How Math Cost Of Permit For Fishing For One Year Understanding (and Fixing) Property Tax Assessment

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Understanding (and Fixing) Property Tax Assessment

Imagine, if you will, Tinyville, a community of just ten houses. All ten homes were the same size and style, built at the same time on similarly sized lots, using similar architectural designs and building materials, each with comparable views and amenities, and each sold to its original owner for the same price, 250,000 dollars Assuming the fair market value of each of these homes was \$250,000, (because after a reasonable period of time, that’s the price at which sellers and buyers had meetings of the minds, not under duress) , Tinyville’s tax assessor valued each property at \$250,000. , resulting in a total underlying property value of \$2.5 million for all of Tinyville.

Like any municipality, Tinyville has expenses: police and fire departments, schools and libraries, water and sewer, sanitation workers, judges and clerks, engineers and inspectors, assessors and tax collectors, clerks and clerks. To keep the math simple, let’s imagine that Tinyville’s annual budget is only \$100,000 and that it has no other sources of revenue (such as parking meters, local sales or income taxes, or hunting/fishing permits). In order to cover their annual expenses, Tinyville’s tax assessor divides their \$100,000 in budgeted expenses (known as total taxes) by each property’s proportionate share of the community’s \$2.5 million total value . Dividing \$250,000 by \$2.5 million means that each home is responsible for 10% of Tinyville’s property tax. Each homeowner (or their mortgage bank) receives a \$10,000 tax bill.

For years, everyone is happy in Tinyville. All families have children in Tinyville schools, march in Tinyville parades, and compete in Tinyville pie eating contests. In the natural course of events, two of the original families were more prosperous than others and moved to better digs in Mediumville, one retired to Southville, one moved to their company office in Westville, and one died in a tragic car accident, but his heirs in Bigville did not want to return to the family home. Anyway, five of the homes went on the market and because the market had been doing well for the last few years, four sold for \$300,000… except for the deceased couple’s heirs – they dropped the house. in disrepair, they stopped mowing the lawn and eventually the squatters moved in and started tearing the place down. When they finally sold it as a “handyman special” they got \$150,000 for it.

Before a year’s tax assessment is “final,” it is sent to each property owner for review. Each owner has the opportunity to dispute the assessment. The five original owners continued to be assessed at a rate commensurate with their \$250,000 property value, and knowing that many of their neighbors were selling their comparable homes for \$300,000, they quietly accepted this assessment. The four new owners who paid \$300,000 each are also valued at \$250,000. Interestingly, it is illegal for a municipality to conduct a “spot assessment” on individual properties, so even though the “fair market value” of these four houses has increased by 20% since the last assessment, they continue to be assessed at \$250,000 each. The tenth house, bought by the handyman for \$150,000, is also valued at \$250,000, but he denies its valuation. He argues that the fair market value of his home should be based on its recent acquisition price and, using the various legal methods available to him, revalues ​​it at \$150,000.

Assuming the total tax does not change by \$100,000, what happens to each owner’s property taxes? Nine of the ten houses are still listed at \$250,000 each, but the last one is now only valued at \$150,000. One might quickly (and incorrectly) guess that homes with unchanged assessed values ​​would see no change in their \$10,000 property tax bill, and that the tenth home would pay only \$6,000, but that doesn’t quite add up ; Tinyville needs to raise \$100,000 in taxes to balance its budget, and this formula only adds up to \$96,000. What actually happens is that the denominator also changes. Tinyville’s total assessed property value is recalculated based on each property’s assessed value and now adds up to just \$2.4 million. This means that each of the \$250,000 homes now represents just over 10.4% of the total and is now responsible for that percentage of the \$100,000 rate, raising each of their assessments to \$10,417. The handyman’s \$150,000 value is 6.25% of the total, so he is now responsible for only \$6,250 of the Tinyville tax.

Some (including manual workers) would argue that manual workers’ houses are worth less and therefore should pay less tax than their neighbors. Others (including his neighbors) would argue that his house is the same size and shape, takes up as much land, and requires the same police, fire, schools, libraries, sewers, and other services as Tinyville, and that he should pay the same amount than the other houses. Some (including the original five families) would argue that the resold homes should be valued at their higher new market values ​​and that the new owners should pay proportionally more taxes. Others (including the four new owners) would argue that the fair market values ​​of their homes (as evidenced by their selling prices) are indicative of the true fair market value of the five unsold homes, even though these homes are not ‘have recently sold. changed hands These are the kinds of issues that confound property owners and tax assessors, assessment review boards and courts in every municipality, every year.

In a perfect world, when the handyman applies for a building permit to repair and restore the value of his home, the new value he creates from the work he performs should bring his tax settlement back into line with the d other comparable houses, thus reducing the percentage of its neighbors. of the total tax, accordingly. Unfortunately, not everyone applies for a building permit, and not even all projects require a building permit. Upgrading your kitchen appliances improves the value of your home without the need for building permits. Many municipalities do not require a building permit to add a new layer to your roof or to repaint your bathrooms. Of course, there are also homeowners who build attic bedrooms or lofts over their garages without a permit, and not all new home buyers are smart enough to realize that they are paying for these unpermitted improvements. If you complain to the assessor that your neighbor has a finished basement without a permit, the assessor does not have the same authority as a building inspector to call and demand to see that basement in order to properly tax them… and not all The building department inspector is willing to conduct inspections with an anonymous tip, so you may have to go on record as the man who criticized his neighbor. Consequently, many home improvements are not reflected in appraisal records.

Since buying a home in a down market gives you the ability to regret your tax assessment based on its new apparent fair market value, other homeowners can use your new “fair market value” to argue that his house is comparable to yours and that his assessment should also be lowered. This creates an additional burden on appraisers as they attempt to determine new values ​​for homes that have not recently sold based on evidence created by comparable homes that have. As more and more homeowners come up against their rates, it lowers the denominator of the total value of the council’s rate, increasing the actual tax bills of homes that have not been assessed. Naturally, this reinforces the process, prompting more and more homeowners to regret their taxes, creating more and more work for advisers. However, taken to the unimaginable extreme, in a community where home values ​​have fallen, it can take several years for all homeowners to realize they are being assessed unfairly (compared to their neighbors) , but ultimately, when the last of them finally regrets their taxes, everyone’s share of the new denominator should be comparable to their share of the original denominator, meaning that they all, on average, eventually they will pay almost as much tax as before. In the intervening years, those who got on board first and had the biggest and earliest reductions in their assessed home value will reap the biggest short-term benefits. Some would go so far as to argue that this is fair, as in so many other cases in life when the early bird gets the proverbial worm.

However, the chaos and disparity involved causes more work and therefore costs municipalities more in assessments, review boards and hearings of claims. In the worst cases, when claims processes fail and are left to the courts to decide, municipalities have to pay unanticipated refunds to claimed property owners, which reduces their immediate coffers and further increases tax rates in later years to compensate for these losses. For scholars of economic theory, Keynes would argue that such machinations are a necessary and productive part of the system, and that they employ lawyers who would otherwise earn less; these lawyers rent offices, hire staff and buy office supplies and, in effect, make the wheel of the economy turn. Hayek would counter that these legal costs don’t so much enrich the system as they redirect capital that would have been used elsewhere, such as the tax savings that allow homeowners to buy new furniture, hire a gardener, or take a vacation. I would consider these inefficiencies in the tax assessment process an unnecessary cost that allocated resources in a less than optimal way… and I would tend to agree with him. I don’t know what the solution is, but I know we should try to find a better one.

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