An unexplained lag in sales tax collections and the prospect of losing commercial property tax revenues in a court battle had Overland Park officials on edge as they set the public hearing for the 2020 budget.
City Manager Bill Ebel told council members Monday that more bad news on either issue would likely mean spending cuts, even though the latest property valuation estimates are higher than anticipated.
Ebel’s comments came in a committee meeting before the council set Aug. 5 as the public hearing date for a 2020 budget that is largely unchanged from the one he recommended in June. The $304.8 million budget estimates that the tax rate will remain flat at 13.566 mills. The rates won’t become final until this fall, after appeals are finished.
Because fewer people than expected appealed their property valuations this spring, the values on which property is taxed are a bit higher than expected, Ebel said. The budget was written with the assumption that values would increase by 4.4 percent. They may be 4.7 percent higher instead.
But that bright spot for city budget makers is more than offset by fears about court rulings on how commercial property is valued. Walmart recently won an appeal to the state that the county had overvalued its stores using the value of the business as a factor. The retailer argued that values should be set based on the building only, making the value of an open store the same as that of an empty store.
This argument, known as “dark store theory,” has been gaining traction in other parts of the country as well. Ebel speculated that the Walmart’s continued success could have a ripple effect on future budgets.
For example, if the decision stands, cities will more than likely have to refund excess property tax payments made to the retailer over the past three years, Ebel said.
The case could inspire other retailers and perhaps office property owners to use the same argument on their property values, he said. “That is a scenario that is catastrophic, in my opinion,” he said.
Although it could take months or years to determine the outcome, the city could end up with 25 to 30% of its property tax revenue at stake, Ebel said. “That is something I’m not quite sure how you would plan for.”
Slow sales tax collections were another reason for concern, he said. The city budget was written with the expectation that sales tax would grow by about 2% over last year. However tax collections so far are about 6% less statewide than last year, he said, with every city in Johnson County collecting less than last year.
“I don’t mean to be worrisome but it’s real and we’re watching it,” Ebel said. So far the state has not been able to pin down why sales tax is off in Kansas, but some of it may be due to how collections are timed, he said.
“I don’t think anybody today can quite figure out what is going on in Johnson County or the state of Kansas when nationally and internationally economies are growing,” he said.
Some city council members said the sales and dark store issues should have an impact on how they approach other decisions. Councilmember Faris Farassati said the council should be careful about tax incentives to developers. “We are at a juncture where we need to be extremely critical of any kind of tax giveaway,” he said.
Councilmember Logan Heley said quicker implementation on energy conservation upgrades could put the city in a better position for future budget problems. The city plans to gradually change to LED lighting and update automation systems in its buildings.
The council will not take final action on the budget until after the public hearing. The budget is scheduled to be formally adopted Aug. 19.