Ad Valorem Taxation (Property Tax) Definition literally means - - PowerPoint PPT Presentation

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• Definition literally means "According to \i:
• Once regarded as fairest possible 'tax

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• Based upon principle that a~o\Int
• f tax

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• Major source of revenue for many local g

Ad Valorem Taxation

(Property Tax)

• Value is typically "Market Value"
• n value of

property owne~/

Property Tax

• Purpose of property tax:
• A method which will provide!!(f!:~

method for sharing the bU«d;~'~f provl

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government services to pr~erty

and p

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• Based upon premise that property wea

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measurement by which/prppe~ty

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compared and asked to Ptly their fa· cost of government

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• IS a

ayb~i

• f the

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Property Tax

• Rooted in the principle of "Market Value"
• Market Value can be elusive,,specially fl

"assessors"

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• Assessors asked to value prppef\~Y

at mar

but not given tools for the tequit~ment

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• Markets can be "volatile" from year to y
• Assessors do not alwa

available to perform t

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Property Tax

• Consequently, it is believed that the property tax, based
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ategories

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­ncrease lin upon a market value assessment, is unfair and ine

There has been legislation aimed at correcting

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­to

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perceive Inequi les, u '.

." .~~':I;,;;;~.mor

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d~i~a~n ef~ d:l'~Ie1~ar~

assessors office

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Increases in assessed values usu~lI\

do mean

taxes

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Even if mill rates are reduced they are\not r as some property assessments increase

Property Tax

• Does "Equity" in tax burdens truly exist?
• Market values vary for different property cat

assessors lacks tools necessary t~;8j~~;

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• Market Analysis is determined by~past

sales of

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• Sales of residential property ar~

~e~erally

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• Sales of commercial property

!~r~ mut;:h fewer

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• The assessor may receive information on man

sales, but not commercial sales

• Commercial property sho

.",.9 t

and expense data which -- ···'flot

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Property Tax

• Although the assessors attempts to value all

property at market value, it is not an eas

• Property owners complain a150ut the inc

assessed values every year /1\

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• Most residential properties/cke\assessed

market value than commetcijaI property

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• Residential properties are assessed a
• f 90%­95% of market value statewide
• Commercial propertie"

:I~EI to

'f~'"ide

assessed between 65

7

8

sales

datij

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re IS an d

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Property Tax

• The primary difference between residential and

commercial Rroperty assessment ratios is the availability of data

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• However, the difference ind~ates

that t

inh~ren~ inequality between/I~pmmercial

residential property assess~e~ts

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• This inequality cannot be/'cqrrected unle

existing system is changed, Ichange b mandatory disclosure system forresi data and commercial incom!e and expen

• Neither is likely to ha

Are There Problems with the System?

• Some believe there are problems, because

assessments constantly rise causin ..

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• The Market Value concept fot property

essmento/

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subject to the volatile mark¢~

activity in

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• During rising markets mO$t wo~ry

that t

swill also!1

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rise

• During market declines some worry thati,a:txes will not

decline with the market

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• Both worries have so

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Are There Any Alternatives?

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• Legislation similar to California's Proposition 13 was

introduced in the legislature last sessio

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• Sounds good, but it will a,ctually\ create i

and may tax lower income people mo

• The proposed legislation also does not afllllW

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reca pture 0 mar e!J!\,,,~\:

ti!l~!IIJ!!I/f;,;\~l\I~':ll\!!\,\zio

pel~1IV

se s

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• This would cap assessments;at no more1llan a 2%

increase per year

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Background

• Rapid uncapped increases in assessed values caused

many to have to sell or lose ho~e

• 5 Years preceding Prop.13/f'e'Sl~(fential

ues

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increased 76% but tax rat~

were only

wered 2°/~

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• Prop 13 adopted in Calif in/~\g78

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• Mand.ates a property tax tva.ite\Of 1% (1~.~.

ills)

• Requires property be asse~sed\

at mark.

