S.B. 97 Tax Revenue Amendments: transcript

Okay, thank you. Uh, this one also has a sub, um, just nature of the process. So I'm gonna ask that we delete entitle and bodies, uh, senate bill 97 and replace it with first substitute Senate bill 97.

Yeah, there's a, there's a lot in this substitute. Um, and it's better. Alright,

Okay. Thank you very much. Okay. Um, this, this started as an interim bill where, uh, and the interim committee, uh, supported it. Um, and really we were looking at caps and what I've, uh, you know, looking at caps and looking at ways of trying to, uh, you know, trying to deal with, um, escalating or variability of property tax. Our property tax system system is fantastic, uh, as it protects. Um, uh, it protects the government institutions with revenue, but it is, uh, terrible sometimes from the taxpayer standpoint because the taxpayers seize variability every year. Uh, and it can go up a little bit, go down a little bit, or if they go through ation, it goes up a lot. But the one thing that is, that is sure is that our local entities are guaranteed a, uh, they're guaranteed their revenue and that guarantee of revenue has, uh, has caused some issues. Um, and it caused consternation among taxpayers. So the purpose of Senate Bill 97 is to try and create a, uh, you know, a, a balancing, uh, in the property tax system so that it favors both parties, uh, and not just the entities. Um, one, uh, lemme just tell you about some of the things in the sub, um, in addition to the cap component, and I can talk about that here in a second. But it limits the amount of surplus funds that a city can accumulate to no more than 25% of state of total revenue in the fund. Um, one of the things that is, uh, we'll have to identify, just by the way, we have not included all the entities that need to be included for this limitation. And so that will come in, uh, in a, in the next sub. The, uh, but that 25% we've seen fund balances from, uh, general fund, uh, fund balances and reserve account balances surge, uh, over the last 10 years. And that, um, that balance you're causing me, are you okay? Okay, that, that those fund balances are, are causing great concern because we are seeing more and more money held by the government in government savings accounts, uh, and not for, and not, you know, for the benefit of the taxpayer, so to speak. I mean, they get the down, uh, the down level services, but at the same time, property tax is a very fixed and finite guaranteed amount. And the interesting thing is the need for reserve accounts is really minimized with property tax because the rates are guar, or sorry, the amount is guaranteed every year, there's very little risk in property tax amounts absent a major destructive force to a, a total loss or a loss in the base of their, uh, that, you know, the, of their property tax amount. And since that risk is so low to the entities, allowing them to have excessive surpluses at the local entity level is creating where we're, we're, again, putting money into the savings account at the detriment of having them in the taxpayer's pocket. Uh, second, uh, uh, policy component is it limits the primary residential exemption to one per household. This is a, uh, this is a ch a significant change in that, that, uh, you know, right now it applies to rental, it applies to anybody that's a primary tax or a primary home, or it could be somebody's primary home. They get the benefit of the residential exemption. What we've seen is in Utah, we are now seeing, we've gone from, we were 20% rental, we're now at 29, almost 30% rental, uh, here in the market. And we're seeing more and more rentals accumulated. And, uh, those things that you incentivize, you get more of. So this would, uh, in essence change the tax structure for, for rental units as a rental owner. This will negatively impact me, however, still think this is better policy. Um, let's see. Uh, let's see. It requires owners to apply for the residential exemption if the property was in ineligible the prior year. Uh, it also exempts, uh, let's see, exempts from the cap. It exempts school districts that receive state guarantee money because they may need to increase their property taxes by greater than 5%. Uh, in order to keep up with the state minimum guarantee, um, for locally assessed new growth, what we found is that new growth, it doesn't have a very good definition. And I've talked to the counties and, and they're on board with trying to find a better way. This sub changes the new growth such that new growth only counts when it's 200% higher. Uh, so when the prior year value increases, just adding a shed or a driveway or, you know, a new, uh, new component will not necessarily change, uh, the attributes of the property, uh, and won't add 200% value to the property, therefore would not count as new growth. Okay? New growth is meant to, uh, is meant to compensate a, a, a, an entity for, um, when they, you know, get a new taxpayer or a new, you know, some new home or new business comes online, that new home and that new business then adds to the services that need to be supr supplied and therefore it increases their budgets and then, you know, changes the rate. Um, let's see. Uh, it also reduces the certified tax rate by any interest amount that a taxing entity keeps on a, uh, a reserve account. Reserve accounts are, like I said, they're, they're burgeoning and we're trying to find ways to decrease the incentive for maj maintaining, um, for maintaining, uh, savings accounts that money belongs in the, in the pockets of taxpayers. Last but not least, this prohibits, uh, this prohibits a taxing entity from considering a change in value for physical improvements to a property until those physical improvements are completed. Um, there's a, there's a difficulty in trying to figure out when, uh, new growth occurs. And what we found is that, um, you know, some entities are taking, let's say it's a new home. When the new home is started, let's say it's in September, but it's not completed by December 31st. Carries over to the next year. Cities are taking the, uh, or sorry, entities are taking the permit value that's been applied to, they're adding that to the land and that becomes new, the new growth calculation. But that's actually not a guarantee for new growth until the project is complete. And so pushing that risk and that new growth off a year is actually better than calculating it based on an unrisked, uh, return or unapproved or unfinalized project where the growth ha growth hasn't necessarily occurred yet. So, uh, that's the major portions of the bill. Um, let me look back and see if I've missed anything else. Um, uh, for, oh, uh, this al the bill also excludes tangible personal property from the calculation of project area new growth. This was, we, we removed tangible personal property for new growth. Uh, you know, back in 2015, if I remember right, it might have been 2016 is my bill, house bill 25. I'll tell you how long ago it was. Um, and we removed tangible personal property, but because it's so variable, um, but somehow, uh, in the, you know, bills and that kind of thing, it got included back into project area new growth, such that tangible personal property is adding new growth and immediately begins to be depreciated. And once it is depreciated, the value then shifts to the tax burden to taxpayers instead of being paid by the taxpayer that brought the tangible person that piece of tangible personal property. Uh, boy, I feel like that's a lot, but really, let me just tell the committee for, for all intents and purposes and working with the counties and several, you know, city entities, et cetera. I know there are going to be concerns about this sub. I think we're just trying to get a menu of things that need to be considered and, uh, you know, I'm meeting with members of the house, uh, on the taxations proposals that are in the house. And some of these things may be included in that menu when this bill finally arrives, but it's not there yet. And so what I can tell you is it the bill in its current format is not final and there will be a lot of sausage making before it is final. Um, but uh, on one other clarification, somebody, uh, online, uh, said that this was removing truth and taxation so that entities could increase your taxes all they want. And I just want to be clear, that is not part of the bill. Truth and taxation still exists. Everybody's gonna have to still go through truth and taxation. So that rumor that this is a, uh, a, uh, Trojan horse to get rid of truth and taxation is not correct. That's not in the bill. So just make sure that wasn't in the beginning Bill. And it, and it isn't here either. So that I'm happy to answer questions, uh, if people have them.

