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HomeMy WebLinkAboutItem A: Measure 37 Givings Tax ECC UGENE ITY OUNCIL AIS GENDA TEM UMMARY Work Session: Measure 37 Givings Tax Meeting Date: January 25, 2006 Agenda Item Number: A Department: Planning & Development/City Attorney Staff Contact: Susan Muir/Glenn Klein www.eugene-or.gov Contact Telephone Number: 682-6077/682-5080 ISSUE STATEMENT Ballot Measure 37 requires that when certain regulations restrict the use of property and reduce its value, the government must pay compensation for such restrictions or waive the regulation. The purpose of this work session is to explore options for the creation of a tax or charge on “increases in value,” also known as a “givings tax,” in order to create a fund to pay such compensation claims. BACKGROUND At the January 19, 2005, City Council meeting, Councilor Bettman noted that one of the impacts of Measure 37 is to make it more difficult for the City to revise existing regulations and adopt new regulations by requiring compensation (or waiver of the regulation) if the regulation reduces the value of a property. Councilor Bettman also noted that while some regulations may reduce the value of some property, other regulations (and other government actions) can also have the effect of increasing the value of other property. She asked the council to hold a work session to explore whether the City should pursue the creation of a tax, fee or charge to capture some of the increase in value in order to fund payment of Measure 37 claims. Following a poll of the council, a work session was scheduled for June 13, 2005. At the June 13, 2005, meeting, the City Attorney and the Planning and Development Director updated the council on what had happened to that time on Measure 37 issues, including an update on what was happening in the legislative session. They also identified some of the issues related to implementing a “givings tax,” including Measure 5 limitations, a legislative pre- emption on a real estate transfer tax, and a significant administrative burden for developing and implementing the tax. The council directed staff to undertake additional analysis and to return to the council with specific options for the council to consider for a givings tax. Measure 37 Litigation On October 14, 2005, the Marion County Circuit Court issued a decision finding that Measure 37 was unconstitutional. That decision was appealed directly to the Oregon Supreme Court. On January 10, 2006, the Supreme Court held oral argument. A decision from the Supreme Court most likely will be issued somewhere between early summer and the end of the year. L:\CMO\2006 Council Agendas\M060125\S060125A.doc Other Jurisdictions Staff is unaware of any other jurisdiction in Oregon that has adopted a “givings” or “value added” tax. The Metro Council (Metropolitan Service District) is looking at the possibility of adopting a “windfall tax.” The tax being discussed would be imposed on the “windfall” to property owners when their land is brought inside the UGB. Half of the funds raised would be used to purchase conservation easements on farmland that have valid Measure 37 claims. The other half would be used to pay for public improvements like schools, roads and sewers in the UGB expansion areas. Metro’s discussion is still at the beginning stages. Tax/Fee Options The City Attorney and staff have come up with four separate options for a possible “givings tax” to fund Measure 37 claims. The four options are summarized in the following chart and briefly described below. Each of the options is more fully discussed in attachments A - D. Givings Tax Options Categories of Actions Examples of Actions Captured in Tax/Fee Option Name Captured in Tax/Fee (not all inclusive) Option 1 – Quasi-Judicial Rezoning ? Narrow Upzoning tax Site Specific Actions Change designation in Metro or refinement ? plan Option 2 – Local New City Investments Build a park (regional or neighborhood) ? ? Investment Tax that Improve a Improve streets, sidewalks or alleys ? ? ? Neighborhood Plant street trees ? ? ? ? ? Option 3 – New Legislative Actions Amendment to land use code ? ? ? Legislative (Single Legislative Amendment to Metro plan ? ? ? Change Tax Change Affecting Amendment to refinement plans ? ? ? ? Multiple Properties) ? ? ? ? Option 4 –All Factors Affecting Real estate market changes ? ? ? Capital Gains Property Value Except Interest rates on mortgages - ? ? Tax/Fee Property Owner Supply and demand factors - ? ? Investment and Inflation Inflation - ? ? Actions by other governments ? ? ? Build a state university ?- ? Build a neighborhood school Broad - Extend water and electric service - Prior quasi-judicial actions ? Prior City investments ? Prior legislative changes ? Option 1 – Tax on upzonings: Property owners occasionally request the City to change the zoning of their property or the land use designation for their property in the Metro Plan or in a refinement plan. Often times, this change in zoning or designation will increase the value of the property. The council can adopt an ordinance that imposes a tax or fee on that increase in value. The council would need to identify the amount of the tax or fee – presumably a percentage of the increase in value. The increase in value would be measured by the difference in value immediately before the change and immediately after. L:\CMO\2006 Council Agendas\M060125\S060125A.doc Option 2 – Tax on City investment: The City undertakes public improvements that increase