Understanding Oregon 101 – The Property Tax

Legislative Revenue Office 2016 Public Finance Basic Facts

The property tax in Oregon is a local tax. It funds most local services and many functions of county and city governments. Large portions of school districts’ and community college budgets also depend on property tax receipts. Taxable property includes real property, mobile homes, some tangible personal property used by business and in the cases of centrally assessed property, intangible property. Prior to the passage of the property tax limitations of Measure 50, property tax was generally based on a property’s real market value. Since 1997-98, each property has a real market as well as an assessed value. Property value assessment and taxation is conducted at the county level, except for large industrial properties and “centrally” assessed utilities, where Oregon Department of Revenue plays a major role.
 
Property tax rates differ across the state. The rate on any particular property depends on the tax rates approved by local voters and the limits established in the Oregon Constitution. Most properties are taxed by multiple districts, such as city, county, school, community college, port and fire districts. The total tax rate on a particular property is calculated by adding all the local taxing districts’ rates in the area. The tax on each property is computed by multiplying the total tax rate by the assessed value of the property and then (if needed) reducing the calculated tax in response to constitutional limits. Annually, the county assessor verifies the tax rates and levies submitted by each local taxing district. Collection of taxes and distribution of the funds to local districts are done by the county tax collector.
 
In 2014-15, the total Real Market Value (RMV) of taxable property in Oregon was $469.5 billion, an increase of 8.3% from 2013-14. The total Net Assessed Value of $343.2 billion reflects a 4.3% increase over 2013-14. Excluding $220 million in taxes imposed for Urban Renewal, taxing districts imposed $5.541 billion in 2014-15. This reflects an overall 5.1% growth rate from the prior year.
 
Exemptions

Not all properties are taxable. Major exemptions include intangible property (stocks, bonds), tangible personal property of individuals (household furnishings, sporting equipment), licensed property (cars, trucks), business inventories, government property (unless leased to a taxable business or individual), and property used for religious or charitable purposes. Electric cooperatives, rural telephone exchanges and some other property are exempt from property taxation because other taxes are paid in lieu of property tax.
 
Some properties are taxed at lower values. These “specially assessed” properties include some forest land, farm land, and open space land. These properties are taxed at their values in the restricted use and are subject to penalties if not continued in the use for which they are specially assessed.
 
Limitations

Measure 5
Measure 5 is a tax limitation constitutional amendment approved by Oregon voters in 1990. It restricted taxes on any parcel of property per $1,000 of real market value: the education category is limited to $5 and general government to $10. Tax “compression” occurs if the tax extended on a property exceeds either of the Measure 5 limits. That is, if taxes for an individual property exceed the limits, then the taxes for that property are reduced to the limits. Local option levies are the first levy type to be reduced. General obligation bonds are not restricted by Measure 5 limits.

Measure 50
In May 1997 voters passed a second constitutional amendment to limit property tax. Measure 50 did not replace Measure 5, but rather established a second level of restrictions. Measure 50 gave each district a permanent tax rate which cannot be increased without a constitutional amendment. However, voters can approve local option levies for up to five years for operations, and up to the lesser of ten years or the useful life of capital projects. Local option levies, as well as general obligation bonds, must be approved by a majority vote at a general election. Prior to November 2007, a double majority (i.e., a majority of at least 50% of eligible voters) was needed to approve either a local option tax or a general obligation bond proposal.
 
Measure 50 also defined the concept of Assessed Value (AV). The 1997-98 Maximum Assessed Value (MAV) for each property was set at 90% of its 1995-96 real market value (RMV). If no new construction occurs on the property, then the growth in maximum assessed value is capped at 3% a year. However, assessed value cannot exceed real market value. The ratio of MAV to RMV is known as the Changed Property Ratio (CPR). Across all taxing districts, the ratio of AV:RMV was at its lowest in 2008-09 at 55.6%. In part due the recession’s impact on residential and business property values, the statewide ratio levelled off at about 78% in 2012-13 and 2013-14 and reached about 75.5% in 2014-15. Prior to the great recession, changes reflected high appreciation in real market values of property that occurred in many areas of Oregon relative to the 3% constitutionally capped growth rate in MAV.
 
The table on the following page breaks down 2014-15 property taxes by type of taxing district and tax source. Generally the largest portion of property tax revenues come from a district’s  permanent rate. Taxes from this source totaled $4.408 billion in 2014-15, accounting for 76.5% of all taxes imposed. The 2014-15 tax revenue attributable to the permanent rate registered an annual growth rate of 5.2%. Community College districts, K-12 districts and Education Service districts increased their revenues from all sources over the prior year by 4.1%, 5.2%, and 4.9%, respectively. County taxing districts, City districts and Special Districts grew total revenues over the prior year by 4.4%, 5.3% and 5.9%, respectively.
 
