County Debt: $0.0129

Clark County Family Court: $0.0192

School District Debt: $0.5534

County Operations: $0.4470

Henderson Debt: $0.1500

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Other Policy Considerations

• Generates Additional Revenue

• Requires Programming Changes (Assessors)

• Nexus to Demand for Government Services

• Long-Run Strategy

• One-Step, Not a Comprehensive Fix

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Part III

What are the

Impacts of the

Proposed Changes?

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Impact Assessment

• Estimating the impact of deducting the depreciation factor is challenging, because the impact will differ depending on the rate of real property appreciation – If property values remain flat: property tax collections will decrease at a slower rate than

they do today because improved property will depreciate at a slower rate

– If property values decline: property tax collections will decrease at a slower rate than they do today because improved property will depreciate at a slower rate

– If property values increase by less than the statutory abatement caps (3%/8%): property tax collections will increase at a more rapid pace than they do today because improved property will depreciate at a slower pace

– If property values increase by more than the statutory abatement caps (3%/8%): there will be no impact on property tax collections in the current year; however, the abated amounts will be recovered during periods in which property value declines because improved property depreciating at a slower pace will result in higher rates of property tax abatements than exist today

C-39

Hypothetical Current Year Impacts Selected Clark County Jurisdictions

Modeled Rate of Depreciation

@ 1.50% @ 1.25% @ 1.00% @ 0.75% @ 0.50%

County School Debt $0 $571,943 $1,143,886 $1,715,828 $2,287,771

County School Ops and Maintenance $0 $765,793 $1,531,586 $2,297,378 $3,063,171

Boulder City General Operations $0 $1,739 $3,477 $5,216 $6,955

Henderson General Operations $0 $91,982 $183,965 $275,947 $367,929

Clark County General Operations $0 $456,108 $912,217 $1,368,325 $1,824,433

City of Las Vegas General Operations $0 $164,868 $329,736 $494,604 $659,472

North Las Vegas General Operations $0 $14,951 $29,902 $44,853 $59,803

Clark County Fire Service District $0 $109,531 $219,062 $328,593 $328,593

Las Vegas Redevelopment (203) $0 $24,638 $49,277 $73,915 $98,553

Las Vegas/Clark County Library District $0 $72,488 $144,976 $217,464 $217,464

State of Nevada $0 $173,699 $347,397 $521,096 $694,795

Combined (All Districts) $0 $3,142,976 $6,285,950 $9,428,923 $12,571,900

Assuming that the rate of depreciation was fully phased down from 1.5 percent per year to 1.0

percent per year in FY 2011-12, an estimated $6.3 million in incremental property taxes

would have been generated in Clark County. This translates into an increase of approximately

0.28 percent.

*Note: Selected entities only. Totals do not sum to 100 percent.

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Hypothetical Current Year Impacts Selected Clark County Jurisdictions

Modeled Rate of Depreciation

@ 1.50% @ 1.25% @ 1.00% @ 0.75% @ 0.50%

County School Debt $0 $571,943 $1,143,886 $1,715,828 $2,287,771

County School Ops and Maintenance $0 $765,793 $1,531,586 $2,297,378 $3,063,171

Boulder City General Operations $0 $1,739 $3,477 $5,216 $6,955

Henderson General Operations $0 $91,982 $183,965 $275,947 $367,929

Clark County General Operations $0 $456,108 $912,217 $1,368,325 $1,824,433

City of Las Vegas General Operations $0 $164,868 $329,736 $494,604 $659,472

North Las Vegas General Operations $0 $14,951 $29,902 $44,853 $59,803

Clark County Fire Service District $0 $109,531 $219,062 $328,593 $328,593

Las Vegas Redevelopment (203) $0 $24,638 $49,277 $73,915 $98,553

Las Vegas/Clark County Library District $0 $72,488 $144,976 $217,464 $217,464

State of Nevada $0 $173,699 $347,397 $521,096 $694,795

Combined (All Districts) $0 $3,142,976 $6,285,950 $9,428,923 $12,571,900

Assuming that the rate of depreciation was fully phased down from 1.5 percent per year to 1.0

percent per year in FY 2011-12, an estimated $6.3 million in incremental property taxes

would have been generated in Clark County. This translates into an increase of approximately

0.28 percent.

*Note: Selected entities only. Totals do not sum to 100 percent.

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Impact Assessment Considerations

• Growth Over Time. Depreciation is applied every year, so assuming all things remain consistent, the impact would be expected to increase each year.

• Full Depreciation. Currently, a property is fully depreciated after 50 years. Under the proposed alternative, it would take most newly constructed properties 75 years to fully depreciate.

• Valuation Trends are Critical. Tax collection impact will be inconsistent from year to year; however, the impact on the entities collecting the property tax will witness increased stability. In strong growth years, the collection impact will be minimal, but abatement balances will grow, insulating governments from subsequent downturns. In weak growth years, governments will not experience the combined impact of falling values and depreciation.