Value at

time of sale, therefore;"

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• Requires mandatory sales disclosure
• Allows assessments to rise no more th

year until next sale

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Prop 13 Limits

• Acquisition value based (Market Val
• 1% tax rate,y
• 2%

maximum increase fr~m

base var. per year

• 2/3 vote to increase tax/~

\Qr bonds

• Reappraisal (to market/~~Iu~)

upon c

• wnership or new con$tr~cti~n

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• Ownership change exCludes certai

members (between spouses, childre grandparents-grandchildren if p'arent

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Negative Impacts of Prop 13

• Local governments had to get creative to find revenue to replace lost property

tax revenue

• New investment is heavily taxed (full mar~~"\;i\iC

fees, exactions/" mitigation, dedications and easements)·········,····,

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• Anti­competitive ­ new buyers are taxed h~avier

than curren

perty owners/ i '

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• No equity of tax burden exists between ~lrpilar

properties

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• New investment does not generate sufficient revenues for 10

pay for itself over long term \

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• Therefore, politics becomes anti­growth, since growth ca

ems and does not pay for infrastructure or improvements

• Consequently, "big box store" developments are more welco

generated

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Negative Impacts of Prop 13 cant.

• Change in ownership is more a loophole than tax
• wners look for ways to stall reassessme
• Business property easier to find loo~holes

than residjtitial property 11\

• The tax burden then shifts to hom~b~\ners

who can

loopholes as easily / I \

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• Because it fails to cover costs fqr gbverhment, relia

taxes, such as sales tax, is increas~d

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• Younger, 1st time homebuyers pay a disproportion

property taxes

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Positive Impacts of Prop 13

• Many homeowners who did no

sell were saved from h,a:vin

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foreclosed upon or ha~1

ng to sel

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• It does give taxpaye/~

a\measur

certainty of their pr~p~rtY

taxes

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• Saved average homeowner thou

dollars in property tax over the

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PROPERTY TYPE AS A PERCENT OF THE TAX ROLL

Source: Santa Clara County Assessors Office 80.0% "­­­­­­- 69.1% 67.1% 70.0% I 60.0% 60.0%

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60.0% PERCENT OF TAX ROLL 49.8%

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50.0% 50.2%

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40.0% I 48.0% 40.0% 40.0% 30.0% I

• .....

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31.3% 30.9%

68.7%~o

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1995

r"

1985 1980 1975

20.0% +1­­­­­­­­­,­­­­­­­­,­­­­­­­­­,­­­­­­­­­,­­,­­­­­­­­­­­­­­,

• • • •

ALAMEDA COUNTY CALIFORNIA PARCELS BY BASE YEAR

Source: Office of the Assessor, Alameda County, 2007­2008 Annual Report 16.00% .--~~~~~-r~~~--~---r---~~-~~I~--~~I--~~~-~T--~~~I 12.00% I

...........

10.00% I-

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W

8.00%

0::: W

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6.00% 4.00% I / 14.00% +­­­­­­­­+­­­­­­­­­­+­­-

1975 Base Year 13.05% of the parcels pay 2.15% of the taxes

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• •
• 2006 Base Year

7.78% ofthe parcels pay 14.86% of the taxes

PERCENT OF TOTAL PARCELS. PERCENT OF TOTAL VALUE

• ......

I 1985

"....

7'

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2.00%

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: &•

0.00%

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1975 1980

Selected Excerpts from Warren Buffett's Response To the Wall Street Journal November 3, 2004 Yet there was no mention in the story of my second house in Laguna nor any mention of the tax inequities within California. Instead, the headline, the body of the story and quote made it appear as if I was only talking about the difference in taxes between Omaha and California.

market value property taxes 2003 Laguna Beach (purchased early 19705)

$4,000,000 $2,264 '

Laguna Beach (purchased mid

19905)

$2,000,000 $12,002

Omaha

$500,000 $14,401

taxes as share of market value,';

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Index

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For example, the statement in the editorial's second paragrap billionaires in Chico will appreciate Mr. Buffett's generosity with th make no sense if the writer had understood that I was criticizing t

• California. My sympathies are clearly with the "non­billionaire

300 000 house in Chico toda th ,(i

.r. es m

>,",'. 0R

those borne b this non­resident 1)1u

. lilion

This family, because of Proposition 1 ,nas beet e ected to

Cap Assessments or Something Different?

