demystifying property tax for the - deloitte united states · demystifying property tax for the...

2019 Deloitte Power & Utilities ConferencePower is not staticDecember 3-4, 2019

Bits, Bytes & Barrels” webinar

Demystifying property tax

for the controllership

function

Debbie Loesel, Senior Manager, Deloitte Tax LLP

Copyright © 2019 Deloitte Development LLC. All rights reserved. 3

Contents

Property tax fiscal landscape 6

Property tax valuation 10

Assessment cycles 14

Data and reporting considerations 17


Property tax fiscal landscape


Largest share: Property tax revenues are the largest component of state and local general revenues.

Exceed income tax: Property tax revenues are greater than corporate income tax and individual income tax revenues combined.

State and local general revenuesProperty tax revenues

Corporate Income Tax, 4%

Property Tax, 34%

Sales Tax, 24%

Individual Income Tax, 25%

Other Consumption Taxes, 12%

Share of Total State and Local General Revenues, by Source, 2016

Source: State & Local Government Financial Data Query System. http://www.taxpolicycenter.org/slf-dqs/pages.cfm. The Urban Institute-Brookings Institution Tax Policy Center. Data from U.S. Census Bureau, Annual Survey of State and Local Government Finances, Government Finances, Volume 4, and Census of Governments. Date of Access: (04-Jan-19 10:12 AM).

Note: Other Consumption Taxes include selective sales taxes (e.g., cigarette taxes). These results generally reflect national data, and may vary depending on the actual jurisdiction.


State and local tax revenues: Property tax as a percentage of overall state and local tax revenue was between 28% and 35% in the 2000-2016 time period. While there are some peaks and valleys, the general trend is upwards.

Local only: Between 2000-2016, property tax ranged between 71%-75% of total local tax revenues.

2000-2016Property tax revenues over time

Source: State & Local Government Financial Data Query System. http://slfdqs.taxpolicycenter.org/pages.cfm. The Urban Institute-Brookings Institution Tax Policy Center. Data from U.S. Census Bureau, Annual Survey of State and Local Government Finances, Government Finances, Volume 4, and Census of Governments. Date of Access: (10/15/2019).


Property tax differs from other taxes in that there is typically a statutory revenue formula or requirement.

Massachusetts has limits on the maximum levy (as a percentage of assessed value) and on year-to-year changes in the levy.

Here is an example of a levy limitation calculated for a town with $250,000,000 in aggregate assessed value:

• Prior fiscal year levy amount: $5,000,000

−Plus 2.5% statutory factor: $125,000

−Plus new growth (property added to tax base): $150,000

−Plus local option overrides: $500,000

• Subtotal: $5,775,000

Levy ceiling (2.5% of $250,000,000): $6,250,000

Lesser of subtotal and levy ceiling: $5,775,000

Tax rate: $23.10 mills ($5,775,000/$250,000,000)

MassachusettsSimple levy example


Property tax valuation


Assessed value for property tax purposes may not necessarily equal fair market value.

• Assessing authorities typically try to calculate a measure of fair market value.

• Assessed value is typically fair market value as adjusted for assessment ratios and/or equalization rates. The tax rate applies to assessed value.

−Fair market values can be adjusted for an assessment ratio. Example: Connecticut assesses property at 70% of true and actual value.

−Fair market values can also be equalized. Equalization rates account for level of assessment differences within a state. For a jurisdiction with an equalization rate of 95%, the assessed value is 95% of fair market value.

Assessed ValueProperty tax valuation


The property tax value of an asset is generally not equal to the net book value of the asset.

• For property that operates as a system, e.g., utilities, railroads and pipelines, and spans multiple local jurisdictions, some states use a unitary approach.

−The operating property is valued as a unit and typically cost, income and market approaches are considered.

• Other states may use a non-unitary cost-based approach.

−In some cases there are statutory depreciation schedules. It’s very typical for depreciation schedules used for property tax valuation to have a residual value.

−Some jurisdictions use cost trending. Installed costs are put in constant dollars using an index like the Handy-Whitman Index of Public Utility Construction Costs.

Valuation methodologiesProperty tax valuation


Michigan: Reported locally, schedule per Michigan Department of Treasury, 2019 Form 3589, Table I: 15 year life, 50% residual.

Ohio: Reported centrally, schedule per Ohio Department of Taxation, 2019 Form U – EL, Schedule C (Distribution): 25 year life, 15% residual.

Residuals: What relationship do the residual values have to the earnings ability of the plant?

Michigan and OhioComparison of Electric Distribution Plant Depreciation Schedules


Assessment cycles


There can be a significant lag and variations in the property tax assessment cycle.

• For personal property, there can be a significant lag between when a project is placed in service and when it hits the assessment rolls.

−The lag can create challenges in budgeting and forecasting and understanding whether large CapEx projects have been reflected in the property tax liability.

• The variations in taxing authority’s fiscal years between states and even within states increase difficulty with accruals, as the preferred accrual period is the taxing authority’s fiscal year.

Timing issuesProperty tax assessment cycles


Timing differencesAssessment cycle examples

Dallas, Texas

• Assume an electric pole installed in November 2018

• The pole would be reported on the personal property return due April 1, 2019.

• The corresponding bill would be issued in October 2019 and become delinquent on February 1, 2020.

• The jurisdiction’s fiscal period (Dallas County) is October 1, 2019 – September 30, 2020.

Boston, Massachusetts

• Assume an electric pole installed in November 2018

• The pole would be reported with the personal property filing due March 1, 2019.

• The first bill based on the actual assessed value (as opposed to preliminary payments) would be issued in late December and payable by February 1, 2020.

• The jurisdiction’s fiscal period is July 1, 2019 – June 30, 2020.

Binghamton (Town), New York

• Assume an electric pole installed in the public right of way in November 2018

• The pole would be reported on the special franchise inventory report due April 30, 2019.

• The corresponding bill would be due in January 2021.

• The jurisdiction’s fiscal period is January 1, 2021 – December 31, 2021.


Data and reporting considerations


Location: Property tax compliance typically requires fairly detailed location information. One town in New York has 31 reporting districts for example.

Cost elements: In some states with statutory exclusions, it becomes very important to maintain data at the level required to claim the exclusions.

Land changes: Many states have land change reporting requirements that are outside of the normal property tax compliance cycle.

Data and reporting considerations

This publication contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication.

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demystifying property tax for the - deloitte united states · demystifying property tax for the...

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