Because the property tax, unlike most other taxes, falls on the value of wealth, the gov-ernment must determine the taxable value of that wealth—a task that greatly compli-cates administration of the tax. Figure 3–2 depicts the three phases of the property tax cycle: appraisal, assessment, and collection.
Figure 3–2 Phases of the property tax cycle
Appraisal determines the value of property for tax purposes, using legally specified standards of valuation.
• Taxable and tax-exempt property are discovered.
• Legal owners and taxable site of property are identified.
• Property is appraised on the basis of use and estimated value as of the appraisal date.
• Property owners are notified of changes in appraised value.
• Appeals from property owners are heard by independent board of review.
• Adjustments to appraisals are reviewed and approved by board and appraiser.
• Final certified appraisal roll is prepared.
Assessment adjusts appraised value to determine the taxable value of property.
• Appraised value is multiplied by assessment rate (or ratio) to determine assessed value.a
• Assessments are equalized by state agency to the same percentage of full value across jurisdictions.a
• Assessed value is adjusted for partial exemptions, such as homesteads.a
• Truth-in-taxation notices are prepared and published.a
• Public hearing is held on proposed tax rate and/or budget.
• Tax rate(s) is(are) set by governing board.
• Rate(s) is(are) certified as being within legal limits.a
• Tax roll is prepared and certified.
Collection involves the preparation and distribution of tax notices to both current and delinquent taxpayers.
• Tax bills are prepared and mailed to owners of record.
• Lien is attached to property to secure payment of taxes, penalties, and interest.
• Current tax payments are received, credited, and distributed.
• Unpaid taxes become delinquent after due date.
• Delinquent-tax roll is prepared.
• Delinquent-tax notices are prepared and property owners are notified.
• Court order is sought to foreclose on lien on outstanding delinquencies.
• Property is sold at a public auction for payment of back taxes, penalties, and interest.
a Not performed in all states.
Appraisal
The appraisal phase begins with the identification and valuation of all taxable property in a jurisdiction and ends with the preparation of an appraisal roll, which lists the owner of each property, along with the property’s legal description and appraised value. State law typically specifies a particular date, such as January 1, as the date to which all appraisals are pegged and on which legal ownership is established. The owner of the property on the appraisal date is legally liable for the tax, regardless of whether the property is subse-quently sold.
State law usually defines the basis for appraising property for tax purposes. In most states that basis is an estimate of the property’s fair market value. However, there are signifi-cant deviations from this standard. For example, in California, the post–Proposition 13 basis is either the selling price (acquisition value) of the property or its 1975–76 appraised value if the property has not sold since ratification of the amendment. Starting from this basis, county assessors may annually increase real property appraisals by no more than 2 percent or the consumer price index, whichever is less. Whenever a property sells, the purchase price becomes its new appraised (and assessed) value, creating a higher tax liability for home buyers, including first-time buyers, and for businesses moving into or relocating within the state. Curiously, property transferred within a family across generations retains its original value plus, of course, the annual 2 percent adjustment.
A number of studies have documented the significant inequities and adverse economic effects over the long term that such a valuation scheme introduces.22
Both Florida and Michigan have adopted this acquisition basis of appraised value, capping annual increases in assessments at the rate of inflation or at 3 percent in Florida and 5 percent in Michigan, whichever is less. Unlike California, however, Florida and Michigan apply caps only to the principal residences of homeowners.
As might be expected, state laws vary considerably in defining how appraisals are done; variations include (1) the level of local government responsible for appraisal administration, (2) the frequency of reappraisal, and (3) the state’s role in ensuring pro-fessional standards of appraisal. Because it directly affects allocation of the tax burden in a jurisdiction, property appraisal is a politically charged task. However, as it is a matter of expert judgment, it should be removed from the political arena.
Administration of appraisals County governments are the ones most frequently assigned the task of administering appraisals, although New England states tend to give the task to cities and towns. Maryland is the only state that places that responsibility in a state department of assessments and taxation.23 In Montana, the county assessor is a state employee, and the state provides all the funding for the assessor’s office.