Thank you. Uh, Mr. Chair for the sponsor. Um, you line 11, this is in the long title. Uh, the bill establishes a rebuttable presumption that property owned by a business entity does not qualify for the residential tax exemption. So, um, I assume a trust does not count as a business entity, correct?

Correct. It is not a business entity.

Alright. Uh, so, but if I have a, uh, an LLC, maybe I have a duplex and I live in half of it mm-hmm. And an LLC, you know, owns the other half for tax purposes. That is, so the, the presumption there would be that that is not a residential exemption, even if I'm just renting it out to my favorite neighbor.

Correct. And so if you would

Have, have to, and how would I rebut that

Perception? Okay. So you'd go and rebut it by the fact that you live there, therefore it is your primary residence. Mm-hmm. And as fair, the owner on title and, And then my neighbor, the same thing. Who do I rebut it to? The county. County. Mm-hmm. Before I get my tax notice. Like if they send one, assuming that it's not, that it, because it's, it's, uh, I should say 'cause it's gonna fall on my renter, right? Mm-hmm. If, if, uh, he gets a notice or I, I guess the corporation will get a notice that the taxes are 5,000 instead of 45% of 5,000. Then um, do I have to pay the 5,000 because I, I didn't rebut the presumption in time. If you don't go and if you don't take an active role in managing your property tax strategy, you would pay the higher amount. I would Rec until I rebut it. Until you rebut it, at which point it is rebutted and you can, you know, but that presumption, you know, again, LLC, ownership, everything else you can go rebut that presumption. And I think we could put some flesh on the bones on what qualifies for, you know, a rebuttal. Uh, and you know, a lot of duplexes are on the same tax parcel. And so as a result, because they're on the same tax parcel, even if they have separate addresses, the entire property qualifies because it is under the same. And that's fair enough. Maybe a duplex wasn't the right example, A town home or I don't know, two single family homes that, or, or you know, the property in St. George, whatever, anything that you're renting to somebody

that is that person's primary residence Yes. Is eligible. I guess I'm concerned that this change might catch a lot of people currently off, off guard and that a lot of people are not going to know at all that they need to make this rebuttal. Um, and that their taxes are going to go up a lot, um, in a way that I think we could probably prevent. So as you make the sausage, keep that in mind. I am adding it to my list of sausage to grind.

Thank you Mr. Chair. Just, I have a clar clarifying question online. I believe it's 6 7 4, subsection 12, um, 6 74.

Yeah. Okay.

And I'm reading on the comparison, just to make sure you added this new language related to the provision of subsection 12 A does not apply to school districts. Correct? Um, just reading through this. Okay.

Uh, it is, so, uh, if you read 6 74 through 6 6 77 through 6 79, correct? That is the prohibition. Um, that's, that's the cap is 6 74 through 6 76, and then 6 77 through 6 79 is the prohibition. Uh, on, you know, for example, if on 6 79 it says where they in accordance with 53 F 2 6 0 1, that's the minimum school program. Mm-hmm. So they have to maintain a minimum effort to participate in that program. In order to do that, they may have to increase their taxes more than 5%. This exempts them from that 5% cap for the purpose of catching up with the state's minimum program.

Okay. So you're making that clear that the schools will not be impacted for that purpose.

For that purpose. Yep. Okay. Thank you. Yep.

And, and I think this is, you know, part of the issue is, um, we've had so many local governments raising property taxes, but it largely falls on school districts at 75 to 80% that have been of most people's property tax bill.

And we're excluding that from the increase or the, the cap Only if they're participating in a minimum school program.

Okay. If they're not participating in a minimum school program, that's, that they're a donor district, but many school districts are participating in the min in minimum school program. Yeah. And then part of my concern on this is there's a lot of cities with very small budgets. Mm-hmm. And the smaller the budget, the more that tax rate issue hits them.

Can I tell you a better reason to hate it? Can I tell you a better reason to hate the cat?

I'd love, love For you to,

lemme tell you a better reason why this cap probably will not last much longer than the first sub. Uh, you know, to, uh, everybody's chagrin, I'm sure. Um, the cap itself has problems, uh, from an underwriting standpoint. Um, but the bigger underwriting risk is, um, flexibility as it turns out when we look at bond ratings. So, uh, the, you know, looking, I talked with, uh, folks from public finance today, including the treasurer, and we walked through risks. And one of the things that that gives us a good bond rating at the local municipal and entity level is we have flexibility in property tax. They do not have flexibility in sales tax, they don't have flexibility in income tax, they don't have flexibility in other things, but they do have flexibility in property tax. They could raise the property tax, go through the truth and taxations to make sure that they can cover their, uh, bonding obligation. So because of that flexibility, they have higher bond rating. Right. If we take away that flexibility or limit that flexibility, we may knock them down in bond rating, which will then add, you know, basis points potentially to the underwriting cost of a bond or a public financing structure. And that alone, uh, you know, causing a decrease in the bond rating of every municipal entity is probably not politically tenable for any of us. Um, but that being said, uh, you know, the, the idea of the cap is such a lovely idea, but the risk of the cap that it creates to bonding is, is not worth the trade off in my opinion. But I just don't want to cave into the cities yet on that.

