Taxation Limits on Local Governments, Municipalities and School Districts in the State of Georgia - Case Study Example

Taxation limits on Local governments; Municipalities and School Districts in the of Georgia Taxation limits on Local governments; Municipalities and School Districts in the state of Georgia I. Introduction There exist a number of limits on taxation both statutory and constitutional that apply in the state of Georgia. The reasons for the existence of such limitations vary, but majorly they are meant to check county government expenditure, Ensure property taxes are maintained at reasonable and reduced rates and improve the accountability of the municipalities and district schools in the collection and the use of public funds (Brazer, 2008). According to the constitution of the state of Georgia, municipalities are authorized to impose taxes as per the general law or in line with the provisions of the constitution. Besides this, the general assembly may enact laws locally to empower the municipality to charge and collect taxes, within set limits of the municipality. Shah (2006) explains that all the legislation within the state must be in agreement with the United States Constitution, which is supreme as envisioned in the Supremacy clause of the constitution. In addition, there exist limitations in the ability of local governments to act in a certain way as a result of provisions in the United States Constitution. For example, according to Taylor (2009), in the Fifth Amendment provision of the federal United States Constitution, local governments are prohibited from acquiring private property with an exception where the property is to be used by the public and where fair compensation has been offered to the owner. This research paper will be focused on the limits of taxation applicable to the municipalities and school districts by investigating different taxation limits imposed by the state of Georgia on the local governments. The paper will be divided into sections, in the first section; the taxation rates for the various taxable items will be discussed. There are a number of assets, goods and services on which a person is required to pay tax. They range from properties, businesses and even personal income. The second section will discuss the limitations and the, time, of implementation and its effect on the local government operations. In the third section, will explore the three major limits of taxation that are imposed on municipalities by the state of Georgia, these are, property tax rate limits, specific tax rate limits and the property tax levy limit. The fourth section will be a summary of the taxation limits the intended purpose of imposing them in the municipalities and school districts. Lastly, a conclusion on the impact that taxation limits has on the local government’s delivery of service and general operations. Sources of State and Local Government Tax Revenues The state collects taxes from different sources to enable the provision of essential services and funding of projects within the municipalities (Taylor 2009). In his work "Allocative efficiency and Local Government”, Taylor explains that out of these sources, Property tax is the highest contributor of state and local government taxes as per the 2008 fiscal year. The second highest contributor is individual income tax. This is a levy that a property owner pays on an annual basis to the municipality in which the property is located. The State of Georgia employs a number of constitutional and statutory limitations on property tax rates for the local governments. These limitations apply at three different levels; at county level, municipal level and the school districts. The second highest contributor of taxes to local governments is a Sales and Receipts tax and the third is individual Income tax. Individual income tax is a levy payable by individual or business entities based on the amount of income or profit they make. Other sources of tax revenue are corporate income tax, motor vehicle tax and other specific taxes. Property tax Haveman and Terri (2008) studied the trends in property value in the US between the year 1998 and 2008. They discovered a sharp increase in property prices especially for residentials in the United States of America over the years. The prices for a house in 1987 when compared to that in 2008 shows over 120 percent increase. The graph below shows how this price has increased over the years. They remained in the period 1989 to 1998 almost constant before rising spontaneously in the following years to reach the highest price at around the year 2006. After this year, the prices have gradually reduced by an average of 16 percent. However, this small decline still leaves the prices twice as high as those in the year 1998 (Haveman and Terri 2008). Figure source: S&P/Case-Shiller Home Price Indices. At times when a property value appreciates at extreme rates, there is a likelihood of a similar increase in the tax rates (Lynch 2007). Such increases are a source of controversy between the local units collecting the tax and the people with respect to accountability by municipalities and benefit derived from the taxes collected. Taxation limits are important in such situation to control increases in tax rates. Why there is need to limit taxation in a state There are many government units that depend on taxes from residents of a given state to provide services. These units are counties, municipalities and special districts to be specific. Counties and municipalities are the two major