Property tax may need to rise to pay back bonds

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By Megan Poinski

If property values don’t start increasing, the state may need to increase property taxes or tap the general fund to pay off its bond debt, legislative analysts told lawmakers.

Legislative analyst Patrick Frank told the House Appropriations Committee that with home values declining, the state is collecting less money to use to pay back bonds.

“If we keep the current property tax rate, I think in 2014, there will be a gap,” State Treasurer Nancy Kopp said. “And you will have to look at either going to the general fund or raising the property tax.”

Bonds are paid back out using several sources, including property taxes. The general fund, where most of the state’s revenues go,  has not been used to pay back bonds for almost a decade.

Kopp said that the general fund has historically played a role in paying back bonds. In 2003, that burden was shifted to property taxes, and the Board of Public Works raised state property tax rate so the money would be there.

In 2010, Kopp said, the board reduced the property tax rate. With lower property taxes and homes worth less, the money is running short.

Frank said that while general fund revenues could be used to pay back bonds, it is not what he would recommend.

“Our issue really is that there’s a long term deficit in the general fund and this is adding to it, so we’d like to reduce that,” Frank said.

The property tax is currently 11 cents for each $100, Kopp said. Right now, a penny of property tax brings in $68 million.

Frank said that it appears that home values are beginning to level off, and the state will be losing fewer revenues to property tax exemptions.

“Perhaps we’ll eventually get to the point where there is no downgrade,” Frank said.

Frank showed delegates a chart that showed how much revenue the state was losing through homestead tax exemptions – a tax credit for people who live in their homes and see their property values increasing.

The homestead tax exemption softens the blow to homeowners of sharp increases in property values and also provides a hedge for state revenues, Frank said. Because property owners are not paying so much more, the state does not suffer as quickly if property values fall.

Del. Gail Bates, R-Howard, asked if rolling back the homestead exemption could help with the financial issues. Frank said that would take too long to make the necessary impact.

“Ultimately, yes, you’d have to increase the rate,” he said.