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Understanding Ohio's property tax situation - Part 1: The Problems · Public Education Matters

• Various student voices 0:08 Public education matters. Public education matters. Public education matters. Jeff Wensing 0:15 This is Public Education Matters brought to you by the Ohio Education Association. Katie Olmsted 0:26 Thanks for joining us for this edition of Public EducationMatters, a special two part edition, actually, as we really dig into Ohio's property tax situation, I'm Katie Olmsted, and I'm part of the communications team for the Ohio Education Association and the public school educators OEA represents in communities all across the state. Right now, a lot of those communities are in limbo because of a big question mark about what's going to happen with property taxes in our state. The state has been paying a smaller and smaller share of the cost of running Ohio's public schools, pushing a bigger and bigger burden onto local property taxpayers to cover those costs. But at the same time, in recent years, we've also seen a big increase in a lot of property values and in the size of some property tax bills, because of some of the interactions between different property tax laws in our state and policy decisions coming from state lawmakers. People in Ohio are feeling the pinch, and they are calling for property tax relief. State lawmakers are considering a whole raft of bills now that they're back from recess, but the bottom line on a lot of them is that they could truly devastate Ohio's public schools, forcing layoffs, program cuts and so many other harmful things that would hurt our kids and our whole state. But if Ohioans don't get property tax relief soon, we could very likely see a ballot measure to abolish property taxes in Ohio altogether, which would be even more catastrophic for schools and local services, in a way, I think few people really comprehend the thing is, I think a lot of people, myself included, don't really comprehend Ohio's property tax situation. It is complicated, and there is not a simple, easy fix. But that's where Dr. Howard Fleeter comes in. We're having a special two part podcast discussion with him to really dig into Ohio's property taxes and what can and should be done to provide meaningful property tax relief without doing so on the backs of Ohio's public school students, before we can talk about where we need to go though, we really need to talk about how we got here, and that's what we have for you in part one of this special two part series, take a listen. Howard Fleeter 2:44 Hi. I'm Howard Fleeter. I'm an economist based in Columbus, Ohio, and I've had over 30 years of experience working on state and local taxes and school funding, and I am the research consultant for the Ohio Education Policy Institute. Katie Olmsted 3:04 So it's hard when we start with such a giant question, but this really does feel like a giant issue in our state right now. What is going on with property taxes in Ohio? Howard Fleeter 3:14 Right. Well, I think it's not an exaggeration to say that Ohio is experiencing a property tax revolt at the moment, and so people are unhappy with the rate at which their taxes have gone up and taxes, property taxes have gone up at different rates in different parts of the state. It has a lot of different factors. But you know, the first thing I think people need to understand about property taxes is that Ohio has always ranked in the top third or so of the states in terms of local taxes, and we tend to rank in the bottom third of the state in state taxes. And when you put them together, we rank about in the middle. And this goes back to the early 1990s which is the first time I started looking at this data, and I think it predates that and that the reason for this is that Ohio provides a lot of services and funds these services at the local level that lots of other states provide at the state level. So every state provides K-12 education and all but one of those states funds it at the you know, has property taxes as the main local component of that. The only state that doesn't is Hawaii. You know, states have like, you know, states have libraries, states have cities, counties, townships, right? The thing that we have at the local level, the lot of other states don't, is a lot of human services that we fund at the local level. And so if you think about your property tax bill, and you know, if you get your bill sent directly to it, and you can look at it. You'll see Developmental Disabilities levies. You'll see alcohol, drug addiction, mental health levies. You might see a health services levy. You'll typically see a children's services levy and elderly services levy. Where I live, we have a zoo levy. You know, these, you know, but these human services. Types of things we fund at the local level, and other states fund and deliver those services at the state level. So our property taxes are always going to tilt towards the higher end of things. When you compare us nationally, right now, we rank eighth nationally in property taxes, and again, that's higher. We've tended to rank between 10th and 15th. What has happened over the last 25 years or so is that