levels of local governments while special districts are established to serve a special purpose. The special districts comprise of areas covering a number of municipalities. They are responsible for services like education, fire safety and sewerage management. School districts are established to manage schools, both elementary as well as secondary. They are established with proper laws and ways of collecting revenue to function as separate governments besides the municipalities. These units give a percentage of property tax to the state government. If allowed to collect taxes without limitation by the state, the units are likely to apply taxes that are prohibitive to investors who want to invest in various sectors of the economy. The revenues collected will also be hard to be accounted for thus the need to enforce limitations. The municipalities will therefore be required to form budgets considering the available funds. This will limit over-collection of taxes and misuse of the collected funds. The state is the one that devolves some functions to the municipalities, but the municipalities have no powers provided for in the constitution. The Dillon’s rule provides that a state will have authority to manage, merge or even abolish municipalities. Therefore, it is the state that determines what type of taxes will be enforced and the limits thereof in the collection of tax. In the state of Georgia, counties are tasked with tax collection, management of electoral processes, and maintenance of roads in specific jurisdictions and are responsible for citizen’s welfare. In order to carry out this function effectively, the counties and municipalities have a number of revenue sources with the majority being taxation. The main taxes collected is on property, sales and gross receipts as well as tax on individual income. The chart below shows the percentage of property tax received by the state of Georgia for the year 1982 to 2012. II. Purpose The state limits property tax rates charged by local governments for three main reasons. According to Steven (2012) in the article “results of local spending and revenue limitation” the first reason is a way of checking the growth of the local units, counties that have developed most of the required structures should charge fewer taxes in order to reduce the burden of the residents. Secondly, to ensure accountability in the expenditure of public funds, this is done to limit misappropriation and lastly to promote reliance on the State government. Rate limits have their origin as a result of local government practice of financing of private enterprises a case in point, the expansion of railroad for private benefit, this lead to a public outcry and demand for accountability in the expenditure of government funds. Property and Assessed Values The county tax bills include the actual value of the property and the assessed value for the property. The “fair market value” is defined by Abelson (2006) as the value in monetary terms that a buyer can offer to buy a property and that a seller is able to accept without there being any other relationship between the buyer and the seller. The assessed value is taken to be forty percent of the market value unless specified otherwise. Properties of aesthetic value qualify for preferential assessment, for example the ones listed or are qualified for listing as historic places in the state or nationally. The assessment shall be preferential for the building or structure, the land on which it is constructed and an area of not more than two acres around the property. Such a property can fall under two categories of classification by the department of Natural resources; landmark historic property or rehabilitated historic property. It will be eligible for preferential tax assessment for a nine year period during which time its assessment value will be higher that at its final certification or last change of ownership. For rehabilitated historic property to qualify for preferential treatment, it must have increased in value by over 50 percent if owner occupied. For income producing real property, the increase in fair value following rehabilitation should be over 100 percent for it to be given preferential treatment. There are cases where a property is partly a residential property and partly income producing, then it will have appreciated by over 75 percent of its initial fair value (GDR 2011). For landmark historic property to qualify for preferential treatment, they should have been certified by a local government as landmark historic property. In some cases, local orders may decide to extend the preferential assessment to; tangible income-producing real property, tangible, but residential property, or a combination of the two. Taxpayers may also qualify for preferential treatment of they agree to maintain their property as either agricultural land or property set aside specifically for conservation purposes for a period of 10 years. In assessing agricultural property the assessed value is taken as 30% 0f the real value of the property. Conservation use property in the state of Georgia is assessed at current use value and not fair market value. The assessment basing the value as per the current use of a property also applies to environmentally sensitive properties. This must first be certified by the department of Natural resources as is the case with constructed storm water wetland property which is also charged at current use value. Current rates of income tax in Georgia and the need to guard against double taxation Double