the fair market value of property. Some of the time, the City creates a local improvement district and assesses the benefited property owners the cost of the improvements. Occasionally, the City makes an improvement and pays for that improvement with other public funds, and does not require the benefited property to pay for the improvement. For example, the City may purchase property for and develop a park, or may purchase property for open space. Some of these improvements may increase the fair market value of nearby property. The “local investment” tax would involve taxing that increase in fair market value. Option 3 – Tax on increase from legislative change: When the council adopts changes to land use regulations or plans, depending on the nature of those changes, it is possible that the changes reduce the fair market value of particular properties, but it is equally possible that the changes increase the fair market of certain properties. For example, if the council amends the land use code to expand the types of uses allowed in a particular zone, or relaxes a height or setback restriction, or increases the maximum density for a particular type of zone, the value of certain properties may increase. This option would involve imposition of a tax on the increase in fair market value resulting from an ordinance that amends the land use code or makes a legislative change to the Metro plan or to a refinement plan. Option 4 – Tax on capital gains: The first three options each would impose a tax on increases in fair market value resulting from specific, identifiable and discrete events: an upzoning, a public improvement, or a legislative change to the Metro Plan, refinement plan or land use code. Each of those options also likely would be prospective only – i.e., the tax would be imposed only for future upzonings, public improvements and legislative amendments. (In theory, the tax could be imposed for past upzonings, public improvements and legislative amendments, but the administrative costs and problems would increase significantly.) Option 4 would impose a tax all on increases in fair market value during all or part of the time period that someone owns a piece of real property except for (a) increases in value that result from the owner’s investment (for example, a remodel), and (b) inflation as measured by the CPI or some other index. In theory, the tax (1) could be imposed (and collected) on an annual basis, or alternatively, (2) could become due upon some triggering event, such as the sale of the property or the issuance of a building permit to undertake new construction or a remodel on the property. If the council chose the first alternative (annual basis), each year, the City would have to calculate and all owners of real property (with increased value) would have to pay the tax. If the council chose the second alternative, the tax would be calculated only upon the triggering event. The tax would operate similar to a capital gains tax. First, a difference in value would be calculated by comparing the value from one year to the next (for annual tax), or the value between the triggering events. Second, “investments” by the owner (such as a remodel) would be subtracted from that difference (along with inflation and any other factors chosen by the council), and the remainder would be taxed at a rate set by the council. Attachments A - D include preliminary answers to several questions about how each of these options would work, including legal issues, administration, whether there are any Measure 5 issues, and the impact on the property owners. In addition to those questions, once an option is selected, the council would have to determine several other items: 1. Should the tax apply only where property is vacant, or to all property whether developed or undeveloped? L:\CMO\2006 Council Agendas\M060125\S060125A.doc 2. To whom should the tax apply: all property owners or owners of only certain types or classes of property (for example, exclude low income, non-profit, etc.)? 3. To what does the tax apply: the value of only the bare or unimproved land, or the land plus all improvements? 4. When and how would such a tax be imposed and collected: annually, immediately upon a triggering action such as application for a land use change or sale of the property, or deferred until transfer of the property? RELATED CITY POLICIES Measure 37 may have an impact on the City’s ability to regulate property under its Land Use Code (Eugene Code chapter 9). Creation of a fund to pay compensation for Measure 37 claims could assist the City in preserving its regulatory authority in this context. COUNCIL OPTIONS 1.Direct the City Manager to study one or more of the options in more detail, including completing a proposed analysis of the tax/fee amount and economic consequences. 2.Postpone further consideration until after the Oregon Supreme Court issues its decision on the constitutionality of Measure 37. 