• Since the assessment process is primarily used for

sharing the burden of government services, does it matter whether the vafue represen.L­ " not?

• Since the "market" is som~W.!I'

hat volatil

assessor is not given the ~~~t

tools to

market, and;

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• Since there appears to .be ~n

irttlerent

into the current system between co residential property, without additional

• An assessment cap

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termine /th!e

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,luitybuilt aland formation;

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• f property

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assessor / I \;

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ket valufe j

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• f "value"

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eeds a pred

• Many property owners and many elected officials

believe that the property tax syste ·

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• This belief is based upon th~.i\faet

that t

follows the law and valuesP1rQperty at

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• When values change forvar;ious\catego

we are simply shifting the tax burden

The Current Method

• The fact is a municipali

amount of revenue t

The Current Method

• Here's how the current system works:

Current Total Assessed Val

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Current Year Budget Amgu~t

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Mill Rate $15,000,000

$1 ,500,000,000

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,000,000

= 10 mills

The Current Method

Your house current market value Your brothers house current market val'ue Brothers current taxes (210,000 X .010)

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210,000 $ 2,100

$ 2,100

ACROSS TOWN

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Your current property taxes (21 O,Of)d'''X .0.10)

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$189,000

$

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,000 10 mills

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Your brothers house current market value On 10 (189,000 X .010)

The Current Method

NEXT YEAR

Budget amount - Same $15,000,000 Total Assessed Value - Same

Mill Rate - Same

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Your house current market value lOP \ 5%

241,500/ i

Your current property taxes (241 ,!5QO

2,415/ up

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ACROSS TOWN Brothers current taxes

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15%

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The Current Method

2 YEARS OUT

Budget amount - up 7%

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253,600/(rrJd)

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2,584; up

7%

Total Assessed Value - Up 5%

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Mill Rate - (16,050,000 +1 ,575,000;(00)

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Your house current market value ;up 50/0

Your current property taxes (241 ,5QO X, .0.1019)

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ACROSS TOWN

Your brothers house current market value No Ch Brothers current taxes (189,000 X .01019)

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The Current Method

Ad Valorem Method Summary ­Taxes

• In 2 years your taxes went up 23%

services, yet the budget only"lrlcr~i

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• Your brothers taxes went dq;wn 8%

~G~ for the same serviC]S! ~~

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• While the ad valorem method m'easures

reality, neither property owner's finan' changes unless they sell their property. increase/decrease is based upon percep (unrealized financial g,ai

~··~' ..

The Current Method

paying an equal share of taxes

• The reported ratio of residential propertY(;i;;~SS

between 90%­95% in larger municipaH~s

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• Most municipalities do not provide com!~rcial

data

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• There is always a question as to whether or not commercial properties are

sales rati

• However, the State Assessor estima~s

/that\the ratio of

property assessments to market valtJe i!s between 65%-

• This is due in large part to the lack of a.

dequat~ sale

income & expense data to perform an ,income approac

• Therefore inequities exist in the current methodology of

value assessments

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sales prices i~

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ue to lack 011 \

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t commerCial

lor lack of

value

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market for the

• gesln

value 'may

An Alternate Method

• The Market Value of property can change radically

from year to year

• In remote cities around the >,tate, very

activity occurs making it alrrt9st impossi assessor to ascertain marketi\value

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• So, what can be done to ~tirhi~te

the c

someone's tax bill just be/cause \the marl change in a certain portion of th\~

city?

