Background & Overview - PDF Free Download

Background & Overview Applied Analysis was retained by the Local Government Fiscal Working Group to review and analyze issues related to Nevada s tax system, including, without limitation, those specific to ad valorem (property) taxes. During the past 18 months, Applied Analysis obtained and analyzed parcel-level data from the Clark County Assessor s Office and the Washoe County Assessor s Office to develop an economic model to test tax collection sensitivity under various scenarios. Concurrently, the Local Government Fiscal Working Group identified and evaluated both longterm and short-term issues related to the state s property tax system. This presentation provides a primer on how property tax works in Nevada as well as some of the present challenges identified during our analysis.

Part I - Understanding Nevada s Ad Valorem Tax System Part II - How Did We Get To This Point? Part III - Where Are We Now? Part IV - What Are The Practical Implications? Part V - Where Do We Go From Here?

PART I - UNDERSTANDING NEVADA S AD VALOREM TAX SYSTEM Part II - How Did We Get To This Point? Part III - Where Are We Now? Part IV - What Are The Practical Implications? Part V - Where Do We Go From Here?

Part I Understanding Nevada s Ad Valorem (Property) Tax System

The Foundation

The Nevada State 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. -- Nevada Constitution, Article X (1864)

Tax Base & Tax Rates Determination of Taxable Value (Tax Base) Land: Full cash value Improvements: Replacement cost less depreciation at 1.5 percent per year for up to 50 years Assessment Rate: 35% of Taxable Value Tax Rates Vary 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.

The Calculation

Taxable Value Market Value

A Typical Home ($150,000) Taxable Value $150,000 Assessment Ratio 35% Assessed Value $52,500 Taxable Rate / $100 $2.8985 Property Taxes Due $1,522

Property Tax Calculation Summary Typical $150,000 Home Year 1 Year 2 Year 3 Year 4 Year 5 Year 51 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) $2.8985 $2.8985 $2.8985 $2.8985 $2.8985 $2.8985 Resulting Tax Liability $1,522 $1,544 $1,567 $1,590 $1,612 $2,615 Effective Tax Rate (Tax Liability as a Share of Taxable Value Before Depreciation) 1.01% 1.00% 0.99% 0.98% 0.97% 0.51% *Note: For illustrative purposes, assumes an annual growth rate of 2.5 percent for land and improvements.

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

Overlapping Tax Rates

Overlapping Tax Rates CLARK COUNTY CAPITAL 0.0500 CLARK COUNTY FAMILY COURT 0.0192 CLARK COUNTY GENERAL OPERATING 0.4599 COUNTY SCHOOL DEBT (BONDS) 0.5534 COUNTY SCHOOL MAINTENANCE & OPERATION 0.7500 HENDERSON CITY 0.5508 HENDERSON CITY DEBT 0.1600 HENDERSON CITY LIBRARY 0.0602 INDIGENT ACCIDENT FUND 0.0150 MEDICAL ASST TO INDIGENT PERSONS 0.1000 STATE COOPERATIVE EXTENSION 0.0100 STATE OF NEVADA 0.1700 COMBINED RATE 2.8985

Although nearly all levels of government are affected by property tax collections, Nevada K-12 schools are the single largest beneficiary of the property tax by a significant margin. Projected Property Tax Revenues Statewide, FY 2016-2017, in millions Distribution of Property Tax Rates for a Single Entity (City of Henderson @ $2.8985/$100 of Assessed Value) $86 $401 $435 $180 $1,339 State of Nevada $0.1700 Clark County Capital: $0.0500 Clark County Family Court: $0.0192 County Operations: $0.4599 School District Debt: $0.5534 School District Operations: $0.7500 $897 Henderson Operations: $0.5508 Schools Counties Cities Towns Special Districts State Henderson Debt: $0.1600 Henderson Libraries $0.0602 Other: $0.1250 Source: Nevada Department of Taxation, Redbook; Clark County Treasurer

The Abatements

3% Annually 8% Annually

County Moving Avg. Growth Rate CPI Change Residential Cap [1] General Cap [2] Carson City -0.6% 0.2% 0.2% 0.2% Churchill 1.9% 0.2% 1.9% 1.9% Clark -2.7% 0.2% 0.2% 0.2% Douglas -1.7% 0.2% 0.2% 0.2% Elko 6.4% 0.2% 3.0% 6.4% Esmeralda 6.8% 0.2% 3.0% 6.8% Eureka 5.0% 0.2% 3.0% 5.0% Humboldt 6.3% 0.2% 3.0% 6.3% Lander 25.0% 0.2% 3.0% 8.0% Lincoln 6.9% 0.2% 3.0% 6.9% Lyon -0.2% 0.2% 0.2% 0.2% Mineral 7.1% 0.2% 3.0% 7.1% Fiscal Year 2016-17 Tax Cap Factors Nye -0.1% 0.2% 0.2% 0.2% Pershing 5.5% 0.2% 3.0% 5.5% Storey 2.9% 0.2% 2.9% 2.9% Washoe 0.0% 0.2% 0.2% 0.2% White Pine 1.5% 0.2% 1.5% 1.5% Statewide -2.1% 0.2% 0.2% 0.2% [1] Residential cap cannot be greater than commercial. [2] Commercial is the lower of 8% or the greater of 10yr average AV or 2x CPI. Source: Nevada Department of Taxation

