“Unintended consequences” is what local government officials are calling it.
Although it might sound like the title to a corny 1980s suspense movie, local government officials in Southern Nevada are worried that a decade-old law enacted to protect Nevadans from the rising property taxes that came with skyrocketing house prices could cripple their funding for at least the next few years.
In 2005, the state Legislature capped property tax increases for residential and commercial properties at 3 percent and 8 percent, respectively. Or at least that’s how it appeared on the surface.
Because of “secondary caps” included in the law that use a complicated tax formula, that increase is expected to be just 0.2 percent for fiscal 2017 year, even as home prices have steadily risen since 2013.
“It’s a 10-year-old law and it’s poorly written,” said Jim McIntosh, the Clark County School District’s chief financial officer. “I think this is really a case of unintended consequences. I think people were pointing this out at the time this law was written.”
To the everyday home and commercial owners, it means property taxes won’t increase much no matter how much their property appreciates. It could be welcome news for people still struggling to recover from the Great Recession.
But what could that mean for county residents when it comes to public services?
For the school district, it means bigger class sizes for the 2016-17 school year. McIntosh said the district is expecting a budget about $15 million to $20 million short of what was anticipated, and told principals Wednesday to plan for this change.
In Henderson, it means a fire station being built in Inspirada will sit vacant until revenue surges upwards, said Richard Derrick, the city’s chief financial officer. Derrick added that the station would cost $2.5 million to staff each year.
And the Metropolitan Police Department’s request for an extra $10 million in the next fiscal year? That probably won’t happen, county Chief Financial Officer Yolanda King said.
Budget projections that included the lower tax cap started circulating in mid-February. No one is talking layoffs yet, but officials throughout Southern Nevada are prepping for smaller-than-expected budgets that could cause a reduction in government services.
King and Derrick said residents should expect longer response times for 911 calls, a reduction in parks services and staffing, and potentially slower progress in public works projects because the funding isn’t growing at the same rate as the population.
“School districts and local governments are required to provide services and we’d like to provide a continued level of service,” McIntosh said. “Costs go up every year.”
More than two years before the housing market crashed, the Legislature saw the astronomical rise of home prices as potentially problematic.
Las Vegas Councilman Bob Beers said the law was written when home values were increasing at a rate that far exceeded inflation, meaning the taxes home and commercial property owners paid were climbing at an equally alarming rate.
The caps were installed to protect the homeowners and commercial property owners from tax bills they couldn’t control and possibly couldn’t afford, Beers said.
But everything collapsed at the end of 2007. Home values in Clark County plummeted by nearly 40 percent from 2009 to 2011.
In Nevada, most of the revenue collected from property taxes is filtered back to local governments. The school districts are the biggest receivers, getting about 40 percent of the revenue, while other local governments, special districts and the state split the rest. That revenue typically makes up between one-fourth and one-third of those governments’ yearly budgets.
In 2015, Clark County residents and commercial land owners paid just over $1.5 billion in property taxes, according to the county treasurer’s office. Because of the the caps, more than $233 million was abated, meaning property owners’ tax bills were reduced.
“Property taxes used to be very stable so it was one that local governments and school districts could count on to provide a reliable revenue stream,” McIntosh said. “Now we’ve got all this variability in it where all of the sudden next year you get nothing, which makes it very difficult for us to budget. We simply can’t rely on this tax anymore.”
The variability comes from the two secondary caps that were part of the law. The first is a 10-year average for the growth rate of taxable home value. The second cap is twice the Consumer Price Index, or CPI, which is a complicated economics formula that is used to measure inflation on a national level.
Not surprisingly, the 10-year average has declined since 2008 and is expected to be in the negatives through at least 2017. But the CPI has been in flux since the Great Recession, too, and is expected to be just 0.1 percent for 2016. Even at just one-tenth of a percent, the CPI is still the larger number of the two and will be the acting cap for property taxes.
The problem is that over the past three years, the housing market and overall economy have started to recover, people are again moving to Southern Nevada, and operating costs for governmental agencies are on the rise, McIntosh said.
“It’s losing money in the sense that we were counting on these revenue increases. In other words, property tax revenues will be flat,” he said. “We always assume there will be some increase, particularly when the economy’s recovering like this.”
Local government officials aren’t sure what needs to change to fix the cap situation, but they agree that something needs to be done to prevent the bottoming-out effect that’s been projected.
One proposal that was brought up in the 2015 Legislature would have added a minimum cap — essentially a tax floor — to the calculations. The floor would have prevented the caps from dropping below 3 percent, King said.
Although that measure, Assembly Bill 412, had the substantial support of every mayor in Clark County, it never made it to a vote and died.
King said she and other Southern Nevada finance directors are using that as a baseline for a new proposal for the 2017 session.
Beers said it might be time to re-evaluate whether the CPI is an accurate measure of inflation for Nevada. If it’s not, it should probably be eliminated from the cap formula, he noted.
As for the school district, McIntosh said the state is obligated to guarantee at least a portion of the property tax revenue that the school district had been getting.
“The state may come through. That’s not out of the realm of probability,” he said. “Who knows what they’ll do, but it’s affecting everybody. That’s why you’ve got this groundswell of people talking about this. I think we will see something next legislative session.”