Understanding (and Fixing) Property Tax Assessment


Imagine, if you will, Tinyville, a community of only ten houses. All ten houses were the same size and style, built at the same time on lots of similar size, using similar architectural designs and building materials, each with comparable views and amenities, and each sold at its own. original owner for the same price, $ 250,000. Assuming the fair market value of each of these homes was $ 250,000 (because after a reasonable amount of time this is the price at which sellers and buyers met, nor under duress , nor under duress), Tinyville's tax assessor valued each property at $ 250,000. , resulting in a total underlying property value of $ 2.5M for all of Tinyville.

Like any municipality, Tinyville has expenses: police and fire departments, schools and libraries, water and sewer, sanitation workers, judges and clerks, engineers and inspectors, assessors and collectors. taxes, officials and secretaries. To simplify the math, let's say Tinyville's annual budget is only $ 100,000, and it doesn't have any other source of income (like parking meters, local sales, or income taxes). , or hunting / fishing licenses). In order to meet his annual expenses, Tinyville's tax assessor divides his $ 100,000 of budgeted expenses (known as the total tax levy) by each property's proportional share of the total assessed value of $ 2.5M of the community. Dividing $ 250,000 by $ 2.5M means that each house is responsible for 10% of Tinyville's property tax. Each homeowner (or their mortgage bank) receives a tax bill for $ 10,000.

For years, everyone has been happy in Tinyville. Families each have children in Tinyville schools, they parade in Tinyville parades and participate in Tinyville pie contests. In the natural course of events, two of the original families were more prosperous than others and moved to better digs in Mediumville, one retired to Southville, one moved to his office. company in Westville and one died in a tragic car accident, but their Bigville heirs did not want to return to their homestead. Regardless, five of the houses were put on the market and because the market had been performing well for several years, four were sold for $ 300,000 … except the one owned by the heirs of the deceased couple – they have dropped the house into run down, stopped mowing the lawn, and eventually some squatters came in and started ransacking the place. When they finally sold it as a 'handyman special' they got $ 150,000 for it.

Before a tax assessment becomes "final" it is sent to each owner for review. Each owner has the opportunity to challenge the rating. The original five homeowners continued to be appraised at a rate commensurate with their property's value of $ 250,000, and knowing that many of their neighbors sold their comparable home for $ 300,000, they silently accepted this assessment. The four new owners who paid $ 300,000 each are also valued at $ 250,000. Strangely, it is illegal for a municipality to perform a 'point appraisal' of individual properties. Therefore, even though the "fair market value" of these four homes has increased by 20% since the last appraisal, they continue to be appraised at $ 250,000 each. The tenth house, purchased by the handyman for $ 150,000, is also valued at $ 250,000, but he disputes his valuation. He argues that the fair market value of his house should be based on its recent purchase price and, through the various legal methods available to him, he has the house re-evaluated at $ 150,000.

Assuming the total tax levy remains unchanged at $ 100,000, what happens to each owner's property taxes? Nine of the ten homes are still valued at $ 250,000 each, but the last is now valued at just $ 150,000. One could quickly (and wrongly) guess that homes with unchanged assessed values ​​would have no change in their $ 10,000 property tax bill, and that the tenth house would only pay $ 6,000, but that wouldn't. does not add up correctly; Tinyville needs to collect $ 100,000 in taxes to balance its budget, and this formula only amounts to $ 96,000. In reality, the denominator also changes. The total value of the Tinyville appraised property is recalculated based on the appraised value of each property, and is now only $ 2.4 million. This means that each of the $ 250,000 homes now represents just over 10.4% of the total and is now responsible for that percentage of the $ 100,000 tax, bringing each of their valuations to $ 10,417. The handyman's assessed value of $ 150,000 represents 6.25% of the total, so he is now responsible for only $ 6,250 of Tinyville's tax levy.

Some (including the handyman) would argue that the handyman's house is worth less and therefore he should pay less tax than his neighbors. Others (including his neighbors) would argue that his house is the same size and shape, occupies so much land, and places the same demand on the police, fire department, schools, libraries, sewers and other Tinyville services, and that it should pay the same amount as other houses. Some (including the original five families) would argue that resold homes should be assessed at their new higher market value and that new owners should pay proportionately more in taxes. Others (including the four new owners) would argue that the fair market value of their home (as evidenced by their selling prices) is indicative of the actual fair market value of the five unsold homes, despite the fact that these homes haven't recently changed hands. These are the kind of issues that confuse homeowners and plague tax assessors, appraisal review boards, and courts in every municipality, every year.

In a perfect world, when the handyman files building permits to repair and restore the value of their home, the new value they create through the work they do should bring their tax assessment down to that of others. comparable houses, thus reducing the percentage of its neighbors. of the total tax, accordingly. Unfortunately, not everyone applies for a building permit, and not all projects require a building permit. Upgrading your kitchen appliances improves the value of your home without requiring a building permit. Many municipalities do not need a building permit to add a new layer to your roof or to renovate your bathrooms. Of course, there are also homeowners who build rooms in attics or lofts above their garages without a permit, and not all new buyers are savvy enough to realize they are paying for it. such unauthorized improvements. If you complain to the tax assessor that your neighbor has an unauthorized finished basement, the tax assessor doesn't have the same power as a home inspector to knock and demand to see this basement in order to tax them appropriately … and not all The building department inspector is willing to perform inspections on an anonymous tip so you may need to declare the guy who has denounced his neighbor. As a result, many home improvements are not reflected on the Tax Assessment Roles.

Since buying a home during a downturn in the market gives you the ability to grieve your tax assessment based on its new apparent fair market value, other homeowners may be affected. makes use of your new "fair market value" to argue that their home is comparable to yours, and that their valuation should also be lowered. This creates an additional burden for appraisers trying to determine new home values ​​that haven't sold recently based on evidence created by comparable homes that have. As more homeowners mourn their appraisals, this lowers the denominator of the municipality's total assessed value, thus increasing the actual tax bills of homes for which appraisals weren't done. # 39; a grievance. Naturally, this strengthens the process, causing more and more homeowners to mourn their taxes, creating more and more work for appraisers. However, taken to the unimaginable extreme, in a community where home values ​​have plummeted, it may take a few years for all homeowners to realize that they are being unfairly valued (relative to their neighbors), but ultimately when the last of them ends up crying their taxes, everyone's proportion to the new denominator should be comparable to their proportion to the original denominator, which means that ; on average, they will all pay about as much in taxes as before. In the years since, those who got on board first and had the largest and earliest reductions in their home's value will reap the greatest short-term benefits. Some would go so far as to argue that it is fair, like so many other cases in life where the early bird catches the proverbial worm.

However, the resulting chaos and disparity results in more work, which costs municipalities more in terms of assessment, review boards and grievance hearings. In the worst cases, when grievance processes fail and are left to the discretion of the courts, municipalities must pay unscheduled reimbursements to justified owners, which reduces their immediate coffers and further increases tax levies in subsequent years to compensate. these losses. For scholars of economic theory, Keynes would argue that these machinations are a necessary and productive part of the system, and that they employ lawyers who would otherwise earn less; these lawyers rent offices, hire staff, buy office supplies and, in fact, spin the wheel of the economy. Hayek would counter that these legal fees do not enrich the system so much, but redirect capital that would have been used elsewhere, such as the tax savings allowing homeowners to buy new furniture, to divert money from it. hire a gardener or take a vacation. He would view these inefficiencies in the tax assessment process as an unnecessary cost that allocates resources in a way that is not optimal … and I tend to agree with that. him. I don't know what the solution is, but I know we should try to find a better one.

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