Opinion ID: 2524427
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Heading: Pro-Rata Reduction Violates the Equal Rate Requirement

Text: The only formula set out in the Oil and Gas Property Tax Act under which one may determine the portion of oil and gas property that a municipality may tax is that expressed in AS 29.45.080(c). Since the formula in subsection .080(c) conflicts with the pro-rata reduction method, the latter method, in my judgment, necessarily violates the statute. But there is another reason why pro-rata reduction is wrong: pro-rata reduction violates the requirement that the portion of oil and gas property taxable by a municipality be taxable at the same rate as other property. This can be illustrated by using the assumptions and the explanation of the pro-rata reduction method expressed in the 1978 Messenger letter. I quote here the Messenger letter assumptions and calculations: Assumptions Average per capita assessed full and true value of property in Alaska (assumed).....$ 30,000 North Slope Borough residents (assumed) 10,000 Assessed Value of AS 43.56 property within North Slope Borough (assumed)............. 2,500,000,000 Assessed Value of non-AS 43.56 property within North Slope Borough (assumed) ... 500,000,000 Total assessed value of all property within North Slope Borough........................ 3,000,000,000 Calculation 1. ($30,000) × (225 percent) × (10,000) = $675,000,000 ($675,000,000 is the total assessed value of property in the North Slope Borough that can be taxed.) 2. 3,000,000,000 > 675,000,000 (Apportionment of the tax base is necessary.) 3. 3,000,000,000 = .225 675,000,000 (The entire tax base must be reduced to 22.5 percent of its full value to come within the 675,000,000 limit.) 4. 2,500,000,000 × .225= 562,500,000 (Value of AS 43.56 property that can be taxed) 500,000,000 × .225 = 112,500,000 (Value of other property that can be taxed) ____________ 675,000,000 Expressed textually, the Messenger calculations tell us that under the assumptions used the 225% cap is $675,000,000. Pro-rata reduction of oil and gas property and other property requires that each element of the tax base be reduced to 22.5% of full value. This results in a figure of $562,500,000 as the portion of oil and gas property taxable by the municipality. Messenger describes this as the value of AS 43.56 property that can be taxed. Now assume that the municipality levies a tax of 20 mills. This is levied on the tax base as limited, $675,000,000. The municipality receives $13,500,000. Of this sum, the municipality receives $11,250,000 (.02 × 562,500,000) from the owners of oil and gas property. The owners are indifferent to this tax, for it will be paid by a credit on their tax bill to the state. It is thus accurate to say that the $11,250,000 comes from diverted state revenues. The municipality receives $2,250,000 (.02 × 112,5000) from the owners of other property. What is the actual rate paid by the owners of other property in this scenario? The municipality imposes the 20-mill tax on only 22.5% of the value of other property using the Messenger calculations. This means that the tax rate on other property is actually not 20 mills, but is instead only 4.5-mills (.225 × 20 = 4.5). So an owner of taxable other property worth $100,000 in this municipality would pay property taxes of $450 ($100,000 × .225 × .02), which is the tax that would be produced by a 4.5 mill rate. By contrast, if the tax were actually 20 mills, the owner would pay a tax of $2,000. But the $562,500,000 of oil and gas propertyin Messenger's words, the value of AS 43.56 property that can be taxedwould in fact be taxed by the municipality at the rate of 20 mills. Therefore the municipality would not be taxing the portion of oil and gas property that it is permitted to tax at the same rate of taxation that it applies to other property. This demonstrates that the pro-rata reduction method results in a violation of the equal rate requirement. It is worthwhile, by contrast, to show what the result would be under AS 29.45.080(c)'s formula for determining the portion of oil and gas property taxable by a municipality. Again using the Messenger assumptions, the 225% tax cap would still be $675,000,000 and this would still be the tax base. Imposing taxes under the literal statutory formula at 20 mills, the municipality would still receive the same amount of revenue as it received under the pro-rata method, $13,500,000. But the makeup of the tax base would be different. From the 225% property cap of $675,000,000, the value of other property, $500,000,000, would be subtracted, leaving $175,000,000 of oil and gas property that could be taxed by the municipality. The tax base would thus consist of - value of oil and gas property that can be taxed = $175,000,000 - value of other property that can be taxed = $500,000,000 - 225% property cap $675,000,000 Applying a 20-mill tax to these elements, $10,000,000 of total revenues would come from the owners of other property (who in this case are paying taxes at a 20 mill rate of assessment) and $3,500,000 would come from oil and gas property tax revenue diverted from the state treasury. In summary, using the Messenger assumptions the state pays almost $8,000,000 more to the municipality under the pro-rata method than it would using the formula expressed in AS 29.45.080(c). Use of the pro-rata formula, in other words, causes exactly what the equal rate limitation was designed to prevent, a shifting of a municipality's fiscal responsibilities away from its general property owners and onto the shoulders of the oil and gas industry, and ultimately, due to the credit against state taxes, onto the state government. [18] In this respect the pro-rata reduction method conflicts with the state revenue-raising purposes of the act. The objective of the equal rate requirement, that local residents should pay their fair share of the cost of local government rather than casting the burden disproportionately onto the people of the state, is thereby lost. [19] And the constraint on high taxation of oil and gas property that would exist if the tax rates were equal is also lost, for the owners of other property pay taxes at a rate that is less than a fourth of the rate on oil and gas property. [20]