Meeting Schedule MEETING REMINDER
CHANHASSEN CITY HALL, 690 COULTER DRIVE
May 10 , 1989, 7: 00 p.m. - Meeting with Orlin Shafer, County
Assessor
May 15, 1989, 7 :00 p.m. - Community Center Task Force Meeting
7 : 30 p.m. - Joint- City Council/HRA Meeting
May 16 , 1989, 7 : 00 p.m. - Board of Equalization and Review
( Property Equalization Meeting)
June 5 , 1989 , 7 : 00 p.m. - Position Classification and Pay
Compensation Plan
. .
CITY OF
_ ,
,..4 \
\I . i CHANHASSEN'
,„,,, , ._,-
690 COULTER DRIVE • P.O. BOX 147 • CHANHASSEN, MINNESOTA 55317
` = (612) 937-1900
MEMORANDUM
TO: Mayor and City Council
FROM: Don Ashworth, City Manager
DATE: May 8, 1989
SUBJ: Discuss Assessing Practices with Carver County Assessor,
Orlin Shafer
It has been a number of years since we had a worksession with the
County Assessor' s office. This is a contractual service between
the County and City wherein they are required to review and
assess i of the properties within the City every year. Property
valuations which will be the subject of the Board of Equalization
meeting on May 16, 1989 represent the work efforts of the
Assessor ' s office from January 1, 1988 through the end of the
year. Accordingly, our worksession for the 10th really has two
functions , i .e:
- Review 1988 Changes : This represents the specific changes
already made by the Assessor and the values which have been
sent to property owners for the Board meeting on May
16th. Although the City Council does have authority to
modify these, changes cannot be more than 1% of the total
gross values within the community. Except for
understanding how and why the values were arrived at by the
Assessor, the Council has very little opportunity to change
such. Values set by the local board in May are forwarded
to the County for them to conduct a County-wide assessment
hearing, i .e. to insure that each of the cities/townships
are equalized. All counties must submit their values to
the Commissioner of Revenue who is to verify that equaliza-
tion exists between all counties in the state. [Note: It
was the Commissioner' s order of adding 15% to all commercial/
industrial properties in Carver County which generated so
much discussion two years ago. ] The Commissioner must
finish this work before October so that those equalized
values can be used by the auditor in calculating taxes
payable in the following year; and
- Discuss Policy Changes : If the detailed review show that
certain segments of homes/ classes of property are not
Mayor and City Council
May 8, 1989
Page 2
being equalized to the extent desired by the Council, this
portion of our agenda should allow for discussion of those
policies. Hopefully, we can come to agreement with Mr.
Shafer as to objectives that the Council would like to see
met during 1989 so that the Board of Adjustment meeting in
May, 1990 can more properly reflect desired goals and
objectives of the Council.
After reviewing the attached information, should you have any
questions, please feel free to contact me.
6S1111116
lbe� J
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Y/
The property tax
•
-Y
The property tax is one of the oldest, and also one of the least honored, ways
of raising government revenue. Nevertheless, the tax, which has been evolving
`' since colonial times,is one of the main supports of such local government services as police and fire protection and education. Although some features of the tax-
. as those which require intragovernmental uniformity in tax rates and prop-
erty assessments—represent an attempt to obtain a fair distribution of the tax
burden, the tax has always been the subject of substantial controversy. The
controversy, howeger, has intensified on many levels in recent years.'
Academic economists, employing different theoretical models, have debated
the effects of the tax on income distribution.It has been argued that the property
tax is unduly regressive,and concerned legislators in some states have attempted
to offset this perceived characteristic by introducing"circuit breaker"provisions
and other measures which provide some tax relief for the aged and the poor.
The employment of property tax as the basis of local educational expenditure
has been attacked on the grounds that the resulting disparities in school spending
among local districts are unfair and unconstitutional. Criticism of the tax has
been more than academic;use of the tax is being curtailed by taxpayer restrictions
such as Proposition 13 in California and similar measures in other states.
Partially as a result of these developments, local government reliance on the
property tax has been diminished somewhat. General revenue sharing (GRS)
and other aid from the federal government and substantial increases in state
funding levels—especially support for education—have reduced the share of
total local revenues raised by the property tax. The increased use of other taxes,
especially in cities,has added to the percentage of local government tax revenues
based on property tax. In spite of these developments, the property tax is, and
is likely to remain, the most important source of local government revenues.
Criteria for tax equity, efficiency, and effectiveness
Several criteria may be used to decide whether to impose a tax and to judge its
equity, efficiency, effectiveness, and long-range acceptability. These criteria are
briefly set forth as essential background for the sections of this chapter that deal
with the origin and development of the property tax, the controversial areas
affecting the property tax, and the administration of the property tax.
1. Fairness. A tax should reflect the ability to pay of those who bear its
burden, or the tax burden should be matched by the benefits that
taxpayers receive. In general. taxes that take a higher percentage of the
income of the poor (regressive taxes) are considered unfair.
2. Certainty. The rules of taxation should be clearly stated and evenly
applied. In the case of the property tax, appraisal of property should
reflect its market value without bias.
3. Convenience. A tax should he convenient to pay, with billing dates that
coincide with the income streams of taxpayers. However, the opportunity
to make monthly escrow payments (under mortgage contracts) and
J 124 Management Policies in Local Government Finance
quarterly payments has made payment of the tax more convenient than a
lump sum payment each year.
4. Efficiency. Fair administration should be feasible and efficient. The
administration and collection costs should not be out of proportion to the
revenues. A tax should be appropriate for its geographical jurisdiction; it
should neither be easy to avoid nor too costly to enforce.
5. Productivity. A tax should produce sufficient, stable revenue.
6. Neutrality. A tax should not distort the way a community would
otherwise use its resources—unless it is very clear that a change is socially
desirable.
Origin and development of the property tax
The property tax is not a tax on all wealth;it is a tax on certain types of wealth,
that of a person or a firm. Real estate is the main element in the tax base. Many
elements of personal property are not taxed, and the property of some owners
(other governments and nonprofit institutions)is exempt.The tax rate is applied
to the assessed value of a taxable property owned on the assessment date. The
-assessed value ideally reflects the value of the property involved; no reduction
is made in the assessed value because of a mortgage or other debt carried on
the property.
In the colonial period, various categories of property were listed as part of
the property tax base, with a specific tax rate for each category. Unless a type
of property was specifically cited by law, it was not included in the tax base.
However, by the middle of the nineteenth century, the tax had evolved into a
general property tax. All property was considered part of the tax base unless
•
, specifically exempted by law; and a uniform rate, specified by a state law or
constitution, must be applied to all property within each district. Property own-
ership was considered an indicator of the ability to pay taxes, an equity that
precluded discrimination among types of property as well as among taxpayers.
Property
Real Property Personal Property
(Realty) (Personalty)
Land and
improvements,
including
buildings and other
structures Tangible Intangible
Household goods, Claims to the value of
motor vehicles, real property ano
inventories, tangible personal property
machinery and in the form of
equipment,etc. stocks, bonds.notes,
mortgages, etc.
i r
1 ,
1 ,
Figure 6-1 Categories of real and personal property
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f.
The Property Tax 125 ,'
At the time, the evolution of the tax to a general property tax and the
development of uniformity provisions were thought to be reform measures de-
signed to remedy the ills of special property taxes. More recently, some states
have introduced property tax classification and provided different rates for dif-
ferent categories of property. These measures, too, are considered reforms. In
some cases, different rates are established for residences, farms, and businesses,
resulting in different impacts on the distribution of the tax burden. In other
cases,different rates on agricultural and open space uses is an attempt to preserve
farmland and undeveloped areas.
There are very practical problems with discovering, assessing, and applying
a property tax to intangible personal property such as secunties,mortgages, and
cash. This kind of property generally is exempted from taxation or taxed at
lower rates than tangible property. Moreover, a tax on intangibles is easy to
avoid and costly to administer fairly. Thus, while some have proposed taxing
intangibles at relatively low rates, others argue that it is wisest to eliminate
intangible property from the property tax base altogether.2
Scope of the propej(y tax
In few places is there a truly general property tax, one that covers and taxes all
properties at uniform rates. Although some states have as many as twenty-five
classes of property, the tax revenue is primarily derived from real estate that
consists of land and improvements and structures on the land. This is clearly
shown by the data on property tax collections by source in Table 6-1. Nearly
half of the local property tax revenue in 1967 and 1977 was from residential real
estate, including farm residences and single-family and multiple family homes.
In 1977, business real estate, exclusive of public utilities, accounted for 18.7
percent of total property tax collections, a decline from the 20.5 percent share
in 1967. Real and personal property tax collections from public utilities declined
from 7.5 percent of the 1967 total to 5.7 percent of the 1977 total.
Personalty, or tangible and intangible personal property as distinct from real
estate, declined in relative importance as a source of tax collections. Where
Table 6-1 Estimated
property tax 1967 1977
collections by source:
1967 and 1977' Distri- Distri-
Amount bution Amount button
Source (in millions) (%) (in millions) (%)
Households $13,293 510 $32.982 52.7
Realty3 11,957 45.9 30.447 486
Personalty.' 1,336 5 1 2.535 4 1
Business firms 10,155 39 0 21 642 34 6
Realty, 5,327 20.5 1 1.672 18 7
Personalty' 2,883 111 6.405 10.2
Public utilities 1,945 7.5 3.565 5 7
Acreage in farms 2,082 8.0 5.973 9 6
Vacant lots 517 2.0 1 938 3.1
Total 26,047 100 0 62.535 100 0
Source:U-S.Advisory Commission on Intergovernmental Re- family homes and about$5 billion or 8 percent.from mul-
lations. Warmly units
1 Includes state property tax collections.estimated at$862 4 Includes taxes on furniture and caner household effects,
million for 1967 and$2.260 million for 1977 The state taxes motor venicles.and intangibles
were primarily tom utilities.railroads,and motor vehicles. 5 Commercial and industrial.other titan puolrc utilities.
2 Includes farm nomes. 6 For oilier man puulic inc.ujes saxes on mercnan•
3 Includes born single-family dwellina units and apartments: mime and on manufacturers mven'ams. loom, and ma-
in 1977,about$26 billion,or 41 percent.was tom single- chinery
126 Management Policies in Local Government Finance
personalty was taxed, it was mostly on the inventories and equipment of mer-
chants and manufacturers and other business firms (except utilities). It declined
from an 11.1 percent share in 1967 to a 10.2 percent share in 1977. Taxes on
such items of personalty as furniture and other household effects,motor vehicles,
and the intangible personal property of households declined from 5.1 percent
in 1967 to 4.1 percent in 1977.
The property tax is levied by some state governments as well as by local
governments. In fact, in 1902 the states collected $82 million in property taxes,
which was 52.6 percent of total state tax revenues. By 1978, however, state
property tax revenues, which had risen to $2.3 billion, only represented 2.0
percent of total state tax collections.' The states, taxing primarily utilities, rail- _
roads, and motor vehicles, make minimal use of property taxes. States have
come to rely primarily on sales, income, and other excise taxes, and virtually
have left property taxation in the exclusive domain of the local governments.
On an overall basis, property tax revenues have declined relative to other taxes.
Property taxes accounted for 82.1 percent of the sum of state and local tax
revenues in 1902. This ratio declined to 45.9 percent in 1948 and to 34.1 percent
in 1978.
--
Revenue growth
•
The decline of the importance of the tax on an overall basis does not mean that
there has been any decline in the absolute level of property tax collections by
local governments. The average yearly rate of increase in local property tax
collections was greater than 8 percent through the 1970s. As Table 6-1 shows,
collections increased by nearly 150 percent from 1967 to 1977. The property tax
still represented 89 percent of local government taxes in both 1902 and 1948,
although it had become more than 97 percent of the total in 1932. By 1978 there
was an increased use of other local taxes. Nevertheless, the property tax still
- accounted for more than 80 percent of local government tax collections.
Nationally, the property tax has remained the major source of local financing
` for local government services. Property tax revenues did not nse as rapidly as
total local government revenues or expenditures in the 1970s, largely because
of the dramatic increases in federal and state grants and partly because of the
increased local government employment of sales and excise taxes. However, the
t property tax remained important in many communities, especially in particular
1 areas of the nation. In twenty-two states, local governments derived 90 percent
• or more of their direct tax revenues from the property tax. The New England,
Great Lakes. and Rocky Mountain regions relied most heavily on property
taxation. In the Southeast there has been less reliance on property taxation and
more use of the sales tax. In the Southeast, however, nine local governments
derived, on the average, more than two-thirds of their local tax collections from
levies on property.
•
Controversial areas
Although the property tax has remained the major tax of local governments, it
has for a long time been one of the least popular sources of public revenue. The
tax has been attacked as unlair because the base, unlike that of a net wealth or
income tax, does not fully reflect ability to pay and appears to impose unrea-
sonable burdens on the poor The very nature of the tax has been attacked as
one that cannot he administered efficiently or fairly and as one that has en-
couraged urban blight, suburban sprawl, and unfair dispantics in local govern-
ment services. More recent analyses, however, have challenged the traditional
•
view that the incidence of property taxation rests most heavily on those with
•
The Property Tax 127 '
i
lower incomes. and changes in state laws and local practices have reduced some
of the regressive pressures.
As a local tax used to support local services,the property tax is a highly visible
levy whose costs can be related directly to the benefits of local government
programs. This visibility is part of the basis for two developments that originated
in California in the 1970s and have had impact over the whole nation. One of
these was the problem involved with use of property taxation as the basis for
local expenditure on public education; the other was a general move to limit the
burden of property taxation and the level of local government spending.
Financing education
In 1971, the California Supreme Court ruled that a local government system to --
finance public education that discriminates among students on the basis of wealth
in the school district is in violation of the equal protection clause in the United
States Constitution.4 In a state school program that relied on local property
taxes, the quality of a child's education would depend on the property values
of the communiy. A child in a poor community would receive less of an edu-
cation than a child in a wealthy community. The Serrano case, and others that
followed in other places, made it clear that the wealth or income of the state
as a whole should determine the level of spending for every child in the state.
Although the court decisions required the end of any discrimination against
any definable group and called for more intrastate equalization of educational
1 spending, the means to accomplish this became the responsibility of the state
4
legislature. The property tax was not discarded as a major source of school
support, nor was there any attempt or directive to equalize educational spending
on a national (rather than intrastate) basis'—even though the reform of the
system of financing public education was a matter of national concern.
Among the ways that states could respond to the move for retorm was to
increase their efforts under equalization and support programs for public schools.
During the decade 1962-1972,the national average of state shares for the support
of public elementary and secondary school education rose only trom 40.5 percent
to 42.0 percent of total local school costs. However, by the 1978 school year,
the state share had risen to 48.3 percent. State governments now provide the
financing for the major share of local expenditures for schools.' With the rising
I contributions from the states and from general revenue sharing in the 1970s,
there was a decrease in the pressure on local property taxation tor the support
of the schools.