Texas has made the greatest effort to remove appraisal from the political arena: it created 253 countywide appraisal districts charged with the responsibility for valuing property in the district. While their boundaries are coterminous with counties, central appraisal districts (or CADs) are politically and administratively self-governing. Each CAD is governed by a board of directors appointed by local governments levying a property tax in the district, and each annually prepares an appraisal roll for its taxing jurisdictions. Local governments in the CAD then use this roll to develop their certified tax rolls. Appraisal districts receive their funding through service charges on the local governments they serve.
Property tax experts recommend that appraisal administration be centralized at least at the county level, with state oversight to ensure consistency in assessment adminis-tration. Centralization provides greater economies of scale and more efficient use of
limited professional staff.24 Only one appraisal for tax purposes should be done for each property. A few states still permit overlapping taxing jurisdictions to prepare separate appraisals, which confuse taxpayers and are an inefficient use of administrative resources.
Frequency of reappraisal Reappraisal poses a major political problem for state and local legislators because taxpayers anticipate that their tax burden will increase. An increase in taxable value, without a concomitant reduction in the tax rate, leads to a higher tax liability. However, frequent reappraisal prevents large shifts in the tax burden across classes of property and, depending on the frequency, also prevents large increases in individual appraisals. The result is increased equity in the allocation of the property tax burden.
Out-of-date appraisal records, such as land maps and property descriptions, increase the cost of reappraisal, so more frequent reappraisals are generally less costly to adminis-ter. Local governments are advised to reappraise all property at regular intervals and real property at least once every three years. Most states require reappraisal of property at least once every five years; however, eight states have no frequency requirements.25
Most states also require that property owners be notified by mail of any changes in appraised and assessed values and be given an opportunity to appeal the revaluation.
States usually assign the task of hearing appeals to an independent board of review.
North Carolina assigns it to the county board of commissioners; Illinois creates a separate board of review in each county. In addition, taxpayers should have access to appraisal information on comparable properties. Illinois requires each county assessor to list in a newspaper the appraised value of each property in the county.
State involvement in appraisal With the exception of Delaware and Hawaii, all state governments assume some role in overseeing local appraisal practices.26 State in-volvement, which is critical to the long-term improvement of appraisal quality, must be-gin with state-provided in-service training and certification of local appraisers. At least twenty-eight states require certification of the chief local appraiser, and twenty-five re-quire certification of all local appraisal staff.27 States should also provide local tax offices with technical assistance, such as manuals on appraisal law and practice, maps, computer software, forms, and readily accessible technical or legal advice. For railroad and utility properties, which are difficult to appraise, the task of valuation is almost always assigned to a state agency, with the taxable value then allocated among local governments.
State governments must enforce a professional standard of quality, either indirectly through interjurisdictional equalization or more directly through challenging valuations, adjusting local appraisals, or assuming responsibility when inequities exceed acceptable limits. State involvement in promoting more professional appraisal practices is critical to improving the quality and equity of local appraisals.
Assessment
Assessment involves making adjustments, such as partial exemptions or fractional as-sessments, to a property’s appraised value to determine its taxable value. A property’s assessed value provides the basis on which the tax burden is distributed among property owners. Variations among state practices are greatest in this phase.
The assessment phase begins with the appraised value of each property being multi-plied by the statutory assessment ratio, which is the principal adjustment in this phase.
At least twenty-one states and the District of Columbia nominally require full-value assessments; that is, assessments cannot be at a fraction of appraised value.28 The remaining states generally sanction fractional assessments. For example, if property is
assessed at 33.3 percent of its value, a property with an appraised value of $100,000 has an assessed (or taxable) value of $33,300. Additional adjustments, such as a homestead exemption, are usually applied after the adjustment for fractional assessment, lowering the taxable value even further.
