ETPI

Education Tax Policy Institute

Estimated Revenue Impact on Schools and Local Governments
From Pending Changes in Tangible Property Tax

Testimony of Richard A. Levin,
Consultant to ETPI
Before the Senate Finance and Financial Institutions Committee
May 31, 2003

(1) Legislature can affect school funds in two major ways:

• Appropriations made for the state share of the costs of education
• Changes in state law governing local property taxes levied by schools

(2) My presentation addresses the second way.

(3) H.B. 95 contains 3 provisions in business tangible property tax laws that will sharply reduce revenues flowing to school districts (and local governments also)

(4) None of the 3 provisions were in the House-passed version of the budget bill. Two were in the Governor’s introduced version. Those include:

a) a "doubling up" of the speed by which the tangible property tax on business inventories will be completely eliminated and
b) a complete phase-out of state payments currently provided school districts and local governments to reimburse local revenue losses from exemption of $10,000 of taxable value for every business.

(5) The third provision, a major change in state law affecting industrial machinery and equipment, appeared in the Senate version on Wednesday. Very simply, it would allow manufacturing machinery and equipment to be taxed starting from the very first year of its use at the "floor" or "salvage" rate currently applied only after the property has been fully depreciated -- often fifteen years or longer.

(6) A simple example to illustrate this machinery and equipment tax reduction proposal is attached to this presentation. In the interest of time, however, I will move immediately to explain the revenue impact of the three proposals on schools and local governments.

(7) Three brief comments must be made about our estimates. First, because so little time has been available to evaluate the impact of the machinery and equipment proposal, those estimates are more tentative than the others.

(8) Second, since all three proposals involve "phase-ins," it is not possible to understand how large an effect they will have unless they are computed in their "fully-phased-in" form. To simplify, we assumed they were fully in place in 2002 and then compared them with how much revenue was actually received in that year. This is perhaps the best possible way to assess what these provisions will mean to local school districts, cities, counties, and townships.

(9) Third, because using such a methodology it is not possible to compute separate figures for the current law that will eliminate the inventory portion of the tax in roughly 25 years from the provision in H.B. 95 that will cause this to occur in about half as much time, these estimates simply represent how much schools and local governments would lose from full repeal of the tax on inventories. In the "big picture," this is a more relevant figure for schools and local governments, even if it is not all directly attributable to H.B. 95.

(10) The estimated loss to local school districts from the combined effect of the three changes in tangible property tax laws is $462 million per year.

(11) The estimated loss to municipalities, counties, and townships from the combined effect of the three changes is $343 million per year.

(12) The combined estimated loss to schools and all local governments of the three changes in tangible property tax laws is $805 million per year.

(13) The methodology applied to compute these loss figures is shown in a two-page attachment. We have also included a simple table to summarize the losses.

I would be happy to respond to any questions you may have today and also to answer questions from you or your staffs at any time in the future.

Example of Senate budget bill’s proposed machinery & equipment tax reduction (R.C. 5701.03, 5711.18):

Tangible Property Tax Paid by a Manufacturer
on an Item of Machinery Purchased for $100,000

Explanation:
Under a provision added to the state budget bill in Senate Finance Committee, a significant new tax reduction would apply to industrial machinery and equipment placed in service after 2003. This example illustrates that for a typical item of machinery purchased for $100,000, the property tax paid to schools and local governments in the first year alone would fall from $1,732 to $322.

Methodology Applied To Compute School District and Local Government Revenue Losses from Pending Changes in Tangible Property Tax

1. Tax Year 2000 Tangible Personal Property Taxes Levied
          (Source: Table 73, 2001 Department of Taxation Annual Report)

School Districts: $1,229 Million

Counties: $325 million
City and Village: $104 million
Townships: $62 million
          Non-school subtotal = $491

2. Tax Year 2000 Assessed Value of Tangible Personal Property by Class of Property
          (Source: Table 76, 2001 Department of Taxation Annual Report)

Manufacturing Machinery and Equipment: $7,627.5 million

Manufacturers Inventory: $4,687.3 million
Merchant’s Inventory: $5,081.1 million
          Inventory Sub-total = $9,768.4 million

Furniture and Fixtures: $5,902.4 million

Total = $23,298.3 million

M&E percentage = 32.7%
Inventory percentage = 41.9%
F&F percentage = 25.3%

3. School District Tangible Property Taxes by Class of Property (estimated)

M&E = $1229 million * 32.7% = $402 million
Inventory percentage = $1229 million * 41.9% = $515 million
F&F percentage = $1229 million * 25.3% = $311 million

4. Estimated Revenue Loss to Schools

12 years from now, Inventory completely phased out and M&E at 1/3 of value
$402 million *.33 = $134 million
F&F = $311 million

Total Remaining = $445 million

Total Lost Local Tax Revenue = $784

Estimated replaced through foundation formula = 50% = $392 million

Net lost revenue to schools = $392 million

Lost school revenue from elimination of $10,000 exemption reimbursement = 70% of $100 million = $70 million

Total Lost revenue to schools = $462 million

5. Other Local Government Tangible Property Taxes by Class of Property (estimated)

M&E = $491 million * 32.7% = $161 million
Inventory percentage = $491 million * 41.9% = $206 million
F&F percentage = $491 million * 25.3% = $124 million

6. Estimated Revenue Loss to Other Local Governments

12 years from now, Inventory completely phased out and M&E at 1/3 of value
$161 million *.33 = $54 million
F&F = $124 million

Total Remaining = $178 million

Total Lost Local Tax Revenue = $313

Lost school revenue from elimination of $10,000 exemption reimbursement = 30% of $100 million = $30 million

Total Lost revenue to other local governments = $343 million

Total Lost Local Tangible Personal property Tax Revenue = $805 million

This represents the revenue loss to all units of local government if the proposed changes were to be applied immediately to the TY 2000 tax base.

Notes:

1. Estimate of 2/3 of M&E lost after 12 years is based on estimated current average of 50% depreciation of existing property decreasing to average of 17% after 12 years.
2. Estimated replacement of lost local school revenues by foundation formula is 50%
3. Inventory tax is currently scheduled to be phased-out – Senate budget bill accelerates this phase-out, so this estimate over-states to some extent the impact of the changes in the budget bill alone although the effects cannot be estimated separately with this method.

Net Annual Revenue Impact on School Districts and Local Governments When All Pending Tangible Property Tax Changes Are In Place

(In Millions of Dollars)

Note: Figures may not add due to rounding