Clark County Abatement Caps History FY Residential [1] Commercial [2] 10yr AV CPI 2x CPI 2006 3.0% 8.0% 12.6% 2.7% 5.4% 2007 3.0% 8.0% 15.7% 3.4% 6.8% 2008 3.0% 8.0% 16.9% 3.2% 6.4% 2009 3.0% 8.0% 15.8% 2.9% 5.8% 2010 3.0% 8.0% 11.1% 3.8% 7.7% 2011 3.0% 8.0% 8.6% -0.4% -0.8% 2012 3.0% 6.3% 6.3% 1.6% 3.2% 2013 3.0% 6.4% 4.4% 3.2% 6.4% 2014 3.0% 4.2% 3.3% 2.1% 4.2% 2015 3.0% 3.0% 1.4% 1.5% 3.0% 2016 3.0% 3.2% -1.8% 1.6% 3.2% 2017 0.2% 0.2% -2.7% 0.1% 0.2% [1] Residential cap cannot be greater than commercial. [2] Commercial is the lower of 8% or the greater of 10yr average AV or 2x CPI. Source: Nevada Department of Taxation

Other Important Concepts Real vs. Personal Property Centrally Assessed Property Net Proceeds of Mines Redevelopment Property Tax Appeals Property Tax Collection Allowances

Part I - Understanding Nevada s Ad Valorem Tax System PART II - HOW DID WE GET TO THIS POINT? Part III - Where Are We Now? Part IV - What Are The Practical Implications? Part V - Where Do We Go From Here?

Part II How Did We Get To This Point?

1864 The basis for the taxation of property in Nevada is established by the second Constitutional Convention of Nevada and ratified by the people of the territory as Article 10. Consisting of one paragraph, it gave the Legislature the authority to provide for a uniform and equal rate of assessment and taxation secure a just valuation for the taxation of all property excepting mines and mining claims, the proceeds alone which shall be taxed and also excepting such property as may be exempted by law for municipal, education, literary, scientific, religious or charitable purposes.

1962 Voters approve privilege tax in place of personal property tax on motor vehicles.

1979 A statutory cap on the property tax rate is set at $3.64 per $100 of assessed value. State property tax levy eliminated.

1981 Year of the Tax Shift. Primary revenue source of local governments shifted from property tax to sales tax. Property tax revenue to local governments capped at 4.5% increase annually. Buildings are depreciated at the rate of 2%. Value no longer based on market.

1983 State levies property tax rate of 5 per $100 of assessed value for debt service. Property tax for schools operating increases 25 to 75. Depreciation of buildings reduced to 1.5%.

1991 Fair Share bill enacted to correct inequities in 1981 Tax Shift plan.

2005 Property tax abatement program is established. Owner-occupied single family homes and residential rental property with rents at or below HUD fair market rents are capped at a maximum of 3% over the amount of the previous year s tax bill. All other property is capped at the current year plus 9 prior years of CPI or 8%, whichever is greater, over the amount of the previous year s tax bill. The caps do not apply to new construction for the first year.

2007 Common-interest community property assessment procedures are changed. The partial abatements (tax caps) for non-owner occupied properties and non HUD rental units is limited to ensure the abatement is not less than 0% nor more than 8%. The $5,000 limit on exemptions of personal property taxes for lodges and charitable organizations is repealed; and an exemption is added for land owned by the Archaeological Conservancy.

2015 A constitutional amendment is requested (SJR13) to change the valuation of property from taxable value to cash value (market value). This measure must be approved again by the 2017 legislature before it can be placed on the 2018 general election ballot.

A new property tax system must be considered which will allow relief to the residents whose property tax values have increased to such an extent as to jeopardize their ability to continue to live in their homes (Section 1 (9)) The provisions of this act are necessary to ensure that the property owners of this State are protected from severely spiking property tax bills that will otherwise threaten their ability to continue living in their homes during the next 2 years while the Legislature studies our current property tax statutes to determine the appropriate remedy to the current property tax crisis. (Section 1 (11)) State and local governments provide critical services to the residents of the State and must be assured of sufficient revenue to fund such services, including, without limitation, police and fire protection, welfare services, and educational services and facilities. (Section 1 (7))

Part I - Understanding Nevada s Ad Valorem Tax System Part II - How Did We Get To This Point? PART III - WHERE ARE WE NOW? Part IV - What Are The Practical Implications? Part V - Where Do We Go From Here?