our local ranking has inched up while our state ranking has gone down. And so, you know, got some statistics here that I can cite. Ohio currently ranks 42nd in per capita state taxes. Like I said, typically, we've been around 35th when you think about K-12 education in particular, over the last 20 years, from 2002 to 2023 Ohio's fallen from 24th to 41st in terms of the State Education revenue per capita for K-12 education, we've fallen from 35th to 45th in terms of the percent of K-12 funding that comes from the state. So again, you know, in per capita revenue, we were in the middle, and in terms of the share of state funding, we were around 35th which is where we tend to be. We're now 41st on one and 45th on the other, right? So we have the state contribution, despite legislators claiming to the contrary. You know, since national census data shows that we are now, you know, in the bottom 10 states in terms of state support for K-12 education, right? And so what that means is that, you know, it should not be a surprise if that has been going on that our local property tax ranking is going to inch up because of the state isn't pulling their fair share of the weight. It's up to local school districts to make it up. So that's the first fact, you know. So there's, you know, there's several factors that have to do with this. Those are the first two. One, we tend to provide more services at the local level than other states, and in terms of K-12 education, specifically, we have been getting we and by we, I will say local school districts. Local school districts have been getting less support from the state, which means that they've had to make it up on the local level. There's one couple other factors at play here, one of which is that at the same time that the state support has been going down and local reliance on local revenue has been increasing, we've also seen a shift in terms of who pays the property taxes. So back in 1991, 47 and a half percent of school property taxes were paid by people, and those people are what we call class one property, which is residential and agricultural. So it's homeowners and farmers, right? Less, like, you know, couple percentage points below half of school taxes back in 1991 were paid by people, which means a little over half were paid by businesses in 2023 the class one share had increased by 20 percentage points from 47 and a half percent to 67 and a half percent, which means that the business share has fallen from 52 and a half percent to 32 and a half percent. So that is a significant shift in who pays taxes. So if you think that over this timeframe, when reliance on local revenues has been going up, there's a kind of a double hit for homeowners and farmers, because not only are there taxes going up, but the share of taxes of each dollar of taxes that is generated is falling more and more on on homeowners. So you know, if out of every dollar of local taxes, a little less than half was paid by homeowners and farmers, now more than two-thirds are paid by homeowners and farmers. And so they're feeling that that, you know? So that's been a trend that's been going on. And you know, the reason for it has been state tax policy changes, which eliminated one local property tax on business, and it significantly reduced by more than two-thirds tax on public utility, property tax on public utilities. And there were good reasons for doing both of those things from a tax policy standpoint, the business tangible personal property tax, which was eliminated beginning in 2005 that was kind of an old economy tax. We were one of only 10 or 12 states that still use that tax. So it made sense to phase it out. And the public utility taxes were cut after energy deregulation, because public utilities, if they had a much higher tax rate than private businesses, wouldn't have been able to compete in the marketplace. So there were good reasons for doing that. The problem was, in other states, face those same kind of forces, but in other states, those taxes weren't necessarily local taxes. So it's incumbent if the state's going to make this change for good overall. For tax policy reasons. They, in my view, owed schools and other local governments some kind of compensation for taking away part of their tax base. And you know, in fact, you know the state, when they remove that business, tangible personal property tax, they also eliminated the state corporate franchise tax, they replaced it with something called the commercial activity tax. But there were a couple problems with that. You know, the combined corporate franchise and business tangible personal property tax raised over $2.7 billion and they replaced it with the tax, which has been raising less than $2 billion at its highest point, and all that revenue has gone to the state. So at the time, back in the day, you know, in 2005 when this happened, 70% of the revenue from the commercial activity tax was supposed to be earmarked for schools. And there isn't anybody left in the legislature that remembers that promise. And that promise kind of fell apart during the recession in 2008 and 2009 so state tax policy changes, have you know, have shifted the the burden. Katie Olmsted 11:08 And one