3.Take no action. CITY MANAGER’S RECOMMENDATION The City Manager recommends that the council take no action. SUGGESTED MOTION Move that the City take no additional action on a givings tax at this time. ATTACHMENTS A. Option 1 – Upzoning Tax B. Option 2 – Local Investment Tax C. Option 3 – Legislative Change Tax D. Option 4 – Capital Gains Tax FOR MORE INFORMATION Staff Contact: Susan Muir, Executive Director Telephone: 682-6077 Staff E-Mail: susan.l.muir@ci.eugene.or.us City Attorney: Glenn Klein Telephone: 682-5080 Staff E-mail: glenn.klein@harrang.com L:\CMO\2006 Council Agendas\M060125\S060125A.doc ATTACHMENT A OPTION 1 – Tax on “Upzonings” Description: Property owners occasionally request the City to change the zoning of their property or the land use designation for their property in the Metro Plan or in a refinement plan. Often times, this change in zoning or designation will increase the value of the property. The council can adopt an ordinance that imposes a tax or fee on that increase in value. The council would need to identify the amount of the tax or fee – presumably a percentage of the increase in value. The increase in value would be measured by the difference in value immediately before the change and immediately after. Is the fee/tax legally permissible, or somehow preempted (by statute or constitution)? The City’s home rule powers authorize the council to adopt any type of fee or charge that is not preempted by federal or state law and that does not violate the U.S. or Oregon Constitutions. Neither the Constitution nor state statutes would preempt the council from adopting such a tax or fee. Therefore, the council has the power to enact a tax on upzonings. Would voter approval be required before adopting the fee/tax? No. Generally, voter approval is required only for certain taxes that are imposed on real property and subject to the limits of Measure 5. Other types of taxes (like the City’s telecommunications privilege tax, or an income tax or gross receipts tax) do not require voter approval. (In certain counties and cities in Oregon, the home-rule charter may include a provision that requires voter approval. Eugene’s Charter does not.) The tax would be subject to referendum. How would the fee/tax be administered and calculated? The charge could be collected either at the time of application or some time later. For example, it could be collected after the rezoning or re-designation is approved, or when the property changes hands. The first option for administration is that the charge would be collected as part of the application for the rezoning or Metro Plan amendment. Since the charge would be one created pursuant to the council’s home-rule powers under the Charter, the council can establish a requirement to submit appraisals as part of the rezoning (or Metro plan change) application. As part of the rezoning or Metro Plan amendment process, the City would need to agree with the applicant’s determination of increase in value, or alternatively, perform its own analysis to develop its own number. The rezoning or Metro Plan amendment processes would need to be revised to add such a requirement. In addition, a decision-maker would need to be designated for determining the increase in value and an appeals process would need to be identified if the property owner disagreed. Rezonings often are decided by a hearings official or the planning commission; Metro Plan amendments, on the other hand, are decided by the council. In addition, some Metro Plan amendments must be approved not only by Eugene, but also by Lane County and Springfield. A second option for administration is to collect the tax after the rezoning or plan amendment is approved. The tax could be determined by City staff, with an appeal to a hearings officer. The rezoning or plan amendment could be made effective only upon payment of the tax, or the L:\CMO\2006 Council Agendas\M060125\S060125A.doc collection of the tax could be deferred until the property is transferred (in order to provide the property owner with a source of revenue to pay the tax). Determining the amount of the tax will involve two decisions: a policy decision and an administrative determination. First, the council will need to determine the tax rate as part of the adoption of this type of tax. Presumably, the tax rate will be a percentage of the increase in fair market value resulting from the rezoning or comprehensive or refinement plan amendment. This rate could be structured a number of different ways. The simplest way to structure the rate would be as a straight percentage of any increase in value; for example, the rate could be 25% of the amount that the property increased in value. More complicated structures could include exempting a portion of the increase and taxing the remainder. In this latter alternative, the council could structure the tax as follows: determine the increase in value, deduct from that increase a percentage of the increase or alternatively, the amount that the property spent in obtaining the rezoning, and then imposing a tax on the remainder (for example, 25%). The tax rate determination is a policy decision based on the public interest, fairness, etc. The second decision is the administrative decision of determining the increase in fair market value resulting from the rezoning or plan amendment. This determination likely will need to be based on appraisals or other evidence of the fair market value of the property before and after the rezoning or plan amendment. Once these two determinations have been made (the first determination would be part of the ordinance and apply to all future rezonings and plan amendments), the determination of the amount of tax actually owed would be a simple mathematical calculation. What is the anticipated cost of administration (and what are the things that would make it high or low)? The costs to the City in administering this type of tax would be relatively low when compared to the other three options. The universe of people subject to the tax would be easily determined (property