Tweak sought to Nevada’s commercial property tax cap formula

Lower tax cap hikes on commercial property, along with reduced property values on hundreds of commercial parcels that totaled nearly $10 billion over the past three years, are helping some businesses trying to grow again, but also are a double-hit resulting in fewer dollars for revenue-hungry local governments in Clark County.

Wildly escalating property values prompted then-Gov. Kenny Guinn and the 2005 Legislature to cap the annual increases in property taxes. Residential rates were held to 3 percent, while commercial properties paid a maximum of 8 percent each year.

Rising Clark County commercial property values made the 8 percent annual increase a forgone conclusion for several years, even after the bubble burst and values fell.

But a little known aspect of the commercial property tax cap is making its presence felt.

And Nevada’s Assembly speaker plans to introduce legislation in 2015 to tweak the commercial side of the tax formula to bring back some of that lost revenue more quickly.

TWO COMMERCIAL FORMULAS

The commercial cap is set using two analyses: either an 8 percent maximum increase or a formula using the consumer price index, whichever is less.

This second formula uses a growth rate based on a nine-year rolling average of assessed value for each county as part of the calculation.

As commercial property values fell precipitously starting in 2008, the rolling average kept the cap at the maximum of 8 percent in Clark County. But as those boom years continue to fall out of the rolling average, the annual increase has declined, and is expected to reach only 3 percent in the coming tax year, the same as paid by residential property owners.

The cap this year was 4.2 percent, and reached only 6.4 percent in the 2012-13 tax year.

Terry Rubald, deputy executive director of the Nevada Taxation Department, which calculates the cap based on a specific formula, said it will likely take some time for the commercial property cap to again reach its 8 percent level.

Add in the reduced property values in the commercial sector in Clark County and taxes are well below the boom years.

The county Board of Equalization this year reduced the value of approximately 1,400 commercial properties for tax purposes from $8 billion to $6.5 billion for the coming tax year.

The reductions are small in comparison to the overall taxable value, however, according to information provided by the county assessor’s office. Before the coming tax year’s reductions were approved by the Board of Equalization, commercial property in Clark County was valued at nearly $44 billion.

Property values for the coming year, including residential, total about $165 billion in the county, which would be a 12 percent increase over values in the current year.

The commercial property value reductions are required by state law when the taxable values set by the assessor are higher than the actual values of the property.

In the 2013-14 tax year, values for hundreds of parcels were reduced by nearly $3 billion, from $11.3 billion to $8.3 billion. And in the 2012-13 year, the property value reductions totaled more than $5 billion, from $16.8 billion to $11.6 billion.

The lower values can be established based not only on the value of the property itself, but also the income derived from it. So a hotel that saw its occupancy rate drop from 95 percent to 40 percent could make a claim for reduced value.

Once these lower values are established by the Board of Equalization, the tax rate can rise only by the amount of the cap, which is a maximum of 8 percent. Increased property values do not automatically mean a higher property tax bill.

As a result, the annual increases from the property tax cap are being applied to parcels at these much lower rates well into the future, barring some change such as new construction.

LEGISLATIVE FIXES PROPOSED

Assembly Speaker Marilyn Kirkpatrick, D-North Las Vegas, said recently she intends to pursue changes to the law in the 2015 session to allow commercial properties to “reset” to higher values as property values recover.

The proposal is not aimed at generating a tax windfall for local governments, but instead is a parity issue with residential property owners, she said.

Kirkpatrick also wants to shed more light on the Board of Equalization when it makes the determination to lower the value of parcels. The process is not very transparent, she said.

Marvin Leavitt, chairman of the Committee on Local Government Finance, said the residential side of the cap is creating fiscal issues for local governments as well, however.

He cited as an example a house valued at $200,000 in 2008, which saw its value drop to $100,000 during the recession, but has regained its value and again is worth $200,000 today.

Despite the return of value, property taxes capped at 3 percent growth per year are being collected on the lower value, which can be as much as 50 percent less, Leavitt said.

“It may take 20 years to get back to where the levels were before the recession, he said. “So I think it has become a big problem. Property values are coming back but not the revenues.”

Some type of reset for residential property to reflect the rise in value could be considered by the Legislature, and would go a long way to helping local governments, particularly North Las Vegas, out of their fiscal difficulties, Leavitt said.

Leavitt acknowledged that tinkering with the residential property tax cap would be a challenge for lawmakers.

UNINTENDED CONSEQUENCES

Carole Vilardo, president of the Nevada Taxpayers Association, said the partial abatement created by lawmakers in 2005 did its job in providing property tax relief in a time of hyperinflationary property values, but there were also unintended consequences now being seen as a result of the economic downturn.

The limits have affected the ability of local governments to pay down debt issued before the legislation, she said. Debt approved by voters after 2005 is outside the cap, but not that incurred before the legislation, which typically has a life of 20 years, Vilardo said.

And a person who bought a house that was in foreclosure is paying more property tax than a neighbor down the block because when it was owned by the lender, it was no longer an owner-occupied residence entitled to the 3 percent residential cap, Vilardo said.

“It has to be looked at,” she said of the law. “Those issues don’t bode well for any recovery.”

Although a review is needed, there are unlikely to be any changes to the residential side of the equation, she said.

The cap is popular with homeowners, and any changes would require a two-thirds vote in the Legislature, she said.

Contact Capital Bureau reporter Sean Whaley at swhaley@reviewjournal.com or 775-687-3900. Follow him on Twitter: @seanw801.