M-8 - Budget Special Report - FY 2024-2025

Part of the 2021 property tax legislation included a provision to reduce, and eventually eliminate, the backfill. Cities are divided into two categories based on property valuation growth from FY 2014 to FY 2021, which then determines the schedule they have for the reduction in backfill payments. The table below details these categories and the reductions. <table> <tr> <th>Property Valuation Growth <b>Less than Statewide Average of 31.24%</b> (FY 2014-FY 2021)</th> <th>Property Valuation Growth <b>More than Statewide Average of 31.24%</b> (FY 2014-FY 2021)</th> </tr> <tr> <td>Backfill reduced over 8 years (1/8 of amount each year until it reaches zero)</td> <td>Backfill reduced over 5 years (1/5 of amount each year until it reaches zero)</td> </tr> <tr> <td>679 cities</td> <td>261 cities</td> </tr> </table> The reduction in backfill payments has begun and will continue on the respective schedules before it is eventually eliminated. <i>The backfill funds should be recorded as intergovernmental revenue from the state. For those using the standard Chart of Accounts the account number is 4464: Commercial/Industrial Replacement Claim Payments.</i> Another major component of the 2021 legislation eliminated the Multi-Residential property class, which had been created through the 2013 property tax law. The class was established in FY 2017 and included several types of properties, such as mobile home parks, assisted living facilities, and property primarily used or intended for human habitation containing three or more separate living quarters (including the portion of a building used for human habitation, even if human habitation was not the primary use of the building). Multi-residential property was given its own eight-year rollback schedule that resulted in a decline in taxable values over time. No backfill was created as part of the 2013 legislation. Prior to the re-classifying of these properties in FY 2017, the vast majority were commercial properties and taxed at their full assessed value. The 2021 legislation moved these into the residential category going forward. In 2022 the state legislature passed a bill that eliminated the Business Property Tax Credit and replaced it with the equivalent of a rollback on all commercial, industrial and railroad properties. While not all eligible properties applied for and received the previous tax credit, the legislation placed a rollback on the first $150,000 of taxable value on all commercial, industrial and railroad properties that is equal to the residential rollback percentage (the value that exceeds $150,000 will be subject to the commercial, industrial and railroad rollback of 90%). The $125 million state appropriation that funded the Business Property Tax Credit was converted to a backfill payment. Importantly, the Department of Revenue released a fiscal note that estimates this appropriation will not be sufficient by FY 2029 as affected properties grow in value over that time. This change took effect in FY 2024.