owners applying to the City for a rezoning or a plan amendment). On average, there are between 25 and 50 rezonings each year. Information could be required as part of the rezoning or plan amendment application, and the rezoning or plan amendment could be made effective upon payment of the tax (reducing collection costs). However, unless the City were willing to accept the values stated in the appraisal submitted by the property owner, then the City would incur administrative costs to obtain its own appraisals. The cost of such an appraisal could range anywhere from a few thousand dollars or more – particularly since two values would be needed (the “before” and the “after”). In addition, where the City and property owner disagreed as to value, the City would need to defend its determination in front of a hearings official, and possibly in court. Has the property owner paid (or will the property owner owe) other assessments, taxes or fees in connection with the same triggering action? Measure 50 allows assessed value (and therefore property taxes) to be increased under certain circumstances, such as for additions or improvements, partitions, subdivisions, rezoning where the property is used consistently with the rezoning, lot line adjustment, or the property is dis- L:\CMO\2006 Council Agendas\M060125\S060125A.doc qualified from exemption. If the triggering action for the application fee is also one of the actions that triggers higher property taxes, then the property owner would be paying (and the City would be receiving) two different taxes for the same rezoning, for instance. L:\CMO\2006 Council Agendas\M060125\S060125A.doc ATTACHMENT B OPTION 2 – Tax on “Local Improvements” Description: The City undertakes public improvements that increase the fair market value of property. Some of the time, the City creates a local improvement district and assesses the benefited property owners the cost of the improvements. Occasionally, the City makes an improvement and pays for that improvement with other public funds, and does not require the benefited property to pay for the improvement. For example, the City may purchase property for and develop a park, or may purchase property for open space. Some of these improvements may increase the fair market value of nearby property. The “local investment” tax would involve taxing that increase in fair market value. Is the fee/tax legally permissible, or somehow preempted (by statute or constitution)? As noted above, the City’s home-rule powers authorize the council to adopt any type of fee or charge that is not preempted by federal or state law and that does not violate the U.S. or Oregon Constitutions. Neither the Constitution nor state statutes would preempt the council from adopting such a tax or fee. Therefore, the council has the power to enact a tax on these increases in fair market value attributable to improvements by the City (or by other governmental entities). Would voter approval be required before adopting the fee/tax? No. Generally, voter approval is required only for certain taxes that are imposed on real property and subject to the limits of Measure 5. Other types of taxes (like the City’s telecommunications privilege tax, or an income tax or gross receipts tax) do not require voter approval. (In certain counties and cities in Oregon, the home-rule charter may include a provision that requires voter approval. Eugene’s Charter does not.) The tax would be subject to referendum. How would the fee/tax be administered and calculated? In order to impose this type of tax, the City would need to make several determinations. First, the City would need to determine whether a particular public improvement was likely to increase the fair market value of property. If so, the City then would need to determine which properties actually increased in value and by how much. Following those determinations, the tax (presumably a percentage of the increased value) could be calculated and imposed. The council could require that collection of the tax occur immediately, or be delayed until the property is transferred. The City likely would need to rely on certified appraisers in order to determine whether property increased in value as the result of a public improvement, and if so, by how much. A property owner would have the right to challenge the City’s determination (including going to court to contest it); therefore, the City would need to have substantial evidence to support its L:\CMO\2006 Council Agendas\M060125\S060125A.doc determination. That evidence most likely would need to be in the form of appraisals from certified appraisers. Determining the amount of the tax will involve two sets of decisions: a policy decision by the council, and a set of administrative determinations. First, as with the “upzoning” tax, the council will need to determine the tax rate as part of the adoption of this type of tax. Presumably, the tax rate will be a percentage of the increase in fair market value. This rate could be structured a number of different ways. The simplest way to structure the rate would be as a straight percentage of any increase in value; for example, the tax could be 25% of the amount that the property increased in value. More complicated structures could include exempting a certain portion of the increase and taxing the remainder. In this latter alternative, the council could structure the tax as follows: determine the increase in value, deduct from that increase a percentage of the increase, and