Missoula’s Property Tax Working Group begins deep dive for solutions to skewed system

When a Brooks Street business owner opened his tax bill this year, he couldn't believe the 118-percent increase that waited inside the envelope. While his business hadn't changed, his assessed value had jumped dramatically, hence the increase in his tax bill.

The story was one of several shared on Thursday by Missoula Mayor John Engen as he convened the first meeting of the Property Tax Working Group, a panel of local officials, business owners and lawmakers called together to identify where the system is broken and how to fix it.

Much of the challenge may sit at the state level, mired in a convoluted system that has even the most seasoned experts confused.

“I've been involved in municipal taxation for the better part of 16 years, and I continue to be surprised about the complexities around some of these issues,” Engen said. “We're out to collect evidence and information that we can use to see if we can bring some better balance to this system, and create some alternatives as we move forward.”

While the Missoula City Council lowered the tax rate last year, many Missoula residents and business owners still saw their taxes jump due to an increase in their property's assessed value – a function of the Montana Department of Revenue.

State law requires the department to send a classification and appraisal notice to property owners in the first year of each appraisal cycle, and whenever a change in ownership, classification or value has occurred.

“I'm not trying to throw DOR under the bus, but as someone who's responsible for talking to you all about this, we can't make much sense of it,” Engen said. “Until we get an explanation that allows us to make some sense of it, it's a mystery.”

At the group's first meeting at City Hall, several local bankers expressed concern over the inequity in the state's appraisal process and the impact it has on local businesses, including Barb Callaghan with First Security Bank.

Callaghan said the unexpected increase in assessed values has placed borrowers in a bind, “some to the point where it has a big impact on their ability to repay loans.”

The increases have also forced several property owners to increase rent on Main Street businesses, often pricing them out of the market. The owner of Noteworthy Paper and press shared a similar story, as did Walt Muralt, who owns Muralt's Travel Plaza and the Broadway Inn.

“With the Broadway Inn, my taxes went from $41,000 to $63,000 – a huge chunk compared to the profitability,” he said. “For 15 years, it went up maybe $1,000 or $2,000, or down $500. You're talking changes within 1 to 5 percent, but suddenly it’s a 50-percent increase.”

Despite the jump in property values, the revenue isn't making its way to the coffers of local government because of the way taxes are levied by the state. Citing examples, Dale Bickell, the city's CAO, said for every mill levied in the city of Bozeman, the city nets $2.15. Yet despite the increase in property values in Missoula, a mill only levies $1.71.

That means Bozeman can levy fewer mills and raise more revenue.

“We've been crunching these numbers for a couple years on why we have these high real-estate values happening in Missoula that still aren't translating to a number like Bozeman, Helena or even Kalispell has,” Bickell said. “While our real-estate values go up, our taxable values, as a percent of that, aren't going up. They're not maintaining and it doesn't make any sense to us.”

That left many members of the upstart working group looking to the state for answers, a topic that will likely follow in future meetings as the group looks to solve the mystery around taxation and find solutions.

“I've been working on property taxes in Missoula for 20 years, either as an auditor or working for local governments,” Bickell said. “There are still things that surprise me and I don't understand. It's a very complex thing and there's so many moving parts.”

What is known is that local elected leaders have heard a single message loud and clear – that increasing taxes are a growing concern among residents. While the burden of higher taxes initially falls on property owners, it often trickles down to renters as well, and businesses that lease storefronts.

Missoula County clerk and treasurer Tyler Gernant believes commercial properties, at least, have been undervalued for years. That changed during the state's latest appraisal cycle, prompting at least two lawsuits against the state.

“For the most part, commercial properties were not being taxed at a fair market value, but now I think it's gone in the opposite direction,” said Gernant. “There's two lawsuits I'm aware of challenging commercial property valuations in Missoula.”

Gernant said the state has also instituted a “desirability factor” that's calculated into the appraisal process.

“If you're located on the Reserve Street corridor or the Brooks Street corridor, you’re going to have a desirability factor that's higher than other areas of the city or the county,” he said. “Those are things that are reflected in the values that are new to Missoula.”

Citing statewide research, the group also agreed that the problems aren't contained in Missoula.

“It's happening statewide,” Engen said. “How is it that our real estate values are going up, but our collections don't reflect that? It's a fundamental question, and we need some answers to that.”