of those those tax policy changes is the continued flattening of the income tax so there's one less thing for the state that's bringing in, and that's putting that downward pressure on on the state's share of funding for things like public education. Right. If you do that, you gotta make up that money somewhere, right? Howard Fleeter 11:26 Right. Yeah, in the same budget, when they eliminated the business tangible personal property tax, back in 2005 this was House Bill 66 they implemented a 21% decrease in the state income tax, and that increase has only, has only continued over time, we have cut the state income tax by more than 40% in terms of what the rates were right. And so we're a point where the highest rate back in 2005 was seven and a half percent. And starting next year, we're going to have a flat rate income tax, which is 2.75% so I'm going to come back to the income tax in a couple minutes, but I want to mention, you know, the last force that you know, as we live in a state that relies heavily on local taxes, as the state support for K-12 education has been declining as property tax changes have eaten away at the tax base and shifted who pays it. You know, while all that was going on, our somewhat fragile equilibrium about protecting Ohio property taxpayers from increases in their property taxes when properties are reappraised every three years, that started to fall apart several years ago. And you know, while, you know, I think we were kind of bumping along, dealing with all these other changes I talked about, starting four years ago, we began to see property values, particularly for residential properties, for people's homes, going up at a much, much higher rate than is typically the case. And so we now it has not been uncommon over the last three, four years to see average property values at reappraisal go up 20% 30% sometimes more than 30% when typically over a three year period, they might go up. You know, I mean 10% 12% right? I've got data that goes back to the early 2000s we only had one year where we were over 12% and now for the last four years, we've been well over 12% the last time that we saw property values go up at this rate at reappraisal was almost 50 years ago, in the mid 1970s and what we did in the mid 1970s was we passed a passed a law cut called House Bill 920 in 1976 and then we put it in the Constitution in 1980 and the idea of House Bill 920 was when properties are reappraised the average tax rate in each taxing district in the state would make it so that the average property owner would not pay any more taxes on their voted levies. So essentially, that was a complicated way to say something, and I'm going to explain it hopefully more clear now that what we do is when properties go up at reappraisal, we roll back the millage rate on every voted levy in the state, and that levy for schools, for developmental disabilities, for libraries, for townships, for municipalities, for children's services, elderly services, all the things that every single voted levy gets rolled back so that that levy does not collect one more penny after the reappraisal than it did before the reappraisal. So all the local governments that rely on these levies will not get any more money after after property values go up. And what that means is that the average homeowner will not pay more on any of those voted levies after the reappraisal. So. Katie Olmsted 15:04 So what's been happening over the last few years that made it so that system wasn't working for everybody anymore. I mean, I was just reading something from the Hamilton News Journal. It was talking about House Bill 186 and I'd love to talk to you about that one, but it was talking about how the property tax bills have gone up much higher than that in specific spaces. Howard Fleeter 15:27 Right. So there's three reasons why your taxes can go up. Okay? So one reason is something that we call inside millage, and that is unvoted millage. The Constitution allows 1% of true value, which is interpreted it as 10% of as 10 Mills, right? A mill is a 10th of a percent, and that's what we measure property tax levies in, is Mills so, so you can have up to 10 mills of inside millage, and it is typically split between school districts, cities, counties, some townships, you know, the allocation of inside millage goes back to the 1930s right? And has hardly changed since then. That is immune from House Bill 920, so, but at the same token, it's only 10 mills, right? And the average property tax rate in the state is, you know, for class one is, probably, you know, is close to 40 mills. I think I haven't checked it lately, so, I mean, at most that's 25% and in most communities, the average rate is 50, 60, or 70 mills. So inside millage does go up after reappraisal, but it's a small fraction of most home of most taxpayers, tax bills. The other, the next thing that can happen is you can get an increase even on your voted levies if your house appreciated more than the average value in your community. So if the average increase in your community was 15% they roll back the millage rates by 15% so that overall, that same amount of money is collected. But if your taxes went up 20% you're going to get an