then impose a tax on the remainder (for example, 25%). Second, the City would need to determine which properties increased in value, and by how much. These determinations will need to be based on appraisals or other evidence of the fair market value of the property before and after the public improvement. The cost of these appraisals would need to be borne by the City. The cost of any appeal (to a hearings official, for example) also would be borne primarily by the City. Once these two sets of determinations have been made, the determination of the amount of tax actually owed would be a simple mathematical calculation. What is the anticipated cost of administration (and what are the things that would make it high or low)? The costs to the City in administering this type of tax would be in medium category as compared to the other three options. Unlike the “upzoning” tax, the City would need to determine the universe of people subject to this “local investment” tax for each public improvement, and then would need to determine the amount of increase for each of those properties. The amount that any particular property increased in value would not necessarily be the same for all of the properties. In order to make those determinations, the City will need to pay for appraisals. As noted previously, the cost of such an appraisal could range anywhere from a few thousand dollars to $10,000 or more – particularly since two values would be needed (the “before” and the “after”). In addition, where the City and property owner disagreed as to value, the City would need to defend its determination in front of a hearings official, and possibly in court. Has the property owner paid (or will the property owner owe) other assessments, taxes or fees in connection with the same triggering action? Measure 50 allows assessed value (and therefore property taxes) to be increased under certain circumstances, such as for additions or improvements, partitions, subdivisions, rezoning where the property is used consistently with the rezoning, lot line adjustment, or the property is dis- L:\CMO\2006 Council Agendas\M060125\S060125A.doc qualified from exemption. However, a nearby public improvement is not one of the triggering actions. Therefore, a property owner would not be double assessed for those actions. If the triggering action is a local improvement that is being fully or partially paid from property owner assessments through a local improvement district, or if the improvement is funded from General Obligation Bonds, then the property owner would be paying the City twice for the same triggering action. L:\CMO\2006 Council Agendas\M060125\S060125A.doc ATTACHMENT C OPTION 3 – Tax on Increases from Legislative Changes Description: When the council adopts changes to land use regulations or plans, depending on the nature of those changes, it is possible that the changes reduce the fair market value of particular properties, but it is equally possible that the changes increase the fair market of certain properties. For example, if the council amends the land use code to expand the types of uses allowed in a particular zone, or relaxes a height or setback restriction, or increases the maximum density for a particular type of zone, the value of certain properties may increase. This option would involve imposition of a tax on the increase in fair market value resulting from an ordinance that amends the land use code or makes a legislative change to the Metro plan or to a refinement plan. Is the fee/tax legally permissible, or somehow preempted (by statute or constitution)? As noted previously, the City’s home-rule powers authorize the council to adopt any type of fee or charge that is not preempted by federal or state law and that does not violate the U.S. or Oregon Constitutions. Neither the Constitution nor state statutes would preempt the council from adopting such a tax or fee. Therefore, the council has the power to enact a tax on the increases in fair market value resulting from legislative changes to the land use code or to land use plans. Would voter approval be required before adopting the fee/tax? No. Generally, voter approval is required only for certain taxes that are imposed on real property and subject to the limits of Measure 5. Other types of taxes (like the City’s telecommunications privilege tax, or an income tax or gross receipts tax) do not require voter approval. (In certain counties and cities in Oregon, the home-rule charter may include a provision that requires voter approval. Eugene’s Charter does not.) However, since the tax would be adopted through an ordinance, it would be subject to referendum. How would the fee/tax be administered and calculated? In order to impose this type of tax, the City would need to make two sets of determinations. The first set determinations would be policy decisions to be made by the council. The second set would involve administrative decisions, presumably made by staff or a hearings official. First, the council would need to determine the amount of the tax that would be imposed. Like the first two options, the tax could be a specified percentage of the increase in fair market value. This rate could be structured a number of different ways. The simplest way to structure the rate would be as a straight percentage of any increase in value; for example, the tax could be 25% of the amount that the property increased in value. More complicated structures could include exempting a certain portion of the