The tax limitation movement'
From the mid-1970s on, there has been a growing movement to enact restrictions
on the growth of taxes. The restrictions that have been used are not uniform
across all states. In a number of states, limits have been placed on revenues
alone; in other states, limits have been placed on expenditures. Sometimes the
limits have come in the form of amendments to state constitutions; sometimes
they are simply acts of the legislature. The modern movement to limit govern-
mental activity began in California, with an attack on the property tax spear-
headed by Harold Jarvis. The experience in California culminated in voter
passage of the famous Proposition 13.
The revolt against the property tax stems from the combination of two de-
velopments: the proportionately greater growth of property %clues relative to
income and the increasing employment of such sophisticated devices as the
computer to keep assessments up-to-date. The success of the assessor. one who
keeps assessment values abreast of rising property values, means that in boom •
I
I/ 128 Management Policies in Local Government Finance
areas such as California,the property tax escalates faster than income and various
government units ride a curve of rising revenues.
The essential features of Proposition 13 have been neatly summarized by
William Oakland:
_ The Jarvis-Gann Amendment, or Proposition 13 as it has come to be known: (1)
restricts the property tax rate to no more than one percent of assessed value; (2)sets
assessed value for a property which has not been transferred since 1975-76 equal to its
fair market value in that year plus two percent per year(compounded); in the event
that the property has been transferred since 1975-76, the market value at the time of
sale is used(plus the two percent growth factor); and (3) requires that new taxes or
increases in existing taxes(except property taxes) receive a two-thirds approval of the
legislature in the case of state taxes,or of the electorate, in the case of local taxes.8
Although the initial voter approval of the Jarvis-Gann Amendment that placed
Proposition 13 into the California constitution caused considerable trepidation
# among local state officials, the actual belt tightening and cutting of programs
was less than anticipated because the state government had a considerable sur-
i plus, which it parcelled out to the local governments. The initial passage of
_ Proposition 13 has been followed, however, by the passage of Proposition 4,
which is essentially an attempt to further restrict increases in governmental
activity. Proposition 4 limits increases in governmental spending to increases in
population and to the consumer price index (CPI) or state per capita personal
income, whichever is lower. Thus, it is worth noting that although the Jarvis
movement and Proposition 13 were most heavily directed against the property
tax,there is some evidence that the voters in California also have been registenng
a general protest against the size of the public sector.
The underlying forces leading to Proposition 13 and the potential economic
and financial impact of tax limitation legislation were the topics studied at a
conference held in 1978 at the University of California, Santa Barbara. The
• proceedings contain some important insights into the implications of the tax
limitation phenomenon.'
Shapiro, Puryear, and Ross, for example, suggest that Proposition 13 may be
best explained not as a simple reaction against a Leviathan government but
rather as "an expression, by the property owner-voter, of dissatisfaction with
beanng a growing share of the public financial responsibility."10 Between 1965
and 1979 the assessed values of single-family housing in California increased at
• a much faster rate than the assessed values of commercial and industrial property
in that state. Shapiro et al. also point to public opinion findings that implied
that Californians were generally satisfied with the level of public services re-
ceived. Legislation that changes the mix of taxes in favor of sales and income
taxes may, by favoring these more elastic revenue sources, actually promote a
larger rather than a smaller public sector was another point made by Shapiro
et al.
In another interesting contribution. Brennan and Buchanan suggest that the
taxpayer revolution can be satisfactorily understood only in a public-choice set-
= ting they call the nonbenevolent despot model. In such a system, constitutional
rather than electoral constraints may he needed to express citizen preterences."
Is the current wave of tax and spending limitation movements a transitory
phenomenon? Michael Boskin feels "that nothing could he further from the
truth." Boskin's insight is that"the concern over government spending and taxes
is primanly a concern over the total tax burden and the aggregate amount of
spending at all levels of government."'=Taxpayer unrest has developed because
"all growth in income in the United States since 1973 has been either eaten away
by inflation or gone into government spending.""
Tables 6-2 and 6-3 contain data compiled by the U.S. Advisory Commission
.• on Intergovernmental Relations(ACIR)that show the extent of the tax limitation
•
:t,
£_''�N.y Y �.' S L -.!r 4i-A a •� t d - ''''r Enl.. - �, -4.._:1.:- '''17.-=:':-:_ - f.-
The Property Tax 129 /
Table 6-2 State limitations on local government taxing and spending powers
Item
Property Full Property
tax rate disclosure tax levy Expenditure Assessment
limits laws limits lids
constraints
Number of states with
such laws prior to 1970 40 0 3' 12
Number of states with 0
such laws by
November 1979 403 104 205 86
6'
Source:ACIR staff compilation based on data prepared by tana, Texas, Virginia, Tennessee. Kentucky, and Rhode
IAAO,CCH,and ACIR.
I Prior to 1970:Arizona.Colorado.and Oregon. Island.
g 5 By November 1979:Alaska.Arizona.Colorado,Delaware,
2 Prior to 1970:Arizona. Indiana, Iowa. Kansas. Kentucky Louisiana, Minnesota.
3 Due to rapidly rising property values.tax rate limitations
have lost most of their effectiveness as a tax control mech- Ohio,Florida.Oregon.M ssath usetts,N Utah.xico n and Ut wiscon-
anism.As a result,states are now adopting other forms of 6 By November 1979:Arizona.Iowa.Kansas,New
tah.
Jersey,
tax and expenditure controls. Massacnusetts.Nebraska.Nevada.and California.
4 Includes only those states that redwre automatic property 7 Includes those states placing a limitation on annual as-
tax rate rollback to offsat.caost or all of annual increases sessment increases.States with such limitations by Sep-
in the assessment base in the absence of a rigorous full tember 1979 include:California.(Paso.Minnesota.Iowa,
disclosure procedure. '.e paid announcement of pro- Maryland.and Oregon.In addition,Nevada will loin this list
posed tax increase and public hearings.States included if a ballot measure approved in 1978 receives voter sp-
are as follows:Arizona.Florida. Hawaii. Maryland.Mon- proval again in 1980.
movement. The number of states with levy limits on property tax has increased
dramatically since 1970. All of this legislation is bound to have serious effects
because all states do not have surpluses to act as a fiscal cushion against the new
limits. Since the federal government is itself in a belt tightening mood, it is not
likely that the tax limitation pressures will be mitigated by increased state and
local reliance on federal aid. State and local governments will be forced, there-
fore, to Increase their productivity, make greater use of fees and charges, and
shift some services to the private sector. In her analysis of the tax and expenditure
limitation movement, Deborah Matz recognized these forces and concluded:
It seems more likely than not that even if the limitation movement per se has lost
some of its momentum, fiscal austerity at all levels of government will prevail. The
biggest losers stand to be the poor and lower income families who may not be able to
afford new or increased user tees or private service contracts."
Despite the reduction in local cost pressures on education and the property
tax reductions resulting from Proposition 13, major efforts also ‘N ere made in
California to limit local expenditure." Other states during the 1970s moved to
limit both taxes and expenditures, as illustrated in Tables 6-2 and 0-3.
•
The requirement to balance budgets in local governments has led some analysts
to conclude that the controls of the 1970s went beyond the attempts made in
1 1930 to limit the burdens of the property tax.The rationale for a balanced budget
is to limit local government expenditures and taxes simutaneously and. in some
states, to shift the burden from property to other tax sources or to shift some
of the financing burden to the state governments.'" One analyst suggested that
rejection of tax increases in the Michigan tax rate referenda, for example, gen-
erally indicated that local services had attained or exceeded the level voters
considered optimal." In any case, voter initiative provisions on tax rates and
other property tax controls were said to have increased because of the rapid
growth of local government spending and taxes.'s
Although some critics of such controls have suggested that simply reducing
the property tax would not improve its fairness,''ACIR has called for moderation
(1.0 percent to 1.5 percent of market value) in the use of the property tax base.
• .rte - l.y.j,.-,"vt L_.ai�. .W;-+."�'F{ -Y4V'f�' '�� s+... -
•
J 130 Management Policies in Local Government Finance
Table 6-3 Recent state and local revenue/expenditure limitations 1 January 1976-1 January 1980.
Constitutional State Local
State Year or statutory' limitation limitation2 Remarks
New Jersey 1976 S X X State expenditure growth is limited to the
increase in state personal income.
Municipalities cannot increase their budgets by
more than 5% per year Both limits can be
exceeded only by a majority vote on a
referendum.
Colorado 1977 S X State general fund expenditures are limited to a
•
7%annual increase.An additional 4%may be
allocated to a reserve fund, but amounts over
11% must be refunded to taxpayers.
Michigan 1977 S X A Budget Stabilization Fund was established,
•
•
with provisions for pay-in to the fund during
periods of economic growth and pay-out during •
recessionary periods. It is now used in
conjunction with the 1978 state spending
limitation.
Rhode Island 1977 S X The legislature adopted a non-binding
"suggested"8%cap on the annual growth of
budget appropriations.
Tennessee 1978 C X Increases in appropriations from state tax
revenues are limited to the estimated growth in
the state's economy The lid may be exceeded
by majority vote of the legislature.
•
Arizona 1978 C X State spending is limited to 7°s of total state
personal income. The limit may be exceeded
by 2/3 vote of the legislature.
•
Hawaii 1978 C X Increases in state general fund appropriations
are limited to the estimated growth in the
state's economy Larger increases must be
approved by a 2/3 vote of the legislature.
Michigan 1978 C X State tax revenues can increase only as fast as
the growth in personal income. If revenues
exceed the limit by more than 1%, the excess
•
is refunded through the income tax. If the
excess is less than 1%, it is placed in the
Budget Stabilization Fund. The limit may be
exceeded if the Governor specifies an
emergency and 2/3 of the legislature concur
Texas 1978 C X Increases in appropriations from state tax
revenues are limited to the estimated growth in
• the state's economy The limit may be
exceeded by a simple majority of the
legislature.
California 1979 C X X Increases in state and local appropriations are
limited to population growth and inflation The
limits may be exceeded, but appropriations in
the following three years must be reduced to
prevent an aggregate increase in expenditures.
The limits may be changed by the electorate.
but the change is effective only for three years
• G
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•
The Property Tax 131
Table 6-3 (continued)
Constitutional State Local
State Year or statutory' limitation limitationz Remarks
Louisiana 1979 S X State tax revenues can grow only as fast as the
0
increase in personal income Proceeds from
severance taxes are not included in the
limitation.
Massachusetts 1979 S X Increases in local government expenditures are
limited to 4%. Override provisions are included.
The limitation expires 31 December 1981
Nebraska 1979 S X No political subdivision may adopt a budget in
which the anticipated receipts exceed the
current year's by more than 7%. Further
allowances are included for population growth
exceeding 5%. The limit may be exceeded in
•�� the event of an emergency or upon voter
approval.
Nevada 1979 S X X The state budget is limited to the 1975-77
biennium budget adjusted for population
changes and inflation. Local budgets are tied
to 1979 fiscal year budgets adjusted for
population changes and a partial inflation
allowance The limits may be exceeded "to the
extent necessary to meet situations in which
there is a threat to life or property
Oregon 1979 S X The increase in state appropriations for general
governmental purposes for the 1979-81
biennium is limited to the growth in state
personal Income in the preceding two years.
Utah 1979 S X X The annual increase in state appropriations is
limited to 85%of the percentage increase in
state personal income. The increase in local
revenues may not exceed 90% of the
percentage increase in state personal income,
with further adjustments for population growth
allowed. The limits may be exceeded by a two-
thirds vote of the legislative body of a unit of
government.
Washington 1979 S X State tax revenues can grow only as fast as the
average increase in state personal income over
the three previous years. The limit may be
exceeded by a 27-1 vote of the legislature.
TOTALS 15 6
•
Source:ACIR staff compilations based on:Commerce Clear- 1 C Constitutional S-Statutory
ing House. State Tax Reporter National Conference of 2 Only the SIX state actions that placed o■erall limitations on
State Legislatures,A Legislator s Uurde to State tax and local government revenues and experodures are included
Spending Limits,March 1979 in this table. Since 1970. States have imoosed approxi-
mately 35 other restrictions on the ability of local authorities
to raise property taxes
•
132 Management Policies in Local Government Finance
- "As with any other tax, the heavier it becomes, the less obvious are its virtues
and the more glaring its defects,"20 according to ACIR. Nevertheless, some
concern remains for the equity of the tax and the traditional argument that the
incidence of the property tax is regressive, falling more heavily on those with
low incomes than on those with high incomes.
- Tax incidence
• - The argument that the property tax is regressive relies on several assumptions
about the shifting of the tax burden and the spending patterns of different income
groups. It is assumed that taxes on owner-occupied homes cannot be shifted,
while the taxes on other residential property are shifted to renters in proportion
to rents paid. The burdens of taxes on commercial and industrial properties also
are assumed to be shifted to consumers through the prices charged for goods
and services of these firms.
Statistical studies show that those with lower incomes spend a higher per-
centage of their incomes for consumption, and specifically for shelter, than do
those with higher incomes. If this observation is coupled with the idea that much
of the property tax burden is shifted through higher prices for goods and services,
including housing,it appears that those people with lower incomes bear a greater
tax burden as a percentage of their incomes. Using these assumptions, ACIR
has published estimates of the incidence (burden) of the property tax as a
percentage of the 1972 incomes of families in vanous income classes. The prop-
..__
erty tax burden was greatest on families with incomes of less than$3,000 in 1972,
• or 13.0 percent of family income. The burden declined to 8.0 percent in families
with $3.000 to $4,999 in income. It continued to decline as income rose, to 4.4
percent for the income groups making from$20,000 to$49,999 and to 2.1 percent
of those incomes of $1 million or more. While the average burden was 5.0
percent of income, given these assumptions, those with incomes of less than
$10,000 were found to carry a greater tax burden.='
` Henry Aaron and others have challenged the traditional view of the regres-
sivity_ of property taxation. Aaron suggests an alternative shifting assumption
and warns that measuring the burden in relation to current income rather than
permanent income may be misleading. Even if property taxation is viewed as
I an excise tax on housing. Aaron has said, some measures indicate that the
effective incidence of the tax shows progression for homeowners and propor-
tionality for renters rather than regressive effects. Aaron views the property tax
as a kind of national tax on owners of capital. He concludes that property taxes
are thus borne by all owners of capital in the nation ui proportion to their
ownership of capital. Because ownership of capital and levels of income are
I correlated he concludes that the incidence of the property tax is. in the long
run. progressive.22
ACIR also has published estimates of the distribution of the burden of the
property tax as a percent of 1972 income,assuming that the tax on improvements
is borne only by owners of capital. These estimates show the burden declining
from 7.2 percent for those with family incomes under$3.0(X) to 2.6 percent, for
those with incomes from $10,0(x) to $14,999. However, the burden then rises
in stages to 24.6 percent for families with incomes from $5()0,000 to $1 million.
and declines to 18.2 percent of income for those with income levels of$1 million
or more.23 Given the assumptions that relate the tax burden to capital owners.
these estimates indicate that the property tax is regressive for lower-income
classes and that the burden declines as income rises. Beyond the middle-income
range, however, the tax is progressive because the burden rises with increased
levels of income. ACIR notes that this progressive effect may he overstated
because the implicit income values for the shelter in owner-occupied homes is
not included in the definition of income groups or in the estimates of the burden.