General obligation bond revenue in 2014-15 totaled $779.7 million or 13.5% of all taxes listed in the table. Across all taxing districts these revenues increased .8% in 2014-15 relative to 2013-14, with 66.8% of the total accounted for by K-12 taxing districts. Historically these funds have been an important source of revenue for the K-12 taxing districts. Since 1999-00, the average growth in K-12 bond revenue has been 5.4%. In 2014-15, K-12 bond revenue increased 2.4% from the previous year. Since the timing of bond maturities affects the level of bond revenues in any one year, one or more years of data is needed to determine a significant trend.
 
Bond revenues for community colleges increased by 2.0% over the prior year. Bond revenues for cities increased 2.1% from a year ago. In 2014-15, county taxing district’s bonds decreased 26.3%1  and special district’s bond revenues decreased 0.1% from 2013-14.

Across all other taxing districts in 2014-15, local option tax revenues increased 14.3% over the prior year, totaling $352.7 million. Cities and county taxing districts accounted for 43.8% of local option tax revenue in 2014-15. The share of local option revenues generated for K-12 education was 38.0% in 2014-15. Special taxing districts accounted for 18.1% of local option taxes in 2014- 15.
 
Passed in 1990, Measure 5 introduced limits on taxes paid by individual properties. When a property’s  taxes  are reduced  due to the limits,  the  reduction  is referred to as   “compression”.
 
Compression occurs when a property’s tax rate must be lowered so that the tax imposed on the assessed value of a single property does not exceed $10/$1,000 of the property’s real market value for non-school  taxing districts and $5/$1,000 for school taxing districts. The maximum assessed value of a property is allowed to increase 3% each year, but it may not exceed a property’s real market value. Therefore, in cases where  the real market value of a property grows  by less than  3% annually  or its real market value has declined, that property’s tax rate may have to be reduced (i.e., compressed) in order to satisfy the $5/$1,000 or $10/$1,000 requirements.

Districts are not in compression per se, rather properties located within taxing districts may be in compression. Permanent and local option levies are subject to the Measure 5 rate limits, bond levies are not.
 
There are two primary components that cause compression.

Foremost are tax rates. If applied tax rates are below the $5 and $10 limit thresholds then no compression will exist. Rate limitations are calculated against a property’s real market value (RMV), however, tax rates are applied to a property’s assessed value (AV).

Because of this, a property’s ratio of RMV:AV can impact whether the property is “in compression”. A widening RMV:AV ratio will decrease the overall level of compression whereas a contracting ratio will increase compression reduction. Illustrated by comparing 2006-07 with 2014-15 where compression reduction as a percent of tax extended was 1.4% as compared to 3.6% in 2014-15. This corresponded with statewide average residential CPRs of .579 and .768 respectively.
 
In 2014-15, many taxing districts were affected to some degree by ‘compression’ which is the difference between ‘extended’ taxes and a lesser amount that can actually be imposed on an individual property because of Oregon’s Constitutional limitations.

Appreciation of property values during Oregon’s housing market boom in the late 2000s helped lower compression reductions statewide and the subsequent recession increased them again. Compression reduction ranged from $48.8 – $53.0 million between 2005-06 and 2008-09 increasing to $188.7 million in 2014-15. Regional disparities persist with respect to the importance of compression, as measured by the dollar value of the compression reduction relative to the amount of tax imposed. In 2014-15 compression reduction statewide totaled 3.6% of taxes extended, 54.8% (totaling $103.3 million) of total loss occurred in Multnomah County. (Tax extended relating to bond levies is not included as bonds are not subject to measure 5 compression limits.)

In other counties, the dollar value of compression reduction was lower, but in relative terms, reduction in some counties was similarly significant. For example, in Morrow County, the compression reduction totaled $2.7 million but it accounted for 10.0% of this county’s property tax extended.
 
The fiscal significance of compression reduction also varies across taxing districts. For example, a number of counties had their Measure 50 permanent rates established at a time when the counties were receiving significant funding from federal forest timber payments. These federal forest payments have declined since the permanent rates were established and more recently have been under constant threat of being significantly reduced or eliminated. Compression may  be a significant issue for the recipients of federal forest payments because it may restrict these districts’ ability to offset some portion of the lost federal revenue by raising their revenues from a voter approved local option property tax.