increase and taxing the remainder. In this latter alternative, the council could structure the tax as follows: determine the increase in value, deduct from that L:\CMO\2006 Council Agendas\M060125\S060125A.doc increase a percentage of the increase, and then impose a tax on the remainder (for example, 25%). The tax rate determination is a policy decision based on the public interest, fairness, etc. The council also would need to decide whether collection of the tax would occur at the time of the amendment, or alternatively, would be delayed until the property is transferred. Delaying the collection of the tax until the property transfers would provide the owner with a source of funds from which to pay the tax. However, the delay would also postpone the City’s receipt of that revenue, and it would be unavailable until the transfer to pay Measure 37 claims. Second, a series of administrative determinations would need to be made. For each amendment to the land use code, Metro Plan or refinement plan, the City would need to determine whether the amendment was likely to increase the fair market value of property. If so, the City then would need to determine which properties actually increased in value. For those properties where the fair market value increased, the City would need to determine for each individual property the amount of that increase. And finally, the City would need to calculate the amount of the tax (presumably a percentage of the increased value). In order to make the second set of determinations, the City likely would need to rely on economists, certified appraisers or both. It may be possible that economists can develop a computer model that, when coupled with information from the GIS system, could be used to identify properties where the fair market value increased. Staff has had conversations with a couple of economists (potential consultants should the council direct the City Manager to move forward with one or more of these options) who indicated that such a computer model would probably cost in the $50,000 - $100,000 range to develop, but once developed, might only cost a couple thousand dollars to run for a particular legislative change. Once the properties with the increased fair market value have been identified, it then would be necessary to identify for each property the amount of that increase. For this step in the process, it likely would be necessary to retain certified appraisers to provide that information since it would need to be property specific. A property owner would have the right to challenge the City’s determination (including going to court to contest it); therefore, the City would need to have substantial evidence to support its determination. What is the anticipated cost of administration? The costs to the City in administering this type of tax would be in medium to high category as compared to the other three options. Unlike the “upzoning” tax, the City would need to determine the universe of people subject to this “local investment” tax for each amendment to the land use code and each legislative change to the Metro Plan and refinement plan. Compared to the “local investment” tax, the cost also would be higher: the universe of properties that might be subject to this tax is far greater and covers the entire City, whereas the universe of properties with the “local improvement” tax is going to be geographically constrained to properties in the vicinity of the public improvement. Once the properties have been identified where fair market value likely increased, the City would need to determine the amount of increase for each of those properties. The amount that any particular property increased in value would not necessarily be the same for all of the properties. L:\CMO\2006 Council Agendas\M060125\S060125A.doc In order to identify the affected properties and then make determinations as to the amount of increase in fair market value, the City likely will need to retain both economists (for the identification task) and appraisers (for the fair market value determination). As noted above, a preliminary estimate by economists for developing a computer model to identify properties is in the $50,000 - $100,000 range, with a cost of a couple thousand dollars for each legislative change. The cost of an individual appraisal (to determine actual increase in fair market value) generally ranges anywhere from a few thousand dollars to $10,000 or more – particularly since two values would be needed (the “before” and the “after”). Should the council direct the City Manager to further investigate this option, the Manager would contract with both economists and appraisers to identify specific economic and appraisal tools for carrying out this option, as well as specific proposals (including contract amounts) for creating those tools. In addition to the administrative costs noted above, there would also be additional costs where a property owner objected to the City’s determination as to whether a legislative change increased the fair market value to the owner’s property, and if so, by how much. Where the City and property owner had such a disagreement, the City would need to defend its determination in front of a hearings official, and possibly in court. Has the property owner paid (or will the property owner owe) other assessments, taxes or fees in connection with the same triggering action? Measure 50 allows assessed value (and therefore property taxes) to be increased under certain circumstances, such as for