increase, not of 20% just the difference between 20% and the average. And so some people who live in neighborhoods who've appreciated more than the average will see an increase. But what that also means is, in order for the average to be where it is, for every place where there's houses going up more than the average. There has to be another area that have gone up less than the average. Those people will actually get a decrease in their taxes, right? And I, you know, my suspicion for the last 30 years has always been the people who live in the neighborhoods whose property values have been rising more, they're unhappy because they're seeing an increase, even though that increase is much smaller than if we did not have House Bill 920 and then the people who live in the neighborhoods that appreciate more slowly and get a decrease, I think they think it's a mistake, and they just kind of keep their mouth shut, right? So you hear about the people whose houses have gone out more than the average, right? But again, House Bill 920 still protects those people to a substantial extent. Katie Olmsted 18:00 Right. Howard Fleeter 18:00 Big problem. Katie Olmsted 18:01 Thats's what happened with my house with the last reappraisal? Howard Fleeter 18:04 Right. Right. Yeah. And in, you know, over the last two reappraisals I've had, back in 2020 my property taxes went up because my house went up more than the average, and then in 2023 my taxes went down a little because my house went up less than the average. They're still a little higher than they were before. But you know, that's not atypical. You know, I understand why it is. I tend, every three years to explain to my neighbors what's going on with their taxes. But you know, the that happens all the time, the thing that has really been different is when property values go up at such a high rate. We have now got almost two-thirds of the school districts in Ohio. It's something called the 20 mill floor. And I think it's 11 million people in Ohio, our property tax is complicated. I think there's a lot of things about it that most people don't understand the details of. Probably most people have never heard of the 20 mill floor until lately. And the 20 mill floor is something that has been in place since at least 1976 when House Bill 920 was passed once we started to roll back millage rates, there was the understanding by the legislature at the time that school districts millage should not be rolled back below 20 mills, and at the time that 20 mills is what we call the state qualifying millage. Every school district has to have 20 mills in place in order to get state aid. And then the other thing was, back at the time, the way we computed the local share of funding in the state aid formula was that we assumed that there would be 20 mills of local contribution. So the what we called the charge off was 20 mills. The qualifying millage was 20 mills. And so we created something called the 20 mil floor to make sure that every district was contributing what it was expected to by the state. And so we've now. Katie Olmsted 19:51 So that would prevent the imbalance the other way from what we're seeing right now. The state right now is not paying its fair share, but without that 20 mil floor language put in there. It would be possible that the local property taxpayers would not be contributing what they. Howard Fleeter 20:04 Right, right, yeah, yeah. That's, yeah, that's a good way to explain that, right, that that floor makes sure that local property taxpayers pay, pay at least, you know, 20 mills, which is 2% you know, over time. And so, you know, the number of districts at the 20 mill floor go, you know, fluctuates over time, right? And you know as back in 2012 there were a little over 100 districts at the 20 mill floor. Last year, by my count, there were over 400 districts at the 20 mill floor. In 2020, 2023, there were over 400 districts. 2024 there were a little bit under 400 districts. We'll get the data for 2025 I think it's going to be over 400 districts again. But I mean, whether it's above or below, it's about two-thirds of the school districts, which is a very, very high number. It's unusually high. Katie Olmsted 20:54 Does that reflect? I'm sorry to keep interrupting, but I'm just trying to wrap my head around it, because this is complicated, and I'm trying to learn everyone else. Yeah. Howard Fleeter 21:01 Very complicated. So go ahead interrupt me. So. Katie Olmsted 21:04 Does that reflect the growing challenges of passing property tax levies that as as local communities are turning down these levies more and more, they're they're falling below that 20 mill floor, so they're stuck at the 24, anyway? Howard Fleeter 21:19 In some places, yes, right? So it's, we've, you know, when you have, we have 600 school districts in Ohio, and we've got the different areas of the state are very different from each other. So I try not to try and make blanket statements that say, x is because of y, right, right? You know, there's, there's, there's a couple factors at play, right? And you know, one of them is that we know that rural areas of the state tend to have lower taxes than lower property taxes than the urban and suburban areas of