Y _ � �t
,� . - All _ �.�.��..++ k^ +YC-✓4 I:R*
• •
The Property Tax 133
The ability of capital owners to shift the burden of the tax to others (in rental
fees or in prices charged for products) has been viewed as critical to the deter-
mination of whether the property tax is progressive or regressive. Richard Mus-
grave has noted that different conditions in various markets lead to different
conclusions about shifting the tax burdens for rental housing and shifting the
burdens for different types of business property. However, he agrees with
Aaron's.assertion that the use of lifetime income patterns would make the
distribution of the property tax burden less regressive; he concludes that the
property tax on housing is progressive.24 Nevertheless, some now believe that
the property tax may be less regressive than estimated originally; they feel that
the analyses that compare the income and tax rates of local governments are
less reliable indicators than studies that compare burdens and incomes of house-
holds within local governments.25
Dick Netzer, an economist who has spent much time studying the property
tax, feels that the property tax is not a national tax, nor is it a general tax on
capital. He notes that general policies are framed for fifty separate state systems
and that separate determinations of rates and assessments are made by some
70,000 local units. As a result, he feels that definitive empirical work must be
limited to particular places and times.26
Homestead exemptions and circuit breakers
ACIR has noted that homestead exemptions and other programs of property
tax relief may not have very significant impacts on the regressive effects of the
tax. A homestead exemption excludes a determined amount from the assessed
value of a single-tamily home before the tax rate is applied. The problem,
however, is that in many states the amount excluded (sometimes up to $5,000)
is the same for all homeowners, regardless of income, age, or property value.
Instead of homestead exemptions, ACIR recommends the use of "circuit
breakers," financed by the state government and specifically designed to provide
relief for low-income homeowners and renters who may be overburdened by
property taxes.' Since the adoption of the first circuit breaker by Minnesota in
1964, some twenty-nine states have adopted measures that partially shield low-
income families from excessive property tax burdens. Circuit breakers vary sub-
stantially among the states. Most states specify income limits that range from
$2,500 to $10,000 per couple; the modal level of income ranges from $4,000 to
$6,000. In most circuit breaker plans, the amount of relief declines as income
rises, and no relief is offered once the income limit is reached. Some states
include only homeowners in their programs; others also cover renters. Many
programs are restricted to the elderly, with eligibility beginning at sixty-two or
sixty-five years of age, and some offer state tax rebates or credits. ACIR has
determined that, in general. these special provisions have made the property tax
less regressive."
It has been noted, however, that circuit breakers may favor those who are
only temporarily poor and those with large amounts of property who may not
be poor even if their current amounts of income are low. Moreover, the elderly,
who might otherwise liquidate or trade down the value of their homes, may be
induced to stay in them if the market values are not fully reelected in the property
taxes levied on them as homeowners.'" A deferral of all or part ot tax liabilities
until a set future date or until a future sale or transfer of property may be a
better alternative to circuit breaker relief provisions for the aged.'''
Capitalized value of income
The property tax can, as noted.above, be viewed as an excise tax on shelter or
1 as a tax stream with a current value that is the equivalent ot a sales tax. Another
I
i
134 Management Policies in Local Government Finance
view of the property tax is that of a capitalized tax on property—a view that
often cites the property tax as a major cause of urban sprawl.
Both income and property ownership can be viewed as separate bases of
ability-to-pay taxation. Income, however, is viewed as a flow over a period of
time, while capital, or property, is perceived as a stock of wealth owned on a
particular date. These are related concepts because the property is expected to
yield income over a future period. One way to determine the value of an asset
is to capitalize the value of its expected earnings. For example. assume that a
property is expected to yield $500 a year for an indefinite penod of time and
that the market rate of return to capital is 10 percent a year. The capitalized
value of the property is then $5,000, the same as any other asset expected to
, yield$500 a year given a market rate of return of 10 percent. The owner of that
property has levied on his or her account an ability-to-pay tax that is similar to
the ability of another person who has an income of$500 from another source.
A tax of 1 percent on the property value then imposes an annual burden of$50,
. f
the equivalent of a 10 percent tax on the $500 income cited in this example.
i
'• Circuit breakers The circuit breaker this approach superior to homestead
provision for property taxes is an exemptions because the circuit breaker
attempt to relieve persons of tax recognizes degrees of need for relief
burdens that are excessive, in relation from the property tax. Because it is
to their incomes or ability to pay. This state financed, the circuit breaker does
provision is analogous to a circuit not burden local governments,
breaker to prevent electrical overloads. especially those where the elderly and
j It is designed to protect the poor from poor may be concentrated. However.
--- -_ i a "tax overload' without affecting the some object to the provision on several
property tax revenues from those who grounds. (1) it fails to recognize fully
f are able to pay This is usually done by the ability of the eligible taxpayers to
providing the relief at the expense of pay with savings, securities. or other
1 the state, rather than that of the local, assets; (2) it protects the estates of the
I! governments. The relief, available to elderly, whereas permitting deferral of
!, the elderly, the poor, or both tax payments would not; (3) it permits
.: 1 (depending on the program), phases elderly owners to keep properties off
out gradually as the income of the the market, preventing potentially better
taxpayer rises. and it is not available uses and making property more
for those above stated income levels. expensive and more difficult to obtain
i for the young; and (4) it encourages
• A property tax burden is considered greater local government spending by
f excessive when it exceeds a stated making local officials less sensitive to
- proportion of household income This the income pressures of taxpayers. Of
1 varies among the states, from 4 course, proponents of the circuit
percent to 7 percent. Many states breaker offer responses to each of
provide ceilings—on incomes, the these arguments.
value of eligible property, and the
amount of rebate or relief—and provide Source: U S. Advisory Commission on
relief only for those above 62 or 65 Intergovernmental Relations. Financing
years old Some states provide relief Schools and Property Tax Relief—A
for renters as well as tor homeowners. State Responsibility A-40 (Washington,
assuming that a stated proportion of D C Government Printing Office,
rent (varying among these states from 1973), pp 43-51
10 percent to 30 percent) is for
property taxes
•
The U S Advisory Commission on
Intergovernmental Relations considers
•
/•
The Property Tax 135 J
Moreover, whenever there is a change in the tax, the difference may be
capitalized and reflected in property value. In the example above, a property
yielding $500 in income was valued at $5,000. If, with no other changes, an
annual property tax of $100 were levied, the effect would be to reduce the
aftertax income to $400. As a result, the value of the property would fall to
$4,000, reflecting the capitalization of the tax increase. However, if the tax
increase was accompanied by additional services (e.g., improved education or 1
recreation), this could increase the demand for such property and offset the
effect of the tax increase. A tax decrease (with no drop in services) could be
expected to increase the aftertax income and the capitalized value of the taxed
property.
The process of capitalization of the property tax has been cited as a cause of
urban sprawl. In some areas, central city tax rates have risen more rapidly and
'' are higher than those in suburban areas. The effects of this are greater tax
burdens placed on property owners in the city, and a decline in the value of city
property. Although city land and existing structures would have lower values,
those planning new construction may nevertheless buy more expensive land in
the lower-taxed suburbs—and still receive a lower tax bill and lower overall costs
when the improvements and new buildings are counted.This spread of residential
and commercial structures to lower-taxed outlying areas has been described as
,` urban sprawl.
Classification by use
`:(c
if b! i Several different approaches have been taken in response to the problems of
‘`';s Ws'," L•'4' ; inner city deterioration and urban sprawl. In nine states and the District of
v.r� J -)46 -' ' Columbia, property is classified according to its current use."As a result, open
�,��� � land such as that used for agriculture may be taxed at a lower rate. A change
{
y P to urban uses would result in higher property tax rates, a process that slows the
, o growth of urban sprawl. Tax classification is also used to realign the burden by
0' 7 placing higher rates on business properties than on farms or homes.
�ksr.�.,.d4i. ....i :i-,
Another tax reform provides a lower rate for improvements to deteriorated
• properties. A 1977 Pennsylvania state law permitted several cities in that state
..wAtrsw+ (de"'44"° to allow property tax exemptions for a number of years for improvements to
deteriorated properties or to properties in deteriorating areas.32 The purpose of
L°•wriy) 4. ( j4-li these exemptions is to encourage redevelopment of properties and renovation
of neighborhoods.
°�s �'�' �`� In California and several other states, special programs have been designed
Rt"/ ��,�• to prevent conversion of agricultural land to other uses. The landowner agrees
to maintain the land in agricultural use for ten years; in return, the property tax
744.es assessment is based on the capitalized value of the land in agricultural use,rather
than on the market value of the land. The owner may incur a substantial tax
t obligation if he or she cancels the agreement. The criticisms of this arrangement
have been that it carries special benefits for the owners and that it is an insufficient
inducement to prevent development in the urban-rural fringe areas. Some have
suggested land-use zoning instead of differential property tax assessment as a
more effective planning too1.33
Property tax administration
Some controversy would be present even if the property tax were administered
perfectly and uniformly. Because of its inherent features, the property tax has
been very difficult to administer. As a result, many criticisms and proposals for
reform of property taxation deal with its administration. A prerequisite to eval-
uation of the criticisms and reform proposals is an understanding of the process
of property tax administration.
i
,..
1 136 Management Policies in Local Government Finance
Property tax relief and reform The systems in which different tax rates are
International Association of Assessing applied to uniform, market value
Officers believes that the attention assessments are preferable to systems
being focused on government in which uniform rates are applied to
spending in general and on the nonuniform, fractional assessments.
property tax in particular is healthy. The
property tax, although maligned by Assessment systems should be made
many, has several significant attributes, effective Methods currently exist that
particularly in a federal system of make annual assessments possible at
government. As it has evolved, the reasonable cost.
property tax is the major source of tax
• revenue directly available to local Assessors should be shielded from the
government and therefore affords local blame for increasing property tax
government a strong measure of fiscal levies. The popular support for current
• f independence. Moreover, the tax is a market value assessment. which is
more stable revenue source than either essential to equity in property taxation,
sales or income taxes because is seriously eroded when tax levying
property values reflect long-term bodies ride the coattails of assessors
economic considerations, not short- by increasing property tax levies by the
, term economic fluctuations. The percentage increase in assessed
t property tax captures for local valuation following a reappraisal.
government some of the increases in
property value that are partially created Property tax relief should be based on
by public expenditures. The visibility of tax abatements or credits, and property
s_ the property tax also serves to focus tax incentives should be based on use
attention on the quality of governance. restrictions or on abatements or
credits. Property tax relief and/or
- Therefore, the International Association incentive measures that are based on
of Assessing Officers urges that a reductions of assessed value or on
thoroughgoing review of each property other-than-market-value assessment
tax system be performed, that reforms standards have several undesirable
be enacted where they are needed, attributes. Most significantly, each
and that relief be provided when reduction in the property tax base
needed in ways that do not violate the shifts the obligation to pay property
ad valorem principles on which the taxes to nonfavored taxpayers.
property tax is based
Exemptions should be kept to an
The International Association of essential minimum, and the rationale
Assessing Officers further believes that for and benefits received by the
property tax systems should adhere to community from exemptions should be
the following general principles. periodically reevaluated.
Assessments should be based on Source. Excerpted from International
• current market values The property tax Association of Assessing Officers,
is generally conceived to be an ad "Property Tax Relief and Reform.
valorem tax, which means that a tax Statement of the International
levy is apportioned among taxpayers Association of Assessing Officers,"
according to the value of each Assessment Management. vol 1, no 4
taxpayer's property (July—August 1979)• 29-31
• Assessments should equal estimated
market value Classified property tax
•
•
The Property Tax 137
Discovery
Proper assessment is the keystone of an equitable structure for the property tax.
The first step in the administration of the tax is the discovery of the tax base.
It is difficult to find intangible assets such as cash, bank deposits outside the
assessment district, and other assets for which ownership is not subject to reg-
istration and records. Discovery is likely to be limited to the declaration of the
owner,plus reliance on other uncertain tax data(e.g.,federal income tax returns)
or specific legal actions(e.g., probation of an estate)that yield a property listing.
The discovery of intangible property may largely depend on the compliance and
self-assessment of individuals. Many of these persons may rightly feel that by
revealing their assets they incur a tax burden that many others are happy to
forgo. Discovery is difficult and uncertain;enforcement costs for full compliance
are prohibitive; and high rates of taxation on intangible property invite low rates
of compliance. Because the tax on intangible property represents double taxation,
the abolition of a tax on intangibles rather than an intensive effort to improve its
administration may be the best solution to the administrative problems.
Because the process of discovery of personal property other than automobiles
is difficult and incomplete, assessors have tended to be cautious in enforcing this
part of the tax. The pnncipal efforts to improve property tax administration are
likely to continue to focus on real property.
Discovery of real property is relatively easy. Not only does the property exist
in situ,and therefore is subject to canvass, but there is also a conventional system
for recording both its description(especially the location of land and boundaries)
and its ownership.
The initial task of discovery is to record on appropriate forms all of the relevant
details about the property. Prerequisites to this task, however, are the estab-
lishment of a staff and organization, the selection of a form, and the provision
of a system to maintain records and to retrieve information. Not too long ago,
the emphasis was on a checklist of data on the location of land and the nature
of improvements. Today the emphasis is also on the ability to use computers,
specifically to record and retrieve the information.
Inventory
In preparing the property list (inventory), the boundaries as such may not be
recorded for the computer. Identification of parcels (tracts or plots of land) will
be on the basis of drafting, mapping,and a numbering system designed to permit
revisions that could result from consolidation or subdivision of properties. Aerial
photographs may be used to confirm the location and to identify parcels and
improvements, to establish relationships among different areas, and to check for
changes. Such aerial photographs have led to the discovery of land areas that
had been omitted from tax rolls for many years.t1
Assessment
Once discovery and inventory are completed, the property may be appraised.
Appraisal and assessment are the heart of the administration of a property tax;
• in this process, the share of the tax burden is determined for each property
owner: The assessor's job is to establish a valuation for each parcel; this deter-
mines the total value of the property in the district. Assessment is a complex
task. It may not yield to rule-of-thumb appraisal or arbitrary judgment; both
equity and law require that each valuation be defensible. The assessor is tre-
e quently called on to defend the accuracy of any valuation as well as the uniformity ,
of the method of appraising the value of properties.