taxation is when an individual is taxed twice on the same item. Income tax is charged on all incomes both as wages and profits. The state of Georgia has different categories of taxation basing on income; lowest earners pay Income tax at a rate of 1 percent and the highest paid individuals pay at 6 percent. The different filling types are required to use different tax brackets in submitting their tax returns. In the case of a married couple, it is advisable to file tax returns individually as filing tax return together may result in being charged tax at a higher rate than if each individual filled the returns alone. The state imposes tax limits to local authorities so as to lessen the tax burden to the residents of the municipalities or school district, while at the same time ensuring services such as fire rescue, libraries and schools are well funded. The actual rates are illustrated in the chart, below. III. Limits on Taxation Applied by the State of Georgia to Municipalities There are over 536 municipalities currently in the state of Georgia. In some cases, cities merge to form consolidated county governments (Georgia, n.d.). The Center for Urban Policy describes the six basic limitation types for the state of Georgia as (1) Overall Property tax limits, (ii) the specific property tax limits, (iii) property tax levy limits also referred to as revenue limitations, (iv) General revenue limits also called expenditure increases, (v) Assessment increases related limits and (vi) Truth-in-taxation or full disclosure requirements (Georgia, n.d.). Those applied at the municipal level are overall property tax limits, property tax levy limits, assessment increase related limits and full disclosure requirements. The local government’s way of spending or taxing is restricted variably by these limitations. In many cases, there exists a laid down procedural way of going around the limit when there is a necessity to do so (DeTray 2007). Limits on Taxation Applied by the State of Georgia to School Districts The state of Georgia applies four major limits on taxation to school districts. These are overall property tax rate limit, the specific property tax limit, the limit on general revenue or expenditure and full disclosure (Lynch 2007). Each taxation rate limit will be considered individually and its effect on the school district analyzed. Dates of enactment of tax and Expenditure Limitations on Local Governments in the State of Georgia Taxation rate limits are introduced following a legislative process that puts into account the views of all the stakeholders. At the end, the decision to implement them is subject to a popular vote. Only after this process can the rates be implemented at the various levels of county, municipality or school district. The various tax limitations were introduced to the school districts and municipalities in different years as elaborated in the table below; (Adopted from Tregilgas (2006).   Overall property tax rate limit Specific Property tax rate limit Property Tax revenue limit Assessment increase Limit General revenue limit General expenditure limit Full Disclosure County        2000      1991 Municipality  1945            1991 School District  1945  1945          1991 Discussion and Analysis of Constitutional and Statutory Limitations Overall property tax rate limits These limits are characterized by three main features as described by Zodrow (1999), first, there is a ceiling set which cannot be exceeded except with a two-third majority vote, this refers to the highest possible percentage that can be charged on a property. Secondly, the limits apply to the aggregate rate in all the local governments. Lastly, there is a chance of it being avoided through alteration of assessment practices; otherwise it is binding especially when coupled with assessment increase limits. The owner of a property is required to pay a levy on that property he or she owns, this levy is called property tax (UONS 2007). This levy is payable on ownership of land, buildings or other constructional improvements on the land, personal property or property that is intangible which is also called real estate. According to Ploeg (2006) the state of Georgia law requires that property tax is paid by March, being payment of the year before. The taxation rate on property tax varies depending on the type of property. In the state of Georgia, property tax is collected by the various municipalities. The tax rate applicable is determined on an annual basis by the board of county commissioners of the various municipalities and district schools (Abelson, 2006). The rates are measured in units called mills where one mill represents a rate of $1 per $1000 of the property assessed value. On average, the rate is 30 mills. Currently the state of Georgia is phasing out tax rate on real and personal property, a process that is expected to be completed in 2016. The state law also provides that property be valued at 40% of the market value unless specified otherwise by a superior law. The limitation on property tax rate is provided where the municipal assemblies are expected to roll back property tax rate in cases of increased inflation. The assemblies are also required to hold at least three public hearings if they intent to increase mill rates (Entin, 2004). These limitations are intended to guard against counties increasing rates without satisfactory reason and to ensure the interests of property owners are considered and protected. Specific property tax limits These limitations are imposed in 30 other states besides