Well, and I, I guess part of my concern is I'm Just being honest, right? And this is some of my, and, and you went through this as well, going from the house to the Senate and, and I know that we're more likely in the Senate to let the sausage continue because we have the second Yeah. Reading calendar and all of that. But that's a real poison pill for me on that 5% cap because I think it's impossible to work with for smaller cities.

You and I agree. Just don't tell the cities yet. Okay. They have, they've this really hot negotiation. They're Very aware. They, But yeah, yeah, they, they have me like over a barrel. It's gonna be a very tough negotiation, but just know, uh, don't tell 'em yet, like I said, but, uh, it will not make it to the second substitute.

Okay. Let me, let me do this. If I were to do a single amendment so that I could feel more comfortable voting for your bill and change that from 5% to 500% knowing that you're gonna change it, would you have an opposition to that?

None at all. Because I do not wanna vote for this at 5%. By all means, if you want to add two zeros to that number, uh, it, that will be just as effective as removing the cap. So yeah, I'm fine either way.

Okay, thanks. There may be amendment on the fly here.

Thank you Mr. Chair, members of the committee and, uh, Cameron deal, director of League of Cities and Towns. It's hard to follow that exchange. Senator, I do just want to, I want to thank Senator Bre for his question and actually all the, all the legislators on the committee for this, this question. We recognize the proper taxes, big issue, uh, this, this legislative session. Senator McKay knows that we have concerns about the bill and we've been talking about it for the last little while and we'll continue to do so. We take him at his word that we'll continue to have these, uh, discussions over the next few weeks. Uh, couple quick points. So I just wanna make sure everybody has for situational awareness of all the general funds that cities, uh, that cities have, like sales tax general fund, we can't authorize our own sales tax. So property tax is the one lever that we can pull to increase the general fund. Additionally, cities are only 13% of all the general fund revenue in the state. So Senator Brammer, you were right as you were talking about that, that breakdown. Cities are 13% of all of that aggregate, uh, proper tax piece. There are fair questions around new growth, uh, but just recognize as we have those conversations around how we calculate new growth, uh, that it is still important, uh, whether a city allows for detached a DU or, or there's additional new growth in the community, that we are able to capture some of that property tax in order to pay for services and infrastructure. Uh, there are also a lot of questions about the truth taxation process and making sure residents feel heard during that process. That'll be part of this sausage making as as we continue. So while we're concerned about both the original bill and the substitute bill, there's a lot of conversation to still occur in the weeks to come.

Uh, I'll make a motion that, uh, I'll ask Senator Brammer to withhold his 500% just for the purpose of, of drafting cleanliness. Uh, save us the time. I, but the spirit of it is there and I feel it, as does everyone else. Uh, you have my commitment that that's, that's gonna be taken care of. So, uh, with that, I'll move that the first substitute, uh, Senate Bill 97, uh, move forward with a favorable recommendation.

Uh, no, but I appreciate the committee's, uh, faith and trust in, in working through these issues. Uh, trust me being, dealing with this issue, uh, as we look at property Texas specifically, and I'll tell those behind me, the key is, and, and we all know this, uh, is do no harm, right? And so, uh, the idea of trying to shore up this process to, um, you know, to provide balance for entities and taxpayers is really important, uh, to my constituents and to all of our constituents. And the cities have the same constituents as well, and I know it's important to them as well. So, uh, with that, uh, I'll, I'll waive summation.

Senator McKay. Thank you President. Thank you President, uh, Senate Bill 97, uh, is a tax cleanup bill that deals with several issues that, uh, we're dealing with. There are several primary policies in here, happy to debate their merit, uh, and, you know, welcome, you know, conversations off the floor if there's issues. Um, what we've seen in a study that was done by the treasurer just this last year, uh, was the, uh, the accumulation at our local subdivisions around the state. Um, we've got accumulation of reserve accounts, um, and we're trying to find ways to, uh, you know, minimize that accumulation. 'cause every dollar in a government's hands is not dollar in the economy or, you know, in family's pockets. So when I look at, uh, when you look at Senate Bill 97, the first parts of the bill, uh, deal with that. It limits the amount of surplus funds that may accumulate in a city or county, uh, subdivisions general fund. And, uh, the purpose of that is a few years ago, we went from 15%, then from 15% Uintah, 25%, and then 25% we Uintah 35%. This is a measure to peel back, uh, the effort that we, uh, went from 35% and take it back down to 25%. Uh, the next part is, uh, is substantial. Uh, you know, policy shift and merits some conversation, but it limits the residential property tax exemption to one primary residence per household. And what this does is it will make it so that primary homeowners who live in their home will be able to claim the property tax exemption for, uh, primary homes. And the, uh, and others who want to claim, uh, this exemption, uh, will then, um, you know, be asked to, to pay a hundred percent and not receive the exemption, the 45% exemption. It creates a rebuttal presumption that a property owned by a business entity does not qualify for residential exemptions. Um, it requires residential property owners to apply to the county to receive a residential exemption if they did not qualify the month, the time before. Um, back to the fund balancing measures, it prohibits taxing entities from depositing property tax revenue to a, in, into a reserve fund for capital improvement projects after a certain date. And that date is a year, uh, is after the effective date of the bill. Um, but it doesn't require the discouragement of, uh, of those surplus fees. Um, so they then have to create wasteful spending. They can still save it for capital projects. Um, but it, um, but not if they've hit that, uh, 25% limit we talked about earlier. Um, this excludes, uh, valuation increases from physical properties we've been trying to come up with and deal with. You know, my, uh, my constituents give me a lot of, um, you know, feedback on, uh, property tax and how it isn't working well for them. And one of the issues we found is, uh, a weak definition for what counts as new growth. So we are currently working with the counties and with the cities to come up with a, uh, meaningful, uh, uh, definition of what's in here. Um, we're not a hundred percent sure that we've got it yet. And so there's gonna be a lot of conversations. This in project in concert with, uh, Senate Bill 78 that we talked about before. The other thing this does is it excludes the increases of tangible personal property for project area new growth. Um, this is a ratcheting effect that we dealt with back in 2014 and then again in 2016. And then somehow we added this to the CRA code to allow, uh, this ratcheting for the pur of this, uh, you know, this new growth, uh, change. And this calculation of new growth, or sorry, uh, for, uh, purpose of CRA project area new growth, allowing tangible personal property is creating volatility and also creates uncertainty within the budget. So we're trying to put some, uh, bumpers around that issue. And then last but not least, it's takes the interest that is, uh, earned on accounts, uh, that are held in surplus, and it takes that interest and subtracts it from the certified tax rate calculation, which would then be a reduction of tax burden to our local property tax payers rather than the entity receiving the interest from these, uh, from these reserve accounts and then adding that to their reserve or spending it in, uh, in another way, uh, that is outside the certified rate and truth and taxation process. I feel like that's a mouthful. Um, I, like in senate Bill 78, and I mentioned this during the presentation, there will be a lot more conversation about Senate Bill 97 as we deal with the counties and the cities, uh, trying to find definitions for these parts and, uh, trying to dig through the appropriate balance in the, uh, residential exemption. So for that, Mr. President, I'm happy to yield to questions.