V 138 Management Policies in Local Government Finance
The assessor's goal generally is to value the land and improvements of each
parcel at the market price (variously characterized as actual, fair,true, cash, or -
money value) and then set the assessment on each parcel at some uniform
percentage of its market value. This is not an easy task. Only a very small
t proportion of the property on a tax list during any fiscal period is subject to an -'
arm's length market transaction where an actual price would help establish `
market value. Even when there is direct evidence of a sale price on a parcel,
the assessor must be sure that the listed price reflects the market. He or she
must be sure that the price listed is not the result of a forced sale or of a :y
transaction between relatives where undervaluation may reflect a gift or other ak
• - special circumstances. -
"` Annually bringing the assessment of each parcel of taxable property up to
.7N , e.li:0141 y►e•. (j market value is highly desirable,even in a relatively static economy.The dynamic
,. j,alc~h a nature of the real estate market,especially in metropolitan areas,often prevents , =
ems" s t`~ assessors'offices from maintaining current market values on the list of properties. ;'3
pY 1..-i In the midst of rapid change and development, many assessors can only hope <re
r% to do appraisals and reassessments on a fraction of the existing list of taxable .�
of r .,. /•"G'f a 1 property in any given year. Simply making sure that new construction is added
Tgf
j . _ to the current tax list may become a major task.35* y
Br" 90 X°
As a result of such pressures,most assessors do not attempt annually to reflect =?
0,4,./re/ va/ t e the changes in market price levels. Instead, they try to maintain uniformity in
' the fraction of current market value at which each parcel is assessed. Even in
t : states where the law specifies that assessments should be at 100 percent of market
value, the actual average assessments will vary from this mark.
F Some of the differences between assessed and market values reflect admin- ,
`a istrative problems in reassessing all properties to reflect annual changes in market -
' price levels. Also, many local assessors deliberately use fractional assessments
•� Tarr Al e -c r�`4 in an attempt to achieve uniformity in t relationship between the assessed
Na.e 44,444- -5 444.--4{, value and market value for each property:The rationale for uniformity is that .,3
j. 0,,/4,J 0 957, _/ as long as a uniform assessment percentage is applied to all market values, the
i . 7 shares of total property tax revenues borne by each property owner are not
si Me.rAV/ (i&�44 a 46O distorted. This has been countered by arguments that such underassessment ,•i,sl'�'t_e
a'7 ac4:aJ o kw" I. 4'5 w'T\ distorts the true tax rate, and that it complicates the administration of state
equalization programs that may be related to the assessed roe values of ;y
, t ," t,t:t+r 0.2 Ae r i♦.S q P g Y property ttY ,+r.-
; the districts. The latter problem, however, is generally solved through sampling ,yx
,c71-6 c K techniques. State equalization boards, using the results of their sample surveys,
i i i adjust the local assessment ratios for the purposes of state programs.36 At
Where there is an active, competitive market for homogeneous items, market °'
forces will establish a going price that can be used by assessors and other op-
'
1 F - praisers to formulate the market data approach to assessment. Even when going
i.' market prices are subject to frequent change (e.g., the markets for securities,
commodities,and livestock),prices are quoted to establish values on a particular 5'
r 1t day. These market values can be used to impute the value of the units that were•
•tPpowrs tRe /"°st not sold on that day. Similarly, current market price data are the most direct -
• c...,.• o N T a�ie,d ‘ti••J evidence of current property market values and should be relatively accurate,
even for properties that have not recently changed hands.
Is..., A1;..~er•f. ;e (14,1".4 Some problems arise,however,because each property is in some way unique.
°/ Si,.....4• f.•4..s o / 0f The market values of particular properties,therefore,cannot be directly imputed
I. 6.I�r # �«r����� from transactions on other parcels without accounting for the differences and •
y similarities among them. Nevertheless, it is also clear that even when a small
.414°r 41, , 44 proportion of properties in a particular area is sold during a period of observation,
f1/., :, c •• /t � the prices of these transactions provide useful information on the values of other
/ ( ( L jL parcels in the area.
Q 4ce,re..cGs ,baT,,..ls«r
•j , t l.o '/a-s J•s f•♦. M o.a Xe t U s e o f s a l e s d a t a Sales data l eJ)een_usedby assessors and other appraisers
►• for a long time. The simplest way to estimate the market value..-of_a_property
1 iortce -• iheaever / fate_ 41.ceet«r..1 �_
f R.c7. del: / .
�! /.� A. fa.e// .� ilt �3- ..ifn.ev'' it Ili --s .:.i. - ,.._
:x` �j n- g,,...5 1 "Se./44 £P..+.• " t1..f:rf+es '
'- `` �r►E NSSGSj�w W r/� G eta�¢t a� •{"1��. Mot�' etc C¢�.7
// a/4Jt.c,c.f,,..s of pr.r.,fy eenhe/ 6y ' the jAfc f,- a.r} , at
ex... x..r.ev a t t..a / a/' f[e, .ft.., e, L.a 1". 14 a The Property Tax
139 ../.
if
/�y dO c.K .. .. • , 4474.4....,-.....no j; pr.r• "V..J I•G•KNT 74 i d
i
? has been to note the_recent sale_prices of comparable-parcels. Assessors, there-
50- eh... I.rse .L re fore, note all sales and their characteristics. In some jurisdictions, the sale of a •
AQ.,,,y e l u „R..6:/illy property is a signal for the reassessment of that particular property based on its
_` ! most recent price; the data in such cases is clear, current, and direct. If there
a:, . is no revaluation of the properties in the area or district as a whole, however,
`�° v°/"" `� "��` ' then the revaluation of recently sold properties will result in higher property tax
'. , •e......4..., I~ •' "- burdens only on those particular properties. There is a lag in reassessment of
.
-A.- :e s /4,_„,,A Ps ,,e unsold parcels and, therefore, in the redistribution of the property tax burden-
-A.- ,` t�.y ,1,s�,. ....... solely because of the timing of a sale. If a small staff or other constraints preclude
annual review and reassessment of all properties, it would be more equitable
to postpone the reassessment of any properties bought on the market until the
number of transactions yields sufficient evidence (and there is enough time)for
a general reassessment.
r2e�w , �u c. Annual reassessment,at least through the use of traditional methods of viewing
and appraising properties, has been beyond the financial capacity of most as-
- S.,.• yec.rs t sessors. Nevertheless, the assessor who has access to a computer may find a
/YI,N Mu O f-« reasonable basis for more frequent reassessment. The assessor can code and
k" transfer most of the-information on the property records—including property
descriptions and assessed values—to computer files. The assessor can,similarly,
record all property transactions by noting the price that is stated when the deed
-1' :I '�"` r'�`�`j
; s 4. is recorded. In places where the full purchase price is not required to be written
+ '` de!;,6 4. on the deed or reflected by transfer tax stamps,the information can be obtained
by talking with the participants in the transaction.
S. -•'"r`.f 'It. cc— The sales files may then be listed by the identification number of the parcel
•. i •-.ss.Ss•••••-4* '-./et %N
(which will also indicate its location), the date of the transaction, the assessed
��,,r,.,,, @.N..1 y 9' value, and the sale price or adjusted market value. This procedure permits the
;; ,,,.�� 6 rr¢Pwete� 'E° calculation of an assessment/sales ratio—the ratio between the assessed value
:.t and the price. This process has been used not only by local tax bodies, such as
.t o.-t r '0.+S . counties or school districts, but also by state tax equalization boards and by the
surveys made for the 1977 Census of Governments." If the assessment process
FA..,"4..tse-, 4 i1 has been reasonably accurate and the property market stable, the assessment
r: .
x re.t s +• w t•••rw,>tisrut-f to market price ratio will be close to the official assessment ratio of the juris-
` pr-sy ...t diction.
r;, .Ssats.•.e.f
f Separate samplings may be developed for different areas of the district, for
s. C'� d`�` f.r•`�ss,wS different types of property,for each zone,or for any other relevant characteristic.
• c•Ms•r 4••••-_) . Ef,,.....o...•., The assessment ratios obtained may serve as the basis for updating assessments
in each relevant category of similar properties.Adequate sales data should
.1wf� fr..NsA., / 4',/e g rY P P Q permit
s..; this procedure to be carried out annually at a reasonable cost with a minimum
in"`"f`N`c A41 6e- - amount of on-site appraisals.38
v- c.•r t :Mt 774 c fIfit
Statistical approaches A somewhat more sophisticated method for bringing as-
,., `rtK""j w` sessments up-to-date is multiple regression analysis, which is essentially a sta-
;r, 4"•,c e d #• f"-"do tistical method for correlating independent variables with a dependent variable
;. o,,,,,r: to predict market value.
r ,,.,N atrtSSor ,
In appraisal, the characteristics of properties may be used as independent
• s6r'""5)- variables in an equation where the dependent variable is the estimate of property
values. The coefficients for the independent variables in the regression equation
indicate the expected changes in property value from a change in the independent •
. variable (e.g., the nature of improvements).39
The employment of market data through various statistical techniques and
tests, then, may be used to obtain the assessment values. In some instances,
•
however, properties are not easily or directly comparable to other properties
and can make the market data approach unreliable. In these instances,two other
•
methods may be employed for assessment purposes. One of these is to estimate
•
the replacement cost for the improvements on the property.The other approach
' is to capitalize the net income derived from the property.
i.1
.t t �
E * r»t stg - mss- ;; w + • -
. - _____ __ ._ in we.�. ..�
140 Management Policies in Local Government Finance
Multiple regressions for property homes, that x, is the independent
values A multiple regression for variable representing the number of
•
assessing property values takes the bathrooms, and that b, (the coefficient
form of: for x,) is $800. On this basis, with all
7.
y=a+b,x,+b2xZ+b,x,+. . .+x other property characteristics or values
for independent variables held
where y equals the estimated market constant, the estimated sales price (y)
value of properties; x„ . . ., x„ represent would increase by$800 for each unit
the values of the independent increase in the value of x,, or for each
variables; b,, . . ., b„represent the additional bathroom. If the equation is
.. i• coefficients or parameters for the in logarithmic form, the value for b,
independent variables: and a would be expressed as a percentage
represents the intercept value, or the change in the value of the estimated
• estimated value if zero values were sales price for a change in the value of
I associated with the independent the independent variable. Uses of the
1 variables. equation would include the prediction
j _ of different levels of prices associated
1 For this purpose, the independent within different neighborhoods of a
3 variables would be the characteristics community as well as the prediction of
of the properties in the sample. different property values within a
I.
Examples of such variables would neighborhood that are associated with
1 • include lot size, location, front footage, differences in lot size, size and type of
- I type of building, type of construction, structure, and other characteristics.
. , number of rooms, and square feet. The
- data used to estimate the property If the capitalization argument is
value would be the market value followed, however, the tax rate also has
I (dependent variable y) and the an impact on the property value which,
property characteristics (independent in turn, has an impact on the tax. If
( variables x) for each parcel in the these interrelationships are not taken
sample of recorded sales. into account, the estimated coefficients
will be biased. Multiple regression
To see how the equation would be analysis must be usea very carefully.
interpreted, let us assume that the
equation is related to single-family
i
The replacement 'alue approach involves an estimate of the value of an
existing improvement or structure on the property based on the current cost of
,
constructing the structure, less a depreciation allowance for the age of the build-
ing. The size, number of rooms, building matenals, and similar characteristics
's of the structure are specifically taken into account. The estimate of replacement
/ cost is made according to current building costs.
The depreciation tactors permit the value of the building to be adjusted ac-
cording to its age and condition. These factors. classified by types of structures,
are round in the depreciation tables, which are part of the assessor's manuals.
The subtraction of depreciation from the cost of reconstructing the structure
• yields a net replacement value. This may be roughly checked against available
. current prices for alternative buildings, even though the buildings may differ
somewhat in construction, age. or condition.
The land value of the building site would he estimated separately.This is done
by noting sales prices of land that is similar in terms of zoning, general location.
size, and any other tactors that might atfect desirability and price. Both front
- footage and area of the site may serve as bases for determining the lot value:
the values derived may he roughly compared to market transactions for vacant
land. finally. the total of land value plus the depreciated replacement cost of
• the structure may be compared to the recent sale prices of other properties in
The Property Tax 141 ✓�
order to test the estimate of market value. Although sale prices are used to
confirm the estimated assessed value, the other steps are required because no
property is exactly similar to another.
When buildings are clustered in housing developments or industrial parks, the
adjustments in estimates of property values may be relatively easy. These ad-
justments are necessary to recognize differences among land values for particular
properties. The external checks for market prices may be applied to groups of
similar properties to determine the separate assessment valuations for each of
the properties involved.'"
Another method of estimating the market value of property is to capitalize
the gross income derived from the property. This is done by discounting the
gross income at a weighted average rate of the going rate of interest and the
desired rate of return on the equity investment in the property. The approach
is seldom used as the sole basis for assessment, but it is useful in checking the
values derived by the other approaches." Direct capitalization is particularly
helpful when the market for a type of property is impertect or limited in scope
(e.g., hotels and theaters). The success of direct capitalization hinges on the
availability of reliable estimates of annual gross income or rent, accurate esti-
mates of operating expenses, and allowances for depreciation. The availability
of such estimates permits the calculation of the income for the property. The
income or annual rent atter operating expenses may then be divided by a current
discount rate to estimate the property value. For example. if the net cash flow
from a property is$100,000 and the required rate of return is 12.5 percent, then
the estimated property value would be $800,000. The sale of similar properties
in the estimated price range will confirm the assessor's valuation.
The capitalization method leads to underassessment. however, if the property
is not used for its highest possible income—for example a property being held
primarily for speculation on future appreciation in value. A case such as this
should be revealed in the process of checking the results of the capitalization
method with available market data. Any large disparity in estimates ot market
value—in the absence of specific zoning, classification, or other provisions to
the contrary—should be resolved by using the estimate reflecting highest possible
returns. The higher value, indicated by sales data. would reflect the market
estimate of the capitalized value of the property in its highest, most profitable
use.'-'
None of the three methods (market price, depreciated cost, or capitalized
value) is likely to be used exclusively. Even when market data are scarce, the
available sales transactions are still used to check the values determined by other
approaches. The combination of these methods and the existing and developing
•
analytical techniques provide adequate bases on which the assessor can determine
reasonable estimates of true values in all but the most extraordinary situations.
