Fiscal Note & Local Impact Statement

126 th General Assembly of Ohio

Ohio Legislative Service Commission

77 South High Street, 9th Floor, Columbus, OH 43215-6136 ˛ Phone: (614) 466-3615

˛ Internet Web Site: http://www.lsc.state.oh.us/

BILL:

H.B. 170

DATE:

May 3, 2005

STATUS:

As Introduced

SPONSOR:

Rep. Hughes

LOCAL IMPACT STATEMENT REQUIRED:

Yes

 

 


CONTENTS:

Exempts certain fraternal organizations from real property taxes

 

State Fiscal Highlights

 

STATE FUND

FY 2006

FY 2007

FUTURE YEARS

General Revenue Fund

     Revenues

- 0 -

- 0 -

- 0 -

     Expenditures

- 0 -

$0.3 million net decrease

$1.5 million net increase

Note:  The state fiscal year is July 1 through June 30.  For example, FY 2006 is July 1, 2005 – June 30, 2006.

 

·        Reduction in tax revenue to school districts, as a result of tax exemption for real property of fraternal organizations meeting stringent criteria, would increase foundation aid payments to school districts beginning no earlier than FY 2008.  Because few properties appear likely to qualify for the exemption relative to total property in the state, the loss of tax revenue and the increase in foundation aid to school districts generally would be small.

·        Under current law, taxes on all real property are reduced 10%, which is reimbursed to local governments by the state.  Lower taxable property value as a result of the tax exemption in the bill would reduce the state’s reimbursement payments.  The increase in school foundation aid payments would be much larger than this reduction.

Local Fiscal Highlights

 

LOCAL GOVERNMENT

FY 2005

FY 2006

FUTURE YEARS

Counties

     Revenues

- 0 -

- 0 -

$1.4 million net loss

     Expenditures

- 0 -

- 0 -

- 0 -

Other Local Governments

     Revenues

- 0 -

- 0 -

$1.9 million net loss

     Expenditures

- 0 -

- 0 -

- 0 -

Note:  For most local governments, the fiscal year is the calendar year.  The school district fiscal year is July 1 through June 30.

 

·        The bill would exempt from taxation real property of fraternal organizations that support charitable purposes and meet certain other criteria.  The exemption would begin in tax year 2006, so it would not affect tax payments until December 31, 2006, and thereafter.  The loss of tax revenue to local governments is expected to be small since few properties appear likely to qualify for the exemption relative to total property in the state.

·        The reduction in taxable property valuation would increase foundation aid payments to most school districts from the state beginning no earlier than FY 2008.  These payments would partially offset the loss of tax revenues for most districts, with about a one-year lag.  School district net losses depend on the effective rate for real property for continuing levies above the state foundation program.

·        For emergency and bond tax levies, the reduction in real property taxable value would be offset by a tax rate increase, to ensure that the specific amount of tax revenue required by the levies is raised.  Loss of tax revenues from the exempted fraternal organizations would be replaced by increased taxes on other property owners.  New levies of all types would require a higher tax rate to raise the same amount of revenue.

 


 


 

 

Detailed Fiscal Analysis

 

The bill provides a tax exemption for real property of a fraternal organization that meets certain criteria.  These criteria include the following:  (1) the real estate is held or occupied by the fraternal organization, (2) the property is used mainly for meetings and administration of the organization, (3) the organization is a domestic fraternal society, order or association operating under the lodge, council, or grange system, (4) it qualifies for federal income tax exemption under section 501(c)(5), 501(c)(8), or 501(c)(10) of the Internal Revenue Code, (5) it supports charitable purposes financially, and (6) it has been operating in the state of Ohio with a state governing body for at least 100 years.  The last of these criteria is particularly limiting.  Few organizations have lasted a century or more and also meet the other criteria.

 

One of the groups that is thought to meet the criteria for tax exemption under the bill is Masonic lodges.  A survey of more than 400 Ohio lodges of this organization conducted in 2001 found that real property taxes on these locations totaled about $1.5 million.  By comparison, net taxes collectible on all Ohio real property for tax year 2002 totaled $8.6 billion, so a real property tax exemption for these lodges would have reduced property tax revenues by a tiny fraction of 1%.  With appreciation in property values, real estate taxes due on Masonic lodge properties in the state might be closer to $2 million for tax year 2006, when this bill goes into effect.  A few other charitable groups may also qualify for this tax exemption.  The state Department of Taxation thinks groups meeting the 100-year requirement may include the Elks, Moose, Eagles, and Masons, but may eventually include many other groups if this bill becomes law.  In testimony last year opposing a very similar bill, H.B. 467, that agency estimated a net loss to the state General Revenue Fund of $1.52 million, and a net loss to local governments of               $3.3 million.  These figures are used as the basis for the estimates in this fiscal note.  Effects on local governments would vary, with some more affected while others would be unaffected by this bill.

 

Effect of Tax Exemptions on the State

 

State aid for school districts includes a foundation or basic aid program that targets assistance to districts with the lowest tax capacity.  Each district’s capacity is measured as 23 mills (2.3%) times the district’s taxable property value.  The formula determining state assistance compares this measure of capacity with the product of a per-pupil foundation level of funding—$5,169 in FY 2005—times the district’s average daily membership.  A further adjustment is made for local costs.  Any shortfall is filled by state aid.  Under this formula, a decline in taxable property value, such as might result from H.B. 170, would increase annual state aid to most school districts by 2.3% of the property value reduction.  If total statewide taxes were reduced $4.8 million annually, by this bill, then the cost to the Department of Education would be somewhat less than half of this, or about $2.1 million per year.  Per-pupil property values in about 4% of school districts are high enough that they do not receive state base cost funding based on the formula calculation alone.  If any of these districts included property qualified for tax exemption under the bill, the resulting reduction in tax receipts would not be partly offset by an increase in state funding.

 

Taxes on all real property are subject to various reductions from voted or administered millage rates.  One of these reduces taxes by 10%, which is reimbursed to local governments by the state.  Lower taxable property value as a result of the tax exemption in the bill would reduce the state’s reimbursement payments.  The increase in school foundation aid payments would be larger than this reduction.  If $4.82 million in net property tax payments were eliminated by the bill, the cost to the state of the 10% rollback would decrease by about $540,000 annually.

 

Effect of Tax Exemptions on Local Governments

 

The bill provides that the tax exemption would be effective beginning in tax year 2006.  The earliest date when local governments would be due to receive reduced tax payments, relative to what those payments would otherwise have been, is December 31, 2006, the first payment date for tax year 2006.  In the local fiscal highlights above, these reductions in taxes are shown as beginning in calendar year 2007.  As described above in the discussion of state aid for schools, the loss of part of the property tax base because of the tax exemption would be partly offset for most school districts by an increase in state aid.  The increase in state aid corresponding to reduced tax payments due for tax year 2006 would be received by school districts in their FY 2008, beginning July 1, 2007.  Losses for other local governments would generally not be offset.

 

For some types of real property taxes, a reduction in taxable property values as a result of tax exemption for fraternal organizations would trigger adjustments in tax rates.  Emergency levies are enacted to raise a specific amount of tax revenue.  Bond levies must raise enough tax revenue to service outstanding bonds.  For emergency and bond tax levies, tax rates are set annually to raise the required amounts of revenues.  A reduction in taxable value under the provisions of H.B. 170 would be offset by a tax rate increase, to ensure that the specific amount of tax revenue required by the levies is raised.  The fraternal organization granted the exemption would pay no real property taxes, and other property owners would pay more taxes.

 

 

 

 

LSC fiscal staff:  Phil Cummins, Economist

 

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