Written by Don Ratzlaff Monday, 31 December 2012 11:32
The state’s attempt to stimulate economic growth could come at a cost to Marion County taxpayers in the form of higher property taxes at the county and local levels.
If approved, legislation proposed for debate in the 2013 Kansas legislative session would further shift the tax burden from manufacturers to residents by broadening tax exemptions for manufacturing machinery and equipment that was initially passed in 2006.
The legislation would allow industries and manufacturers in Kansas to receive a tax exemption on the valuation of their property based on fixed machinery and equipment, effectively altering the definition of “personal property.”
In other words, a manufacturer would not pay property taxes on machinery that was so affixed to the property that it affects the assessed valuation of the property.
Structures formerly on the tax rolls, such as large grain silos, elevators and oil tanks would now be exempted, plus related equipment that services those assets.
The exact financial impact for local governing entities that rely on property-tax revenue, such as counties, cities and school districts, is difficult to calculate with certainty because the legislation itself is inexact.
“No one has any idea because we don’t know what it is that they’re looking at,” said Larry Paine, city administrator for Hillsboro. “We could lose easily 25 percent of the (city’s) assessed value, maybe up to 70 percent of it. A 25 percent change in the assessed value would be horrific.”
Decreased revenue could bring a decrease in services or new ways of generating income.
“It’s like, OK, shut down the city, and the things we do for people,” he added. “Or, we do things like shift support of the general fund, and other things we get property tax for, over to where we charge user fees—for water, sewer, electric and garbage.”
Paine said a 25 percent reduction in Hillsboro’s assessed value would mean a reduction in property-tax revenue of around $157,000. To make up the difference would require an increase in the local tax levy of 10 mills, which is a 25 percent increase from the levy approved for 2013.
“A 10-mill increase on property tax, if you divide that among say 3,000 people, is $52 a year, which is not unreasonable,” Paine said. “But when you talk about a 10-mill increase, the dollar amount is not the real issue. It’s the psychological: ‘Oh we just raised taxes by 10 mills.’”
According to information distributed by the Kansas Association of Counties, Marion County government would need a 5.41 percent mill levy increase (3.58 mills) to make up for a projected loss of $371,818 in property-tax revenue.
“I think those numbers are very conservative,” said Dan Holub, chairman of the Board of Commissioners. “It’s going to be a lot worse than that.”
He estimated the potential loss at between $500,000 to $1 million, the latter being about one-sixth of the county’s current budget.
Holub said the hit would be one more significant loss of revenue the county has had to absorb in recent years.
“We took a $700,000 hit on that 2006 exemption,” he said. “Then there’s the $3 million we lost on Keystone (Pipeline exemption). We’re not going to see hardly any of that, come 10 years. If we get a dime I’ll be surprised, between depreciation and expansion (of the pipeline).”
The current tax-exemption legislation was considered in the 2012 session, but died in committee before the Legislature could vote on it. A study on the legislation was ordered and is expected to be released in spring 2013.
The bulk of debate over the fixture exemption began with two large Kansas manufacturers, as well as lobbyists with the Kansas Chamber of Commerce, that argue such an exemption would promote economic development throughout the state.
The KAC, however, maintains the companies are only looking to decrease their taxes, not boost the local economy. Large manufacturers can survive without the exemptions, according to Melissa Wangemann, KAC legislative services director, while local governments likely will feel the strain if the legislation passes.
“The argument the state chamber is making is that, ‘All we did is get this thing tax exempt—you guys raise the taxes,’” Paine said. “So of course it’s not their fault, it’s ours. That really is the stupid side of it because people aren’t that dumb. They know exactly what’s going on.”
Paine said he understands the view most manufacturers may have on the issue.
“If you had the opportunity to reduce the property tax for your business, you’d do that,” he said. “I can see that.
“But this is one of those things where the list (of exemptions) will go on forever, and pretty soon the only thing taxable will be the land. Everything else will be considered a consumable—even the buildings because you can remove the building, too.”
Increased mill levies will raise the property tax on homeowners, agricultural landowners and other taxpayers who do not have affixed machinery and equipment, according to KAC’s Wangemann.
The value of county-only property able to be written off tax rolls statewide if the legislation passes, Wangemann said, is more than $400 million.
“No county can make up that kind of a hit, unless you start cutting law enforcement and road and bridges, which is the primary part of the county budget,” she said.
“It’s going to fall on the people who remain—and who remains is going to be your smaller commercial properties who don’t have equipment and residential homeowners.”
An expansion of the property tax exemption on machinery and equipment also impacts the statewide mill levy on railroads and utilities, and decreases the availability of funding for education, Wangemann added.
A bigger trend
What angers Paine is that this latest legislative initiative is one more step in a movement to shift taxation from higher levels of government to the local level.
“When the Legislature approved (the 2006 exemption) to begin with, they said they were going to help cities and counties offset that revenue—and they have not done it yet,” Paine said. “The Legislature has had to deal with loss of revenue at the state level, so they said, ‘We lost our share so we’re not going to give you yours.’
“Those of us in the municipal environment do not trust the Legislature that they’re going to (help counties and cities),” he added. “They exempted with the expectation that those businesses would have more business development going on because they saved a few shekels. Well, it’s not showing up in our sales-tax income like that.”
Sales tax generally is not generated at the manufacturing level, but at the retail level.
“Basically, it results in a drop of tax value that can’t be replaced any other way than by shifting it to the homeowner,” Paine said.
Efforts to resist
The idea behind Kansas Gov. Sam Brownback’s plan for economic development, his administration has said, is to offer businesses incentives, including tax breaks such as the fixture exemption, to draw them into the state—thus improving the economy.
Holub said he has seen evidence that Brownback’s plan may be working in urban northeast Kansas as some Missouri businesses have crossed the state line.
“Big deal,” he said. “How about everybody west of Johnson County? We’re not going to benefit here.
“It’s a firm-flam thing.”
Paine said the League of Kansas Municipalities has been “quietly lobbying” for the fixture-exemption legislation to be abandoned, but he’s unsure if legislators will be responsive.
“It’s basically folks that sit around for three of four months in Topeka making decisions about what we do down here in Hillsboro every day of the year,” he said. “They don’t have a clue what it takes to manage a city. and they don’t care.”
The KAC, meanwhile, has vowed to continue its more-overt lobbying efforts, Wangemann said, largely because every county in the state would see an increase in their county-only mill levies, ranging from less than 2 percent to nearly 40 percent, according to the KAC spreadsheet.
“The KAC wants to reason with these guys,” Holub said. “It’s too late for that. We need to be more aggressive.”