Op-Ed: Tax Extenders are Critical to Stable Rural Growth

Philip Ellis_headshotAs we approach the end of the year, minds turn toward family, Christmas, big dinners, and snow. But for many in rural America, it’s also time to wrap up the tax year and set the strategy for the year ahead. For cattle producers and farmers equipment purchases, new buildings, and other major capital expenses are logical considerations. Unfortunately, for many the tax code has looked more like a gamble than a sure bet. Key provisions like Section 179 deductions and bonus depreciation that had been extended in 2014, again have been pushed to the end of the year. Earlier this year, the House permanently extended both Section 179 and bonus depreciation, but the Senate has yet to act. Without action, Section 179 dropped back down from $500,000 to $25,000 and bonus depreciation completely disappeared for the current tax year.

If Congress fails to act in December, producers will not be able to take these provisions into account during this tax year. Congress can retroactively extend these provisions, but in the real world, we cannot retroactively make plans or purchases. These provisions are key considerations when making the decision to purchase machinery and equipment. Those capital expenditures provide the pass through growth for much of the rural economy that relies on agriculture. That is why it is so important for Congress to act to pass a multi-year extension of Section 179 and bonus depreciation in early December. Producers need access to these tools while they still may be of use this tax year, and the certainty in future years to plan without waiting until the last minute to make major financial decisions.

We understand all too well the cyclical nature of the markets and weather we live with every day. These forces are beyond our means to control. But the tax code should not be as unpredictable as the weather or the markets. There is bi-partisan support for these provisions, and these provisions provide inducements for small businesses nationwide to grow and expand. In turn, that increases economic growth in areas where it is needed most. I encourage you to join with the members of the National Cattlemen’s Beef Association in talking with your members of Congress and ask them to pass a multi-year tax extender package.

By: Philip Ellis, NCBA President

Explanation of Montana Tax Reappraisal Notices

The following is a guest column from Montana Representative Rob Cook, R-Conrad

Representative Rob CookThe arrival of reappraisal notices from the Montana Department of Revenue (DOR) has many Montana taxpayers experiencing sticker shock. But, before we are panicked enough to begin construction of a bunker, it would be useful to know how a sharp increase in appraised market value affects our actual tax bill.

Let’s look at a reappraisal notice. Assume that we find in the table on page 2 that the previous year taxable value for our residence was $1000 and that our current year taxable value is now a frightening $1500. Should we expect that our current year property taxes will also increase by a factor of 1.5?

The short answer is no and, while there are many factors that contribute to this, I’ll attempt to explain a few of the most important.

First, we should consider that if the taxable value of our property grew at such an alarming rate, shouldn’t the taxable value of all the neighboring properties have grown by a similar factor? If we didn’t complete any new construction or major renovations since the last appraisal in 2008 – then it is likely that our new values simply reflect an uptick in the local housing market and that our new taxable value has not moved disproportionately to that of our neighbors.

Perhaps inadvertently, we have uncovered one of the nuances of the Montana property tax system – when we are investigating a particular class of property the absolute value of an individual change is not as important as the comparison of the properties relative change to the relative change of other members in its class. For example, if the average change for neighboring properties was 1.3 and our change was 1.5, then we should expect that our taxes will increase by a greater percentage than our neighbors. Conversely, if the average change for neighboring properties was 1.7, then we could expect that our taxes would increase by a smaller percentage than our neighbors. In the latter case, it is actually possible for our taxes to decrease!

Next, we should consider what happens when the taxable value of every class of property increases. We know that the total taxes collected is equal to the taxable value multiplied by the mill rate, so did our county and local government just get a license to explode their budgets?

Fortunately, in this scenario, taxpayers are protected by Montana law. The growth in county and local government budgets is limited to one-half the average rate of inflation plus the taxes provided by any new growth. Thus, if the total taxable value goes up, the mill rate must be reduced so that total collections do not exceed the maximum allowable budget.

Finally, if we take into account the maximum budget constraint and the relative movement of our property within its class, it becomes apparent that the actual property taxes we will be required to pay does not mirror the increase in taxable value. In fact, in most cases any increase in property taxes should lie much closer to the increase provided by the maximum budget constraint than to the multiplier derived from the comparison of the current and existing taxable values.

This has been a very simplistic explanation of a reappraisal notice and I would be remiss if I did not mention that, in addition to the discussed relative movement within a class, there is also relative movement between classes. The legislature attempts to mitigate the latter by employing a technique called ‘taxable value neutrality’.

Taxable value neutrality simply means that the statewide total taxable value of residential, commercial, and agricultural properties remains the same each year. This was achieved in the last session by lowering the tax rates for each of these classes.

Because this mitigation technique is applied to the statewide totals, it can cause tax shifting at the local level. If we wish to be strictly accurate, these shifts must be considered when attempting to decipher the actual tax impact of the reappraisal notice.

Our property tax system and reappraisal process can be difficult to understand. I have selected a residential property example but the same considerations apply to commercial and agricultural properties. I hope the explanation has been useful and I appreciate your time.