the state. And there's a variety of reasons for that. I mean, you know, one of the biggest forces for that is that incomes tend to be lower in rural areas and that they can afford less, right? So the the voted tax rate is lower in rural areas. And so the average rate in a rural school district might be 45 mills, and in a suburban district it might be 65 or 70 mills. There's some districts that is over 100 mills, right? And so the rural districts are closer to that 20 mill floor because they don't pass levies at the same rate. And they tend to not pass levies at the same rate because their incomes are lower, and these people can afford them less, right? And they and their property values are also lower, and so their state aid is more, right? So their local share of taxes is going to be lower and they're going to be closer to the floor. So that's one thing you know. So you know, of those roughly 400 districts at the floor, about half of them are there just because their millage rate is relatively low and they're they're at the 20 mil floor right now for what I call, quote, unquote, natural causes, just the working of House Bill 920 over time. There's a second factor at play, though, that certain types of levies don't count towards the 20 mill floor, and those are something called a school emergency levy and a school substitute levy. Substitute levy is a variation of an emergency levy and an emergency levy, which was created, I think, dates back at least to the early 1980s I'm not sure exactly when that was, before my time. I'm not sure exactly when it was created. But an emergency levy is also called a fixed sum levy. It's for a fixed amount of money. So if you pass an emergency levy for a million dollars, it will only raise a million dollars for as each year that it's in place. So the emergency levy, if your property value goes up in the district for any reason, it automatically rolls back the middle age, apart from the whole 920 rollback mechanism, it is designed so that any increase at all in property values in the district for any reason, you build a new subdivision, you get a you get a factory that's built, you have a strip mall, you have an office park, anything that would increase the value of the property or reappraisal, which causes the existing properties to go up, it automatically rolls back the rate on on those emergency levies, so that you're only rate you're raising the same amount of money. And I think back in 1985 there was a decision made by the legislature that those levies would not count in the 20 mil floor calculation. And so you now have almost exactly half of the districts at the 20 mill floor have an emergency or a substitute levy in place. And so I think there are lawmakers that accuse school districts that do that of gaming the system, right? You're getting an additional levy, and you're not. You're, you're still at the 20 mill floor. You know that additional levy, by definition, cannot ever grow for any reason, though. And so what's. And it's like I said, you know, we had thing we were kind of bumping along in our sort of equilibrium where we've got all these things changing, and yet we're our system for protecting taxpayers was still working, okay? I think that that fell apart when we had this huge spike in property values a couple years ago, and all of a sudden, all these districts got put at the floor. And so, you know, half of them have emergency levies. Half of them don't have emergency levies. But the you know, there's legislation that is going to change the definition of the floor so that those districts with emergency levies will now be above the floor. And but that's not going to help any taxpayers in the other half of the districts that don't have those types of levies and on. Maybe the one thing that I should have said at the very beginning was, what does it mean to be at the 20 mill floor? It means that the House bill 920, millage rate reductions don't work for your school taxes. They still work for all the other property tax levies that you have in place. They just don't work for your school levies. And so if your property just went up, you know, 30% and you're at the 20 mill floor, they cannot roll back the property the millage rates, so your school taxes will go up by whatever percentage your property just went up. And so again, in rural areas, we tend not to have property values go up at the same rate, right? But you know, what we've been experiencing with property values has affected, really, every part of the state, and there's various reasons. It's complicated. It's part of a national trend. I think it started during covid, but it's, you know, mean that, you know, there's multiple, multiple factors, one of which is a housing shortage, one of which is something called interest rate lock, where when interest rates, which were low, started to go up at oftentimes it's more expensive for somebody to sell their house and buy a new one, because you might go from a 3% mortgage rate to a 6 or 7% mortgage rate, and so in that case, it's your best decision is to stay put. So you've got fewer houses on the market. When you've got fewer houses being sold, it raises the price. There have been shifts in pattern of where