Back in an earlier life, I worked with state and local governments to improve their property valuation systems, for the purpose of tax assessment.  Our main goal in working with our customers was to avoid the situation that faces many New York counties right now:

Local governments here in well-to-do Westchester County are being overwhelmed by property tax appeals, driven by a growing industry of companies seeking reductions in homeowners’ bills in exchange for a share of their savings.

The record-setting number of tax grievances, which nearly quintupled from 2008 to 2010, are adding fiscal pressure to communities already throttled by economic losses and cuts in state aid.

Towns are being forced to refund millions of dollars to homeowners who show they have been overcharged. Some, like New Rochelle, have been forced to increase tax rates to make up for the erosion of assessed property values. Others, like Greenburgh, are also exploring costly townwide revaluations — a move that many towns have not made in a half-century or more.

This kind of crisis is easy to prevent. But it requires transparency in the operation of the Tax Assessor’s office.  There are two elements required. First, property needs to be revalued annually. Second, the assessed value should be as close as possible to 100 percent of market value.

In most counties, neither of these elements are in place. Revaluations are done infrequently, and assessed values are expressed as a fraction of the current market value.

 Towns here do not regularly reassess individual homes; instead they establish an aggregate valuation increase each year that is imposed on all properties.

As a result, assessments of older, more stately homes had not kept pace with their soaring market values, while middle-class residents and those owning expensive homes built more recently were paying considerably more than their fair share of taxes, and could argue persuasively for a reduction.

The article notes that revaluations are expensive, which they are when done infrequently.  The expense of a “full reval” mostly stems from the data collection effort required, with a visit to every house to gather the characteristics of the property.  Once all the data is collected for all the properties, a computerized model is created, associating recent sale prices with sets of property characteristics, giving a price per square foot of living area, adjusted by other property features, including, of course, location.  The data collection effort invariably requires more workers than are on permanent staff, and is usually handled by outsourcing the data collection and model creation to an outside vendor.

A program of annual revaluations relies on just collecting information on properties that have changed in the past year, using building permit filings as a source for determining what properties have changed structurally, and on collecting data on the properties that have sold in the last year or two, updating the valuation model.  The updated valuation model is applied to all properties, and taxpayers receive an annual valuation notice, at 100 percent of market value.

This makes it easy for the taxpayer to determine whether the model is doing an accurate job of estimating her property’s market value–the assessed value should be the market value. Relative changes in property value are also picked up automatically by the model; the problem the Times notes in Westchester doesn’t arise, because location and style adjustments to market value are incorporated annually by the inclusion of recent sales information. And the workload is such that the data collection and modeling work can be handled in-house.

Johnson County, KS is an example of a jurisdiction that follows this property valuation methodology.  You’ll note they also include recent sales information relevant to the taxpayer’s property.

So why do so many jurisdictions use opaque processes that create situations like the one facing many New York counties?

County (municipal in some states) elected officials do this to hide tax increases.  Property taxes are assessed by multiply a rate times the dollar value, a rate that usually values by land use.  This rate is called a millage.  Most of the time the tax base, the total value of the jurisdiction’s property, is rising in value, because of both new construction and  of historically rising property values.  What should happen is that an increase of 5 percent in the tax base should be reflected in a 5 percent reduction in the millage, with some individual properties rising in value more than 5 percent and some less.

Instead what happens is the jurisdictions “establish an aggregate valuation increase each year that is imposed on all properties.”  When they impose that blanket increase in value, of say 5 percent, they reduce the millage at the same time, but generally by less than 5 percent. The elected officials proclaim a property tax cut of, say, 3 percent, when they have actually increased it by 2 percent.

This gets masked by the fractional assessment–if your million dollar house goes from a valuation of 250,000 to a valuation of 262,500, you’re pretty hard pressed to determine whether that new number is correct or not.

But when there is a precipitous drop in values overall, there is an incentive for private organizations to introduce transparency, explain how this works to taxpayers, and get them reductions in value to reflect current market conditions. Because this is done piecemeal, and helps people with highly valued homes more than low-valued homes, this process actually increases the inequity of an already generally inequitable system of property taxation.

It also wreaks havoc with jurisdictional budgets, and exposes a decade or two of  flim-flammery by local elected officials.  This is actually something a small number of taxpayers can do something about. Attending county commissioner meetings, using open records laws and other forms of citizen oversight can in fact be practiced at the local level.

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