PROPERTY TAX RELIEF

General property tax relief began with the Property Tax Relief Act of 1929. This act imposed a personal income tax and dedicated the revenues to offset the State’s property tax levy. As a result, the State has not levied a property tax since 1940.

Senior Citizens Property Tax Deferral Program

The senior deferral program was enacted in 1963. Homeowners age 62 and older may defer payment of property taxes until the owner dies or sells the property. The State pays the tax and obtains a lien on the property for the tax and accrued interest at the rate of 6% per year. At the time of enactment, the owner’s household income was required to be under $24,500 in the year prior to applying. Once in the program, a taxpayer could defer only in years when federal adjusted gross income was less than $29,000. In 1977, the Legislature expanded the program to include special assessments. Special assessment deferment was discontinued in 2011 (HB 2543).

The 1999 Legislature opened the deferral program to the disabled community and increased the initial income threshold to $27,500 in the year prior to applying and raised household income once in the program to $32,000. The 2001 Legislature raised the initial household income to match the “once in the program limit” of $32,000. These income limits are indexed to the U.S. Urban CPI. The current household income limit is $43,000 for the 2016-17 tax year.

Participation in the senior deferral program grew rapidly from the late seventies into the mid-eighties, going from 1,976 paid property tax accounts in fiscal year 1978-79 to 12,228 in 1985-86. Participation peaked in fiscal year 1989-90 at 13,165 paid senior deferral accounts. Participation then steadily declined until 2001-02 when the first group of disabled participants began receiving deferral. Participation then held relatively steady until 2008-09 when overall participation began to increase.

Nominal tax paid on behalf of deferral participants followed a relatively similar pattern. A high of $20.2 million in tax paid was reached in 1989-90 followed by a period of steady decline. In 2001-02 when disabled participants were added to the program, tax paid began to increase modestly until 2009-10 when rapid growth occurred.

Repayment of deferred balances followed a different trend. From 1978-79 to 1993-94, repayments increased rapidly before maintaining a steady annual amount ranging between $18 and $22 million per fiscal year. This dynamic required continuous appropriations to the deferral revolving account through the 1994-95 fiscal years. From 1995-96 through 2007-08, as repayments continued to outpace tax payments, the deferral account was able to appropriate out over $90 million, including payments of just over $14.5 million to Oregon Project Independence (discussed in more detail later).

Beginning in fiscal year 2007-08 a combination of factors began to occur that would reverse the cash flow of the deferral account. Annual repayments dropped below $18 million for the first time in over fifteen years while tax payments began to grow at an increasing pace. Fiscal year 2008-09 was the first fiscal year in which tax payments exceeded repayments since the 1991-92 fiscal year. Due to cash flow issues, Department of Revenue was forced to pay only two thirds of property tax account balances in November of 2010 with the remaining third being paid in May of 2011. In response to the cash flow issues, multiple changes were made to the deferral programs.

Changes are described below.

2009 – HB 3199

       Removed continuing appropriation from state General Fund to deferral revolving account in times of insufficient funds to make deferral payments

       Established authority of State Treasurer to lend moneys to the Department of Revenue in amounts needed to make deferral payments. Required repayment of funds to Treasury within five years with interest.

2011 – HB 2543

       Limited net worth (excluding value of home) for new and existing participants to $500,000

       Adjusted continuing qualification income criteria to household income rather than adjusted gross income

       Instituted home occupancy requirement of owning and living in home for at least five years prior to applying for program

       Required proof of homeowner’s insurance

       Limited qualifying properties to those at a certain percentage of the county median real market value of residential properties. Limit is dependent in part on number of years a participant (or applicant) has owned and lived in the home.

       Changed interest rate from six percent simple to six percent compound for deferred amounts on or after November 2011

       Required participant re-certification every two years

       Properties with reverse mortgages no longer allowed to participate

       Eliminated five year extension for heirs to repay deferred taxes

       New special assessment deferrals no longer accepted

       Eliminated transfer of excess funds to Oregon Project Independence. 2012 – HB 4039

       Allowed participants removed from program solely due to reverse mortgage disqualification stemming from HB 2543 (2011) changes to receive deferral in 2011 and 2012

       Changed recertification requirement to “not less than once every three years” allowing for a staggered recertification process

       Refined definition of county median RMV. 2013 – HB 2510, HB 2489

       HB 2510 allowed reverse mortgage participants brought back into deferral program by HB 4039 (2012) to remain in program in perpetuity so long as they meet all other qualification criteria

       HB 2489 created ability for participants that participated in program in 2011 and no longer qualify due to reverse mortgage or five year property requirements to reapply for deferral in the program beginning in 2014. Limited re-approval of participants to first 700 to reapply.