Extraordinary cases do exist. For example, such properties as an operating
railroad or public utility that serve an area larger than a particular district are
not appropriate subjects for local assessment. Estimates of the values of the
separate parts of a system may make little sense compared to a valuation of the
system as a whole. It is questionable whether a locality that has a portion ot the
total system—the railroad yards and terminals—in its boundaries should impose
a cost on all riders. It is also questionable whether utilities should he required
to pay a property tax that is built into the utility rates for all users—especially
when there are other taxes on utility revenues. In many states, the state gov-
ernment assumes the responsibility tor the assessment of railroad and utility
property. In some instances, the states apportion the centrally assessed value
among the districts; in others, the states collect the tax for themselves."'
For some industries, alternative taxes have been developed in lieu of the
property tax. 1'he effects of the property tax could conflict with public policy.
For example, property taxes on the value of forests may induce earlier cutting
142 Management Policies in Local Government Finance
V
than would otherwise be economically justifiable. In many jurisdictions a sev-
erance tax, which is levied on the value of timber when it is cut and sold or used
by the owner,has replaced the property tax. 'The severance tax does not require
annual payments, which might force the owners to cut timber prematurely in
• order to raise cash to pay taxes.The severance tax has also been used in extractive
industries.45
Periodic reassessment In a dynamic economy,periodic reassessment is necessary
•
. to maintain a reasonable relationship between the assessment base and market
values. The problem does not involve just the base but also involves the more
important problem of keeping individual properties in line. Although market
trends may be clear for real estate prices as a whole, the rate and direction of
the trend are not likely to be uniform. There can be many declining neighbor-
• hoods in a central city that is surrounded by exuberant suburban developments.
During the same period, market values in various neighborhoods could be de-
,' clining or rising. Periodic reassessment must be frequent enough to reflect these
types of situations, In large assessment districts with well-staffed offices,periodic
reassessment is a continuing function. Every property is assessed every few years,
using a combination of mass appraisal and site-visit techniques and the application
of sampling and statistical methods. There may be, of course, some lag in the
adjustments for different areas, but the judicious rotation of areas should permit
- ! an organized staff to deal with this problem,in spite of the budgetary constraints
that may preclude annual reassessment of all areas and parcels.
In the many smaller distncts, staff limitations (in both numbers and compe-
tence) may preclude the frequent reassessment of existing parcels. The principal
effort may be devoted to recording new properties and construction and to
noting new prices reflected in transfers. In such cases, the passage of time
nurtures inequity. The longer the time between reassessments, the greater the
variations between the assessed and market values for particular properties,and
the greater the dispersion in the ratios of assessed to market values among
i" properties and neighborhoods.
is The most reasonable solution to this problem lies in the consolidation of the
smaller assessment districts to achieve economies of scale, which has been oc-
i curnng to some degree in recent sears. There has been a decline in the number
l of assessment districts and a concomitant increase in the areas served by full-
i , time assessors of greater competence.
A second and perhaps better solution lies in the periodic reassessment of the
smaller districts by outside agencies, preferably by professionally qualified con-
- s suiting firms. A new assessment of all areas and properties in the district is
necessary. After giving property owners adequate notice of the new values, a
procedure for extensive review and appeal is usually established before the
• results of the reassessment are used to determine the tax levy. The reassessment
should result in a substantial reduction in the coefficient of dispersion for the
district, that is, how close the assessed values of different properties are as
percentages of their market values.
A general reassessment should he carned out periodically. There are good
reasons tor doing so..Clearly, a ten-year period is too long to permit dispersion
to continue, especially where there is much new construction and where the
market is particularly active. The less frequent the reassessment,the more heroic
• the final adjustments will be and the greater the stress on individual property
owners. Sharp changes in value will surely raise opposition to the implementation
of reassessment: such opposition is less likely if changing values are accommo-
dated more gradually.
• The difficulty individual property owners may have in meeting sharply rising
tax levies dunng a period of rapid value changes may lead to calls for special
. I
rkl•:: /
The Property Tax 143
classification of land for agricultural use, or for a moratorium on the imple-
" mentation of the new assessments on old holdings. Such measures may be
opposed by the owners of new homes who, when old properties are reassessed,
benefit from the equalization in the tax burden.46
:a. Assessing assessment How is the quality of assessment itself to be assessed?
•One way the effectiveness of the assessment process may be tested is by cal-
a.•• u N a w a�4.-
culating the average coefficient of dispersion or average deviation from the mean.
This coefficient reflects the closeness of the range of the ratio of the assessment
,
o a y • a- "'&° values to market values for different properties. It therefore estimates how
tare„,„ii., '��%s accurately the assessor apportioned the property tax burden among owners on
the basis of property values. While more sophisticated statistical techniques can
f yP° .f .0. ,1q-,c.a be used, the coefficient of dispersion historically is the accepted measure of
uniformity in assessment practice.
)' ex'ceP i.' +4,4
The coefficient is calculated in four steps. First, the assessment ratio for each
_ r f..,/ p. ...f •f parcel in a sample of recently sold properties is determined. Use of the ratios,
instead of the amounts, permits comparisons for different types of properties in
4e",r`//y ^`" ``..P owl
different ranges of values. The second step g pis to determine the mean average
�4� gale: r,,,,,i..s , ;or median of the assessment ratios for the sample of transactions. The third step
is to compute the average deviation of the individual property assessment ratios
4 y yt".t.ra! a..h5.r,ss) from the mean average or median assessment ratio. The final step consists of
relating the average deviation to the mean average or median assessment ratio.
44- .°'°t°`r'�`s The result is the coefficient of dispersion.47
S e//,,, .,. - rO,°•° The four steps are illustrated in Table 6-4. The coefficient of dispersion
equalled 17 percent. This measure, if based on a representative sample of dif-
ferent°, °°° ) la')°°• ferent types of property,may be used to grade the effectiveness of the assessment
c°` °OD �/� , process in a district. A coefficient of dispersion of 10 percent or less is usually
considered acceptable because of imperfections in the data and the problems •
•
.pro4/a de es inherent in valuation procedures. The coefficient of dispersion in the example
•
ex:vi. w A e so./es cited would be considered one that would indicate some problems.Many students
of property tax administration are concerned with the results of surveys that
4 Art. i o, cre4 a{wT I {„4.
?' 4•w J0 y•i.4.. AS 14
assess.••e,-I al-ray?, Table 6-4 Illustrative table for coefficient of dispersion
Kit.d l'er • �C "3-M
,•,,,P 4� , fife ".9A1..r.4..tt...• p•......� Recent Assessment Assessment Deviation from
a Property price' value' ration average or median3
ike4.f-•a Yee, Pt.*‘41
r.5�„���, r.1,340,e/.. Parcel A 100,000 37,000 37% 55 — 37 = 18
1 Parcel B 80,000 40,000 50% 55 — 50 = 5
t)q 7/o 1s ; 7%u So,.€ Parcel C 75,000 30,000 40% 55 — 40 = 15
f'
-' Parcel D 70,000 42,000 60% 55 — 60 = 5
t Pr.,G/.., a�crsls .r
Parcel E 65,000 35,000 63% 55 — 63 = 8
W Ael[r ;.......1 " /.cs,d Parcel F 60,000 33,000 55% 55 — 55 = 0
Parcel G 35,000 28,000 80% 55 — 80 = 25
• u It 1-44. e,fr, Mean assessment rate 55% Avg. deviation 9.4%
•
Coefficient of dispersion = Average deviation from mean assessment ratio
.- Average assessment ratio
. 9 4
__
55.0 = 17 or 17%
1 Hypothetical values are used for this illustration. of the mean value and,where the values are different,the
2 The assessment ratio is the assessment value as a per- results may vary
centage of the recent price.The average for the seven 3 The calculation of the deviation is for the absolute value
parcels is calculated at 55%.For this illustration.the mean and disregards the sign,or whether the assessment ratio
4 or average value is equal to the median value associated on a parcel is above or below the average or median.
with Parcel F Use of the median is an alternative to use
144 Management Policies in Local Government Finance
\/ i.
indicate that 80 percent of the assessment districts have coefficients of dispersion
at 20 percent or above.48 -
A problem encountered in some localities is that of the assessor who—despite
claims that the same assessment ratio is used for all types of property—tends ">`.
tYPe
to favor or to discriminate against industrial, commercial, and rental residential
4 a c« sele l r..in• - properties. Private dwellings,for example,may be assessed at 60 percent;rental T .`.
j N�^�°� e� �� l e properties,at 50 percent;commercial,at 40 percent;and industrial,at 30 percent.r-.
If there are enough representative sales in each category. the...assertion of clas,- .7-.:
.a.. y sification bias can be tested objectivgly. The test is similar to the coefficient of
dispersion; the average assessment ratio for each category is substituted for the 1"..'
. . ;. :,. • assessment ratios of the separate properties. This procedure permits the calcu- .
lation of a coefficient of dispersion relating the average assessment ratios of the tit_
,11..:--,a. ,c+.c-_:... _ different classes of property to the overall ratio for the district.49 The different
assessment ratios, however, may reflect a political view on the tax-bearing ca-
6;
pacity of different properties.
Another problem that sometimes appears is overassessment of low-value prop- .:. ';
- erties in relation to the assessment of higher-priced properties. Sometimes called
regressive assessment, this may occur because the assessor is more familiar with °" '
the values of lower-priced properties, which generally are sold more frequently. x. :
When the assessment ratios on smaller properties are generally above the av-
1 erage, the ratios for the larger properties tend to fall below the average. Table
x 6-4 illustrates the problem of regressive assessment. The average assessment is
55 percent. The properties with sales prices of $75,000 or more are assessed
below average; those with lower prices are assessed above average. r•
' The problem of regressive assessment may also be exposed by calculating the
price-related differential in the assessment ratios. The first step in measuring the
price-related differential is to calculate a weighted aggregate assessment ratio -
' (the total value of all assessments divided by the total values of the parcels in
the sample). The second step is to calculate the unweighted average of the t "'
assessment ratios. The means of the unweighted assessment ratios divided by
the aggregate assessment-sales ratio gives the price-related differential. If the .-a
two ratios are equal, the price-related differential will be 1, or 100 percent. If
the price-related differential is substantially greater than 100 percent,it suggests -
underassessment of higher-priced properties. A value considerably less than 100
percent would indicate the underassessment of lower-priced properties.
The existence of a price-related differential may be more important for prop-
erties in a given category than among categories.50 Political problems may arise
if there is a price-related bias in the assessment ratios of residences in general,
or if one section of the city or district is overassessed relative to other districts
in the area. A lower assessment of industrial properties as a category (as corn-
pared to the assessment ratios for residential or commercial properties),however, ''
..I,, ._ may, be the result of a deliberate policy to attract industrial employers and to '
stimulate economic development.7t S N M � f .r 4 ;N
The coefficient of dispersion may be used to compare the assessment efficiency
S.- - P4.-1 's /4.""..'9°• of different districts. A district is said to be doing work of acceptable quality
2` when the coefficient of dispersion for single-family nonfarm houses in the ju-
a' Gto�r`p/t •of t�:s.
a s A
1' •tt y , risdiction is less than 20 percent; and yet, 70 percent of the at sampled as
1e'
°'►
salt s o 4 N r _ ,t : t :s long ago as 1961 failed to meet that standard'The evidence suggests that there 1.
i Is stilt a need for better property tax administration in a substantial majority
i o.r" �' ~°`•r`+¢17 the districts.52 P P Y ty of a
f I de n.,•",r f•. 114- Assessment is a complex and often controversial task, and the persons who
j a S se fir.. .....1 r.9.4 f ~ manage this function carry' hea vY responsibilities, particularly for the equitable;
a•,...1 , treatment of all taxpayers. The assessment process is facilitated when the com- 1
ponents are clearly understood and when the techniques employed make full
use of the latest statistical tools-and methodologies.
r
is
- • . . , - • -, ,....4
The Property Tax 145
Deriving the tax base
In addition to assessment,the administration of a property tax involves numerous
procedures, including establishing rates, billing, enforcing collection. The pro-
cedure for determining the tax list is an example. Some properties and owners
are eligible for exemptions.These exemptions,which may be partial or complete,
are granted under law on the basis of the use of the property (e.g., hospitals,
• homesteads, and educational, and religious institutions) or on the basis of the
status of the owners (e.g., the elderly, veterans, persons with low income, and
firms with industrial development incentives). These exemptions vary in their
financial impact. In some jurisdictions the impact can be extremely severe if a
high proportion of the land is held by large universities, churches, hospitals,
public housing authorities,or state and federal government agencies. Even when
•
these organizations make payments in lieu of taxes, the payments seldom equal
the amount that would be obtained through property taxes. Of course, the tax
exempt entities may return services and economic value to the community in
excess of the taxes forgone. In general, though, it may be better to subsidize
such activities directly rather than by tax exemption.
Determining the levy
The budget officers usually subtract the estimated amounts of revenues to be
derived from sources other than the property tax from the total estimated ex-
penditures. The difference between the two determines the levy to be raised by
property taxation. The property tax rate is then determined by dividing the
required levy by the total value of taxable property assessments. Adjustments
are made for anticipated delinquencies and for estimated tax collections paid
Payments in lieu of taxes of the armed services at nearby federal
Substantial amounts of property are installations. Payments in iieu of
exempt from local property taxation property taxes may also be made by
because of ownership by federal. state, state governments to compensate
and local governments and by localities for revenues lost as the result
nonprofit, private organizations such as of state mandated exemptions.
churches, hospitals, and universities. Payments may also be made on a
The property tax exemption has the voluntary basis by some exempt
effect of providing a subsidy for those private organization to compensate for
owners and for the activities conducted local government services.
on those properties In some cases,
however, payments are made in lieu of In lieu payments. however usually fail
taxes. to offset Cully property taxes that
would have been required in the
• For federal properties exempt from absence of an exemption. Some argue
local taxes, these in lieu payments may that the subsidies granted to exempt
take the form of a share of the private properties ought to be voted as
revenues derived from the operation of appropriations: thus, that the costs
the properties. such as the royalties or would be more explicit than they are
the sale of timber, mineral or grazing under tax exemptions.
rights. In addition. payments may be
made in recognition of local Source. Joan E. O'Bannon. 'Payments
government services. such as school from Tax-Exempt Property. in Property
districts, under programs to defray Taxation USA. ed Robert W Lindholm
costs resulting from the enrollment of (Madison University of Wisconsin
children of federal workers or members Press. 1967) pp 187-212.
.
• 146 Management Policies in Local Government Finance
from past delinquencies. The resulting tax rate is expressed in terms of the
number of mills per dollar (or the number of tax dollars per thousand dollars)
of assessed values'
- The amount of tax due on each piece of property is the tax rate times the
assessed value of the parcel. Bills reflecting the tax assessment, tax rate, total
liability, and terms of payment (dates and discount and penalty rates) are sent
to the property owner on record by the tax collector. In some states, billing and
collection are centralized by county; in others, the cities, counties, and school
districts may all collect these taxes separately. The tax traditionally has been
- collected in one annual payment in the year after the assessment; but use of
quarterly and semiannual installments have become more popular in recent
years.
