Auditors Say State Property Tax Rolls Have Missed $1.2 Billion of New Construction

Legislative auditors say the Montana Department of Revenue is struggling to keep tabs on new development, meaning existing taxpayers pay more than they should

By Eric Dietrich for Montana Free Press

Screenshot from Montana Department of Revenue website

The Montana Department of Revenue, responsible for maintaining the property listings used to calculate property tax bills, is losing track of hundreds of millions of dollars a year in new construction as it struggles to keep its data updated, according to a study published Thursday by legislative auditors.

The auditors say the department’s approach to tracking new development and property-value-boosting renovations, which relies primarily on reviewing building permits, is failing to ensure that construction activity is quickly and accurately reflected in the tax rolls. That means lower tax bills for people who own newly built or renovated properties, but less money collected for public services and higher bills for other taxpayers.

READ THE STUDY

Auditors suggest that the department improve its efforts to reliably track building permits filed with other state and local government agencies and also expand its efforts to use aerial imagery to identify development that isn’t captured via building permits. They also say the revenue department can do a better job of managing in-person property inspections that help keep its data current and do more to retain field office staff.

In a formal response to the audit findings, revenue director Brendan Beatty writes that the department generally agrees with those recommendations, but noted that implementing many of them would require the state Legislature to authorize additional funding.

Auditors, department representatives and lawmakers will discuss the study at a meeting of the state’s Legislative Audit Committee set for Tuesday and Wednesday next week.

While property tax rolls are maintained at the county level in many states, Montana’s 1972 Constitution makes tracking properties for tax purposes a responsibility of state government. As such, the revenue department keeps a database of each of the state’s roughly one million distinct properties and their estimated value (much of that data is accessible to the public via the Montana State Library’s Montana Cadastral website).

In theory, when a vacant lot is developed into a higher-value home or business — or when a homeowner makes their property more valuable by, say, adding an addition — the department updates its records. Then, when it comes time to calculate fall tax bills each year, the list of properties for each of Montana’s 56 counties is passed to county treasurers, who factor in the collection rates necessary to fund local government budgets and mail bills to property owners.

Those tax bills are calculated proportionately to each property’s share of the local tax base — meaning an $800,000 house is theoretically responsible for twice the share of school and law enforcement budgets as a $400,000 house next door. If the owner of that $800,000 house completes a home renovation that adds $100,000 to their property value, their tax bill should, in theory, rise for the next tax year as their property becomes a greater share of the tax base. Assuming that local government budgets stay constant, their neighbors’ bills should decrease slightly in turn.

If, however, the state revenue department fails to get that renovation factored into the property tax rolls, the $800,000 house doesn’t see the tax increase, and its neighbors don’t see the corresponding decrease.

Furthermore, new construction is also a key funding source for many local government budgets. Under state law, city and county tax collection growth is capped at half the rate of inflation, with an exception for taxes levied on new development. As a result, many local government leaders say they rely on taxes from new development to keep their budgets workable when public expenses — say, gas for police cars or salaries for librarians — grow with inflation.

As such, the notion that the revenue department may not be keeping up with new development has been a major source of concern for local government leaders. Earlier this year, for example, Bozeman-area local government officials expressed frustration that the revenue department had fallen behind with tracking new construction in Gallatin County, saying the dynamic could harm services and force existing property owners to overpay.

The new audit report indicates that the Gallatin County situation is indicative of broader challenges for the department.

Auditors note that taxpayers aren’t necessarily inclined to voluntarily report property improvements that could result in higher tax bills. They also note that the department’s reliance on building permits puts it at the mercy of the different permitting standards that apply in different parts of the state. Rural areas, for instance, often don’t require full-fledged building permits for single-family homes.

In some cases, the auditors write, the department says local building officials are hesitant to share permit data because the local officials believe doing so could discourage property owners from filing for building permits. They add that there’s currently no state law that requires local jurisdictions to routinely share permit data with the revenue department in a standardized form.

The auditors also note that department staff often don’t have time to check properties to ensure the accuracy of the department’s data. They say more than a third of residential and commercial properties in Montana haven’t been inspected by the department to check the accuracy of their valuations in the past six years. Additionally, more than one in five of those properties haven’t been inspected by the department in more than a decade, auditors say, noting that they’re particularly concerned about properties in rural areas that can be difficult for department staff to access.

At a state level, the auditors say they estimate that the revenue department is failing to identify about 14% of the new value of residential construction each year between 2018 and 2023, an amount that represents about $300 million annually or $1.2 billion over the six-year period. They say that figure translates into about $8 million in annual property tax collections.

In comparison, the auditors say, the total value of residential properties across Montana was about $114 billion in 2023 and Montana taxpayers paid about $1 billion in property taxes on residential properties in 2022.

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According to a Gallatin County official, a backlog processing new construction at the local Department of Revenue office could mean the owners of some new construction aren’t sent 2024 tax bills that reflect the true value of their property — shifting burden to other taxpayers.

by Eric Dietrich 08.27.2024