When a redevelopment agency (RDA) finally starts taking its tax increment years after being created, does the resulting rise in other taxing entities' certified tax rates count as an illegal 'tax increase' under Utah's truth-in-taxation law?

Plain-English summary

A city that had created a redevelopment agency (RDA) years earlier — but only just began actually taking the RDA's property tax increment — asked the Commission to clarify a puzzling mechanical effect it had discovered in Utah's certified-tax-rate formula: Current Year Collections ÷ Adjusted Property Value = Certified Tax Rate. An RDA's captured tax-increment value is subtracted only from the denominator of that formula. As long as an RDA takes its increment starting the same year it was created, this causes no distortion. But in practice, RDAs typically take one to three years (or longer) to generate enough increment to be worth triggering — and during that gap, the tax revenue that should eventually go to the RDA instead flows to the ordinary taxing entities (city, school district, county, state).

The city's concern: once the RDA finally starts taking its increment, the certified-rate formula keeps the numerator (revenue) guaranteed at the prior year's level for every other taxing entity, while shrinking the denominator (taxable value, now reduced by the RDA's captured increment) — mechanically forcing each entity's certified tax rate upward, with no public hearing, even though nothing about the entities' own budgets changed. The city asked whether this was (1) the equation being calculated correctly, and (2) consistent with the Legislature's actual intent.

The Commission held there was no truth-in-taxation problem, though it agreed the mechanics work exactly as the city described:

• Utah's truth-in-taxation law (§ 59-2-924(2)(a)) is designed to guarantee each taxing entity the same total property tax revenue as the prior year — not the same tax rate. The Commission's own rule (R884-24P-24(L)(1)) deducts RDA increment value from the denominator specifically to accomplish that revenue-preservation goal.
• Because the statute bases the certified rate on last year's actual collections with no carve-out for revenue a taxing entity received only because an RDA hadn't yet started taking its increment, there's no textual basis to read in an exclusion for that situation.
• The taxing entities aren't harmed enough to require their approval of every RDA merely because they'll eventually lose future increment revenue — though the Commission acknowledged two real (if lesser) detriments: entities must set politically unpopular higher rates to hold revenue flat, and they stop benefiting from new growth in the RDA area once the RDA begins taking its increment.
• The bottom line: while the overall tax burden within the RDA's boundary area does increase, no individual taxing entity experiences a legal "tax increase" — because truth-in-taxation is about protecting against unapproved revenue growth for each entity, not about capping the total taxes property owners pay. Since revenue for every entity stays flat, the public-hearing trigger never activates, and the Commission found the statute's intent was being correctly carried out.

What this means for you

Cities and other taxing entities operating a redevelopment agency

Expect that delaying an RDA's first tax-increment trigger year will eventually force a one-time jump in other taxing entities' certified tax rates when the increment finally starts flowing to the RDA — that's how the formula is designed to work, and it does not require a truth-in-taxation public hearing because entity revenue doesn't actually increase.

Redevelopment agencies and economic development officials

This ruling confirms the certified-rate mechanism protects taxing entities' revenue, not their rates, when an RDA activates its increment — a useful point when explaining rate changes to stakeholders or the public.

Accountants and tax professionals advising local governments

The key distinction is revenue vs. rate: truth-in-taxation's public-hearing trigger is about entity revenue growth, so a rate increase caused solely by the certified-rate denominator shrinking (from an RDA increment deduction) doesn't itself require a hearing, even though it raises the effective tax burden on property within the RDA's boundary.

Common questions

Q: Does the rate increase caused by an RDA taking its increment require a truth-in-taxation public hearing?
A: No — because it doesn't increase any taxing entity's actual revenue, which is what triggers the hearing requirement.

Q: Does this mean property owners inside the RDA boundary pay more?
A: The Commission acknowledged the tax AREA (the RDA's boundary) does experience an increase from the prior year, even though no individual taxing ENTITY does.

Q: Could this situation ever require taxing-entity approval before an RDA is created?
A: The Commission found no basis to require blanket approval on this theory alone, though it noted the rate-increase and lost-new-growth effects could reasonably factor into why approval requirements exist for RDA creation generally.

Citations and references

Statutes and rules:

• Utah Code Ann. § 59-2-924(2)(a) (truth-in-taxation certified tax rate)
• Utah Admin. Rule R884-24P-24(L)(1) (RDA increment deduction from taxable value)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/94-030.htm

Original ruling text

94-030

Response March
29, 1995

Request

Val Oveson

Commission Chairman

Utah State Tax
Commission

1950 West 210 North

Salt Lake City, Utah
84134

[RE: Seeking an Advisory Opinion Letter -
Clarification of Certified Tax Rate Calculation when a RDA triggers the tax
increment.]

Dear Chairman Oveson,

Following the advice
of the Property Tax Division, we are writing this letter. As a city, we are seeking understanding concerning
the calculation of a taxing entity's �Certified Tax Rate� for property
tax. The perplexity happens when a
redevelopment agency (RDA) triggers the tax increment for a certain area.

It is our
understanding the certified tax rate is calculated as follows:

Current Year
Collections

---------------------------------- =
Certified Tax Rate (%)

199X �adjusted�
property value

The numerator is the
actual dollars collected that year. The
denominator is the value of the property which is adjusted for a �couple of
items�: (appeals, collection %, new growth, and **redevelopment agencies). ** RDA�s only affect the denominator of the
equation. There is not a problem with
the equation as long as the RDA's �base year� and �trigger year� are the same
year. (base year = RDA creation
year; trigger year = year to start taking tax increment) In reality,
this will never be the same year. It
usually takes one to three years for the projects to develop enough to generate
a big enough increment to trigger.
After the creation of the RDA area and prior to the trigger year, the
property taxes collected in that area are remitted to the different taxing
entities (City, School District, County, State,..).

