The Role of Property Tax in American Government (Part 1)

By Todd D. Jones, MAI, CRE, FRICS, and Michael J. Mard, CPA/ABV, CPCU

Note to reader: This article starts a series of columns addressing The Role of Property Tax in American Government culminating in the generally accepted methodology of the real estate appraisal, business valuation and accounting industries reconciled and properly applied to a property tax case study. The series of columns will address trends in government, statutory limitations available to tax payers, industry standards applicable and a sample case study.

Introduction

Most know that the federal government is primarily funded by income tax levies on corporations and individuals. In contrast, state governments are generally funded by a combination of revenue sharing from the federal government, income and corporate taxes, sales taxes, and user fees; the proportion of revenue from any particular source varies widely from state to state. Property taxes and user fees fund local governments. While property tax expense is not the largest expense item on a corporation’s expense ledger, it is often a significant amount.

In most states, property taxes are levied and adjudicated by local government. And despite general similarities, the localized nature of property tax administration has given rise to widely varying rules, procedures, deadlines, and processes among taxing jurisdictions. Annual modification of statutory, administrative, and case law is commonplace, making standardization impossible. Local expertise is critical for taxpayers and client service professionals concerned with avoiding malpractice claims.

Property Tax in the United States

Property tax is likely the oldest form of taxation in human history. Ancient China, Babylon, Egypt, and Persia used property taxes to fund government operations. Ancient property taxation schemes were directed at land and its productive value.

In the United States, property taxes were enacted during colonial times. State and local governments in fourteen of the fifteen states were taxing land by 1796, and four were taxing inventory (stock in trade). In contrast, Delaware did not tax property, but rather the income from it. In some states, “all property, with a few exceptions, was taxed; in others, specific objects were named. Land was taxed in one state according to quantity, in another according to quality, and in a third not at all. Responsibility for the assessment and collection of taxes in some cases attached to the state itself; in others, to the counties or townships.” Vermont and North Carolina taxed land based on quantity, while New York and Rhode Island taxed land based on value. Connecticut taxed land based on type of use. Procedures varied widely.

During the Twentieth Century, many jurisdictions began exempting, or partially exempting certain property from taxes (e.g., the homes of war veterans, widows, and the handicapped), primarily for political gain. After World War II, some states replaced exemptions with “circuit breaker” provisions limiting increases in the assessed value of primary residential property to prevent citizens from being taxed out of their homes.

The economics of local government expansion have given rise to taxpayer initiatives in many states attempting to limit property tax burdens. The most famous of these is California’s Proposition 13; enacted in 1978, it amended the California constitution to limit aggregate property taxes to one-percent of the “full cash value of such property.” “Prop 13” also limited increases in the assessed value of all taxable property to two percent per year. In 1992, Florida’s “Save Our Homes” amendment did much the same, but only for primary residences, or homesteads. Approximately twenty states have some form of assessment limitation.

Tax policy is discriminatory, and as such, introduces political pressures among various property types. As part of a property tax update, the following chart was presented to the Florida Senate in Issue Brief 2012 – 207. This chart reveals the proportion of total statewide property tax revenues levied between residential property (i.e. voter-owned), and non-residential (i.e. commercial) property, since 1974.

Assessment differentials and exemptions may cause a property’s taxable value to be lower than its just value. In Florida for corporate and residential properties, “just value” is market value, less transaction costs, subject to various limitations and exemptions. So, as taxable value diverges from just value, various classes of property are not affected equally. In 1974, the taxable value of nonresidential property, which includes largely exempted agricultural property, was only 62% of its taxable value, while the taxable value of residential property was 81% of its just value. During the 20th century, the ratio of taxable value to just value for nonresidential property increased to 66% in 2000 and increased to 74% by 2011. This resulted in political efforts, driven by the business community, to restore some balance.

In contrast, the ratio of taxable value to just value for Florida residential property has shown considerable variation. This is because of the effects of an increased homestead exemption enacted in 1980, the Save Our Homes assessment limitation (enacted in 1992), falling residential real estate values during the Great Recession, and the 10% limitation on assessments of non-homestead property. All of which contribute to a frenetic legislative environment as various interests lobby for equitable treatment and relief from over taxation.