Yes. Okay. I had a couple of questions and I, I understand what you're trying to do. And you're saying that if this goes through that, what the counties have in the general fund right now, they could only go 25% of what the annual budget is for next year's taxes?

That's a great question. Actually. It will, it's 125%. So right now they're allowed to save one year of the prior year's property tax revenue in code. And this amount that we created is a buffer that allows them to capture above that one year's rate, that one year. So basically, it's akin to right now they're allowed 135% of their budget. Now we're taking it down to 125% of their budget.

And, and that's for the county. So on line 6 78, we exclude school districts. Why are we, uh, treating them different? Seems like to me they're the ones that collect the most amount of the taxes and, and the percentage we should be addressing some of that.

Yep, thank you. Okay. The line 6 74 to 6 79 deals with the cap that we talked about, where 5%, they can't increase taxes more than 5%. What we have is the minimum school program and the minimum school program, uh, and a school district is required to charge a certain amount of tax to qualify for the minimum school program. And what that does is it, it trues them up and may make sure that they're not just relying on the minimum school program its funds. Instead they're relying on local effort and the minimum school program. Does that make sense? Now, what we did last year was we required, uh, these taxing entities, so the school district specifically to re uh, set their rate to meet the minimum school requirements every two years instead of every five years. And what that does is, on occasion, it's not all the time, but on occasion, if the only reason they're raising their property tax is to, is to, um, qualify for the minimum school program, then by all means, if we have an obligation on one side of state code, it's really hard to exclude everyone on the other side of state code that they couldn't qualify for the minimum school program, even though the property tax at local effort doesn't make, doesn't meet the required amount. Does that make sense?

That's the only reason, and I, I agree I have discomfort in doing it. I'm with you. But at the same time, um, you know, trying to maintain that balance, I feel like is, is an important component and, and it reminds me to add that to my list of things to work on on the bill. Well, yeah, I, I was thinking more or less their bonding ability and what they have, so I appreciate that.

You, you, you talk about the, the businesses. Are we talking about if, if you own a home and you rent it to someone, that that now will be increasing so that it's not a benefit to own a second home that somebody classifies as their full-time residence?

Thank you President. Um, I know this will surprise everyone, but we have a lot of second tax, second home tax sheets. And by that I mean people that own a second home, but clean a primary residence in multiple jurisdictions, right? They, uh, you know, Washington County deals with this a lot, um, but there are places, you know, outside cabins in rural Utah, whatever that struggle to try and, and balance this as well. One of the, so they do this for tax purposes. If a home is rented for less than 60 days, so Airbnb or that kind of thing, it already qualifies as being a business and as a result is part of the, um, business tax and pays a hundred percent of their property tax. This is for homes that are rented longer than 60 days. That longer than 60 day period means that they will, they will qualify as a business also and not receive the residential exemption. They'll pay the full amount on, on their property tax. I was asked earlier, and I think this is something, uh, as a novel approach, but we're looking at ways, uh, you know, we looked at the Constitution and there isn't a requirement that it has to be the full freight that, you know, so looking at ways to maybe phase into it or reduce it by a certain amount over time. We're looking at some of those options as we're negotiating this part of it. But we, you know, 10, I can't remember if I can't remember my numbers, I'll just, you know, make it up for a moment. Just assume that I'm giving you a range of, of, of accuracy. But 15 years ago-ish, we were around 20% rentals, uh, for, for our, our single family homes, uh, and, you know, apartments, town homes, everything else. We were about 20% of our total market was, was, was, uh, rental. Now we've, we've had this tax, uh, availability. And what it does is, you know, if a large, uh, investment company comes in and buys a bunch of, you know, single family properties and rents them out or builds a community and rents them out, they qualify and get a tax advantage, a tax incentive to have those rentals. What this will do is it will say those large organizations or whatever, they will no longer get that tax credit or as a primary resident, uh, resident or primary residents. The other thing it will do at now, and you know, we've looked at other ways of carving this up too, but anybody else who isn't the primary owner on title would not qualify for that residential home exemption. So if a kid is living in, you know, they're renting it or they're loaning it to a kid or whatever, they would need to put the kid on title to qualify for the exemption as well in that process. Thank You. That's A lot.

Thank you. I appreciate that. And I do have one other, I'll take, take it offline because I think it's a suggestion that we might look into to, to try to tackle the same problem.