Fractional assessment is generally introduced when a long-delayed reappraisal would otherwise result in a sudden jump in appraised values and when a shift to full-value assessments would prompt considerable anger among taxpayers. However, evidence and experience show that appraisal equity improves significantly when governments use the full-value standard. In their review of assessment practices, John Bowman and John Mikesell conclude that property tax administration is most uniform when assessment ratios are high—that is, at or near 100 percent—and applied with regularity.29
Texas’s experience is instructive. In 1981, the state implemented a previously ratified constitutional amendment abolishing fractional assessments and empowering the State Property Tax Board to monitor the progress of CADs toward achieving full-value and more uniform assessments. In 1985, the 253 CADs achieved a statewide median assess-ment ratio of 0.90, with an overall coefficient of dispersion of 18.49. (The greater the coefficient of dispersion, the less uniform the assessments are relative to value.) That is, on average, the reported taxable value of property was at 90 percent of its estimated (appraised) value. By 2009, these statewide measures had improved to 0.99 and 13.71, respectively—a remarkable administrative accomplishment and a testament that quality assessment practices can be achieved even in volatile real estate markets.30 Additionally, Texas state law requires CADs to reappraise real property at least once every three years and personal property annually.
In addition to Texas, North Carolina and Kentucky, among other states, provide evidence that full-value assessment can be achieved without creating a taxpayer uprising.
The keys to success include preventing local governments from reaping revenue wind-falls from reappraisal (through either full disclosure or a tax freeze), keeping taxpayers fully informed of the reappraisal process, sustaining a regular cycle of reappraisal, and compelling local governments to move toward a full-value standard.
Another tax relief measure benefiting homeowners is assessment caps. As a way of cushioning the impact of rising market values, at least nineteen states now limit increases, following reappraisal, in the assessed value of residences.31 Such caps benefit property owners in real estate markets where property values are rising rapidly. Unfor-tunately, higher-valued properties tend to increase more rapidly in value, and any cap on assessed values differentially favors these property owners over other taxpayers. Assess-ment caps not only introduce unfairness but also create vertical inequity to the extent that a household’s financial ability to pay its taxes is correlated with property value.
Collection
Collection focuses on two sources of revenue: current taxes and delinquent taxes. The more successful a government is at collecting the first source, the less need there is for collecting the second. As a general rule, local governments responsible for collecting property taxes should achieve at least a 95 percent collection rate on the current levy.
That is, no more than 5 percent of the current levy should become delinquent.
Level of compliance depends primarily on local economic conditions, especially the unemployment level, and on the aggressiveness of the collection effort. The role of the tax collector requires professionalism and a balance of fairness and firmness.
The accompanying sidebar lists strategies for improving current and delinquent tax collections.
Collecting current taxes The design of the tax statement is a key factor in improv-ing the current collection rate. A well-designed statement clearly identifies the amount due, the basis for determining tax liability, and the penalties and interest charges for late payment. Some governments send tax invoices electronically to reduce printing and mailing costs and to provide more timely notice to taxpayers. State laws usually define the information that must be provided on the statement, but within those guidelines, governments can exercise discretion in bringing taxpayers’ attention to the amount due and the due date. Figure 3–3 is a sample tax statement for the overlapping taxes of a city, school district, and county.
Some governments offer discounts for early payment, but the effectiveness of this approach is doubtful given the unattractive discount rates that local governments are able to offer. A more effective measure is to mail or e-mail a reminder notice to taxpayers two to three weeks before the due date. While this increases collection costs, govern-ments generally find the improved collection rates well worth the effort.
Another means of improving current collections is to build goodwill through more convenient collection methods, such as an online payment option and extended office hours during peak collection periods. If it is legally possible, the tax collector should accept partial payment, with the unpaid balance subject to penalties and interest. Formal provisions should also be developed for hardship cases.
Collecting delinquent taxes The collection of delinquent taxes begins with the preparation of a delinquent taxpayer roll. Some states, such as Kansas, require the tax col-lector to publish in a newspaper the names of delinquent taxpayers and the amount owed.
Convincing taxpayers that they will eventually have to pay back taxes is critical to a successful delinquent-tax collection program. Once the due date passes, the tax collector should immediately send delinquent individuals a reminder that taxes are past due. Gov-ernments may use the same form as is used for the current tax statement but with pen-alties and interest added. Each successive contact with the taxpayer should increase in intensity and urgency. For example, if there is no response to a letter asking the taxpayer