The Property Tax Cycle

In every jurisdiction, the corporate and residential property tax cycle is essentially similar, in that there are seven fundamental stages to the process: Discovery, Rendition, Assessment, Notification, Challenges, and Billing.

Discovery

Assessors are tasked with discovering and identifying property within their geographic jurisdiction. The discovery process is typically facilitated by local government’s police powers. For instance, real estate transactions are recorded in the official records by the Clerk of the Court; those records are provided to the assessor, as are construction permits and the like. In this way, very little real estate escapes discovery; when it does, most assessors have the ability to “back assess” for several years.

Specifically identified property is typically tracked (i.e. as parcels for real property, and as accounts for personal property) as individual records in the assessor’s office. Real property parcel records include data such as the legal description, the size of land and buildings, construction type, transaction history, and other data deemed by the assessor, or the supervising state agency, to be relevant in valuing the parcel for assessment purposes.

Most assessors today use cadastral mapping to track real property. A cadastral map is a map that shows the boundaries, and therefore ownership, of land parcels. Cadastral maps may also contain additional details, such as survey district names, unique identifying numbers for parcels, certificate of title numbers, positions of existing structures, section or lot numbers and their respective areas, adjoining and adjacent street names, selected boundary dimensions and references to prior maps. Today, geographic information system (GIS) technology has greatly expanded the capabilities of cadastre management to apply a comprehensive register of the real estate or real property’s metes-and-bounds to tax collection of a jurisdiction.

Rendition

Most states exempt intangible asset value and individual personal property from taxation, but tangible business personal property is taxed in many states. In those states, businesses must file a rendition, or return, every year. The rendition is typically a fixed asset schedule identifying the asset, its original cost, the date it was acquired or went into service, its age, its useful life (which is sometimes established by law), and its current value.

Assessment

The assessor estimates the value of the property within the taxing jurisdiction as of a specific date, according to a specific definition of value, for the purpose of levying taxes to operate the local government.

Notification

Once an assessment has been determined, the property owner (i.e. taxpayer) is notified. Typically, notices are mailed to taxpayers.

Notice is a fundamental constitutional right guaranteed by the fourteenth amendment. “An elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” This may include a requirement that, upon learning that an attempt to provide notice has failed, “reasonable follow up measures” should be pursued. The notice must be sufficient to enable the recipient to determine what is being proposed and what the individual must do to prevent the deprivation of his or her interest. Typically, service of the notice must be reasonably structured to assure that the person to whom it is directed receives it. Such notice, however, need not describe the legal procedures necessary to protect one’s interest if such procedures are otherwise set out in published, generally available public sources.

Timeframes for responding to the notice, in order to file an assessment challenge, are generally very short. Thus, prudent parties establish procedures to accelerate responses to the receipt of any notices of proposed assessments or taxes.

Challenges

Most of the public’s interaction with assessors occurs in the assessment challenge phase of the process. Local adjudication of property tax challenges presents special hurdles for taxpayers, insofar as many hearing officers are neither valuation experts, nor knowledgeable regarding the laws that govern the process. In fact, in many jurisdictions, representatives of the taxing authorities are the arbiters of the challenges.

Constitutional guarantees to fair redress and due process have their roots in the Magna Carta, the contract that established the basis for self-governance in Western society. Without these guarantees, the government can take any citizen’s life, liberty, or property, for any reason and with no recourse, as European monarchs in the Middle Ages often did.

The First Amendment in the Bill of Rights of the US Constitution states, “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press, or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.”

The First Amendment entitles every citizen of the United States to a trial, or hearing. The Sixth Amendment guarantees fairness by requiring a speedy, public trial, an impartial jury, a legitimate court, knowledge of the basis for the action, the ability to confront and present witnesses, and to be represented by counsel. According to the Supreme Court, “redress of grievances” is to be construed broadly: it includes not solely appeals by the public to the government for the redressing of a grievance in the traditional sense, but also petitions on behalf of private interests seeking personal gain.

The Fifth Amendment guarantees “due process” and “equal protection” rights. These rights were imposed on the states in their judicial and administrative proceedings through the adoption of the Fourteenth Amendment.