Thank you. Um, there's a, you know, I was one of the no votes in committee on this, and I, you know, I still have several of the same concerns. I know that the bill sponsors working on a lot of those. There's, there's not a lot of tax policies that the bill sponsor and I really diverge on. Uh, oftentimes we are the quorum in rev and tax. Uh, and so we're, we're oftentimes voting on, on a lot of these. Um, but there's a couple that I would still like to see address and I can't quite get there. There's other problems that he's addressing that I think are absolutely essential. Um, and I, and I think it's important that some of that gets put out publicly. Um, one of the concerns that I have is a flat 5% cap on tax increases. Now, I like some level of control on tax increases, but I worry about a, a one size fits all percentage tax increase. I think if Salt Lake City increases their taxes by fi their revenues by 5% on an avalor basis, you know, that's a lot. That's a lot. And it would probably be appropriate, but if, if you're asking, you know, that, you know, a, a very small township only increase by a small amount, that may not be sustainable for that township when they need to, to do something or buy something that's a bigger portion of their budget. Uh, additionally, I have some concerns as to the incentive that that creates for entities to always be increasing taxes above the rate of inflation for fear of losing the ability to increase should they need them in the next year. And so it kind of pushes the entities into a, a yearly tax increase to the point where it normalizes it, uh, for the citizens. Um, as far as the amount of, of, uh, funds held, I, I do think that needs to be sized appropriately to the entity. And so I, I'm looking for some of those changes. I'll probably be a no on to, I hope that some of these can get, you know, I know that he's the, the bill sponsor's working on this, and I, and I have confidence that he'll get there. Uh, but I, I do have those concerns and, and, uh, I do share some of the concerns as to, and I know with school districts it's very difficult because of the, you know, the minimum, uh, tax payment and I, and also the bonding issues. So there may be other ways to skin that cat that, and I'm happy to work with the bill sponsor on getting there, but for now, I'm a no. Although, uh, I do like many of the things in the bill. Thanks.

Thank you, Mr. President. I had similar concerns as, uh, Senator Winterton with the 25% capital, um, reserve. Would this impede or school districts from having reserves so that they could save up for like a capital improvement? Or would this, uh, negatively impact their abilities to hold onto money and not have to bonds because they've actually been saving money? Would that impede them from doing that?

Okay. Um, I'm actually a little bit surprised by your question about this, knowing where you come from. Uh, instead of saving up for capital projects, I would argue that the school districts ought to be using this money for ongoing operation maintenance salaries and wages and not for capital projects. And what I'd argue is that this savings program that we've created for entities is actually deleterious to the benefits that can be provided to employees. It wasn't me. Um, it, it's, it's not helpful to the employees efforts or their desire to try and increase or improve, uh, you know, salary and wages. So instead, they're saving up for capital projects instead of providing it for salary wages. One, two, the capital project is, we, we never intended in our system for property tax to be used to save up for anything, the intent of property taxes to meet ongoing operations for steady revenue purposes, like salary and wages. If you use property tax for intermittent expenses like capital projects, what you end up doing is you end up creating a perverted incentive to save money rather than communicate with taxpayers on what a capital project is that's needed. They aren't bonding, they aren't, you know, communicating with taxpayers on those needs. And because of those issues, we have a, a brimming frustration with a property tax system that outside of Utah is the model of the country. Everyone loves our property tax system, but there is growing angst and frustration over this ability to save property tax money that was meant to meet present day obligation and not be a savings vehicle for future programs.

Yes, thank you. Um, I, I understand that point of view and I understand that, uh, I, I actually agree with most of what you said. My concern is some of our school districts, which brings us down to line 6 77 when we're gonna be, um, levied and add Vale Auditorium tax, um, doing quick research. This seems to be something that is, might be a regressive tax as people are really trying to hold onto their assets in those kind of ways when you are, um, lower income. And then also, um, having that buy-in for a local effort by raising the minimum school program fund. When I think about school districts like Tink, tick, Daggett and, um, Sanpete that really struggle with those bondings, this concerns me that we're asking them to bond for a minimum school program so they can meet those demands, when really they, they have struggled for years to meet those demands. And in some of those small districts, I've actually heard them say that they can't bond for their capital improvements, so that they do use some of these tactics to keep current with, uh, other school districts around them. Like in Morgan and, um, Roy, they've actually used this. So that concerns me greatly. And, um, this might be something that you're working on. My last concern is line 9 59 with the definition of new growth. I know that my colleague here is working on a, um, bill that is discussing the, the Hillview or Mountain View community and their new growth. Would this definition of new growth, um, have their situation in mind as we were moving forward?

Yeah, that was a question about the new growth definition. I know that Mountain View, the new school district that was developed, would this help them with the definition of new growth because they are, um, running a bill about new growth and how they can bond for their schools, that an unprecedented growth in that area.

Thank you. You know, uh, that's a great question. Um, I'm not familiar with the bill yet of whether, so I, I don't know the specific issue, but I'm more than happy to sit down and see if I can help fix it. I mean, I understand, I understand new growth is an issue and we're, you know, we're trying to get the definition right and including more voices in that conversation is definitely gonna make it better. So I'm, I'm happy to talk.

Thank you. I appreciate that. You know, uh, we, we feel a lot of frustration when we're talking about our schools, but our schools come from so many different areas. I mean, Park City is so different than tech. Uh, tic and Daggett is way different than St. Washington County. So, uh, trying to thread those needles and find the balance is hard. And so I appreciate your willingness to work with people.

Thank you, president. Uh, that I think I have similar concerns about the school districts and what we've heard, uh, in this debate already. I also have heard some concerns about renters and the potential for this bill to, uh, impact the cost of, of rentals for folks who are, you know, not the vacation rentals, but the long-term tenants who are, uh, leasing the spaces that might see, uh, uh, an increase here. So I'm wondering if the sponsor could please speak to how he sees this, uh, impacting renters in this state.

