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Understanding (and Fixing) Property Tax Assessment
Imagine, if you will, Tinyville, a community of only ten houses. The ten houses were the same size and style, built at the same time on similarly sized lots, using similar architectural designs and building materials, each with comparable views and amenities, and each sold to its owner. initial 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 that’s the price at which sellers and buyers met, neither of them being coerced ), the Tinyville tax assessor valued each property at $250,000. , resulting in a total underlying land value of $2.5 million 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 tax collectors, civil servants and secretaries. To simplify the calculations, let’s imagine Tinyville’s annual budget is only $100,000 and it has no other sources of revenue (such as parking meters, local sales or income taxes, or hunting/fishing permits). In order to meet his annual expenses, the Tinyville tax assessor divides his $100,000 of budgeted expenses (known as the total tax levy) by each property’s proportionate share of the total appraised value of $2.5 million. dollars from the community. Dividing $250,000 by $2.5 million means each home is responsible for 10% of Tinyville’s property tax. Each homeowner (or their mortgage bank) receives a $10,000 tax bill.
For years, everyone has been happy in Tinyville. The families each have children in Tinyville schools, they march in Tinyville parades and compete 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 company’s office in Westville and one died in a tragic car accident, but their heirs in Bigville did not want to return to their family estate. Anyway, five of the houses were put on the market and since the market had been doing well for several years, four were sold for $300,000… except for the heirs of the deceased couple – they dropped the dilapidated house, stopped mowing the lawn, and eventually squatters moved in and started trashing the place. When they finally sold it as a “handyman’s special” they got $150,000 for it.
Before a year’s tax assessment becomes “final”, it is sent to each property owner for review. Each owner has the opportunity to challenge the assessment. The original five owners continued to be assessed at a rate commensurate with the value of their $250,000 property, and knowing that many of their neighbors had sold their comparable homes for $300,000, they silently accepted this Evaluation. The four new owners who shelled out $300,000 each are also valued at $250,000. Strangely, it is illegal for a municipality to perform a “spot appraisal” of individual properties. Although the “fair market value” of these four homes has increased by 20% since the last appraisal, they continue to be valued at $250,000 each. The tenth house, bought by the handyman for $150,000, is also valued at $250,000, but he disputes his appraisal. 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 revalued at $150,000.
Assuming the total tax levy remains unchanged at $100,000, what happens to each homeowner’s property taxes? Nine of the ten homes are still valued at $250,000 each, but the last one is now valued at just $150,000. One could quickly (and wrongly) guess that houses 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 doesn’t add up. not correctly; Tinyville needs to collect $100,000 in taxes to balance its budget, and that formula is only $96,000. What actually happens is that the denominator also changes. Tinyville’s total land value is recalculated based on each property’s land value and now stands at just $2.4 million. This means that each of the $250,000 homes now accounts for just over 10.4% of the total and is now responsible for that percentage of the $100,000 tax, raising each of their assessments to $10,417. The handyman’s $150,000 assessed value is 6.25% of the total, so he’s now only liable for $6,250 of Tinyville’s tax levy.
Some (including the handyman) will say that the handyman’s house is worth less, and therefore he should pay less tax than his neighbours. Others (including his neighbours) would say his house is the same size and shape, takes up the same amount of land, and places the same demands on police, fire, schools, libraries, sewers and other facilities. other services in Tinyville, and that he should pay the same amount as the other houses. Some (including the original five families) would argue that resold homes should be assessed at their new, higher market value and new owners should pay proportionately more tax. Others (including the four new owners) would argue that the fair market value of their homes (as evidenced by their sale prices) is indicative of the actual fair market value of the five unsold homes, despite the fact that these homes do not have not recently changed hands. These are the kinds of issues that confuse property owners and plague tax assessors, assessment review boards and courts in every municipality, every year.
In a perfect world, when the handyman files a building permit to repair and restore value to his house, the new value he creates by the work he does should bring his tax base in line with other comparable houses. , thereby reducing its neighbors’ percentage of the total tax, accordingly. Unfortunately, not everyone applies for a building permit, and not all projects even require a building permit. Upgrading your kitchen appliances improves the value of your home without requiring a building permit. Many municipalities don’t need a building permit to add a new layer to your roof or re-tile 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 homebuyers are savvy enough to realize they’re paying for such unauthorized enhancements. If you complain to the tax assessor that your neighbor has an unauthorized finished basement, the tax assessor does not have the same power as a building inspector to knock and demand to see that basement. -soil in order to tax it appropriately…and not all The building department inspector is willing to perform inspections on an anonymous tip, so you may need to record the guy who tipped off his neighbor. As a result, many home improvements are not reflected on tax assessment rolls.
Since buying a home during a market downturn gives you the ability to challenge your tax assessment based on its new apparent fair market value, other homeowners can actually use your new “fair market value” to argue that their house is comparable to yours, and that their assessment should also be lowered. This creates an additional burden for appraisers as they attempt to determine new values for homes that have not recently sold based on evidence created by comparable homes that have. As more homeowners challenge their assessments, this lowers the denominator of the municipality’s total assessment value, increasing the actual tax bills of homes for which assessments failed to make the assessment. subject of a grievance. Naturally, this reinforces the process, prompting more and more homeowners to complain about their taxes, creating more and more work for assessors. However, taken to unimaginable extremes, in a community where home values have plummeted, it may take all homeowners a few years to realize that they are being unfairly priced (compared to their neighbors), but eventually, when the last of them finally pays their taxes, each’s proportion in the new denominator should be comparable to their proportion in the original denominator, which means that they will all pay on average about as much in taxes as before. In the meantime, those who got on board first and suffered the biggest and earliest reductions in home value will reap the greatest short-term benefits. Some would go so far as to say it’s fair, like so many other instances in life where the early bird catches the proverbial worm.
The ensuing chaos and disparity, however, leads to more work, costing municipalities more in terms of assessments, review boards and grievance hearings. In the worst-case scenario, when grievance procedures fail and are left to the courts to decide, municipalities must pay unscheduled refunds to justified owners, which reduces their immediate coffers and further increases tax levies in subsequent years to compensate. these losses. For economic theorists, 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 and buy office supplies and, in fact, keep the wheels of the economy turning. Hayek would counter that these legal costs don’t so much enrich the system as they redirect capital that would have been employed elsewhere, such as tax savings allowing owners to buy new furniture, hire a gardener or take holidays. He would view these inefficiencies in the taxation process as an unnecessary cost that allocates resources less than optimally…and I would tend to agree with him. I don’t know what the solution is, but I know we should try to find a better one.
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