additions or improvements, partitions, subdivisions, rezoning where the property is used consistently with the rezoning, lot line adjustment, or the property is dis- qualified from exemption. Neither a change to the land use code, nor an amendment to the Metro Plan or to a refinement plan, would trigger a revision to the assessed value. Therefore, a property owner would not be double assessed. L:\CMO\2006 Council Agendas\M060125\S060125A.doc ATTACHMENT D OPTION 4 – Tax on “Capital Gains” Description: The first three options each would impose a tax on increases in fair market value resulting from specific, identifiable and discrete events: an upzoning, a public improvement, or a legislative change to the Metro Plan, refinement plan or land use code. Each of those options also likely would be prospective only – i.e., the tax would be imposed only for future upzonings, public improvements and legislative amendments. (In theory, the tax could be imposed for past upzonings, public improvements and legislative amendments, but the administrative costs and problems would increase significantly.) all Option 4 would impose a tax on increases in fair market value during the time period that someone owns a piece of real property except for (a) increases in value that result from the owner’s investment (for example, a remodel), and (b) inflation as measured by the CPI or some other index. In theory, the tax (1) could be imposed (and collected) on an annual basis, or alternatively, (2) could become due upon some triggering event, such as the sale of the property or the issuance of a building permit to undertake new construction or a remodel on the property. If the council chose the first alternative (annual basis), each year, the City would have to calculate and all owners of real property (with increased value) would have to pay the tax. If the council chose the second alternative, the tax would be calculated only upon the triggering event. The tax would operate similar to a capital gains tax. First, a difference in value would be calculated by comparing the value from one year to the next (for the first alternative), or the value between triggering events (for the second alternative). Second, “investments” by the owner (such as a remodel) would be subtracted from that difference (along with inflation any other factors chosen by the council), and the remainder would be taxed at a rate set by council. Is the fee/tax legally permissible, or somehow preempted (by statute or constitution)? As noted previously, the City’s home-rule powers authorize the council to adopt any type of fee or charge that is not preempted by federal or state law and that does not violate the U.S. or Oregon Constitutions. The tax limitation created by Measure 5 (Article XI, section 11b of the Oregon Constitution), and the preemption on real estate transfer taxes (ORS 308.615) create some limits on the City’s ability to adopt a “givings” tax that is structured like a capital gains type tax. Measure 5 limits the amount of “property tax” that governments can impose. Measure 5 contains its own definition of “property tax” for purposes of that limitation: a “property tax” includes both (1) a tax levied against the property itself (like the annual ad valorem property tax), and (2) a tax imposed on the property owner as a direct consequence of ownership of the real property. However, a charge that is imposed upon the owner for some other reason, and not as a “direct consequence” of ownership of the property, is not covered by Measure 5’s limits. Thus, for example, a monthly stormwater fee that is imposed only on owners of developed property is not imposed on the property owner as a direct consequence of ownership, but instead, as a direct consequence of the property begin developed. Here, if the council chose to impose this tax for L:\CMO\2006 Council Agendas\M060125\S060125A.doc all properties (developed and undeveloped), it is likely that someone would challenge the tax as being a Measure 5 tax. We would argue that the tax was not imposed as a “direct consequence of ownership,” but instead, as a direct consequence of having increased in value. This would be a close legal question. Depending on whether the fee was imposed on an annual basis, imposed only for properties that had been or are being developed, or imposed only when some other event triggers the tax, the likelihood that the City would prevail would vary. Should the council direct further work on this option, as part of that additional work, the City Manager would intend to schedule an executive session with the council to allow the City Attorney to discuss the legal risks in more detail. ORS 306.815 preempts the council’s authority to adopt a “real estate transfer tax.” More specifically, that provision states that a city cannot impose “a tax or fee upon the transfer of a fee estate in real property, or measured by the consideration paid or received upon transfer of a fee estate in real property.” Preliminary research into the legislative history of this preemption suggests that the preemption is focused on preventing local governments from using non- discriminatory real estate transfer taxes as a general revenue raising tool; other fees or taxes imposed as a result of development, or other activity taken with respect to the property do not appear to fall within the preemption – as long as they are not imposed as a prerequisite to transferring the property to another person. Would voter approval be required before