The problem: If any of the taxing entities receive any incremental property tax
prior to the trigger year, they are guaranteed that property tax even though it
is part of the increment that should (and does) go to the RDA. The result is a phantom tax increase that
is given to the taxing entities. The
RDA gets the increment by taking the incremental property value out of the
denominator and apply the combined tax rates.
The taxing entities get the same taxes by guaranteeing the numerator to
be the same. By keeping the numerator
the same and reducing the denominator, forces each taxing entity's certified
tax rate to increase with no public hearing.

The City of XXXXX has
two RDA project areas and one EDA (Economic Development Area) project
area. Our first RDA area was created in
XXXXX. This year is the first year we
are triggering the increment to come to the RDA for the XXXXX RDA.
Through the process of setting the City's tax rate this year, we
discovered the confusion within the calculation of the Certified Tax Rate.

We as the City are the
creators of the RDAs & EDAs. They
are valuable tools available to the City to stimulate economic growth. It is not the City's intent to take
advantage of it's taxpaying citizens by imposing a phantom rate increase
through the taxing entities. After
numerous phone calls with county and state officials, it is explained to us the
formula is established by legislation and it is being carried out correctly.

We as the City are
concerned the intent of the legislation is not being carried out. Why would we need to meet and get approval
from the taxing entities to establish an area if the taxing entities are
guaranteed, as a minimum, the prior year's tax collected. Even when a portion of that amount is the
increment that goes to the RDA. Thus,
the increment will be collected twice; 1) the property owners within the RDA
area pay the county and the county remits the �increment portion� to the RDA.
2) the taxing entities are guaranteed they will receive at least the amount of
tax they received in the prior year.
The certified tax rates of each of the taxing entities are forced higher
because the numerator stays the same and the denominator is lowered. The result is all the taxpayers within the
different taxing entity's boundaries pay that incremental difference.

We as the City are
seeking clarification from the Tax Commission the following items:

1.
Is the �equation� being calculated and carried out correctly?

2.
Is the legislative intent being followed?

This is the first year
we will trigger an increment. We are
planning to trigger the other two areas in the next three years. We feel this
issue is big enough to get direction and clarification on before it goes any
further.

We would appreciate
your opinion on this issue.

Thank you,

XXXXX

Re: Advisory Opinion - - Redevelopment Agency
Tax Increments and Their Effect on Truth-in-Taxation

Dear XXXXX:

This letter is in
response to your request for the Tax Commission to issue an advisory opinion
concerning the tax increment a redevelopment agency (RDA) in XXXXX will receive
in XXXXX. As I understand the specific
facts of your situation, you have asked for our determination of whether the
payment of this tax increment will result in a tax increase for other taxing
entities that share the same boundary with the RDA.

Since the RDA has not
taken its tax increment in the past, this revenue has instead gone to the
taxing entities. Now that the RDA is going to take its tax increment, you are
concerned that the tax rate will increase to provide both the RDA its tax
increment and the taxing entities the same revenue they received last
year. You express a conviction that
this situation should be considered a tax increase under the truth-in-taxation
statutes. The Commission is prepared to
advise you on the consequences of the tax increment for purposes of
truth-in-taxation under current law.

Our research indicates
as follows:

1.
The truth-in-taxation laws are designed to �provide the same ad valorem
property tax revenue for each taxing entity as was collected for the prior
year.� Section 59-2-924 (2) (a) Utah
Code Ann.

a.
To insure this, the Commission includes a deduction to value due to RDA
tax increments when calculating an entity's certified tax rate. Rule ��424P-24 (L) (1) Utah Admin.
R.

b.
As a result, the certified tax rate for each taxing entity within an
RDA's boundary will allow the entity to retain its property tax revenue at the
previous year's level, even when an RDA receives a tax increment.

2.
Subsection 924 (2) (a) states that the certified rate is based on last
year's collections to be used when calculating a certified tax rate. There is no exclusion related to the
increased revenue a taxing may receive when an RDA delays in taking its tax
increment. This statutory construction
would indicate that there was no intent to exclude these proceeds from the last
year's collections amount for each taxing entity.

3.
Neither does the Commission find, as you assert, that taxing entities
are required to approve the creation of an RDA only because they will lose the
future revenue equal to all possible tax increments. Even though the taxing entities may retain their past revenues
when an RDA takes its first tax increment later than its initial year of
eligibility, they experience at least two other detriments for which the
approval requirement could reasonably be inferred.

a.
The taxing entities are forced to set higher tax rates to produce the
same amount of revenue, which may be politically undesirable.

b.
The taxing entities may not benefit from any new growth that occurs in
the RDA area once the RDA does begin to take the tax increment.

As you can see under
the situation you have presented, the tax area in which the RDA is located will
experience an increase in taxes from the previous year. However, the truth-in taxation laws are
designed to ensure that revenue generated by a tax entity does not increase
without a public hearing, not that the revenue within a tax area does not
increase. No tax entity will experience
a tax increase because of the tax increment, and legislative intent is met by
the current application of the certified tax rate process. This opinion is based upon the facts
presented in this opinion. Obviously, if there are deviation from these facts,
this opinion may be negated.

If you do not agree
with this determination, you may appeal to the Tax Commission for a formal
hearing. The results for that hearing
would constitute a declaratory judgment and be appealable to the Utah State
Supreme Court. A notice of Appeal
Rights and a copy of the Utah Taxpayer Bill of Rights are attached.

For The Commission,

Alice Shearer

Commissioner