Part III Where Are We Now?

Nevada Property Tax Collection Trend Fiscal Years Property Tax Collections Property Tax Abatement Billions $5.0 $4.5 $4.0 $3.5 Boom: 2005-2009 Assessed Value: +106% Property Taxes: +57% Abatement: $3.3B Bust: 2010-2013 Assessed Value: -43% Property Taxes: -31% Abatement: $0.9B Recovery: 2014-2017 Assessed Value: +26% Property Taxes: +12% Abatement: $1.8B $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Note: FY 2006 does not include projected property tax collections or abatements for the state portion, as the Redbook did not report them for that year. Source: Nevada Department of Taxation, Redbook

Nevada Property Tax Collection Trend Fiscal Years Property Tax Collections Property Tax Abatement Billions $5.0 $4.5 $4.0 Current property tax collections are approaching FY 2007 levels. $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Note: FY 2006 does not include projected property tax collections or abatements for the state portion, as the Redbook did not report them for that year. Source: Nevada Department of Taxation, Redbook

+15.2% Population +0.8% Employment +25.3% Personal Income +11.8% K-12 Enrollment -3.5% Property Tax Collections Since FY 2007

Nevada Personal Income vs. Property Tax Collections Fiscal Years, 2000=100 300 Personal Income Property Tax Collections 250 200 150 100 Since FY 2000, personal income has grown 102%, while property tax collections have only increased 87%. 50 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Note: FY 2006 does not include projected property tax collections or abatements for the state portion, as the Redbook did not report them for that year. Source: Nevada Department of Taxation, Redbook; U.S. Bureau of Economic Analysis

Nevada Property Tax Collection Trend Fiscal Years Property Tax Collections Property Tax Abatement Billions $5.0 $4.5 $4.0 $3.5 Between FY 2005 and FY 2017, property tax collections have grown 21.4 percent. $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Note: FY 2006 does not include projected property tax collections or abatements for the state portion, as the Redbook did not report them for that year. Source: Nevada Department of Taxation, Redbook

Billions $4.0 $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 Property Tax Collections (Totals) Nevada Property Tax Collection Trend Fiscal Years Property Tax Collections Property Tax Collections With Inflation & Population Impacts $272.3 M 25% 20% 15% 10% 5% 0% -5% -10% -15% Property Tax Collections (Annual Growth) Property Tax Collections Inflation and Population Growth (Combined) 3.9% 2.3% $0.0-20% '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Source: Nevada Department of Taxation, Redbook; U.S. Census Bureau; U.S. Bureau of Labor Statistics; Applied Analysis

Property Tax Revenues Per Capita Inflation Adjusted, 2000=100 Clark County Washoe County $634 $655 $660 $698 $714 $752 $714 $841 $923 $1,007 $922 $738 $642 $569 $543 $554 $560 $816 $813 $830 $842 $885 $882 $878 $915 $931 $998 $950 $866 $773 $725 $710 $711 $723 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Source: Nevada Department of Taxation, Redbook; Clark County Comprehensive Planning; U.S. Census Bureau; U.S. Bureau of Labor Statistics; Applied Analysis

Property Tax Revenues Per Housing Unit Inflation Adjusted, 2000=100 Clark County Washoe County $1,855 $2,182 $2,336 $2,538 $2,305 $1,777 $1,573 $1,413 $1,369 $1,413 $1,460 $2,001 $2,088 $2,135 $2,284 $2,167 $1,981 $1,790 $1,697 $1,670 $1,682 $1,709 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Source: Nevada Department of Taxation, Redbook; Clark County Comprehensive Planning; U.S. Census Bureau; U.S. Bureau of Labor Statistics; Applied Analysis

Property Tax Revenues Per Student Inflation Adjusted, 2000=100 Clark County Washoe County $4,655 $4,860 $4,678 $5,489 $5,941 $6,498 $6,071 $4,688 $4,186 $3,771 $3,626 $3,740 $3,864 $5,606 $5,577 $5,439 $5,704 $6,014 $6,524 $6,421 $5,908 $5,330 $5,037 $4,963 $5,039 $5,151 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Source: Nevada Department of Taxation, Redbook; Nevada Report Card; U.S. Bureau of Labor Statistics; Applied Analysis

Nevada Property Tax Collections vs. Abatements Fiscal Years Historical Property Tax Collections Historical Property Tax Abatements Billions $4.0 $3.5 $3.0 $2.5 +2.3% Billions $1.2 $1.0 $0.8 +27.4% $2.0 $0.6 $1.5 $1.0 $0.5 $0.0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Note: FY 2006 does not include projected property tax collections or abatements for the state portion, as the Redbook did not report them for that year. $0.4 $0.2 $0.0 Note: Property tax abatements were not implemented until FY 2005-06. '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Source: Nevada Department of Taxation, Redbook

Part I - Understanding Nevada s Ad Valorem Tax System Part II - How Did We Get To This Point? Part III - Where Are We Now? PART IV - WHAT ARE THE PRACTICAL IMPLICATIONS? Part V - Where Do We Go From Here?