2014 – HB 4148

       Changed interest rate back to 6% simple rather than 6% compound. Applies interest retroactively for program participants that pay balances on or after July 1, 2016.

2015 – HB 2083

       Created exception to five-year ownership requirement for certain homesteads

       Required homesteads to be insured for fire and other casualty while allowing DOR to purchase insurance for uninsured homesteads

       Increased county median RMV qualification limits for taxpayers that have continuously owned and lived in homestead at least 21 years

       Required DOR to increase outreach to senior community if recertification is not received within 35 days following notification to homeowner.

Following the changes to the program in HB 2543 (2011), paid tax accounts in 2011-12 fell to about half the number in the previous year and overall taxes paid were about 62% of the previous year’s. Subsequent changes have allowed some of the previously eliminated participants to requalify for the program contributing to the moderate growth in the number and total tax paid. In 2015-16, 6,449 senior and disabled accounts were paid.

Operation Project Independence

In 2005, the Legislature created Oregon Project Independence (OPI) and funded it from excess balances  that  accumulate  in  the Senior Deferral Account. Excess balances accumulate  if the property tax plus interest repayments are greater than the amount that the State of Oregon pays counties on behalf of the qualified seniors and disabled who are in the Senior and Disabled Deferral Program. The first payment sent in 2006 from the Deferral Account was in the amount of $250,000. No payment was made in 2007. The January 2008 payment was in the amount of $14.29 million. Funding challenges related to the Senior and Disabled Deferral Program in recent years have resulted in a loss of funding to OPI. To stabilize the program’s funds, the 2011 Legislature removed the program as a source of OPI funding in HB 2543.

Homeowners and Renters Refund Program (HARRP)

HARRP
was created in 1973 and discontinued by the 1991 Legislature. Refunds were phased down in 1991 and then ended. In 1991 HARRP gave property tax refunds to homeowners and renters with household income of less than $10,000. Assets (excludes homestead, personal property and retirement plans) could not exceed $25,000 unless age 65 or older. The program refunded property taxes up to a maximum for each income group.

Property Tax Relief Program (PTR)

PTR was enacted in 1979 and repealed by the 1985 Legislature. The program, when originally enacted, refunded 30% of qualifying operating levies up to a maximum of $800 for each homeowner. Renters were refunded 4.7% of contract rent up to $400 for each renter.

Elderly Rental Assistance (ERA)


ERA
was enacted in 1975. ERA makes payments to renters age 58 and older with annual household income less than $10,000. Assets (excludes homestead, personal property and retirement plans) must be less than $25,000 if under age 65. No asset limit exists for participants older than 65. Rent, fuel and utility costs must exceed 20% of participant household income for calculating a payment. The payment is gross rent (including fuel and utilities) up to the $2,100 limit less 20% of household income, such that the payment reaches the maximum of $2,100 when income is zero and a minimum payment of $100 at $10,000 income. Taxpayers must file Form 90R by July 1 of the year following the year rent was paid to apply for payment the following November. Payments are made by check in November of each year out of a single appropriation to fund this program and make payments to counties in lieu of property taxes for exempt nonprofit corporation housing for elderly persons. If the appropriation is insufficient to cover the payments, payments to both programs are prorated.

In 1992, the total cash outlay from the General Fund reached its highest level with an average refund of $711 per renter. Between 1992 and 2006, the number of participants declined by 63%; and the average refund declined by 34%. One plausible explanation is that between 2002 and 2005, mortgage interest rates declined; and the availability of financial instruments such as the ‘interest only’ mortgages may have enabled a number of former renters to purchase homes. FN1 

(FN1. There are other potential reasons for this decline that worked against eligibility. First, unless a husband and wife or registered domestic partners are living apart permanently on December 31, their income must be combined to determine their household income. Second, in 2005, cost of living allowance raised the minimum social security benefits for a couple to $10,015.)

Another reason is that the income limits to participate in the program are less than the minimum Social Security benefit amount for couples established in 2005. The declining trend has continued through 2015, with 1,754 participants and an average refund of $331.
SB 296 (2015) transfers administration and funding of the ERA program from Department of Revenue (DOR) to Oregon Housing and Community Services (OHCS) department effective July 1, 2017. DOR’s final program processing and check mailing will take place in July and November 2016. After which, OHCS will integrate the ERA program into existing rent relief programs.