Georgia most of them having been adopted in the late 1970s (Shah, 2006). The first states to enact specific rate limitations did so as early as 1900. The specific property tax limits set a maximum rate that cannot be exceeded except through a popular vote. These limits however are applicable to only a number of municipalities in the state of Georgia. The statutory provisions require the state not to exceed one-fourth of a mill per dollar of a property’s assessed value as annual levy for tangible property. Shares of stocks shall be taxed at an annual rate not exceeding five mills per dollar on the property’s value. Exclusions and overrides are also provided in some cases where special levies above the rate limits are allowable. The main features of specific rate limits include the requirement of voter-approval and the exclusion of debt. There are also a number of state specific exclusions, for example, in Nevada a 30 mill limitation on municipalities is inclusive of date while debt for specified projects is excluded in Texas, including construction of dams and roads. The state of New York does not allow levies for special purpose in school districts or municipalities, while including debt service on non capital purpose short term debt. In this state, rate limits are applied against full value (as average for the preceding five years) of taxable real assets. In Illinois and North Dakota, the maximum rate is determined by the population in the municipalities. Other states base on varied factors to set maximum taxable values such as class of property for Pennsylvania and West Virginia or total assessed valuation for Missouri. Property tax levy limits These limits regulate the total amount of money that a municipality can raise from the collection of property taxes without regard to the rate. According to Brazer (2008), the state of Georgia through legislation provides a limit for the rate of growth of the revenue collected by municipalities. In case of over collection of revenue, the funds will be set aside as a budget stabilization fund to up to 10%, any further amount is to be refunded to the taxpayers as set out in the constitution. If any legislative council seeks to increase the annual allowable revenue for the state, it can be done by way of preparing a bill, separate from any other subject and stating the dollar value of the increase. The determining factors for the property tax revenue limit are the allowable annual growth, constitutional exemptions and voter overrides (Bell 2013). The allowable growth in the different municipalities is determined by the state. The exemptions that are considered in setting this limit include offsetting of debts, implementation of new constructions and emergencies. Limit on general revenue or expenditure The limits set maximum revenue that can be collected and regulates the spending of collected revenue. The limit is determined based on inflation rates; it is of a fixed nature thus potentially binding. These limits are more restrictive in nature and comprehensive in comparison to the other limits. They are directed to school districts. The state of Georgia considers allowable growth as a fixed percentage together with other factors in order to determine allowable growth provisions. Limits on assessment increases The ability of municipalities to raise revenue is controlled through the assessment of the escalation in value of properties either naturally or as a result of administrative influence. The limits on assessment increases ensure municipalities do not increase revenues as a result of increased property values. The limit is determined as a percentage of allowable annual increase. In the state of Georgia, a legislation to freeze residential property tax assessments starting January 2001 was passed by the voters of Gwinnett County a year earlier. Increases in home value after this date leads to increase in homestead exemption by a similar amount as a result, the county governments are compelled to implement potential by way of increasing millage rate. The provision is only applicable to current homeowners, in case of a resale; the buyer is required to pay tax based on the full market value. There are a number of exclusions from property tax assessment limits, these are; in cases of new constructions or improvements. The full reassessment was done at the time of sale or change in ownership except when the involved parties are members of the same family. Full disclosure requirements Full disclosure or truth-in-Taxation requires public involvement and a vote by the legislators of a county before tax rate increase can be enacted. The limits are not binding since the rate can be increased through a simple majority vote by the specific legislative body. Full disclosure is less restrictive compared to other rate limits in the state of Georgia. It requires the municipal council to willingly inform the public of the intention to designate a revenue increase as a tax increase. The effect of tax and expenditure limitations on the size of county governments is minimal. However, the limitation considerably affects the composition of county governments in various ways. To begin with, they lead to reduction in county’s dependence on traditional local government revenue sources and also reliance on local own-source-revenue sources. In addition, they increase the reliance of local governments in grants from the state to fund major infrastructure projects particularly in road construction and education. The municipalities have also diversified revenue