Part IV What Are The Practical Implications?

Abatement Distribution Fiscal Year 2017 $700 Million in Property Taxes Abated Means $700 Million in Taxpayer Savings

$700 Million in Property Taxes Abated Means $700 Million in Reduced Public Funding, Particularly for Schools Abatement Distribution Fiscal Year 2017 Towns 3% Cities 13% Special District 13% State (Other) 5% Counties 26% Schools 40%

Abatement Distribution by Land Use Land Use Taxes as Assessed Amount Abated Share Abated Vacant $82,923,312 $29,067,324 35.1% Residential $1,485,033,512 $377,518,367 25.4% Industrial $69,879,594 $11,900,604 17.0% Commercial $493,976,692 $102,192,043 20.7% Non-Profit Community Facilities $4,321,717 $698,132 16.2% Agriculture, Ranching & Wildlife $192,306 $12,485 6.5% Transportation, Communication & Utilities $4,000,660 $619,806 15.5% Minor Improvement $8,248,590 $2,378,955 28.8% Other $12,748,865 $4,375,198 34.3% Total $2,161,325,249 $528,762,914 24.5% $610 Typical Single-Family Household Abatement Source: Clark County Treasurer; Clark County Assessors Office; Applied Analysis

Examples of Resort Property Valuation Reductions (2010) 95% 93% 85% 85% 58% 46% 44% 39% Source: Las Vegas Sun/Clark County Assessors Office

Clark County Resort Corridor Properties Tax Collections as a % of County-wide Collections Fiscal Years 26% 24% 22% 20% 18% 16% 14% 12% 10% 23.5% 22.9% 22.1% 21.3% 21.5% 21.6% 21.2% 20.5% 20.3% '09 '10 '11 '12 '13 '14 '15 '16 '17 Resort Corridor property tax collections have remained relatively stable as a percentage of overall tax collections in Clark County. Source: Clark County Treasurer

Clark County Resort Corridor Properties Abatements as a % of County-wide Abatements Fiscal Years 70% 60% 50% 40% 30% 20% 10% 0% 59.5% 45.9% 39.3% 37.0% 30.2% 25.1% 24.6% 20.5% 19.6% '09 '10 '11 '12 '13 '14 '15 '16 '17 Resort Corridor property tax abatements currently account for less than 20 percent of all abatements in Clark County, which is in line with resort property assessed values as a percentage of County-wide value. Source: Clark County Treasurer

Clark County Resort Corridor Properties 20.3% Property Tax Collections as a Share of County- Wide Collections 19.6% Property Tax Abatements as a Share of County- Wide Abatements Source: Clark County Treasurer

Part I - Understanding Nevada s Ad Valorem Tax System Part II - How Did We Get To This Point? Part III - Where Are We Now? Part IV - What Are The Practical Implications? PART V - WHERE DO WE GO FROM HERE?

Part V Where Do We Go From Here?

Key Takeaways The amount of the abatement will continue to increase. This will continue to put strain on the state s tax systems and acutely impact programs such as education and public safety. Over the longer-term, this will require the state and local governments to do more with less (e.g., increasing class sizes), find alternative revenue sources (e.g., sales tax and commerce tax) or reduce public services. Are we in the middle of the second major tax shift in Nevada s history?

Case in Point: 2015 Revenue Reforms $1.2 B Revenue Enhancements Approved by the Legislature for the 2015-2017 Biennium $1.2 B Property Taxes Abated for the 2015-2017 Biennium Source: Legislative Counsel Bureau, Nevada Legislative Appropriations Report (November 2015); Nevada Department of Taxation, Redbook

Case in Point: AB1 Police Protection $36 M 310 Officers Impact of the Property Tax Caps on the Las Vegas Metropolitan Police Department $35 M 300 Officers Impact of 0.1% Sales Tax Increase Passed as Assembly Bill 1 during the 30th Special Session of the Nevada State Legislature (2016) Source: Las Vegas Metropolitan Police Department; Applied Analysis

Flexibility Simplicity Equity Ease of Compliance Political Viability Integration