Thank you. I'm just glad it's not a substitute. Uh, so let me, let me, let me see if I can, uh, answer that a little bit. Um, I, I'll just tell you anecdotally, as an owner of rental properties, right. This directly impacts me. I don't need to declare a conflict, I just own rental properties. And as a result, this will directly negatively impact me. So, one, two, uh, you know, over the last 10 years, we've had record growth in rents in this state because we've seen record appreciation. And so landlords have done very well during the last 10 years. As far as rental values, I will tell you anecdotally, I know that the, the right now, um, in the market, you know, on the Wasatch front, average renters, uh, are expecting at least a month to a month and a half of rental incentive to sign a new lease. What that means is there's a saturation of, of, uh, in the market for rental properties. And because of that saturation prices are elastic and they're going down for, to the benefit of renters. Right now, if you do this right now, it is likely that the landlord will be the one that receives the additional tax burden as a result of the shift, and the shift will be from single family owner occupied rentals, or owner, sorry, single family owner occupied or even multifamily that are owner occupied. They will see a tax reduction making their homes more affordable, and thus the rich, I'll just use your, uh, favorite words, thus, the rich will be penalized with this policy, not the other way around. And renters, if, if someone looks to just pass this on to the renters, it, it will likely result in the desire to move because things are very, uh, very tenant friendly, I will say right now. And so I do not see this, if there was ever a time in the market to make this adjustment. Now is the time so that those pardon my, pardon my expression, those horrible land owning rich, wealthy, you know, arias. Careful, careful, careful will pay that price. Careful, careful. I, I do own land, by the way. Yeah. Okay. Just don't rent it. All right.

Thank you. I, that's a lot to chew on, so I appreciate the response.

Yeah, I'm throwing myself under the bus too, so

Thank you. I have, uh, I appreciate the debate one. Anytime you guys will sit down and talk tax with me, I feel very happy. Unfortunately, I have to have a bill for you guys to mostly wanna do it. Uh, so I appreciate, uh, appreciate you doing that with me today. Um, it's nice to have a captive audience and be nerdy about tax for a little bit. Um, what, what I'll, what I'll ask is, I know there's several prongs of this policy, and as we've highlighted, there are concerns about some of them. What I will ask is, bodies help like we did on 78. I'll me move it over and then I will come back and explain the changes. I think the senator, uh, from Utah County's point is well taken. Um, and I'm definitely going to be looking into the one size fits all, uh, as it relates to the cap. And, and honestly, and I'll be fully transparent, we're actually doing this research right now with the, with the state treasurer. Um, as we've talked to bonding agencies and we've talked to credit rating agencies, the concern about the cap is what Senator, uh, from Utah County mentioned is the floor becomes the ceiling, right? Uh, or sorry, the ceiling becomes the floor one of the two anyway. Uh, but that every tax increase will be at least 5% and some are below that. And so I believe that that is a legitimate concern and certainly something we ought to look at. I have felt like potentially we ought to remove the cap. Um, but we're doing that research right now with the treasurer, trying to figure that out. There have been, there's been a lot of, you know, uh, ex expressed interest for a cap, but the, the part that came up with the credit agencies is what is the long term impact to debt? Um, and I'll say that cap part of it, uh, is out in the next sub. I'll just be fully transparent. It is out in the next sub because, uh, we're concerned about, uh, the, um, impacts to the credit rating of the various subdivisions throughout the state. So that part of it is, uh, is an, is an important thing to figure out. The, um, and, and then the other question Senator Brammer brought up, or sorry, the senator from Utah County, just the incentive to always increase tax, that floor to ceiling, I believe that's, uh, definitely something we ought to fix. And so I think that will be dealt with as well. And then last, last but not least, right sizing the entity savings. And I've already asked our, uh, I've already asked our analysts to start looking at this question to try and figure out what happens when the base is limited, but you've got a Loa but you've got a significant capital expenditure. What do you do? You know, we've got necessarily existence small schools. I know there's a proposal in the house, this la this next, uh, this year, they're, they're trying to look at, you know, maybe some of the stabilization funds should be used to help these high growth areas acquire land for high schools or for schools or those kinds of things. I think those types of things ought to also be considered in this policy as well. Um, but I, let's you know, put that out there as well. So I'm asking for a lot of eyes on two, which is fine. Uh, and we'll move it over 'cause I don't wanna waste time debating it again on second, and then I'll deal with these issues and bring you back a new and improved.

With that, Mr. President, I move that first set Senate first substitute Senate bill 97. Um, move, be read for a third time.

as many tax meetings as I have this legislative session, but I really appreciate all the stakeholders working together. I think we've got Senate Bill 97 to a place of consensus. You've heard from a lot of your city council members and your mayors with concerns about interest calculations. What we've all agreed is to place a pin in that conversation. Talk about a little bit further on down the year. Uh, later on, uh, it's gonna be the focus reserve accounts and interest bearing accounts and benefits of those reserves is going to be an important topic of our conversation in interim and Revit tax, but it turned out to be too big a lift to, to complete during this session. And so, uh, in Senate bill, the motion I'm going to make is to replace first substitute Senate bill 97 and replace it with second substitute Senate bill 97, which will take away nearly all of the ob the objections that your cities have reached out to you with their concerns.

Thank you. I think that concludes our work.

Yeah. Rules Committee will meet

Thank you very much. Uh, if the committee looks at the comparison between the two, the primary differences between this is, uh, I didn't catch something when the drafter sent, uh, sent me the second substitute. Um, that, you know, we had the, um, the reserves capped at a hundred percent of the prior years, um, property tax revenue. And instead, uh, we're working on a, we worked on this sub to make it so that it's differential based on size of the community or size of the city. And so that line, hang on, I'm just looking for that. I think it's up in line 80, if I remember right. Oh, si. Line 68. Uh, yep, there we go. So if you look at lines, uh, 71 through 81, you'll see the primary difference, which outlines the different size of the general fund being the determiner for the different size of the amounts of the reserve. So for those that have larger, so the cities that have larger budgets, over $50 million, their reserves will be 25%. Uh, there were very few cities that qualified for that amount, but, you know, there you go. Uh, for those that have budgets that are 25 million to 50 million, their reserve accounts go to 28%. And for those that have, uh, general fund budgets that are, uh, that are less than 25 million, their reserve accounts can be at 30%, uh, can be at 30%. And the purpose of making that change is we've had, uh, requests here from the co from, uh, members of the floor as well as members of the public and, and, uh, city officials just describing the, the different needs that they have based on their budgets. And so that's the reason we're setting up this tiered system, uh, for the amount of the reserves. Um, that's the purpose of the sub. Uh, and my intention is, uh, to then after, uh, you know, we can talk about this, but my intention is to circle this again, to give people more time to absorb this and make sure we get it right before we send it over to the house, uh, either this afternoon or tomorrow. Thanks, president.