sources as a result of the limitations. As a result of limitations on taxation rates, there is the development of a public sector that is more centralized but less responsive to local preferences. By adopting a system with increased reliance on the state is likely to result in loss of local control on institutions such as public schools and reduced efficiency in resource allocation. Owners of property have the right to be informed of increases in their propertys value and to receive notification concerning the estimated taxes that is payable as a result of the new value. For a municipality, creating a budget and adopting a new property tax rate to raise funds necessary to support the budget are major functions of a county government. Truth-in-taxation requirements should be adhered to in order to ensure the public involvement and awareness of any increases. Truth-in-taxation is a concept embodied in the state of Georgia law; it requires local taxing units such as municipal councils to make taxpayers aware of proposals to change the tax rate and taxpayers should be given a chance to roll back if necessary or limit increases in tax. Municipalities must comply with truth-in-taxation requirements during public participation meetings, in developing budgets and in setting rates at which to calculate property taxes, however, not all aspects of truth-in-taxation laws are applicable to municipalities. In case a municipality fails to comply with the rules, notice or tax rate, adopting process in good faith, any property owner has the option of seeking may seek an injunction to stop the municipality from sending tax bills until such a time that the district court is convinced that the municipality has complied with laid down laws. Owners of properties need to act to enjoin collections before the municipality meets a substantial amount of its tax bills. A municipality that did not levy property taxes the year before is not required to comply with truth-in-taxation laws in the current year, however, the Controllers office can recommend that it considers publishing a notice and holding a public hearing for the purpose of informing taxpayers of its intention to charge a property tax. Estimated losses are as shown in the diagram below; Discussion on the impact of tax limitations on revenue collection The state is estimated to lose millions of dollars as a result of tax limits. A study based on the data from the department of revenue indicates that capping revenue reduces the options by local governments to raise revenue. Summary There are a number of limitations on taxation specifically enforced by the different states. These limits are put in place to control property taxes, to ensure accountability in the municipalities and the school districts and also to check on the growth of the government (Centre for Urban Policy, 1995). Generally, there exist four limits on taxation imposed by the State of Georgia on the municipalities and school districts (Bell, 2013). These limits are imposed in the form of both constitutional and statutory limitations (Centre for Urban Policy, 1995). The first limitation is the overall property tax rate limits which apply to both the municipalities and the school districts (Georgia, n.d). The second one is the specific tax rate limits which may be used for specific functions. Third is the property tax levy limit which is a revenue limitation imposed both in local government in the municipalities and the school districts (Georgia, N.d) and the last one is the full disclosure limits which are imposed to counties, municipalities and school districts. Application of Overall property tax rate limits by the state of Georgia The state of Georgia has a limitation on overall property taxes charged by counties and school districts. Each property owner is required to pay a levy on that property he or she owns. This levy is called property tax and is payable on ownership of land, buildings or other constructional improvements on the land, personal property or property that is intangible which is also called real estate. According to Ploeg (2006) the state of Georgia law requires that property tax is paid by March, being payment of the year before. The taxation rate on property tax varies depending on the type of property. In the state of Georgia, property tax is collected by the various municipalities. The tax rate applicable is determined on an annual basis by the board of county commissioners of the various municipalities and district schools. The rates are measured in units called mills where one mill represents a rate of $1 per $1000 of the property assessed value. On average, the rate is 30 mills. Currently the state of Georgia is phasing out tax rate on real and personal property, a process that is expected to be completed in 2016. The state law also provides that property be valued at 40% of the market value unless specified otherwise by a superior law. The limitation on property tax rate is provided where the municipal assemblies are expected to roll back property tax rate in cases of increased inflation. The assemblies are also required to hold at least three public hearings if they intent to increase mill rates. These limitations are intended to guard against counties increasing rates without satisfactory reason and to ensure the interests of property owners are considered and protected. An example is the tax rates for Real Property (ad valorem) by the Gordon government as shown in the table below. Residents are first required to calculate millage rates on their properties