The imposition of penalties and interest charges for late payments is part of
- the program of enforcing collection. Nevertheless, in many jurisdictions the
• penalty interest rate is below the market interest rate. This has encouraged
delinquencies because it is a way for owners to obtain relatively low-cost loans.
Liens against the property are imposed when the tax remains unpaid for a long
period. Continuod-delinquency may lead to seizure and eventually to the forced
1 sale of the property to recover the delinquent taxes. Although the functions of
the tax collector and the assessor may be separate, their offices should be well-
coordinated. Both should have access to information on the tax roll, and both
.must be prepared to defend their actions in assessment appeals or enforcement
procedures.
I State supervision
Some of the responsibility for the improvement of property tax administration
has been assigned to state governments. The Advisory Commission on Inter-
- governmental Relations, for example, once suggested that the states reform the
l tax laws to remove such elements as intangible personal property, which are
impossible to administer; to review exemption laws; to consolidate small as-
-
sessment distncts; to improve assessment personnel standards; and to provide
- strong state supervision, coordination, and appeal procedures."
I The case for more active state supervision is based in part on the feeling that
state supervision over local government performance in such activities as edu-
cation and health is no more important (and is no more a violation of strong
t : local government) than supervision to achieve efficiency and equity in local tax
administration."
Improvements in administration have been noted at both the state and local
i levels of government. Some states, for example, have extended technical and
• advisory consulting services to local assessment districts in addition to taking
over the assessment of some categories of property. The size of some assessment
• districts has been made larger by designating the county as the assessment unit
and by consolidating some of the smaller districts. The use of the computer and
the recent development ot mass reappraisal techniques have been extended.
Nevertheless, some of the basic problems in property tax administration re-
main. Research has indicated, for example. that the bias toward a lower rate
• of assessment on properties with higher values does exist. Although more ex-
pensive properties pay more in absolute amounts, the effective tax rate (taxes
as a percentage of market value) is lower for those properties in many jurisdic-
tions. The property tax has been made somewhat regressive as a result.'°
Others contend that the failure to reassess properties frequently enough ag-
gravates the regressivity ot the tax. The lag in reassessment generally raises the
effective tax rates on those properties where values have declined or risen more
slowly than the %,clue of others in the same district. The lag in reassessment also
has received part of the blame for the acceleration in urban decay.' There is
- The Property Tax 147
f :
a tendency to delay recording declines in property value, and too much haste
in recording increases in assessed values for improvements to property.
r F , The failure to assess the values of property that are exempt from taxation has
prevented full knowledge of the costs of those exemptions. There have been
calls for assessments of the property,for a repeal of permanent exemptions, for
f, exemptions on a limited basis,and for estimates of the revenues lost by exemption
of certain properties(including the exemptions used to attract industry)at a cost
to owners of taxable properties.58 A review of the uses of exempt property, to
ensure that such uses are in the public interest, has also been recommended as
a way to reduce the controversy surrounding property tax exemptions.59 As part
of a package to aid localities, Connecticut has authorized special grants to "dis-
_;;.::r; - tressed municipalities" for 75 percent of the taxes lost in exempting certain
manufacturing properties.b0
Many states and localities offer industrial exemptions as part of their economic
development programs, the principal goal of which is to expand or sustain local
'� levels of employment. This goal appears justified because local taxpayers, by
bearing a higher property tax burden to subsidize new industry,have something
to gain. Higher employment helps to sustain the demand and prices of local
property and,ultimately,it adds to the local tax base.Critics of these inducements
note that policies of property tax exemption invite retaliation or imitation; so
many areas offer exemptions that there is no longer any competitive advantage
in doing 50.61
There have been many problems in attempting to enforce assessment of prop-
erties at full (100 percent) and current market value. However, as has been
noted, there is no conflict with equity as long as the assessment percentage_ts
4 used uniformly in the district. In recognition of this obvious fact, fewer states
now have legal or constitutional requirements for full market value assessment.
In addition to those states where assessment rates may be varied by use, some
twenty-four states now have specific assessment/price ratios below 100 percent.62
A problem with the assessment of improvements is couched in the disincentive
effect on capital investment. Movements favoring land taxation in the United
States began a century ago with Henry George. The arguments for taxing land
and exempting improvements are compelling. Proponents note that land values
are derived from community investment and development of public facilities
(e.g., sewers and roads), so that a land-value tax is an appropriate way to
recapture some of that value. A tax on land value is also a neutral tax because
it does not discriminate for or against any particular land use;the most profitable
use is the same before and after a land tax.
Recent proposals would exempt improvements (partially or wholly) in order
'r it to encourage building, to achieve more intensive land use, and to reduce urban
decay an
f.,,, Js tG,(e1 y d housing costs by encouraging the replacement of deteriorated buildings
on valuable sites. Such proposals,however, have been seriously questioned on
0�r/.:.p/.r¢s the basis of revenue adequacy; improvements are a major part of the current
,:,,,,,es td�/y �� tax base. There have also been questions about equity in the subsequent shifts
of the property tax burden. Current owners of land may be penalized because
At 3710-it u,,4/J I they paid prices based on a long standing tax system. In addition, the need to
alter state laws and constitutions imposes serious political obstacles.64
46.4 r-,51,..ti r,6,/.17 ! An empirical study of the effects of implementing a site-value or land-value
;a.-- L.tL r 0,....1 tax has indicated that this would lead to a substantial increase in investment in
' 11 I improvements in the long run.65 The total exemption of improvements,however,
,e 1....G.7,• q, — Ar
would require very high site-value assessments or high tax rates on land to
' r`r"'" w k'a/. maintain property tax revenues. Other empirical studies indicate that, on this
;10,5 Nap basis, only partial exemption of improvements would be feasible. Otherwise, it
re 1.--Ai,,...c,(;� A. would be necessary to supplement property tax revenues with other nonproperty
tax sources.66
pr°%"71'y or rear,/- , There is, then, no overall panacea to eliminate the problems of property
Sa+J:CO 3 TO el .p•rfy
:......,*77;7<..,:.-.7?-;...--,.,`v 4 - ~ i $ r ~k k �c?4a.t, 1 hw^ktc ark arm s t r > .4 � __ _
148 Alanrr;emelrt Policies in Local Government Finance
taxation. Most programs for reform are administrative and give highest priority
to "maintaining uniform assessments through frequent and regular revaluation
of property" as a way to meet concerns for the poor and for urban decay.'
-- ` ACIR calls for market value appraisal by professionals, under strong state su-
pervision or direct state administration of the assessment system, and with dis-
closure of assessment ratios so that the fairness of the system can be judged.
___ ACIR also calls for state financing of circuit breaker provisions, and for state
payment of some state-mandated local expenditures and in lieu payments for
state-mandated property tax exemptions. To avoid further imposition of the
severe restrictions required under Proposition 13, ACIR recommends moder-
ation in the use of and reliance on property taxation. Use of alternative tax
measures and of state support,as sources of revenue that appear more equitable,
: would relieve pressures to restrict local government programs.'"
Conclusion
Past surveys on public attitudes toward taxation have shown the property tax
to be the least popular. In a 1978 survey, however, the property tax was favored
• least by 32 percent of the participants and the federal income tax was favored
least by 30 percent. The difference is not very large, which ACIR states, gives
"little credence" to the notion that people are getting fed up with property
i; taxes."'' In its study of school financing, ACIR cites several reasons for the
unpopularity of the property tax:
1. No other tax is so harsh on low incomes and so "capriciously" related to
ability to pay.
t 2. The tax appears to be anti housing when compared to the preferential
treatment accorded housing outlays under both the income and sales
- taxes.
{
3. The tax is on unrealized capital gains, because increased property values
are taxed prior to increases in spendable income.
4. Administration of assessment of the tax base is more difficult and
1{ subjective (especially during inflation) than for any other tax, and the
shock of reassessment is "without parallel" for other taxes.
l' 5. Less frequent payment (for those who do not pay monthl■ to escrow
- accounts) makes the cost more apparent and painful than the current
I;' payment of sales and income taxes.-"
The propert, t.tx as an instrument of local government finance requires that
we return to an examination of the criteria noted at the beginning
of this chapter.
! 1. Fairness. The tax has been criticized as regressive and unfair. Different
analyses, based on different assumptions, have reached alternative
conclusions concerning the distribution of the burden of the tax. To some
extent that distribution has been changed by circuit breaker provisions
although, as noted above, such provisions have been subject to criticism.
Property tax classification and equalizing grants (especiall% for school
finance) by state governments also have altered the distribution of the tax
burden.
2. Certainty. Property tax administration has been criticized as biased and
costly. Certainly the variations in assessment practices would not be
acceptable for other tax bases, such as income. However. improved state
supervision, increased professionalism. and new techniques promise
improvements in efficiency and equity.
3. Conrenrence. Provisions for more frequent payments. through !ending
institutions and collection procedures, have made the property tax much
more convenient to pay for many people.
The Property Tax 149
sr
4. Efficiency. The property tax can be administered efficiently by local
governments. This is not generally the case for other major taxes, such as
income and sales taxes.
5. Productivity. New construction and rising property values in most areas
have increased the tax base and provided a fairly stable source of tax
revenues despite some fluctuations in income and employment. Local
governments require stable, continuing sources of tax revenues to meet
the requirements of locally desired levels of expenditure.
6. /Neutrality. The property tax has been criticized for its adverse effects on
housing and for restricting capital investment. A land- or site-value base
would be more neutral although difficult to implement.
The property tax is difficult to avoid (as compared to a local sales tax). The
clear evidence of the property tax on an annual bill permits the property owner
to evaluate the costs of locally provided services. Any limitations on expanding
the tax are likely to reflect voter consensus. For these reasons, the property tax
has been deemed a stable and acceptable source of local government revenue
that is particularly well suited for local administration. Specific criticisms have
evoked specific--modifications and improvements, and alternative revenue
sources have only been used to prevent excessive reliance on property taxation.
The property tax has been justified by ACIR in part for its ability to capture
some of the property values created by the community at large.The high visibility
of the tax permits greater accountability in local government, and there are
substantial problems in finding substitute sources of local government revenue!'
Therefore,the local property tax provides a substantial basis for local government
autonomy.
The property tax has declined as a percentage of total local revenues while
federal and state grants have risen. ACIR has concluded that the response to
the Serrano decision should not he a massive federal effort to reduce the reliance
on property taxes for local school spending, but that the states should bear
primary responsibility to deal with intrastate equalization of school spending as
well as with any general property tax relief.'
None of the highly charged controversy over the property tax has led to calls
for its elimination. Property is taxed everywhere in the United States. There is
great diversity in the use of the tax. In 1975-76. the tax was $4S3 per capita in
Boston: it was $93 per capita in New Orleans.' That diversity has facilitated
testing of new policies in different states in an attempt to fudge the effectiveness
and the costs of proposed changes. New pressures on the property tax ma\ arise,
however, if any increased reliance is dictated by declines in intergovernmental
grants to local governments or by increases in local government responsibilities."
Advisory Commission on Intergovernmental 6 U.S. •ldstsory Commission on Intergovernmental
Relations. Pinanc'ute Schools. and Property lax Relations,.1tt;ntticaw i iatttre.c or Fiscal Federalism.
Rebel-9 State Responcthilzrs A-40(Washington. p.20_
I)C Government Printing 011ice. 19731.p.Si). 7 See:J Richard Aronson and Eli Schwartz. 'Local
2 .1 Richard Aronson, Intangible Taxes.A\\isely Government Finance Some Current Issues"
Neglected Revenue Source for Sates. \'atiomd (Workshop.National Science Foundation and Mu-
Tar Journal 19 no.2(June I'hx,l: 184-146. nicipal Finance Officers Association.Sits 14810.
3 U.S.,Advisory Commission on lntereovemmental 8 William II. Oakland. "Proposition\Ill—Genesis
Relations..l7gniticaru!Tenures of[kcal Federalism. and(onscquenccs,",\,;nuual rat Journal (2.no.
/078-/979 Edition (Washington I)C• Got ern- 2(June 1979 Supplement):387-109
ntent Printing Otlice. 19791.Most 01 the historical 9 National /icr Journal 32.no.2(June 1979 Supple-
and current data cited in this section are train tables rnentI.
in this publication. Ill I' Shapiro D i'urcear, and J Russ. r.tx and
4 Serrano c Priest i e.d. 3d 551.-487 P '-d 1241, Expenditure Limitation to Retrospect and in Pro.;..
'tit('al. Rptr WI (1971). pect." National rat Journal 32. nu._ (June 1979
5 1'S..Advisory(•mmusston on Intergovernmental SupplementI I-lu.
Relations. /rrtuneme schooLt and l'ropern• Inv I I (i Brennan and J Buchanan. The Logic at Tax
Relief,pp.. Limits. Alternative (on,atulton.d (onstr.unts of
C Sources of Revenue
Chapter 20
There are several major sources of revenue for. Authority to Tax
cities, including the property tax.This chapter will
discuss these sources. In order to develop and The essential features of Minnesota's tax system
implement a city budget, the council should con- are in the Constitution which vests all taxing au-
sider all of these sources. These sources of thority in the state legislature. 1 Lacking legislative
revenue are as follows. authorization, cities may not levy any taxes under
their own authority.The Constitution dedicates the
Property Taxation revenues from specified taxes to certain purposes.
( Local Government Aid For example,the proceeds from the taxes on motor
C. Homestead Credit vehicles, gasoline, motor fuels, and iron ore
D. Fire and Police Service State Aid production must,in whole or in part,go to support
E. Highway User Fund certain state functions. The Constitution desig-
F. Federal and State Grants-in-aid nates certain state taxes as being in lieu of all
G. Charges for Services other taxes on property.
H. Regulatory Revenues
I. Gifts Within this constitutional structure, the legisla-
J. Interest Income ture alone has the authority to establish a state
K. Investment of Idle Funds and local tax system. All city taxing authority is
L. Enterprise Funds subject to legislative change or revision.
M. Borrowing
N. How This Chapter Applies to Home A consequence of this authority is annual
Rule Charter Cities legislative action substantially changing the
property tax system.