people want to live. You know when during covid, you know more and more people could work remotely. So now it makes it viable to buy a house that's further outside the city or in a different part of the state, if that's where you prefer to live, because you can work remotely. There's a lot of different factors at play that have led property values to spike. But you know what I think has really you know, the straw that broke the camel's back as far as protecting property taxpayers from these large increases is the number of school districts at the 20 mill floor. And you know why there's so many districts at the floor is not as simple as some legislators are trying to make it. It's, you know, and I don't think school districts, even those with emergency levies, I don't think it's fair to say that they've gamed the system. All they've done is played by the rules that the legislature laid out for them over the last 40 years, right? So for the legislature right now to accuse them of gaming the system, I think, is completely unfair and disingenuous. So, you know, you mentioned something a few minutes ago about cutting state income taxes, right? And so that's had two effects. One is, I think that is behind the decline in Ohio State ranking on state taxes, and it's also behind, Ohio falling behind in terms of state support for K-12 education, and it's also applied to other areas of the budget. You know, higher education has actually suffered arguably more than K-12 education in terms of the decline in state support. The safety valve for higher education is tuitions gone up. You know, for local services, it's property taxes going up. And so, you know, we have, you know, if you cut the state income tax, which, until 2014 was the largest single source of state revenue, since 2014 the sales tax is now the largest source. But we have probably, if you've cut those rates by over 40% right, we have decreased revenues by at least 40% over that period of time, which is approaching $10 billion right? I mean, that is a lot of money that is no longer going into the state general revenue fund, which could be used to support public services, and so that that's a long term trend that's started, you know, 20 years ago in 2005 what has happened the last couple years is that for the first 15 or so years of that period where we're cutting the income tax, we were making those rates, kind of cutting them across the board, for all the different rate payers, back in 2005 we had nine tax brackets, right, with the highest one being seven and a half percent. And you know, if we, you know, if we made a 21% cut, each rate bracket was cut by 21 Percent right? If you made a 10% cut, they would all be cut by 10% right? And so what's happened the last several years is that they have stopped cutting the rates across the board. They have instead focused on lowering the rates for the higher earners in the state. And they've done that because the legislature's goal has been to move us from a graduated income tax with multiple rate brackets and to a flat rate income tax with only one rate bracket. And there are national tax organizations that have a belief that that is a good thing. There is not really any economic data that shows that whether your income state income tax is a flat rate or a graduated rate, that either one of those is better for economic growth in the country. But Ohio lawmakers have decided that that is a goal they want to pursue. And in the last two budgets, they have chosen to take the last couple steps in terms of flattening the state income tax, and by doing that, they have lowered the income tax rates on the highest income brackets that have been left. So who's been benefiting the last two budgets from the flattening of the income tax? It's the highest earning people in the state who are the people that are having trouble paying their property taxes right now. It is not the highest earning people in the state. It is lower income people, it is elderly people, it is disabled people, it is a lot of people that live in rural areas, right where those districts are at the 20 mill floor, and the state legislature has made a decision to solve one problem and to not solve another problem. Katie Olmsted 31:40 Okay, we're going to pause the conversation here for right now. That was a lot, I know, but it is so important that we really understand how we ended up with this property tax problem in Ohio, so we can come together and stand up for property tax solutions that are not going to devastate our public schools, which some of the bills moving through the General Assembly really would do. So I thought it was important to break this thing into two parts, to make the whole thing more manageable to take in when you are ready move on to part two of this conversation. And I promise that's the really good stuff about how our state lawmakers can actually deal with this mess. After all, they're the ones who created the policies that put our funding system at this breaking point, but the way forward must be done in a way that ensures our public schools can continue delivering the great education every student deserves. Because in Ohio, public education matters. Transcribed by https://otter.ai