and can use it to estimate property taxes owed. To do this, the millage rate is first divided by 1000, and then multiplied by the property assessed value which is 40% of the fair market value to get the estimate property tax amount. Application of Specific property tax limits in Georgia Specific property tax limits are applicable to school districts only. The specific property tax limits provide that a given rate cannot be exceeded except through a popular vote. These limits however are applicable to specific school districts in the state of Georgia and each has a different allowable maximum rate. In most school districts, the rates do not exceed one-fourth of a mill per dollar of a property’s assessed value as annual levy for tangible property. Shares of stocks shall be taxed at an annual rate not exceeding five mills per dollar on the property’s value. Application of assessment increases limits to municipalities in Georgia The state of Georgia limits the ability of municipalities to raise revenue through increases in property value during assessment. By limiting rate increase as a result of assessment increases, the state ensures municipalities are rational in deciding the tax rates following increase in property value. The limit of the state is determined as a percentage of allowable annual increase. Residential property tax assessments are frozen in the state county of Gwinnet following a vote passed by the voters of the County in the year 2000. Application of full disclosure limits by the state of Georgia. The full disclosure limits are applicable at municipal, county, and school district level in the state of Georgia. It is provided that a millage rate will not be levied annually until such a time that the governing authority of a district school adopts a resolution which will specify the rate. Such resolutions must be ready for adoption and adopted at an advertised public gathering. The authority must in such a case advertise intent and announce a time for a public hearing during the period in which it proposes to establish rates that is more than the rollback rate (a rate that produces revenue levied in prior year minus value added by the revaluation, new construction, etc.). Conclusion The reason for implementing Limits on Taxation by Local Governments in the state of Georgia are to limit the dependence by the municipalities and school districts on the customary local government sources of revenue as well as to make the local governments to rely more on the aid from the Georgia State government. These limitations on taxations also minimize the reliance of the municipalities and school districts on their own sources of revenue. The counties can raise revenue through investment in profitable ventures or disposal of some of its assets besides the collection of tax. By limiting the rate of taxation and capping the maximum amount to be collected as tax by local governments, the state is able to track expenditure in the municipalities and ensure no misappropriation occurs. A balance is reached between the financial requirements of a municipality or school district to carry out their functions and the amount of tax that can be collected without eliciting an outcry from tax payers. The local governments are made to rely more on the state so that the state can moderate development to ensure no single municipality is underdeveloped while others are developed. Thereby ensuring balanced development regionwise. References Abelson, P. (2006). Local Government Taxes and Charges, Journal of Applied Economics p. 1–9, Bell, K. (2013).State Taxes: Georgia. Bankrate. 12-15 Brazer, H. (2008) On Tax Limitations, in Norman Walzer and David Chicoine, eds., Financing State and Local Government in the 1980s Cambridge, Massachusetts: Oelgeschlager, Gunn, and Hain. Centre for Urban Policy. (2007). Tax and Expenditure Limits on Local Governments. Washington, D.C: ACIR. DeTray, D. (2007). Fiscal Restraints and the Burden of State and Local Taxes. Santa Monica, California. Entin, S. (2009). Tax Incidence, Tax Burden, and Tax Shifting: Who Really Pays the Tax?’ A Report of the Heritage Centre for Data Analysis, Heritage Foundation, Washington, 04-12. Georgia Department of Revenue (2011) A Tax Guide for Georgia Citizens P 20-35 Georgia. (N.d). Legal Affair and Tax Policy. 23-26. Haveman, M. & Terri, A . (2008). Property Tax Assessment Limits; Lessons from Thirty Years of Experience. Lincoln Institute of Land Policy. P 3-18 Lynch, P. (2007). Local Council Rate Rises Determined, Ministry of local Government NSW. Ploeg, V. (2006). New Tools for New Times: A Sourcebook for the Financing, Funding and Delivery of Urban Infrastructure, Report, Canada West Foundation. Shah, A. (2006). Local Governance in Industrial Countries, Public Sector Governance and Accountability Series, the World Bank, Washington. Steven D. (2012). Results of Local Spending and Revenue Limitations: A Survey, Perspectives on Local Public Finance and Public Policy 1:111-145 Taylor, L. (2009). Allocative efficiency and local government, Journal of Urban Economics, 37, 201–11. Tregilgas, A. (2006). Local Government finances in NSW: An Assessment, Final report, vol. 2, Independent inquiry into the Financial Sustainability of NSW Local Government, Sydney. UK Office of National Statistics, (2007). The Effects of Taxes and Benefits on Household Income, 2005-06. Zodrow, G. (2010). Incidence of Taxes in Robert D. Ebel, Joseph J. Cordes and Jane G. Gravelle (eds), The Encyclopedia of Taxation and Tax Policy, Urban Institute Press, 207–09. Read More