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Impact on

the Typical

Homeowner

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Methodology and Assumptions

• Applied Analysis created a property tax impact assessment model, estimating taxable value, assessed value, appreciation, depreciation, and tax collections from year of construction (Year 1) through the assumed useful life of the improved property (Year 100).

• The model was developed for a typical single family residential home. For assessment purposes, the cash value of the land was estimated at approximately $50,000 and the replacement cost of the assets was estimated at approximately $100,000.

• The model assumed a straight-line appreciation rate of 2.5 percent per year for both land and improvements. Respecting that this value will ebb and flow throughout the life of the subject property, this value represents a reasonable approximation of the long-run average rate.

• The model uses Clark County Tax District 500 (City of Henderson) as the baseline. Changes in tax rates and/or changes in the entities imposing taxes in any district would materially impact the modeled estimates.

• NOTE: Subject to change relative to market forces, valuation, voter approval on tax rates or legislative action.

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Impact on a Typical Homeowner Home Value Appreciation Trend

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

$1,800,000

$2,000,000

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Improvement ValueLand Value

Assuming an appreciation rate of 2.5 percent per year, a typical property

valued at $150,000 today would be valued at approximately $1.7 million

100 years from now.

Year 1

$150,000

Year 100

$1.73 Million

C-45

Impact on a Typical Homeowner Tax Liability and Effective Tax Rate

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

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Although property tax liability increases over time, the effective property tax

rate actually falls during the first 50 years due to the depreciation factor.

Annual Tax Liability

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

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Effective Tax Rate (Taxes Paid/Assessed Value Prior to Depreciation)

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Impact on a Typical Homeowner Comparison of Alternative Depreciation Assumptions

Reducing the depreciation rate slows the decline in taxable improvement

value, allowing full depreciation to be reached in approximately 75 years

instead of 50 years.

0.0%

0.5%

1.0%

1.5%

2.0%

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Status Quo

Proposed Phase-in to 1.0%, 75% Max

The depreciation factor, steps down

from 1.5 percent to 1.0 percent in Year 1

Depreciation factor continues to

apply under the proposed

alternative for an additional 25

years, until the improvements are

fully depreciated to 25 percent of

their taxable value.

C-47

Impact on a Typical Homeowner Annual Tax Liability Comparison

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

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Status QuoAlternative: Phasing Down Depreciation to 1%, 75% Max

Because depreciated properties are depreciated slower, tax liability is

higher until the property in question is fully depreciated.

C-48

Impact on a Typical Homeowner Property Tax Liability Comparison

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

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Increases in tax liability would be relatively modest in the early years of

the analysis, peaking at year 51 when properties reach peak valuation.

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

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Typical

homeowner pays

an average of

$26.71 per year in

increased tax

liability from Year

1 to Year 10

Peak

incremental

liability is $871

(Year 51) on a

home valued at

$516,000

Cumulative additional

liability is $28,543, or

just over $285 per year

over the 100-year

analysis period

Annual Impacts Cumulative Impacts

C-49

Impact on a Typical Homeowner Property Tax Liability Comparison – Inflation Adjusted

$0

$50

$100

$150

$200

$250

$300

$350

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It is important to keep in mind that price inflation has a significant impact on values

50 years into the future. This analysis expresses the impact in constant 2012 dollars.

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

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Typical

homeowner pays

an average of

$23.17 per year in

increased tax

liability from Year

1 to Year 10

Peak

incremental

liability is $286

(Year 51) on a

home valued at

$170,000

Cumulative additional

liability is $10,531, or

approximately $105 per

year over the 100-year

analysis period

Annual Impacts Cumulative Impacts

C-50

Impact on a Typical Homeowner Effective Tax Rates

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

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Status Quo

Alternative: Phasing Down Depreciation to 1%, 75% Max

Another meaningful comparative analysis is the effective property tax

rate. Under both scenarios, the effective rate declines over time.

C-51

The Bottom Line

• Nevada is Unique | Nevada’s use of a depreciation factor in property tax calculations is unique and has a very significant impact on property tax revenues that support state and local governments as well as schools, public safety and other similar programs

• Property Taxes Destabilized | A sharp decline in values during the Great Recession, combined with Nevada’s property tax abatements and the depreciation factor, has created a situation where traditionally stable property taxes are a less reliable source of revenue

• Long-Run Fiscal Realignment | Reducing the depreciation factor over time will have a relatively modest impact on taxpayers; however, because of the property tax’s broad base and relative contribution to state and local government operations, it will improve the strength of the state’s tax system over the longer run

• Details are Critical | Property taxes are complicated, and so are changes to them

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Documents

Ad Valorem Property Taxes in Nevada