A. Property Taxation
Role of the Property Tax
The property tax no longer is the major source
of revenue for Minnesota cities. Less than 30 per- There are, essentially, only three kinds of taxes:
cent of city revenue comes from the property tax. those levied against what a person earns, owns, or
This section will discuss the property tax as a spends. The income tax is an example of the first
revenue source. Chapter 22 will explain the while the sales tax represents the last. The
process of making the tax levy. Due to significant property tax, levied against real or personal
changes the 1988 legislature made, the property property,is a tax against the wealth a person owns.
tax system is changing,with most changes effective
in 1990. Since the legislature may change the sys- Because most property is relatively fixed in loca-
tem even more in 1989, the 1989 Supplement will tion and because the U.S. Constitution makes its
include an update of those provisions. use impractical on the national level, the property
tax has been primarily a tool for local govern-
Handbook for Minnesota Cities Page 313
1
1
Sources of Revenue 1988 Supplement _
ments. Consequently, it has become the backbone such as minerals, may be separately owned and
of local revenue systems. taxed as real estate. 3
State law has restricted city governments to The term personal property refers to all
levying taxes against property. Most cities depend detached or detachable moveable property, includ-
on it for much of their operating revenues. Many ing furniture and other personal belongings, as
considerations of equity are involved in the well as commercial inventories and equipment a
property tax concept and process. For these business uses to produce income. 4 Virtually all
reasons, local officials should be familiar with the personal property is exempt from taxation. 5
tax itself, with the tax levy limits and authoriza-
tions,with the details of its execution,and with the All real property in the state is taxable as
maintenance and improvement of the tax base. property under the laws of Minnesota,with certain
exceptions. 6 The city has no authority to deter-
Intergovernmental Problems mine what property is taxable, nor in what propor-
tions or amounts. The legislature alone prescribes
The property tax supports many governmental the procedures to follow and sets all rates and ex-
jurisdictions. The average homeowner pays, emptions. The assessor and the local board of
through the property tax, for the support of the review have authority only to determine valuations
city, school district, county, and any special dist in accordance with the procedures the legislature
tricts such as sanitary districts, housing and has prescribed.
redevelopment authorities, hospital districts,
watershed districts, soil and water conservation Assessors must list all real property subject to
districts, and park districts. taxation. The county or city assessor must assess
at least one-fourth of the listed parcels each year,
This multiplicity of taxing jurisdictions creates providing reappraisal of each parcel at maximum
problems, including the taxpayers' confusion ' intervals of four years. The assessor's list must in-
regarding who is using their money. For example, elude all real property becoming taxable in any r
people often criticize city governments for tax in- year with reference to its value on January 2 of i
creases when,in fact,the city decreased its tax rate that year. 7
while other taxing jurisdictions were increasing
theirs. This sharing of the tax base hampers in- Property Tax Process
tergovernmental coordination and limits the coun-
cil's power to increase tax rates within its own levy The steps in levying property taxes start with in-
limitations. structions to local assessors and end with the tax
settlements the county auditor makes.
Equalization of Assessment Ratios
Between April 1 and June 30,or later if the com-
Another intergovernmental problem is the missioner of revenue gives an extension of time$
equalization of assessment ratios between taxing the local board of review must hold a meeting.
districts. Taxpayers in assessment districts which The board examines the assessor's list to deter-
have a high ratio of assessed value to market value, mine if it accurately lists all taxable property.
pay proportionately more property taxes than tax-
payers in assessment areas with a lower ratio, as- By the first Monday in May, the assessor must
suming equivalent actual values in properties. The have delivered the completed assessment books to
state uses several methods in trying to equalize the county auditor. 9
these assessments.
State statutes specify when county boards of
Real and Personal Property Taxes equalization must meet to examine and compare
the assessment of property within the county, and
Minnesota law defines the term real property as equalize them so that each tract or lot is assessed
the land itself including all buildings, improve- at its market value. 10 Action a board takes after
ments, and other fixtures on it; all rights and adjournment is not valid unless the commissioner
privileges pertaining to it; and all mines, mineral of revenue approves a longer session.The law also
quarries, fossils, and trees on or under it. 2 The specifies when the state board of equalization
statutes state that wealth connected with the land, meets. 11
Page 314 Handbook for Minnesota Cities •
C
1988 Supplement Chapter 20
Before October 25, the city council must set the to supply information relating to property assess-
tax levy for the next year and send a certified copy ment and tax collection. The city or any person
to the county auditor. If a city fails to do this, the directly interested in the order may appeal an or-
county auditor will levy the amount that the city der to a special board of tax appeals. 19
levied in the previous year. 12
The assessment official at the county level is the
Before the first Monday in January,the local as- county assessor. It is his or her duty to make the
sessor must receive the property assessment final determination of the value of all property
books.i3 Also before that date,the county auditor subject to assessment and taxation. 20 If the city
spreads the city's tax levy on all taxable property has its own assessor, he or she views and appraises
in the city. On the first Monday in January, the the property,21 but the county assessor assigns all
county auditor delivers the tax records to the book work and final evaluations. The county as-
county treasurer who then collects the tax. 14 sessor must determine the assessed value of all
property in the county and prepare all necessary -
As soon as possible after March 5 and May 20 assessment books and records.
of each year, the county treasurer pays to the city
its portion of all monies the county received from The county assessor must examine the assess-
levy and collection of taxes. 15 ment appraisal records of each local assessor any
_ time after January 15 of each year and must notify
Property tax distributions, the estimated collet- the local governing body of any deficiencies. 22 If
tions that the county treasurer makes to local juris- the local assessor doesn't correct the deficiencies
dictions, must include taxes, special assessments, within 30 days, the county assessor, with the ap-
and any penalties and interest due to the taxing proval of the commissioner of revenue, may do so.
jurisdiction. The treasurer or fiscal officer of any The auditor may charge the local unit for the work,
taxing district may appeal to the county board the and if the local unit doesn't pay by September 1,
county treasurer's estimated collection,if the local the county auditor 3 may levy a tax against property
Cofficial believes the amount is incorrect. in the local unit.
Assessment of Property If districts do not complete their assessments by
May 1, the county assessor will do the work and
There are four steps in the assessment of charge accordingly. 24 These provisions do not
property: appraising property to determine its full apply in cities over 30,000 population.
and true value; classifying property to establish its
tax capacity category; equalizing valuations to City Assessor
reduce inequities; and reassessing property.
If a city has a local assessor, that person must
Assessment Officials place valuations on all taxable real property in the
city. 25 To do this, the assessor receives annually
In addition to members of boards of review or from the county auditor, on or before the first
equalization, the state, each county, and some Monday in December of each year, the necessary
cities have an official responsible for property as- assessment books and blanks. The city assessor
sessment. Any county may require the county as- must complete the work and return the books to
sessor to assess all property, except for property the county auditor either on or before the first
in cities over 30,000 population. 16 Monday in May or after the last meeting day of
the city board of review, whichever is later.
State and County Officials Instructions in these duties are available from
The state commissioner of revenue administers several sources, including an annual meeting with
assessment laws, striving for a fair and equal as- a representative from the state department of
sessment of all property in the state. The commis- revenue. Assessors may obtain valuable assistance
sioner's duties include instructing assessors, from the book, Assessor's Manual, from the corn-
satisfying grievances, and refunding taxes if the missioner of revenue. The state board of assess-
county board and the county auditor recommend ment establishes courses and approves classes that
such action, 17 ordering the reassessment of any schools, colleges, and universities offer.
real or personal property, 18 and requiring cities
Handbook for Minnesota Cities Page 315
•
' J
Sources of Revenue 1988 Supplement
When in doubt about the valuation of a parcel property's initial tax as the product of the
of property, a local assessor should seek aid from property's market value and the net tax capacity
the county assessor. The local assessor should al- rate (one percent in the case of homesteads.) The
ways be reasonably certain before placing valua- homestead credit be stated on homeowners' tax
tions on property and should not hesitate to seek statements. The credit will be the difference be-
whatever aid is necessary. tween the property's gross tax capacity (217 per-
cent times the property's value) and the net tax
Joint Assessment Under Contract capacity (one percent times the property's value.)
The resulting decrease in tax will be indicated as
Any city which is wholly within a county and the"state-paid homestead and agricultural credit."
separated from a township for assessment pur- The value of this homestead credit will increase if
poses may enter into either of two kinds of agree- the market value of the home increases, or decline
ments allowing someone other than a local asses- if the home's market value declines. Tax state-
sor to assess the property. 26 ments will also show the reduction in tax at-
tributable "state-paid tax relief," which will equal
The city may contract with the county to have the sum of education aid,LGA,disparity reduction
the county assessor assess property. Or, the city aid, and county income maintenance aid.
may participate in an agreement with another city
or town. Under such an agreement, either.. Disparity reduction aid
governmental unit could employ an assessor or
they could jointly employ an assessor to assess In 1989, $63.2 million in disparity reduction aid
property in both jurisdictions. will go to taxing jurisdictions with high mill rates.
Generally, jurisdictions whose equalized payable
The local units must make these contracts or 1988 total mill rates are greater than 125 mills will
agreements under the terms of the Joint Powers receive disparity reduction aid. However, the law
Act, 27 and the commissioner of revenue must ap- prohibits using disparity aid to buy down mills at-
prove them tributable to school debt or referenda. About 515 :r
cities will receive disparity reduction aid in 1989.
Valuation of Property For 1990 and later years, disparity aid will remain
at 1989 amounts.
Assessors must value all property at its market
value. 28 The statutes define market value as the Truth in taxation
usual selling price in that location at the time of
assessment. It is the price which a seller could ob- A "truth in taxation" provision that will require all 1
tain at a private sale and not at a forced or auction local governments to notify each property owner
sale. Market value is not necessarily the same as of proposed tax increases and conduct public
original cost or intrinsic value. The assessor has hearings on proposed budgets will go into effect
authority to consider other value-producing factors in 1989, for taxes payable in 1990. Cities under
in assigning value to property. 2,500 population do not have to comply with the
truth in taxation law.
Property Tax Classificiations
Homestead credit replacement aid
The 1988 legislature eliminated the current clas-
sification structure which applied varying assess- Beginning in 1990, the law eliminates homestead
ment ratios to market values, depending upon the and agricultural credits and replaces them with a
property type. 29 The new law creates "net tax new transition aid program. For 1990, the transi-
capacities" for each property type. These tax tion aid for each local taxing jurisdiction will be
capacities are tax rates applied to a property's roughly equal to what that jurisdiction receives in
market value in order to calculate the tax. Taxes 1989 from the homestead and agricultural credit
are now based on a fixed percentage of a minus three percent of the jurisdiction's net tax.
property's market value. Local jurisdictions will receive aid in proportion to
their levy for payable 1989.
Beginning in 1990, property tax statements will
indicate the property's market value and the net The law provides local units with a "homestead
tax capacity rate. The statement will show the and agricultural credit guarantee." This provision
Page 316 Handbook for Minnesota Cities
1988 Supplement Chapter 20
guarantees a taxing jurisdiction that the amount it work, the city, county, and state levels of govern-
receives from the sum of education aid, transition ment review and modify, with limitations, the as-
aid, disparity reduction aid, local government aid, sessments. During this review, two kinds of cor-
and county income maintenance aid will be greater rections are possible: the governing body may
than the homestead and agricultural credits it check the assessor's lists for accuracy, hear in-
would have received under the 1989 homestead dividual complaints, and make any necessary ad-
credit law. justments; and it may equalize the ratio of market
to assessed market values.The first function is the
For 1991 and subsequent years, future transition sole concern of the city board of review, while the
aid payments to each local government will remain county and state boards devote more time to the
at the 1990 level, latter task.
Exempt Property When the entire procedure is complete, the
county auditor puts the valuations in his or her
Several classes of property are exempt from records to use when making up the tax rate figures.
property taxation (but not necessarily from special Only when all three levels of government have
assessments). 31 These include: reviewed and equalized the assessments, do they
become the official assessed values.
1. All public burying grounds; —-
City Board of Review
2. All public schoolhouses;
The city council may serve as the board of
3. All public hospitals; review in cities which have been separated from
the town. 36 In cities which have not been
4. All academies, colleges, and universities, separated from the town for assessment and elec-
and seminaries; tion purposes, the town board serves as the board
of review.
5. All churches, church property, and houses
of worship; The city council may appoint a special board of
review. It may delegate to the board all of the
6. Institutions of purely public charity; 32 powers and duties the council would have if it
acted as the board of review. The members of the
7. All public property, including all city- special board of review serve at the direction and
owned property for exclusive public pur- discretion of the council . The council determines
pose use; and 3.5 the number of members, the compensation and ex-
pense payments, and the term of office. At least
8. Real and personal property for the abate- one member of the board must be an appraiser,
ment and control of air or water pollution. realtor, or other person familiar with property
valuations in the assessment district.
Local governments in Minnesota may not ex-
empt any land from taxation for the purpose of at- The board of review meets in the city clerk's of-
tracting or keeping industry. 34 The city council, fice. The city assessor and the county assessor
however, may offer a developer a deferral of must attend this meeting with their assessment
property tax on property improvements during the books and papers. These officials may take part
construction period until the improvements are in the proceedings, but may not vote.
complete and 50 percent of the area of the building
becomes occupied. 35 Once this occurs, the The meeting date of the board of review, which
developer will be subject to the full property tax must be between April 1 and May 31, is fixed by
plus the property tax on the property at the time the county assessor on or before April 1 of each
the deferral took effect, times the number of years year by giving written notice to the city clerk.After
of the deferral . receiving the notice, the clerk must give published
and posted notice of the meeting at least 10 days
Equalization Procedures before the date of the meeting.
Once the assessor has completed his or her
Handbook for Minnesota Cities Page 317
Sources of Revenue 1988 Supplement
A majority of the members may take action at County Board of Equalization
the board of review meeting and may adjourn the
meeting from day to day for a period of 20 days The county board of equalization consists of
until they complete their work. After 20 days, the either the county auditor and the county commis-
board has no authority and any action it takes is sioners, or a special board of equalization that the
invalid unless the commissioner of revenue has auditor and the board of county commissioners ap-
granted an extension. points. 37 The statutes establish meeting dates.
