Compensating rates? Real property? Tangible property? Understanding property taxes

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UPDATE: Following some reader inquiry, we have added additional information relating to compensating tax rates under the ‘Tax Rates and Revenues’ sub-heading.–LINK nky Editorial, Sept. 21, 2023.

It’s that time of year: cities, schools and other taxing bodies in the region are setting property tax rates for fiscal year 2023-2024. That means you’ve likely seen words like ‘compensating rate’ and ‘tangible property’ and others get thrown around by civic leaders.

What does it all mean? Let’s unpack some common terms and concepts associated with property taxes to better understand what they mean for people’s lives.

Types of Property Tax

Property taxes are broken down into several categories. The first and usually largest chunk of your tax bill is real property tax, sometimes referred to as real estate property tax. This is essentially a tax on everything you own that’s nailed down. For residents, this means houses and other real estate property. For businesses, this means office buildings and other buildings and facilities used to conduct business.

Tangible personal property, on the other hand, is another form of property that isn’t real estate. Depending on where you live, residents may not be taxed on personal property at all–this will vary by jurisdiction.

Businesses, meanwhile, usually have to account for local tangible property taxes since machinery, office equipment and other moveable property used to conduct business are subject to local tangible property taxes.

Vehicles are usually subject to local property taxes as well.

In addition to these categories, there are sometimes other fees and taxes related to one’s property. At times, they aren’t even officially a form of property tax, but they may come up in conversations about taxes. These include taxes and fees for utilities, roads, sidewalks, local emergency departments and other public goods. These fees often vary from jurisdiction to jurisdiction. Sometimes, these fees are flat, but other times, they’re categorized as ad valorem, from a Latin phrase meaning “according to value.” This means the fee is calculated based on the estimated value of one’s property.

Property Valuation

County property valuation administrators, or PVAs, are elected officials in charge of determining the cash worth of people’s houses and other property. The Kenton County PVA Office, for example, describes its duties this way:

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“The PVA’s most complex task is to estimate fair cash value for all property in the county, taking into consideration the property’s size, shape, location, use and condition. Tracking ownership changes, maintaining maps, updating building characteristics and administering proper exemptions for real property are also ongoing responsibilities of the PVA office.”

Note that PVA offices themselves don’t set tax rates or collect taxes. Sheriffs’ departments are in charge of collecting taxes, and governmental bodies, such as city councils and school boards, are in charge of setting the rates.

Property valuation administrators release property values for local areas every year, but physical examinations of property in cities in a county are usually done on a rotating basis. In Kenton County, properties in Elsmere, Erlanger, Fort Mitchell, Lakeside Park and Park Hills underwent inspection in 2022 for taxation in 2023. Crescent Springs, Crestview Hills, Edgewood, Fort Wright, Taylor Mill and Villa Hills are on the docket for inspection in 2023.

Once set, rates levy taxes on a per $100 of property valuation basis. For example, the 2022 Erlanger real property tax rate was $0.301 per $100 of property valuation. That means an Erlanger resident whose house is worth $100,000 would owe $301 in real property tax.

Property values around the country have seen a precipitous rise in the past two years. The East South Central census division of the United States, where Kentucky is located, saw housing prices increase 18.8% from May of 2021 to May of 2022, according to a July report from the Federal Housing Finance Agency. From May of 2022 to May of 2023, prices rose 4.4%.

Twelve-month house price changes. Chart and data provided | Federal Housing Finance Agency July 2023 report

These upticks in value have had drastic effects on tax revenues in the region.

Tax Rates and Revenues

One term that comes up often in tax discussions is compensating rate. The compensating tax rate is the tax rate a taxing body needs to charge to bring in the same amount of tax money on real property as the previous year. A compensating tax rate can be greater or lesser than the preceding year, depending on how much property values have changed.

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One thing to keep in mind about compensating rates in Kentucky–compensating rate calculations do not include valuations for new properties in a jurisdiction. This means that sometimes a city or other taxing body can charge a compensating rate, or even less than a compensating rate, and still bring in more revenue than the previous year. This doesn’t happen too often, but it can occur in places where numerous new properties have sprung up over the course of the last year. This occurred this year in Independence, for instance.

If a city wishes to levy a tax rate greater than the compensating rate, it’s required by law to hold a public hearing where members of the community can weigh in on the proposed change before the council or commission casts a vote.

If a city wishes to raise its tax rate to a rate that generates more than 4% of the revenue brought in by the compensating rate, the citizens within that jurisdiction can form a committee to collect signatures to trigger a recall election. The number of signatures required to trigger an election must be equal to 10% of the city’s voters who cast ballots in the last presidential election. If the committee gathers enough signatures, the question of whether the tax rate should be increased is then left to the voters in the next election.

For this reason, many cities will default to a comp + 4 rate increase, as they’re often called because it allows them to increase tax rates without the risk of being voted down.

A situation like this nearly occurred in Erlanger last month.

“The total net assessed value of real property increased by 28% over the prior year coupled with tangible assessments up by 61%,” said Erlanger Mayor Jessica Fette in an Aug. 11 memo to the city council. “The 2023 real property subject to rate is $1,821,670,288. 2023 personal property subject to rate is $148,242,456. I am recommending a tax rate for real property of .270 and a personal property tax rate of .213.”

Seems simple enough at first glance; rates seem to be going down.

But, as it related to the real tax rate, “technically, that’s comp + 11,” Fette said at the Aug. 15 city council meeting, “but it is still a 29% reduction in the tax rate.”

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In other words, property values throughout the city had increased so much since the previous year that it would have allowed the city to decrease the tax rate itself but still bring in 11% more revenue than a compensating rate on real property.

“Everything is going up in price,” Fette said. “So if we can figure out some way to reduce as much as possible, the burden on our citizens, I’m a strong advocate for that.”

To offset this rate increase, Fette recommended either eliminating or amending the city’s utility franchise fee, which is currently set at 3% for all gas and electric bills for consumers.

This recommendation got pushback from some council members.

Council member Rebecca Reckers thought that discussions of utility fees and property taxes ought to be kept separate. Plus, there was the ever-looming threat of a recall.

“The reality is that a committee will be formed, likely,” Reckers said. “So is it worth it to potentially lose any opportunity at comp + 4 by shooting for comp + 11.”

Discussion ensued among the council members, City Attorney Jack Gatlin and city staff. Even with the city attorney, there was confusion as to whether the tax rate would revert automatically to a compensating rate or something else if a recall election succeeded.

Reckers’ fears may have been misplaced. Kentucky statute states that if the proposed increase is voted down, the rate reverts automatically to a comp + 4 rate.

Still, many seemed to be under the impression that it would revert to the compensating rate, so in the end the council determined a comp + 4 rate would be the best choice, which would bring the proposed real property tax rate to 0.248 and the personal property tax rate to 0.198.

Erlanger completed the public hearing and performed a first reading of the proposed tax rates this week on Tuesday. They will hold a special meeting to perform a second reading later this month.

Check out some of our coverage on taxes in other big cities in Kenton County, including Independence and Covington.

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