Colorado Legislative Council Staff

STATE and LOCAL

REVISED FISCAL NOTE

(Replaces Fiscal Note dated February 4, 1998)State General Fund Expenditure Impact

Local Government Revenue Impact

TITLE:            CONCERNING THE SPECIFICATION OF CERTAIN BUSINESS PROPERTY INSTALLED THROUGH REAL PROPERTY AS PERSONAL PROPERTY FOR PROPERTY TAX PURPOSES.

Summary of Legislation

            The reengrossed bill, as amended in House Appropriations, would specify that pipelines, telecommunications lines, utility lines, or any other business asset or article installed through an easement or right-of-way for commercial or industrial operation shall be deemed to be “personal property” for property tax purposes. This would include oil and gas distribution and transmission pipelines, gathering system pipelines, flow lines, process lines, and related water pipeline collection transportation, and distribution systems.

            The change in classification of certain properties to “personal property” for property tax purposes will result in lower assessed values for companies who report construction work in progress. The lower reported assessed values will result in lower property tax collections than would otherwise be collected in certain cases. Therefore, the bill is assessed as having local fiscal impact. The bill would become effective upon signature of the Governor, and would apply to property tax obligations for property tax years commencing on or after January 1, 1998. This fiscal note has been revised to reflect updated information relating to the value of business property that will be affected by the bill.

State Expenditures

            The bill will result in a reduction in property tax collections for units of local government (see the Local Government Impact section below) where affected properties are located. However, since state aid for schools is computed as the difference between Total Program and the amount collected from property taxes and specific ownership taxes, state aid may be increased to make up for the lost operating budget property tax revenue through the School Finance Act in affected school districts. The need for additional state aid through the School Finance Act identified in this bill is estimated to be $462,782 annually beginning in FY 1998-99.

Local Government Impact

            The bill requires that for property tax years commencing on or after January 1, 1998, pipelines, telecommunications lines, utility lines, or any other business asset or article installed through an easement or right-of-way for commercial or industrial operation to be classified as “personal property” for property tax purposes. Section 39-3-118.5, C.R.S., states that for property tax years commencing on and after January 1, 1996, business personal property shall be exempt from the levy and collection of property tax until such business personal property is first used in the business after acquisition.

            The impact on the local assessment of pipelines in unknown. However, the bill’s impact on properties that are state assessed can be measured. Companies owning state assessed properties report “construction work in progress” as a line item to the Property Tax Administrator. As a result of Section 39-3-118.5, C.R.S., the value of property reported in the “construction work in progress” category is reduced by the amount of assessed value that is attributable to personal property. The policy of the Division of Property Tax is that unless a company specifically provides a listing of the items and value of each item in the listing, the work in progress category is distributed as follows based on the best estimates of the industry mix:

The table below identifies the percentage allocation that the Division of Property Tax would use for pipeline, railroad, and all other state assessed properties identified as “construction work in progress”, based on the classification change resulting from the bill:

            A report prepared by the Division of Property Tax identifies companies that are state assessed that would be impacted by the bill. Based on the report, the total annual value of “construction work in progress” is estimated to be $44.72 million, or an assessed value of $12.97 million. Based on the statewide average mill levy of 82.98 mills, if this property is not reported on the tax rolls until the construction work is completed, the projected statewide annual loss in property tax revenues would be approximately $1,076,236 beginning in calendar year 1999.

            School districts, however, may be reimbursed for their lost property tax revenues for operating purposes through the School Finance Act. Of the $1,076,236 loss in local property taxes, 43 percent, or approximately $462,782 of this amount may be made up to school districts through the School Finance Act. In addition, it should be noted that any reduction in the value of nonresidential property will affect the calculation of the residential assessment rate.

            The Division of Property Taxation estimates that, if this bill becomes law, $1.38 billion in actual value of property ($400.2 million assessed value) currently classified as business real property will be reclassified as business personal property. This includes property owned by oil and gas companies, telecommunications and cable companies, power companies, and railways.

Spending Authority

            The provisions of the bill suggest an increase in the FY 1998-99 appropriation for the Department of Education, Public School Finance, Total Program of $462,782. However, the bill contains a “no appropriation” clause.

Departments Contacted

            Local Affairs