State and local taxes are not collected in vacuums. Each affects the other, and their interaction performs a major role in the delivery of governmental services.
The state of Arkansas relies on the proverbial three-legged stool of taxation: At the state level we collect income and sales and use taxes; local government is the domain of property taxes.
The best illustration of state and local tax interaction is the funding of public education in Arkansas. In fact, the line between state and local government becomes blurred when considering public school funding.
Excluding federal government inputs, state general revenue accounts for about two-thirds and local property taxes the remaining one-third of public school funds, over three-quarters of all property taxes collected are for school purposes, and about half of state general revenue is spent on public education.
The distribution of state general revenue to school districts is based on the wealth of each district measured by the assessed value of property. The locally elected county assessor is responsible for determining the assessed value of most property in Arkansas. So, in effect, the distribution of half of state general revenue depends on the work of 75 people.
Natural gas exploration and production in the Fayetteville Shale Play is projected to have a large economic impact on the state and more particularly in the counties where the play is located. Property values in the Fayetteville Shale are already showing increases where exploration and production are active, and county assessors are reacting to these changes.
County government is Arkansas’ treasury for land information. Though local abstract offices maintain land ownership information, the county courthouse is where the public learns when ancestors bought and sold estates or otherwise acquired or lost them, where the properties can be located, and a reasonable or at least legal estimate of a property’s value.
Each county office, judge, sheriff, circuit clerk, county clerk, collector and treasurer plays a role in property record management, but it all comes together at the assessor’s office.
The traditional job of a county assessor involves completing three tasks: the discovery of, the valuing of and the listing of property for taxation purposes.
The Fayetteville Shale crosses counties where mineral rights have not contributed to the property tax base; at least, natural gas has not been a known commodity in these counties. Historically, up until the Fayetteville Shale Play became active, mineral rights in the counties have been assessed only at the insistence of the property owners, and the assessed values were nominal. No one felt compelled to assess mineral rights, and the records of who owned them faded away.
Retrieving mineral rights ownership is a difficult task. The most challenging property tax aspect of the Fayetteville Shale is finding property ownership. Reserving mineral rights ownership – severing these rights from the rest of the property by sellers – is a common practice, and thoroughly checking deeds for these reservations is the only way to determine when severed mineral rights are created.
Checking deeds and separating severed mineral rights in the records was a low priority in assessor offices in the past. However, the Fayetteville Shale development has changed that, and thoroughly checking deeds is required, including property owner-supplied legacies left by unknown ancestors and those filed daily in the courthouse. It will remain a challenge, one that likely will grow as development of the play expands.
By John Zimpel, arkansasbusiness.com