Topics of Interest

Personal property taxes, judicial rulings among top 10 property tax issues of 2005

Personal property tax matters easily topped the list of the most important issues of 2005, according to property tax experts; beyond that general consensus, however, the answers were all over the board. PTA asked experts to tell us about the year’s most important developments. Some focused on legislative and judicial changes, others discussed trends, and some pointed to valuation. Pulling their responses together offers an overview of the top 10 issues in 2005 and provides a glimpse of the year to come. (Editor’s note: Except for the first two items, the list is grouped by category, not by rank.)

1. Ohio PPT reform

It seems clear the single most important development of the year was Ohio’s PPT reform. HB66 phases out tangible personal property tax on businesses, railroads and telecommunication companies. For railroad and business property, the tax will be eliminated by 2009. Telephone and telecommunication property tax will be eliminated by 2011.

Betty McIntosh, president of Atlanta-based BMac Consulting Company, believes other states will follow suit, especially neighboring states and those in competition with Ohio for the same types of business projects. Two examples she cites are Alabama and Mississippi. If the revenue is not negatively affected, and economic development is positively affected, “then surrounding states would be very interested in trying to follow Ohio’s lead," she says. Some states may even jump on the bandwagon before seeing the results, she adds.

Joseph Calvanico, of Grant Thornton in Chicago, notes PPT relief brings with it a series of other issues, including the classification of personal versus real property. While property currently classified as personal will remain so, the issue may become stickier in terms of not-yet classified property. Will there be a bright line? Where will it be drawn? Both he and McIntosh agree that Ohio—or any state implementing PPT reform—faces one big question: how to make up the revenue.

2. Increased personal-property-tax audits

Ironically, it seems that while PPT relief was the most important legislative development, some jurisdictions are going in the opposite direction. Kyle Caruthers, corporate property tax manager at Coca-Cola Enterprises in Atlanta, says not only were PPT audits on the increase, but in particular, the number of audits performed by third-party auditors rose.

Charles Gilliland, a research economist with the Real Estate Center at Texas A&M University, agrees, noting the prevalence of such audits varies by jurisdiction. For instance, while the practice seems to be common in Oklahoma, it’s not in Texas. (Look for more on this topic in a future article.)

3. Airplane valuation clarified

California AB964, which establishes an assessment methodology for aircraft, was one of the year’s most important developments, says Fred Vance, principal, Fred Vance & Associates in La Crescenta, Calif. (See Nov. 2005 issue for details.) The legislation, which creates a centralized system for commercial air carriers to file one annual property statement, is an attempt to ensure that commercial aircraft are valued uniformly across the state.

4. Texas school funding formula unconstitutional

Late last month, the Texas Supreme Court upheld a state district court ruling that the property tax system funding schools is unconstitutional, and it gave the Texas Legislature until June 1 to come up with a new way to pay for education.

5. Cuno: Incentives under fire

The very fact that a federal appellate court specifically exempted property taxes from its decision in Cuno, finding the incentives in question were unconstitutional, would put this case in the top 10 property tax developments of the year. (In Cuno v. DaimlerChrysler, 386 F.3d 738 (2004), the U.S. Court of Appeals for the Sixth Circuit held that Ohio's investment tax credit against corporate franchise tax violated the Commerce Clause, while its property tax abatement provisions did not.)

But that’s not the only reason, cautions McIntosh. Although property taxes are not part of this landmark incentives case now before the U.S. Supreme Court, there is a ripple effect. McIntosh says there could be hesitation on the part of some governmental agencies in granting incentives. In addition, while she doesn’t expect to see the property-tax provisions revisited, she’s not ruling out the possibility. (For more on trends in property tax incentives, see the July 2005 issue of PTA.)

6. Certain government property used by contractors isn’t subject to taxation.

A California appeals court held that property taxes on personal property allocated by a military defense contractor to the performance of its fixed-price contracts with the U.S. government were improper. According to Calvanico, this addresses an issue facing contractors in many states.

7. Tax relief: Nevada and elsewhere

Vance believes the Nevada property tax cap is one of the year’s top stories. AB489, enacted early this spring, caps commercial property taxes at an 8% annual increase, or a 10-year average rate of increase. For homeowners, it limits increases to 3% annually.

It’s important to note that other states, with varying degrees of success, have been trying to provide some sort of property tax relief. For instance, Arizona enacted HB2779, which calls for phased-in reduction in the class-one assessment ratio from 25% to 20% over a 10-year period.

8. Soaring energy prices, higher valuations

One can’t talk about 2005 without at least addressing energy prices. James Harden, a principal with Ernst & Young’s Energy Valuation Group, Transaction Advisory Services, in Houston, offers insight on the energy front. Refiners have had record margins, he says, and although oil prices have softened, it will be difficult for energy properties to get much property tax relief. Values will not go down in oil and gas producing properties, he says.

9. Low cap rates, high prices

Rather than discuss specific legislation, Deborah Davis, president of Strategic Tax Services in Chicago, focuses on an interesting business trend she’s observing: the great availability of capital at staggeringly low rates, often from REITs and 1031 exchanges.

“There's a lot of money out there chasing a limited amount of product, believe it or not,” Davis says. “The result is crazy-low cap rates and crazy-high prices on real estate.”

Fortunately, she notes, assessors seem willing to concede that perhaps some of this money is creating "investment value" rather than a true fee-simple real estate value.

10. Greater property tax burden on businesses

John Garippa, a partner and president at Garippa, Lotz & Giannuario in Montclair, N.J. and president of the American Property Tax Counsel, addressed a trend he expects to continue well into 2006 and beyond: the reduction of residential property taxes.

“This will not mean that government will cut costs,” he says. “Rather, there will be a continuing push to load the commercial taxpayer with greater property taxes.”

Such a shift will, in some jurisdictions, require state constitutional changes, Garippa says—and he thinks some states will try.

Looking to 2006, Gilliland warns of just such a shift, but for different reasons. “Watch the housing bubble,” he says. If it bursts, it could hurt property revenues and shift the burden to business taxpayers. He adds, however, that it’s too soon to tell.

The 2005 honorable-mention list

Several interesting issues came up in discussions with property tax experts, but not all made the top 10 list.