• How about a method that does not use I;.·e actJQL~n

market value, but somethiQ9 a bit 9Jffer;~'

t tH

subject to the marke·

' . u

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An Alternate Method

• A radical change, yes, but more equitable than assessment caps
• How do we do it? The value of improvements w

cost manual providing changes/update~

• Improvement values would be asse~ed

based up

characteristics, property condition, ~&nstruction

ty

quali~

• f struct~re.

Ttiis i.s one of

~11~ same appr

that IS currently In use. It IS called; 'iTl\e Cost Appr

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• The difference is that the costs would not be adM

current market value. Instead, the

{values would r

period of 3 years at the "cost manual" varue

• At the end of 3 years the manual would be update

cost increases

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to reflect the ain "fixed" for a

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An Alternate Method

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arison!

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e sales

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sed

• Land valuation is more problematic in the

alternate methodology, but will

a land allocation methodc.;.((C;.:j:

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• Improvements may be A\Jed with

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approaches to value, c~~t,

\$ales co

(market) or the incom~

~pproach

• Land is usually always valued with

comparison approach, although, in

th ·

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cases

e Income ;. .

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chools / I due to/th~ et vallie" .

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ion method

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fact that it does not alwc;iy~

ac~ieve

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• Land values will be based upon an allo

using the land to building ratio and the ·

~

An Alternate Method

• Land values may also be obtained with the use of

valuation models built based upon building ratio (allocation) al~~fl

• This approach is one taug~\n

apprais

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now although it is sometirn~s\disregar

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building costs to marc·

COMPARISON OF VALUE CHANGE

If Assessed Value Were Changed Each Year Rather Than Every Three Years

$140,000 $130,000 $120,000 $110,000 $100,000

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$90,000

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$80,000 $70,000

• IInc. : 8%

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• rInc. =3%

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[DeZ=~%J

(Deeo: ­­.3% ­ )

• Inc. : 4%

Dec.= -6%

2009 $60,0004

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$50,000 I I

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(AssUmption+ r

Mkt Up 8% 1

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Cost Up 4%

$40,000 I

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2008

The "Cons" of the Proposed Alternative

• Assessments no longer represent "market value", but cost values
• Primary reason for any tax increases will be reflected b

the assessed value

• Lending institutions may no longer alloW> assessed value.

basis of equity loans

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• Will require other statutory changes, ~Fh\as

full value ~

LIHTC property, and some changes in qptiqnal exempti

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• Will not require a smaller assessment staff a~

the only pic}'i<\ln of the/

responsibility removed is the annual analysis 'of market ~";

at field work

must still be completed "

• Large c~anges

in Market Value will not be reflected in t~:fI3ssess~d

values

uSing this method

...

• Market Values will have to ma

calculating full value determinarr}'~c

(lInC]

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• No more "surprisingly" larg~

incteases irlllssessments

from year to year

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• This approach may lend itself to other s

municipalities, not levying property taxe method to raise reve

The "Pros" of the Proposed Alternative

• Assessments no longer represent "market value"
• Primary reason for any tax increases w·

by the mill rate, not the ass~,~~,~

• Municipal Assessors will havl'ihe tools n

calculate an accurate assesswent

• Assessment appeal process/tJ\1I be simp
• Assessments will become n1or~

stabilize

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• Property taxes will be more !pre(Jictable

Conclusions

• There probably is a workable alternative to the current property

tax system, IE it is decided that the current system will be

changed!

• The alternate suggested here wil,FeqOl"Fe sub

changes

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• Overcoming the "market value" ¢p.,cept will re

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educatlon / I \

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• The proposed alternative allo~sifo~\a

system !!

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equitable without following the traditional mar

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• The proposed alternative removes one elem

which some claim raises property taxes every value

• The "CAVE" people (Citize

".".ally

invariably be against it,

• st

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ial statuto~\

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• re a lot of/ I

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is fair a'nd

alue Goncept

"he formula r, market

erythl

y changes

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