Mr. President, before we circle that, I'm looking at line 1 61 that says 45% of count, uh, residential exemption equal to 45% of a calendar year of the residential property. Is that going to negatively impact some of the older people that live in my community? If they're prop

Thank you. Thank you. Um, I try to be appropriate. Uh, so I'm just curious about these, um, percentages about residential property. Uh, I know that this is something very concerning to me and my neighbors about how their property has taxes have increased. Can you give us a little bit more information on the catalyst or the impetus behind these lines from 1 61 down to 1 68?

you for that question. Thank you. That's the other part that, uh, was in there, and I apologize, I didn't highlight it before. In lines 1 57 to 1 68. Um, it was news to so many people that there is, uh, that rental homes, uh, that rental properties are, um, treated the same as, uh, as primary occupied or primary owned homes residentially occupied. And so what this does is it sets up an exemption that is different between those two. The Constitution allows the legislature to determine how those, uh, exemptions are set up. And what this is, is this is, uh, it will say that if you are the primary owner and you're living in your primary home, you qualify for the full exemption. If you are a, uh, if you're an investor and you are renting the property to someone else, the investor will only qualify for a 40% residential exemption instead of a 45% exemption. And what this does is for the first time, it bifurcates those two property types and, uh, and, you know, makes it clear really, by making those two differences, we, um, we will calculate for the purpose of, uh, you know, for future action or future policy consideration, how much is rental and how much is not. You hear a lot of conversations that we've had up here about disincentivizing, you know, large corporations buying single family homes and renting them out. It's, it's almost impossible to figure out what that impact is. So the thought was to go with this slightly measured response, uh, so that we can figure out where that is and then make policy consideration based on that information.

You. Um, I, I appreciate this policy. I am curious, if you were renting out, if you had like a mother-in-law apartment and you rented out the bottom, would you still be the primary? Would this still be your primary residence or would this be captured in there? Unin unintentionally.

Senator McKay, Thank you. A person. Thank you for asking this. Uh, I actually have one and I'm actually renting one out, so this is a good point. Um, but I also own, uh, other residential rental properties. And the mother-in-law apartment that is a part of the residence would not be, uh, would not be subject to tax or an A DU for that purpose. Right. Would not be subject to the differential because that's inconsequential to its ownership and we're not apportioning that ownership here. Um, instead, uh, this would be a, separately, a separate tax ID that is held only for the purpose of rent.

Thank you for that clarification.

I'll waive summation. Thank you.

So, uh, we've taken, uh, in the second sub in the fourth substitute, we've cleaned up a bunch of the, um, multi-county appraisal trust language. We've cleaned up the, uh, with the tax commission. We had to address a couple of concerns as it relates to the residential exemption and how it's to be enforced and, and managed. And so that's the purpose of the fourth sub. Uh, the fourth sub also has an amendment that Representative Musselman, um, did, uh, that, uh, we'll talk about here in just a minute. But that's, uh, that's the purpose of the fourth sub.

Thank you. Um, I wonder if I could recognize representative or Senator Musselman

Thanks, Mr. President. I move amendment number one to the four, substitute SB 97 in my name.

You, Mr. President. The amendment removes the provision in the substitute that reduces the residential property tax exemption for rental housing and instead, uh, maintains a consistent 45% residential Exemption for residential property used as housing.

Okay, everyone, I want just for just a moment. I heard from some of you on this policy and Representative Musselman was kind enough to prepare the amendment. Um, let me, let me explain what the amendment is, what the amendment does. And I placed this at your mercy. It is at your decision. This is the smorgasbord of policymaking today. Um, so, uh, if what one policy we looked at in this bill early on in the session was bifurcating the residential exemption, saying that currently on a person's primary residence, on a primary residence for anyone, they get 45% off the value. So let's say hypothetically that is a million dollar home just for round numbers. They only, if it's a primary residence, if it's used as somebody as a primary residence, which means it's not a rental and it's not someone's second home, they will only be taxed on $550,000 of the value for a million dollar home. Okay. As we discussed earlier, a, uh, we are the only state in the union that has a primary home exemption that extends that primary home exemption to rental homes. We have, we have seen an increase in the number of rentals in our market over the last 10 years. So the thought was bifurcate this exemption into those that are primary homes and those that are not primary homes and when, and, and used still as a rental. And we vary the rate just a little bit. And by varying the rate just a little bit, we put everybody in a position where they, you know, those rental homes. We will get a scope of the market of how many of these homes exist, and we will begin to create a, a tax different difference differential treatment for residential homes. So that's what this policy does. If you don't like that policy and you want to keep the re the primary residential exemption applying to all homes, then you would vote in favor of the amendment. If you don't like this policy, then you would vote against this amendment. And like I said before, I am completely agnostic about the decision, uh, about the decision we make.

to amend Senator Winterton. Yeah, I'm, I'm slowing down in my thinking right now, and I I'm trying to follow this discussion to the point where if we go with the amendment, does this encourage or discourage ownership? If there's no advantage to owning your own home, then we haven't solved our housing problem at all. If we have something that encourages home ownership, then we ought to stick with the first, first one. And, and that's how my brain's working tonight. Maybe I'm not seeing this right. Could he address that?

Yeah. Um, I'd make the assertion that the property is being used as someone's home. It should receive the same residential tax treatment, whether the occupant owns the home or whether they rent the home. And commercial triple net leases, the, um, the, uh, tenant is, is responsible for the tax. Um, in almost every residential agreement I've ever seen, when the taxes are adjusted, the, uh, the landlord has the right to be able to, uh, adjust the rent appropriately to, to account for the tax. Which means in practice we can talk about kind of the fantasy world, but in practice for certain, the, the, any adjustment in that tax is gonna be passed on to the tenant. That, that's just the reality we're in. So if there's any circumstance where, where the attacks are raised or an adjustment is made, that in practice will be passed on the tenant, which means the tenant is going to pay more in rent. That's just the, that's just the reality. Uh, boots on the road. And I kind of deal in reality, not in theory.

