Tax Base

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Mark Timieski
Posts: 51
Joined: Sun Mar 27, 2005 7:47 pm
Location: Lakewood

Tax Base

Postby Mark Timieski » Sun Apr 10, 2005 8:34 pm

I understand the definition of ìbaseî as it applies to baseball and dating, but as to taxes I have some questions..



Iíve asked two or three dozen people the definition of ìtax baseî over the last few years. The usual reply involves a great deal of stammering. I remember asking a reporter who responded ìI have it written down in my notes somewhere, Iíll have to get back to youî. Iím still waiting, two years later.



This term pops up over and over in the economic development stuff. I saw the term again today in a newspaper article about casino gambling in Detroit. I thought we should all have a clear understanding of the term.



Iíve dug around a bit and found this definition: ìTax Base is a total value of all the taxable items such as- property, income, assets, etc.î



Would the ìtax baseî be different from the perspective of the city, the state, and the fed (each collect taxes, but in different ways). The fed doesnít collect property taxes, so would that be left off the tax base from the feds perspective?



From my understanding, the city gets revenue from property tax, income tax, and personal property tax. Would license fees be part of the ìtax baseî calculation? Are there any other taxes that would be part of the base?



Note that ìpersonal property taxî is tax collected on business inventory. Iím not sure if this tax goes to the city or the state, but Iím of the understanding that Ohio is phasing this tax out over the next several years. Does the city tax base calculation take into account assets such as automobiles (I donít think the city has a way of collecting tax on these, so I wouldnít think this would be part of the base)?



Is the ìtax baseî a quantifiable number? Is it the same as tax revenue? When our houses went through the last reappraisal and our property values had increased would this indicate that our tax base had increased? Are tax abatements counted as a negative in the tax base calculation?


Stan Austin
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Postby Stan Austin » Mon Apr 11, 2005 3:03 am

Mark--- I have always considered a tax base to be a potential or a hypothetical.

In the case of a city it would be the total basis from which revenues might be derived. Substractions can be made from this starting base.

You have pointed out several sources of revenue for the city. A large part of that is the payroll tax. So for the City to increase its tax base it has to add more people who are on payrolls or have the existing people on payrolls earn more money. Now on a profit/loss sheet this might work to the detriment of the schools because these additional people would presumably have kids that needed to be educated. That comes out of the expense side of the schools' ledger.

For them to offset that they need higher property valuation to get extra income. In a fully developed city this can only happen through normal economic appreciation or through deliberate improvements.

This has risk because value is not static, it adjusts to the market. As an example look at downtown Cleveland. The bricks and mortar value of those buildings is one number and the potential rental value is another figure. The buildings potential sale price is based on a combination of the two. The rental demand has been declining so the owners have correctly stated that the value of the buildings is declining and they are therefore asking for reductions in the buildings' property tax valuation figure.

As applied to the West End property tax valuations MIGHT have gone up. The tax base as far as the City was concerned MIGHT have gone down.

The conclusion is that a tax base is a moving target, it is not a fixed number, and it means different things to different governmental jurisdictions.


Stan Austin
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Postby Stan Austin » Mon Apr 11, 2005 5:57 am

Back again (had to go out for my run) This gives me an opportunity to move on to the other side of the ledger. We have talked about what a tax base is - generally real estate or earning potential of an enterprise or an individual.

Now, how do you get it and what are the costs involved in getting or improving a tax base.

If there is raw or unutilized land in a city (Westlake or Solon for instance) the tax base can be easily increased by the owner of that land acting in a rational manner and selling it for more than he paid for it. It will then presumably be used for a house or business both of which would add tax bases, and at little or no cost to a city.

If land is underutilized then maybe an incentive in the form of an outright grant or the promise of future cost (tax) reductions might have to be put in the mix to make the land economically attractive.

You've heard the term OPM--other people's money. It also means Other Politicians' Money. A city can use federal money to clean up a site, or maybe even purchase it. It can offer reduced property taxes (the schools' money). Locally it can use its own money to provide parking. These are all on the expensed side of the ledger. To be justified this expense has to be less than the anticipated increase in revenues over what currently exists.

But there are differnt kinds of people, too as a tax base. For a school board single or childless people who maintain and improve their property are ideal. For a city those on a payroll are ideal.

Let me describe a very real person who at face value sounds like a real asset but actually might not be.

Lakewood is home to one of the richest people in the US. He is a venture capitalist (VC). For discussion purposes let's assume he isn't on the payroll of his company. His income is derived from the dividends on the stock he owns in that company. Therefore, he pays no payroll tax to the city. He might even have lunch at the Senior Center at Northland and Madison (he is, in fact, over 65). He would pay the nominal charge for the lunch but the City has to provide for the building and its staffing. In many ways this individual is a net loss to the City.

His home on Edgewater is about number 2 ranking in Lakewood in terms of valuation in the Cleveland Magazines list of the 250 most expensive homes

His kids are out of school and he obviously pays a lot in property taxes (95% of which goes to the schools). This fellow is a real net plus for the schools.

An apartment owner who acting economically rationally has a lot of Section 8 renters might not be an asset to the City or the Schools. If the tenants aren't working they areen't paying payroll taxes and if they have kids that's an expense for the schools.

Your original question was prompted by the article on casinos. If all that is required to have them is a change in the law then most if not all expenses would be carried by a privately owned casino buying underutilized land in hopes of making a profit. It would employ un or underemployed people thereby increasing there wage base of taxation.

So, in conclusion, the "getting" and maintaining of a tax base has a lot of interelated aspects to it.


Mark Timieski
Posts: 51
Joined: Sun Mar 27, 2005 7:47 pm
Location: Lakewood

Postby Mark Timieski » Thu Apr 14, 2005 6:54 pm

Stan,



Thanks for the explanation. The reason Iím asking is that ìtax baseî always seems to be used with ìdecliningî preceding it. I mentioned the casino article because it was the last time I saw ìdeclining tax baseî in the paper before writing the post. Itís usually something like: ìwar, famine, pestilence, death, and declining tax baseî. The problem is that the term is usually just thrown out there, almost just for effect, without any reasonable analysis of how the term applies to the situation. At this point I have heard so much conflicting information as to the definition of ìtax baseî I really needed to hear some sort of clarification.



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