Sean C. Morgan
The number of properties not affected by property tax limitations – approximately one-third of those in the city of Sweet Home – is growing while the amount of tax revenue reduced by the limitations continues to plummet.
Welcome to the world of compression.
As a result of ballot measures passed by Oregon voters in the 1990s, property taxes are constitutionally limited in the state when tax bills surge beyond real estate values. Specifically, when property taxes exceed $10 per $1,000 of real market property valuation for general government and $5 for education, property tax bills are reduced until they reach those limits.
The difference between that $10 limit and what governments could have collected otherwise is called “compression” by public officials in Oregon.
Here’s how it works: In Sweet Home, all the districts that impose taxes – the city, the school district, Sweet Home Fire and Ambulance District, cemetery district and the county’s general property tax – impose a total tax rate of $24.70 per $1,000 of assessed property value ($2,470 per year on a home assessed at $100,000).
The assessed value of property, established by the County Assessor’s Office, is typically lower than real market value. After calculating a property tax bill based on assessed value, the amount is compared to real market value and reduced to a combined maximum of $15 per $1,000.
Local option levy revenue is reduced before permanent rates when compression happens. While the City of Sweet Home imposes a total rate of $10.44 of assessed value, the city’s permanent rate is $1.41, which contributes to the General Fund. The remainder, used to fund police and library services, are charged in local option levies.
As a result, the property tax limitations have impacted, primarily, police and library funding, without affecting the city’s general fund, SHFAD or the county’s general property tax. The county also has a local option levy, which funds law enforcement and is affected by compression.
Permanent rates are set by the state constitution, but as jurisdictions increase local option levy rates (such as Sweet Home’s police and library), the main effect on compressed properties is to redistribute the proportion received by each jurisdiction.
When the county increases its local option rate, for example, it shifts tax dollars that were going to city law enforcement to the county government rather than causing an increase in property taxes.
While in compression, property tax bills may increase when real market property values increase faster than assessed values, which are limited to 3-percent growth annually. In about the past three to four years, real market values have increased significantly.
Last year, The New Era found property tax bills that increased by 8 to 14 percent. This year, The New Era found bills increasing by 2.8 to 7.7 percent. At 2.8 percent, the property in question was no longer in compression and is near the growth limit of 3 percent per year for assessed value.
Since the 1990s, the majority of properties in Sweet Home have been in compression, but compression has been falling since 2015, when 38 percent of assessed taxes were reduced based on property tax limitations.
At the time, nearly all Sweet Home properties were in compression. Increases in the county’s local option levy, along with the formation of the 4-H district and a local option levy to fund the veterans home in Lebanon, in the previous eight years essentially shifted tax revenue from Sweet Home to the county.
In response, to shift the city’s share of the total back to Sweet Home, the City Council asked voters to increase the local property tax rates by $1.45 per $1,000 for police and 35 cents for library services in an effort to shift funding back to Sweet Home.
Now-retired city Finance Director Pat Gray outlined the plan to the City Council, explaining that when the compression rate starts falling, the city could reduce property tax rates. The idea was that the increase would not lead to a higher effective tax rate for Sweet Home property owners but rather shift funding lost to the county through compression back to Sweet Home.
Voters approved the taxes, raising the police levy to $7.58 per $1,000 and the library to $1.17 per $1,000, in 2015, when the compression rate was 38 percent. The taxes took effect in fall 2016.
Since then, the compression rate, taxes levied but not collected based on the property tax limitations, has fallen to as low as 19.8 percent. Last year, the rate was 24 percent.
Increases in tax bills as high as 14 percent, in the meantime, are the direct result of rising real market values, which decreases compression, a reduction in tax bills caused by the constitutional property tax limitations.
According to tax data, Sweet Home had 4,668 tax lots this year, said city Finance Director Brandon Neish. Of those, 3,130, 67 percent, remain in compression.
Some 1,538, 33 percent, are no longer in compression and receive no reduction from property tax limitations. Those bills may grow up to 3 percent per year, as assessed property value increases.
Under the tax rates in 2015, prior to the voter-approved increase, just 1,819 tax lots, 39 percent, would remain in compression today.
With compression falling, city staff began discussing the tax rate while preparing next year’s budget; and last week, staff proposed a 30-cent reduction in the police levy for the 2020-21 city budget, as reported on page 1.
City staff and the Budget Committee had the same discussion last spring, he said.
At that time, Towry told the committee that decreasing the tax rate would result in tax revenue going back to the county rather than reducing taxes for property owners.
The Police Department had some things it needed to do, he told The New Era earlier this year. It needed to make some information technology updates and deal with fleet issues.
At this point, city officials think the equipment issues have been handled, Towry said. “We just felt there were needs we had to address.”