adopting the fee/tax? No. Generally, voter approval is required only for certain taxes that are imposed on real property and subject to the limits of Measure 5. Other types of taxes (like the City’s telecommunications privilege tax, or an income tax or gross receipts tax) do not require voter approval. (In certain counties and cities in Oregon, the home-rule charter may include a provision that requires voter approval. Eugene’s Charter does not.) However, since the tax would be adopted through an ordinance, it would be subject to referendum. How would the fee/tax be administered and calculated? Administration and calculation of a capital gains type tax would depend significantly on whether the council chose to impose the tax annually on all property where value has increased, or only upon some triggering event. For either choice, the council would need to establish the rate of the tax as well as the factors that would be used to calculate the “increase in value” upon which the tax rate would be imposed. For example, would the tax be imposed on the entire difference in value (assuming a positive number) between the value from one year to next (assuming annual tax), or from one trigger event to the next? Or, would the City deduct from that difference in value items such as new investment and inflation? If the council chose to impose the tax annually, the City would need to develop an administrative assessment mechanism that would enable the City to determine (1) whether property increased in value, (2) if so, by how much, and (3) the amount of the tax. In addition, the City would need to develop a billing system (or contract with another entity) to send out the bills, monitor who has paid, and pursue collection on those who failed to pay. If the council chose to impose the tax upon some triggering event, the administrative mechanism probably would depend upon the nature of the triggering event. For example, if the triggering L:\CMO\2006 Council Agendas\M060125\S060125A.doc event were the issuance of a building permit for the property, then there would be a need to obtain an appraisal to find out what the value of the property will be after the completion of the work authorized by the permit. That value then would need to be compared to the value at the time of the prior triggering event or previous sale of the property. The City would need to deduct from that difference in value investments (and inflation or other factors chosen by the council), and then impose the tax rate upon the remainder. On the other hand, if the triggering event were the transfer of the property, the City could compare the price the owner paid for the property with the sales price, deduct owner investments (and possibly other items), and then tax the difference. (Note again that the more the City relies on the sales price to establish the amount of the tax, the greater the chances that the preemption of ORS 306.815 applies.) In order to make some of the determinations identified above, the City likely would need to rely on certified appraisers. A property owner would have the right to challenge the City’s determination (including going to court to contest it); therefore, the City would need to have substantial evidence to support its determination. What is the anticipated cost of administration? The costs to the City in administering this type of tax would be in medium to high category. If the council chose to impose the tax annually, the City would need to develop an administrative mechanism to calculate, bill and collect a tax on more than 50,000 properties. If the council chose to impose the tax only upon some triggering event – such as the issuance of a building permit or the sale of property – the City would be faced with a less onerous task than annual bills for all property owners, but the task could still be very high, depending on the nature of the triggering event or events. For example, in 2005, there were more than 6,000 properties sold in Eugene. In addition, there were more than 2,000 building permits issued by the City. In addition to the administrative costs noted above, and as with the other options, there would also be additional costs where a property owner objected to the City’s determination as to the amount of any increase in the fair market value of a person’s property. Where the City and property owner had such a disagreement, the City would need to defend its determination in front of a hearings official, and possibly in court. Has the property owner paid (or will the property owner owe) other assessments, taxes or fees in connection with the same triggering action? Measure 50 allows assessed value (and therefore property taxes) to be increased under certain circumstances, such as for additions or improvements, partitions, subdivisions, rezoning where the property is used consistently with the rezoning, lot line adjustment, or the property is dis- qualified from exemption. Depending on how the council chose to impose this type of “capital gains” type tax, a property owner may end up paying tax more than once on the same increase in value for those property actions. In addition, if there has been a local improvement that was fully or partially paid from property owner assessments through a local improvement district, or if there was a public improvement that was funded from General Obligation Bonds, then the property owner would be paying the City twice for the same triggering action. 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