I just received a letter in the mail, from an attorney I’ve never heard of, advertising his Real Estate Tax Appeal business – regrettably, I may have to avail myself of this service. regrettably? Let me explain…
You would think lowering property taxes would be something everyone is for, right? Well, once you understand how property taxes are calculated, and the effects successful tax appeals have, it can start to look a little futile.
Property Tax Calculation
Let’s start with a quick run-through a very, very small example: imagine a town with 4 houses in it, two houses valued at $500,000, one valued at $750,000 and the fourth at $250,000 – the total valuation of all properties in this town is $2 million. Now lets imagine the town has an annual budget of $40,000. The property taxes owed by each house is calculated by taking the annual budget and dividing it by the total valuation of every house in the town, this gives you the tax rate, typically expressed as a “per hundred” number (so much per $100 assessed value of the house). FOr our little town, this is the tax roll:
House 1: Valuation $750,000 – Taxes owed: $15,000/yr
House 2: Valuation $500,000 – Taxes owed: $10,000/yr
House 3: Valuation $500,000 – Taxes owed: $10,000/yr
House 4: Valuation $250,000 – Taxes owed: $5,000/yr
Total Valuation: $2,000,000 – Annual Budget $40,000/yr – Tax Rate: $2.00/hundred
So that is how the taxes play out in our little town. But how are house valuations arrived at? Typically the houses are all reviewed at one time, and a professional organization estimates the price each house in the town would sell for in the real estate market on a given day in the past.
So, let’s say the owner of House #1 feels their house is over-valued and files an appeal, in an effort to lower his property taxes. He petitions the assessor, a process is followed, and the tax assessor agrees that the current assessed value for House #1 is too high, and lowers it to $600,000. What does this do to the taxes in our little town.
Well, it seems a refund is available to the homeowner of House #1 for the difference between the taxes paid for the current year and the new lowered valuation – in our example, that would make their new annual tax bill $12,000 and entitle the owner of Home #1 to a refund of about $3,000. Sounds great – but now our town has to make it through the budget year with only $37,000, not the $40,000 they budgeted the previous year. That causes problems.
Now, let’s assume that the annual budget doesn’t increase the following year, what will the tax roll look like then? Well, we’ll still have a $40,000 annual budget, but the total assessed value in our town is now $1,850,000. That makes our new tax roll look like this:
House 1: Valuation $600,000 – Taxes owed: $12,973/yr
House 2: Valuation $500,000 – Taxes owed: $10,811/yr
House 3: Valuation $500,000 – Taxes owed: $10,811/yr
House 4: Valuation $250,000 – Taxes owed: $5,405/yr
Total Valuation: $1,850,000 – Annual Budget $40,000/yr – Tax Rate: $2.16
See what happened? The taxes of every other house in our town went up about 8%, but the town’s budget remained FLAT at $40,000. How will that make everyone else in town feel about their taxes? Since it is my example, I can tell you how they feel – they all decide to petition the assessor for a re-valuation of their homes, hoping to lower their tax burden, with mixed results.
For this hypothetical, House #2 goes down in value $50,000, but House #3 goes up in value because they added an in-ground pool and finished their basement since the last time their house was assessed – House #3 is now assessed at $600,000. House #4 is found to be properly assessed, so it remains assessed at $250,000. The homeowner of House #2 will get a refund check in the amount of about $1,310, and I’m not sure if the owner of House #3 will get a bill for $2,620, but let’s say they do. This now gives our (very) little town $41,310 to spend this year (that will help offset the increased work in the Tax Assessor’s office!).
Now it’s a new year, and (amazingly) our annual budget remains flat again at $40,000, but now we have a total assessed value of$1,900,000 – this makes our tax roll for this year:
House 1: Valuation $600,000 – Taxes owed: $12,632/yr
House 2: Valuation $450,000 – Taxes owed: $9,473/yr
House 3: Valuation $600,000 – Taxes owed: $12,632/yr
House 4: Valuation $250,000 – Taxes owed: $5,263/yr
Total Valuation: $1,900,000 – Annual Budget $40,000/yr – Tax Rate: $2.10/hundred
Houses #1 and #4 see their taxes go down a few hundred dollars each, House #2 saw their taxes go down about $1,400, and House #3 saw their taxes go up by about $1,800.
Why did I call this “A Run on the Banks“?
Once the re-assessment festival begins, all the houses that aren’t re-assessed will see their share of the tax burden increase to make up the savings/losses to the tax pool from the reassessed houses. Just like a classic run on the banks, once something like this starts, everyone will join in, hoping to not “lose out” on imagined tax savings, but as I’ve shown above, a reassessment simply changes the share of the overall tax burden a particular house has, and if everyone does this, a given house may see their taxes go up OR down. The reality is, the only constant in any of the above examples was the annual budget, and the assessed values of the houses don’t change that. Savy politicians would see the total assessed value in their town go down, and realize that they need to cut the budget to help keep actual tax bills down for homeowners.
Take a look at what happened to the four houses in my little example – with the annual budget kept constant for three years (a very unlikely scenario), only two houses saw their taxes go down, two went up – imagine what would have happened if the budget increased each year (a much more likely scenario)…
In my town, anger at our tax bills runs real high right now, and I think many will request a tax re-assessment – if I choose not to request a reassessment, I am guaranteed to see my taxes go up. If I do, there is a chance my taxes will go down.
I can’t ignore that chance.