Yes. If I, if I can follow up because with that mentality, then there's no real reason to encourage people to buy homes because whether they're renting or not, they're gonna get to pay this tax if the tax is higher, it would encourage home ownership because they could reduce their, their expenses by owning their home instead of renting their home. That's where my mentality goes to.

Great. So what this, so let me just, I, I'll, 'cause I think Senator Winterton asked a great question. We have up here, we have attacked various policy levers to try and deal with housing affordability. Okay. One way that we have dealt with housing affordability is we have created a first time buyer buyer program and used state money to incentivize, you know, first time buyers into new construction. Right? That, that's one another. We created accessory dwelling units. Uh, so, you know, we overrode local control, uh, about, you know, accessory dwelling units. Um, a third, we, you know, we've still had the debate and we have this debate this year, uh, even more. But there's always this constant push to deal with the zoning lever, right? And try and encourage more density or whatever it may be. So that's another lever, another policy lever. The only policy lever we have not pulled to is to try and create an, in a tax incentive for owning the home and living in it. That's the only lever we haven't pulled, right? We've pulled the other ones and some would say we could pull it farther. I'm all about it, right? Is is a 5% differential in price going to change the market? I don't know, but probably not a lot. But it may change it a little bit. And my only response is, instead of, and I have been, I, you know, I'm not a big fan of the other programs where it's, you know, just government interference components and trying to deal with the local control turns into this big fight with my cities. I don't love, but the tax one, that's an easy one to pull for me. So I just look at that and say, that's the one thing I can argue for this policy of bifurcating these two types of ownership or the, and, and classifying these two types of ownership with the residential exemption is, is that we may create a tax incentive for ownership, and that's the only reason for it. And the other part about this is that 5% differential will raise a property tax a little bit on rental properties and it will decrease the property tax of those who own and occupy their own home. So there will be an incentive for people to own and occupy their own home. Um, there you go. I, like I said, I'm agnostic though. I love it all. Th

Thanks, Mr. President. I've been in the real estate game for a long time and I'm one of those guys that just kind of blue collar realtor. I just meet with the normal crowd and purchasing and selling their homes. And I have not once ever, um, seen a circumstance where the individuals that are purchasing homes, especially first time buyers, where they're talking about taxes, what they want is the ability to have that American dream, uh, a home to live. It. It's, it's, it's, they're not concerned about necessarily whether 5% or higher or lower on tax. They want that American dream. They want to build equity. That's the reason people buy homes in in the us. That's the way they always have. That's the way they always will. Um, the idea that this somehow would incentivize is, uh, uh, in theory, I suppose you could make the argument we practice. The reality is it will simply be passed on to the tenants. We have an affordability issue right now. It's, i granted it is actually gotten a little better on renting, but this will make it worse. The adjustment will be immediate. There is no doubt in my mind on that. This is, uh, we wanna keep our property system, uh, working at, at its best. I think on a, on a tax level and, and simple and neutral is always the best. Um, I've always kind of thought that keep it simple, stupid. We hear that in the military and that's what I think we should do here. Keep it simple. Don't pass it on to the tenant. Let's keep it as it is. Thank you, Mr. President.

You very much, president. Okay, well that was fun. Thank you for talking tax with me. That was awesome. I appreciate it. Um, I, I appreciate the policy conversation. I really do hold

Yeah, I just gonna present the bill. This senate, I missed a call for division. So Fi uh, if there's division, I'm gonna recall the bill. I don't need five or more standing, so I'm gonna go and re recall the motion.

Okay, thank you. Let me tell you what's left in the bill and give everybody a, uh, I can't tell you how much. I just appreciate the conversation. Seriously. That's awesome. Um, okay. So what's left is, uh, we did a reserve study and what we found is at the cities and county level, there are problems with over reserves. And honestly, I'm gonna add the state to that list. Uh, we have accumulated large reserves and in my tax brain, policy brain, uh, you know, when you have large reserves, that is an em emblem of either over taxation or underinvestment, right? In public good. And the people expect that if you charge tax dollars that you, you know, use the, that you use the money for, for that purpose. And so in this bill, there is a limitation on the amount of reserve funds by cities and counties. I want you to know that the cities are neutral on this policy. The Utah League of Cities and towns have taken a position of neutrality on the bill as far as limiting the reserves. They're on board or, you know, neutral. I guess it's better than, it's better than, uh, doesn't hate like my last bill. Um, but they're in a position of neutral as it relates to it. There is a sliding scale based on the, uh, the size of the budget as to the amount of reserves that can be had, right? And the counties are in a position where they can save up to. They, their, their budget is largely property tax. And so they'll save up to a hundred percent of their property tax. The the other part, um, that is left in the bill is a, uh, is the calculation of new growth and how new growth is calculated. This is probably the most important part of the bill. It's why, you know, as I was dealing with the policy and making sure, uh, what I ask is, if you don't like the reserve amounts, let's keep working on it, uh, and vote the bill to keep it moving tonight. Um, but the new growth calculation is the number one thing for me. Um, we currently do not have, we in our new growth calculations, we have a definition of what new growth is not. We do not have a great definition of what new growth is. And so when you, uh, read through and start to figure out, you know, you, you read through the definition, it tells you what things are excluded and what things are included for the purpose of, uh, for the purpose of new growth. And the primary driver is new services being needed creates new growth. That's the principle behind it. If it is, if it doesn't create new service. So finishing a basement is not new growth, but it currently does count as new growth without this definition. The other parts that are the other part in it is, you know, an A DU does an a DU count as new growth. It is out if it is outside the structure, potentially it can, if it's then inhabitable right now is an awning off a back porch? No, it's not new living space, but it can be counted currently and you start to dig through a new driveway. Any one of those things, those are additions to value, not new growth. The other part, it's a minor part of the bill, is tangible personal property as it relates to the end of a CRA. Um, with that, Mr. President, I'm happy to, uh, yield for questions.

Un under suspension of the rules. I move that fourth substitute Senate bill 97 as amended pass.