•
In fulfilling its role, the board of review has Although the county board of equalization may
three main functions. decrease and,after notice to the taxpayer,increase
individual valuations, its primary task is to
1. It must review the assessor's list, making equalize the ratio between market value and
sure that all taxable property in the city has assessed market value in the various districts. Its
been properly placed on it. main purpose is to secure uniformity of assessed
value from district to district with only occasional
2. It must review the assessor's valuations, attention to uniformity between taxpayers within
striving to standardize the ratio between any one district. It may not reduce the aggregate
market value and adjusted market value valuations of either real or personal property in
for each individual piece of property. To — the county below the amounts the assessors have
accomplish this, the board may raise or determined, but it may increase these amounts.
lower valuations on individual properties,
but it cannot increase valuations without Upon the property owner's application, the
notifying the property owner and giving board may change a property's homestead clas-
that person an opportunity to be heard. sification or reduce its market value by as much
as $300, reducing or refunding any taxes the per-
3. The board must hear and settle the coin- son has already paid. 38
plaints of individual property owners
regarding the valuations on their property. State Board of Equalization
If a person fails to appear in person or through The commissioner of revenue acts as the state
counsel or written communication before the board of equalization. 39 The commissioner's
board of review after receiving notice of intent to primary assessment task is to assure uniformity of
raise the assessment, or if a person fails to apply valuations between counties. The commissioner
for a review of the assessment, he or she may not may adjust valuations between districts and be-
appear before the county board of equalization for tween classes of property. The commissioner may
a review of the assessment. An exception is when raise or lower individual assessments, but may in-
the assessment takes place after the meeting of the crease individual assessments only after the tax-
board of review or when the aggrieved person can payer has received notice and has had an oppor-
establish that he or she did not receive notice at tunity to be heard. The commissioner may not
least five days before the local board of review reduce the aggregate value of all property in the
meeting. state by more than one percent below the total the
county boards of equalization have reported. The
The local board of review may not reduce the commissioner may order a reassessment of
total or aggregate amount of the county assessor's property in any district.
assessment by more than one percent. This means
that the board must often compensate for reduc- Appeals to Tax Court
tions in assessed values by making comparable in-
creases in assessments against other parcels of The tax court is the final authority for the
property. hearing and determination of all questions under
the property tax laws of the state, except for an
After the final adjournment of the board of appeal to the Supreme Court. 40 The tax court
review, the city assessor may make additional as- has jurisdiction in cases dealing with property
sessments, but the board cannot make further taxes only after the taxpayer has appealed the
review. Complaints on these later assessments can valuation or assessment to the town or city board
go to the county board of equalization, of review and to the county board of equalization,
Page 318 Handbook for Minnesota Cities
1988 Supplement Chapter 20
except for those taxpayers whose original assess- structure. The revenue department estimates that
ments came from the commissioner of revenue. the 1989 funding level for the two new LGA
The tax court has no jurisdiction involving an or- programs combined will be $372.8 million, up 25.5
der of the state board of equalization unless a tax- percent from total 1988 funding of$297 million.
payer contests the valuation of the property.
The basic LGA formula, will provide an es-
The tax court must hold hearings at any place timated additional $62.9 million in 1989 for cities.
in the state so that taxpayers may appear before The new basic LGA formula guarantees each city
the court with as little inconvenience and expense a minimum base revenue amount (levy plus aid)
to the taxpayer as possible. of$160 per household.This guarantee is increased
by $150 per household for each tenfold increase
The small claims division of the tax court has (or fraction) in the number of households. Thus,
jurisdiction in any case concerning the valuation, the larger the city,the larger the minimum revenue
assessment, or taxation of residential property the guarantee.
taxpayer has homesteaded.It also hears cases con-
cerning the tax laws in which the amount in con- No state aid is available under the basic formula
troversy does not exceed $5,000, including if the local unit can finance the guaranteed amount
penalties and interest. 41 per household with 23 percent of its total taxable
value. (The formula specifies 23 percent to be the
The notice that goes to the taxpayer of the as- city portion of the jurisdiction's total taxable
sessment, determination, or order of the commis- value.)
sioner or the appropriate unit of government,
should include written notice that the taxpayer has This basic formula is similar in concept to the
the right to appeal to the tax court, and if ap- school aid formula in that the state will finance
plicable, to the small claims division. The notice the difference between the guaranteed amount per
must state that the taxpayer must appeal to the household and what the city can raise locally.
( town or city board of equalization and to the Lower wealth communities would thus tend to
county board of equalization before appealing to receive more state aid under the formula than
the small claims division of the tax court, except higher wealth communities.
in those cases where the commissioner of revenue
determined the assessment. 42 1989 Basic LGA: Base Revenue Guarantees
B. Local Government.Aid Ranges for
Number of Base Revenue
*
Local government aid (LGA) is a state aid to Households Guarantee
local governments. LGA has undergone several
changes since its creation in 1971. It has replaced 0 - 10 $160
most of the individual taxes such as cigarette, Ii 11 - 100 161 310
quor, bank excise, and gross earnings taxes which 101 - 1,000 311 - 460
the state previously distributed to local
govern-1,001 - 10,000 461 610
ments under various laws. 43 10,001 - 100,000 611 - 760
100,001 and over 761 - 910
By August 15 of each year, the commissioner of
revenue must notify taxing authorities of their aid Special factors increase these base revenue
amounts for the following year, as well as the data guarantees. For Minneapolis, St. Paul, and all cities
factors the state used to calculate the amounts. located outside the seven-courtly metro area, the
Cities must appeal any disagreement with the aid base revenue guarantee is increased by $190 per
figures to the commissioner within 60 days of this household. In addition, for cities experiencing a
notification. decline in population (from the third year preceding
the current year), the increase in the base revenue
Under a 1988 law, the legislature eliminated the Guarantee is 15 percent.
previous LGA formula and established two new
LGA programs: a basic LGA program and an al- The law grandfathers previous LGA amounts
ternative LGA program. These new programs add and minimum and maximum increases apply. As a
a great deal of complexity to the current LGA minimum under the basic formula, each city will
Handbook for Minnesota Cities Page 319
Sources of Revenue 1988 Supplement
J
receive in 1989 the amount of LGA it received in sale compared to the assessment date, and inade-
1988 plus a minimum increase of two percent of quate sale size. 44
its 1988 LGA.The 60 cities receiving the minimum
two percent increase are generally cities with weal- Cities receive their LGA in two equal payments
thier tax bases. Under the LGA basic formula, on July 20 and December 15. A city may request
these higher wealth cities are"off the formula" and an advance from the commissioner of revenue if it
are considered to be able to finance their revenue has a cash flow problem.
needs through their own tax base.
Since the stated purpose of local government aid
As a maximum under the basic formula, a city is to provide property tax relief to local govern-
can receive an increase as high as nine percent of ments, the law provides for uniform accounting
the city's combined 1988 levy and LGA. However, and reporting standards for cities over 2,500 and
the limitation for the maximum increase under this uniform reporting requirements for cities under
basic formula is 20 percent of the city's 1988 levy 2,500 population. 45
or the initial aid amount, whichever is less. (The
initial aid amount is the amount the city would C. Homestead credit
receive under the basic formula if there were no
limits.) Cities receiving the larger basic LGA in- The homestead credit reimbursement is a form
creases are cities where the spending level_ of intergovernmental revenue because it is a
(combined levy plus LGA) is well below the per replacement of the homestead credit from the state
household revenue guarantee in the formula. general fund. The 1988 Legislature retains the
homestead credit for payable 1989, but abolishes
In addition to the basic LGA program, an al- it in payable 1990, replacing it with a transition
ternative LGA formula will provide $12.9 million replacement aid. 46 For payable 1989, the credit
in additional LGA increases to 77 cities in 1989. will continue to equal 54 percent of the gross tax
This formula specifically excludes smaller cities paid on the first $68,000 of homestead value.
with populations over 2,500 and generally helps However, the maximum credit will increase from
(
cities with below average taxable wealth. For the $700 to $725. The 1989 agricultural credit will be
future, the new tax law grandfathers these alterna- the same as payable 1988 (except no agricultural
tive LGA amounts by combining them with the credit is available for seasonal recreational
basic LGA. property.) The agricultural credit, however,will go
One of the figures used to calculate a city's LGA
to all taxing districts, not just to schools.
is fiscal capacity, measured in terms of a city's For payable 1989 only, a special "targeting"
equalized assessed value (changed to "equalized credit will be granted to homesteads with tax in-
tax capacity" under the 1988 tax law.) Equalized creases over 10 percent. The credit will equal 75
assessed value (tax capacity) is the assessor's es- percent of the increase in property tax (after
timate of market value of all taxable property in homestead credit and property tax refund) over 10
a city divided by the city's sales ratio. percent . The maximum credit is $250 and the
credit does not apply to increases of less than $40.
A city's sales ratio is a percentage figure the Homeowners in some suburban metropolitan corn-
state department of revenue derives by dividing munities may be eligible for this special credit.
the assessor's market value figure by the actual sel-
ling price for property sold during the year. Its The taconite homestead credit will also remain
purpose is to equalize the tax capacity of property for payable 1989, but a homestead will not receive
in one taxing jurisdiction to make it comparable a tax reduction of more than five percent over the
with other taxing jurisdictions throughout the previous year.
state. A city may appeal its sales ratio determina-
tion. The law provides that no sales ratio study For budgeting purposes, the city should not in-
shall be conclusive or binding on a court . Any elude homestead credit reimbursement as a receipt
party may introduce evidence of the unreliability in the "expected revenues" section of the budget,
of a sales ratio study, including, but not limited to, because it is reflected in the total tax levy. Also,
evidence of inadequate adjustment of sale prices when the city receives the homestead credit reim-
for terms of financing, inadequate adjustment of
sale prices to reflect the difference in the date of
Page 320 Handbook for Minnesota Cities
C
1988 Supplement Chapter 20
bursemcnt, it should not leave it in the general 5. A reliable adequate method of receiving
fund, but should apportion it to the appropriate fire alarms and sounding alarms;
funds.
6. An additional piece of motorized firefight-
D. Fire and Police, State Aids ing apparatus for use outside the corporate
limits of the city; and
Another important source of intergovernmental
revenue is state aid for police and fire service. 47 7. Other requirements the commissioner es-
tablishes by rule.
The state collects a premium tax of two percent The state fire marshal has the right to inspect
from insurers with authority to write fire, light- the fire department of any city or non-profit
ping, sprinkler leakage, and extended coverage in- firefighting corporation to insure that it meets the
surance on risks within the state. Similarly, a above requirements. 51
premium tax of two percent applies to fire and
casualty insurers for insurance premiums insuring In order to receive fire state aid, the clerk of
against the risks of auto liability/bodily injury, each city having an organized fire department, or
auto liability/property damage, and auto physical the secretary of each independent non-profit
damage. The state apportions these monies as— firefighting corporation and the secretary and
state aid to qualifying cities for fire and police treasurer of the firefighters' relief association
retirement and relief. 48 If 48 is no firefighters' must jointly certify existence of the department or
relief association, then the city must use the fire corporation which meets the minimum require-
aid to maintain the fire department. 49 menu for receiving state aid.The state auditor and
the commissioner of revenue determine qualified
Fire State Aid state aid recipients.
To qualify for state aid for fire service, a city Qualification depends on information in the fire
must have had for one year or more before the department personnel and equipment certifica-
lion,any audits the state auditor or an independent
June 1 reporting date, an organized fire depart-
ment or an independent non-profit firefighting auditor conducts, and any other relevant informa-
corporation providing relief and pension benefits. lion. Upon completion of the determination, on or
Those organizations must meet the following min- before September 1, the commissioner calculates
the amount of fire and police state aid which each
imum requirements: 50
city is to receive.
1. An active force of at least 10 firefighters, If the relief association does not meet the finan-
who may be salaried, volunteer, or a com- cial disclosure provisions in the law, it will not
bination of each, including a fire chief and
assistant fire chief; qualify to receive any money.
2. A schedule of regular meetings and fre One section of the law affects approximately 30
quent drills which include instructions in cities with local non-volunteer firefighters' and
firefighting tactics and in the operation, police relief associations, but some parts also af-
feet volunteer firefighters' relief associations. 52
deployment, and care of firefighting ap
paratus and equipment; The law authorizes the Legislative Commission on
Pensions and Retirement to request and receive
3. Adequate firefighting apparatus and equip- any data on police or fire relief associations. The
ment, including a motorized fire truck state auditor may audit relief associations annually,
equipped according to state standards; but may contract with a certified public accountant
for the annual audit. (Cities may request the state
auditor to allow them to use the city's auditor for
4. A building of sound construction, suitable
the relief association audit.) The auditor's report
for housing firefighting apparatus with
facilities for the care of a fire hose and goes to the governing board of the association and
firefighting equipment; to the affected city council . The state auditor may
determine that an annual audit is not necessary
Handbook for Minnesota Cities Page 321 -
•
Sources of Revenue 1988 Supplement
and may authorize other means for examining the 2. Half of the available state aid is in propor-
financial records of the relief association. tion to the total assessed property valua-
tion, less mineral values. 53
Relief associations may use association funds to
pay for the audits. They are an authorized special Distribution from the state to independent
fund expense. The association may use general firefighters' relief associations occurs in the same
funds to pay for the cost of the audit if the bylaws way: half of the money available goes to associa-
permit. If the audit expenses come out of the spe- tions on the basis of assessed property valuation
cial fund, the cash requirements of this fund will of the areas receiving fire protection service, and
increase by the amount of any extra audit expendi- the other half in proportion to the population of
tures, and the city will ultimately pay these audit- the area the fire department serves.
ing expenses.
A qualifying independent fire department or
The state auditor must file a financial corn- city that provides contracted fire protection service
pliance report with the commissioner of finance to another city or township should include the
for each relief association. The state auditor must population and valuation of that area on its ap-
also notify the legislative commission on pensions plication for state aid.They must file the contracts
if the audit reveals malfeasance, misfeasance, or with the commissioner of finance.
nonfeasance in office, or if the relief association_
has not filed its annual report by July 1 each year. The aid goes directly to the city treasurer. If a
duly incorporated relief association exists, the
The board of each salaried firefighters' and treasurer must transmit the aid within 30 days to
police relief association and each volunteer the relief association, provided the association has
firefighters' relief association with assets or filed a financial report with the city treasurer and
liabilities of at least $200,000, must prepare an an- has met all other statutory provisions. 54
nual financial report. The city clerk or clerk-
treasurer must countersign the report. The as- Police State Aid f
sociation must file it in the relief association office
and submit it to the city council and the state To participate in the police state aid apportion-
auditor. ment,the clerk of each city employing one or more
police officers must file a certification of police
Volunteer firefighters' relief associations with officers. The state sends certification forms in
assets or liabilities of less than $200,000 must December to all cities employing police officers.
prepare an annual statement of financial affairs
and have an independent public accountant or the For state aid purposes, police officer means any
city's auditor certify it. The association must file person:
this statement in the relief association's office and
submit it to the city council and the state auditor. 1. Whose primary source of wage income is
from direct employment as a city law en-
The treasurer of each volunteer firefighters' forcement officer, for not less than 30
relief association must be bonded for an amount hours per week;
equal to at least 10 percent of the assets of the
association, up to $500,000. The relief association 2. Who has been employed for a minimum of
board sets the figure between these levels. The six months prior to December 31 preceding
city council must determine the amount of the the date of the current year's certification;
bond if it has a paid fire or police relief associa-
tion. 3. Who is sworn to enforce local ordinances
and the general criminal laws of the state;
Fire aid distribution to cities is as follows:
4. Who is authorized to arrest with a warrant;
1. Half of the available state aid goes to cities
in proportion to total population based on 5. Who is a member of a local police relief
the latest available statewide federal association or the public employees' police
census; and and fire fund; and
Page 322 Handbook for Minnesota Cities