One of the most frequently asked questions in school finance is why property taxes are used as the basis of local funding in every state across the country. The answer to this question is that unlike income and sales taxes, property taxes are historically stable, tending to increase over time with only rare instances of decrease. This stability is particularly important to schools and other local governments whose comparatively small budgets cannot withstand the larger revenue fluctuations typical of income and sales taxes.
However, in the aftermath of the recession, property values fell in many Ohio school districts, in some cases by significant amounts. At the same time as the recession was decreasing, residential and business real property values and agricultural property values began to rise. This is because of a program dating back to 1975 known as Current Agricultural Use Valuation (CAUV). The premise of CAUV is that agricultural property should be valued according to its in farm production as opposed to its “best and highest” market value (i.e. what a developer might pay to turn farmland into a strip mall, office park, outlet mall or residential subdivision). CAUV values qualifying agricultural property according to a complex formula that includes factors for capital costs, soil types, crop prices and crop yields. Increased crop prices (in some cases to record levels) and historically low interest rates have been two of the primary drivers of recent increases in CAUV over the past several years, along with recent updates made to the formula by the Ohio Department of Taxation.
Table one shows statewide totals of CAUV taxable value compared to ‘Best and Highest Use” values that provide an approximation of the market value of farmland.
Table 1: CAUV vs. “Best and highest Use Property Values, 2005-2014
|Tax Year||Avg. CAUV Value Per Acre||State Total CAUV Taxable Value||State Total Highest & Best Use Value||CAUV % of H&B Use Value|
Source: Ohio Dept. of Taxation PD32 data files, 2005-2013 and 2014 DTE-114 data file.
Table one shows that CAUV values have increased by nearly six times from 2005 to 2014, both in per acre and total value terms. Table one also shows that the gap between CAUV and market value for the state’s farmland has narrowed considerably since 2005, particularly in the past five years. Note that the figures in Table one are statewide aggregate figures and that CAUV varies considerably across the sate, and in some areas CAUV values are now very close to market values.
While CAUV values have been increasing in many rural areas of the state, property values have continued to decline in many urban areas. At the same time, suburban areas, which experienced declines in values as a result of the recession, have seen their values increase at varying rates across the state. Thus, Ohio’s different types of school districts have been experiencing very different patterns of property value change over the past several years.
Tables two and three provide a summary of recent valuation changes in Ohio’s different types of school districts. Table two shows three-year average property values for FY14, FY16 and FY17. FY14 property values are based on the average of property values in Tax Years 2012, 2013, and 2014. Because the State Share index was the same in both FY14 and FY15, the FY14 property values also applied to the FY15 funding formula. The FY16 and FY17 property values are LSC estimates used in the House version of the FY16-17 budget.
Table 2: 3-Year Average School District Property Valuations FY14 to FY17, By Typology Group
|ODE Typology Group||3-Yr Avg. Total Valuation FY14 (TY10, 11, 12)||Estimated 3-Year Avg. Total Valuation FY16 (TY12, 13, 14)||Estimated 3-Year Avg. Total Valuation FY17 (TY13, 14, 15)|
|1. Poor Rural Districts||$19,081,969,041||$19,857,724,033||$20,332,687,495|
|2. Rural Districts||$11,951,038,161||$12,626,357,299||$12,954,105,403|
|3. Small Towns||$26,177,121,222||$26,533,387,187||$26,987,372,125|
|4. Poor Small Towns||$24,069,105,467||$23,778,831,077||$23,978,279,887|
|5. Suburban Districts||$57,653,035,012||$55,921,329,591||$56,268,154,904|
|6. Wealthy Suburban||$48,871,511,513||$48,684,707,647||$49,388,753,308|
|7. Urban Districts||$26,339,520,095||$24,981,319,885||$24,994,132,417|
|8. Major Urban Districts||$27,721,740,907||$26,113,068,023||$26,092,236,322|
Source: Ohio Legislative Service Commission (LSC)
Table three shows the percentage in property values (shown in Table two) from FY14 to FY17 for each of the ODE district typology groups. Table three shows that Ohio’s rural, poor rural, and small town school districts were the only types of districts that had growth in valuation on average from FY14 to FY16. All other district types showed a decrease in average property values over this period, with the declines the largest in suburban, urban, and major urban districts. While LSC forecasts valuations to increase for all types of districts from FY16 to FY17 with exception of the major urbans (which still show a slight decrease).
Table 3: Percentage Change in School District Property Valuation FY14 to FY17, By Typology Group
|ODE Typology Group||% Change in Valuation FY14 to FY16||% Change in Valuation FY16 to FY17||% Change in Valuation FY14 to FY17|
|1. Poor Rural Districts||4.1%||2.4%||6.6%|
|2. Rural Districts||5.7%||2.6%||8.4%|
|3. Small Towns||1.4%||1.7%||3.1%|
|4. Poor Small Towns||-1.2%||0.8%||-0.4%|
|5. Suburban Districts||-3.0%||0.6%||-2.4%|
|6. Wealthy Suburban||-0.4%||1.4%||1.1%|
|7. Urban Districts||-5.2%||0.1%||-5.1%|
|8. Major Urban Districts||-5.8%||-0.1%||-5.9%|
The decrease in property values in urban districts is the primary reason why these districts get the largest percentage increases in funding under both the Governor’s and House’s FY16-17 budget proposals.