Dennehy v. Department of Revenue, TC
| Decision Date | 06 July 1988 |
| Docket Number | No. TC,TC |
| Citation | 756 P.2d 13,305 Or. 595 |
| Parties | Thomas P. DENNEHY, Appellant, v. DEPARTMENT OF REVENUE, State of Oregon, Respondent. 2395; SC S33695. |
| Court | Oregon Supreme Court |
Gregory J. Howe, Portland, appeared and filed a brief on behalf of appellant.
Marilyn J. Harbur, Asst. Atty. Gen., Salem, appeared and filed a brief on behalf of respondent. With her on the brief was Dave Frohnmayer, Atty. Gen., Salem.
John W. Osburn, of Miller, Nash, Wiener, Hager & Carlsen, Portland, filed an amicus curiae brief on behalf of Portland, Beaverton, North Clackamas, and Tigard School Districts.
Howard A. Rankin and Katherine G. Georges, of Rankin, Vav Rosky, Doherty, Maccoll & Mersereau, Portland, and Oliver I. Norville, of Norville & Hiefield, Portland, filed an amicus curiae brief on behalf of the League of Oregon Cities, Gresham City, and the following urban renewal agencies: Albany Redevelopment Agency, Beaverton Urban Renewal Agency, Clackamas County Development Agency, Coos County Urban Renewal Agency, Eugene Renewal Agency, Lake Oswego Redevelopment Agency, Newport Development Com'n, Portland Development Com'n, Seaside Imp. Com'n, Tualatin Development Com'n, and Urban Renewal Agency of the City of Salem.
Since 1916, the power of the state and other taxing units to raise revenue has been limited according to a formula spelled out in the Oregon Constitution. Following a constitutional amendment adopted in 1960, the Legislative Assembly enacted laws for financing urban renewal projects by using ad valorem taxes on the increase of property values in a redeveloped area to pay expenditures incurred for the project. Plaintiff, a resident and property owner in Multnomah County, appealed the assessment of taxes against his property to the Department of Revenue on grounds that the collection of taxes pursuant to the assessment would exceed constitutional and statutory limitations. Obtaining no relief from the Department, plaintiff filed his complaint in the Oregon Tax Court. The Tax Court granted the Department's motion for summary judgment in an opinion which the court amended on rehearing. Dennehy v. Dept. of Rev., 10 OTR 348 (1987).
The basic theory of so-called "tax increment financing" of urban renewal indebtedness (the caption provided in codifying ORS 457.420 to 457.460) is simple, though its administration can be complex.
The ordinary process of taxing real property in Oregon is that taxing units 1 (each county, city, or special district) report to the county assessor the revenue to be raised for that unit. ORS 310.060. The assessor then calculates a rate of levy for each taxing unit based on the assessment value of taxable property in that unit. ORS 310.090. The rate, the fraction of the total taxable property value required to raise the revenue designated by the several taxing units, is applied to the assessment value of each piece of taxable property so as to fix the tax on that property.
Tax increment financing is designed to pay for urban renewal projects by segregating the added property values attributed to urban renewal and devoting the property taxes on this incremental value to paying the costs of the projects. The procedure is set out in ORS chapter 457. The county assessor certifies the true cash value of the property in the urban renewal area on the effective date of the ordinance approving the renewal plan. ORS 457.430. Thereafter, only this value is counted for purposes of computing the rate at which the property is taxed in order to meet the budgeted needs of the several taxing units. ORS 457.440(1). The rate so computed is applied, "extended on the assessment roll," against the actual assessed value of the property in each taxing unit, including increases in value beyond the value previously certified. ORS 457.440(2). Because this increased property value was excluded in setting the tax rate, applying the rate to the higher value will generate funds beyond the budgeted needs of the taxing bodies.
The taxes produced by applying the rate to the old property values certified under ORS 457.430 are allocated to these budgeted requirements of the taxing bodies, ORS 457.440(3); the additional taxes generated by the increase in property values in the urban renewal area are paid to the urban renewal agency "to pay the principal and interest on indebtedness incurred by the agency to finance or refinance" the agency's projects. ORS 457.440(4). The agency may irrevocably pledge these expected increased tax revenues to pay this indebtedness. ORS 457.440(6). In short, tax increment financing captures taxes generated by higher property values due to redevelopment or urban renewal expenditures for paying those expenditures, otherwise leaving the tax bases and tax rates of the several taxing units about where they would be without an urban renewal or redevelopment district.
Plaintiff does not oppose the allocation of taxes between the urban renewal agency (here the Portland Development Commission) and the several taxing units that levy the taxes, as provided in ORS 457.440(3) and (4). He maintains, however, that the directive of subsections (1) and (2) to compute a tax rate including only the certified or "frozen" value of property, which thereafter is assessed against the entire actual value of property in the taxing unit, contravenes the limits imposed by Article XI, section 11(1) of the Oregon Constitution on the amounts that the taxing units may levy without prior approval of the voters.
Article XI, section 11(1) of the Oregon Constitution provides:
Article XI, section 11(2) provides that a tax base must be approved by the voters and can increase without a further vote by no more than six percent above the amount levied in one of the preceding three years. Section 11(3)(a) excludes from the limitation "[t]hat portion of any tax levied which is for the payment of bonded indebtedness or interest thereon."
Urban renewal agencies supported by tax increment financing are not themselves taxing units and have no tax bases. The essence of tax increment financing, as already stated, is that such an agency obtains the revenue generated by applying to the full value of property in the renewal area a tax rate which was calculated to meet the needs of the taxing units when applied to an artificial "frozen" value of the property. Local taxing units ordinarily levy taxes at or above their respective tax bases; if the unit needs less for three consecutive years, the base drops by virtue of Article XI, section 11(2). Plaintiff therefore contends that the additional revenue generated by tax increment financing exceeds the tax bases of the respective taxing units containing an urban renewal area without having been approved by the voters.
Article IX, section 1c, of the Oregon Constitution provides:
As the Tax Court observed, this text was taken from a California provision apparently without considering that a California taxing unit levies its tax in the form of a rate, while each Oregon taxing unit levies a total amount to be raised. ORS 457.440 is designed to produce the amounts levied by each taxing unit, but to do so from less than the actual property values by a correspondingly higher rate of levy. According to the Tax Court, this makes it impossible literally to "divide" the taxes levied by the taxing units, in the words of Article IX, section 1c, but rather adds something to the taxes levied by them, "to provide for the collection of more taxes than are levied by the taxing units in order to have funds for urban renewal." 10 OTR at 353.
The court's analysis left in question who levied these additional taxes, if they were "levied" at all, and against whose tax base they must be tested for compliance with Article XI, section 11. The Tax Court initially concluded that the taxes collected under ORS 457.440 beyond the demands of the several taxing units were, for purposes of Article XI, section 11, imposed by the state itself. "Since the court has concluded that urban renewal taxes raised by ORS 457.440 are levied by the state, it is the state's tax base that sets the limit." 10 OTR at 357-58.
That answer evoked a petition for rehearing from defendant, expressing concern that the court's theory threw doubt on urban renewal bonds, because the state had not levied a property tax for many years and might well have no tax base. Defendant instead offered the court a menu of other theories to sustain the urban renewal financing scheme, among them that the assessor's actions under ORS 457.440 are not part of the "levy" process, that the taxes resulting from the increased property values in the urban renewal area are not "levied," because the amount is uncertain, that the sums collected are not "revenues of the state," that the sums...
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