The Fourteenth Amendment states, “[n]o State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.” The Fourteenth Amendment guarantees that fair redress requires due process and equal treatment of citizens in matters to be adjudicated.

The Supreme Court stated that the Fourteenth Amendment “operates to extend… the same protection against arbitrary state legislation, affecting life, liberty and property, as is offered by the Fifth Amendment.” That said, the Fifth Amendment has always been recognized as a restraint upon government, providing that a legislature must provide “due process for the enforcement of law.”

Further, the Court stated, “[i]nsofar as the police power is utilized by a State, the means employed to effect its exercise can be neither arbitrary nor oppressive but must bear a real and substantial relation to an end which is public, specifically, the public health, public safety, or public morals, or some other phase of the general welfare.”

Private Property Rights

“Private property” is defined as the ownership, control, enjoyment, ability to dispose of and bequeath land, capital, and other forms of property by persons and privately-owned companies.

In our society, private property is distinguishable from public, or collective property, which refers to assets owned by a government entity rather than by individuals or a business entity.

Private property emerged as the dominant form of property in the means of production and ownership of land during the Industrial Revolution in the early 18th century. Previously, the dominant form had been displacing craft production, cottage industry, and guilds, which were based on ownership of the tools for production by individual laborers or guilds of craftspeople.

“One must never confuse possession with ownership; possession is a physical phenomenon, while ownership is a socially constructed circumstance. Only a state can confer the legal situation called ownership.”

State Legislatures

Typically, it is the state legislature’s responsibility to enact laws implementing the property tax scheme within its jurisdictional boundaries. Unfortunately, the property tax schemes in many jurisdictions have become so convoluted as to require the assistance of trained professionals to determine the reasonableness of an assessment. Most states have created a Department of Revenue to oversee the process of local and state tax administration through the promulgation of administrative rules interpreting the statutory mandates of the legislature. A sample property tax formula is presented here:

Assessor’s Market Value $100,000 Assessment Ratio x 0.10 Proposed Assessment = $10,000 State Equalizer x 2.8056 Equalized Value = $28,056 Exemption(s) - $7,000 Adjusted Equalized Value = $21,056 Special Assessment(s) + $3,944 Tax Rate x 0.10 Taxes Due = $2,500

Assessors

Local tax assessors periodically establish the assessed value of taxable property within their jurisdictional boundaries. Assessors represent local government in assessment challenges; thus, they are an adverse party to taxpayers. Despite this, most states encourage taxpayers to meet with assessors to seek relief prior to filing a formal challenge.

Most assessors belong to the International Association of Assessing Officers (IAAO), a nonprofit, educational, and research association. It is a professional membership organization of government assessment officials and others interested in the administration of the property tax. The IAAO was founded in 1934, and now has a membership of more than 7,300 members worldwide from governmental, business, and academic communities. IAAO members subscribe to a Code of Ethics and Standards of Professional Conduct and to the Uniform Standards of Professional Appraisal Practice (USPAP).

Although assessors rely on USPAP Standard 6: Mass Appraisal in the initial development of an assessment, assessors are bound to comply with Standards 1 & 2: Real Property and/or Standards 7 & 8: Personal Property in the defense of a particular property. Also, USPAP’s Jurisdictional Exception Rule does not apply to the USPAP Ethics or Competency Rules.

State Government Oversight Agencies

Virtually every state has an agency or court established to oversee the process. The agency typically coordinates and administers the implementation of property tax law. The agency’s activities are intended to promote equalization (i.e. uniformity) of property valuation for tax purposes and to provide assistance to assessors and taxpayers. Most agencies perform testing on proposed tax rolls to ensure some degree of uniformity across various strata of taxable property. Generally, agencies do not have jurisdictional authority over assessors or the administrative review forum, and can only act in a technical assistance role.

Local Government Taxing Authorities

County Commissions (or Boards of Supervisors, etc.) and School Boards operating budgets are primarily funded by property taxes in most jurisdictions across the United States. These local taxing authorities typically set the local tax rate, but not until after they know the amount of the tax levy at issue. This is partly why property taxes are assessed in arrears. In today’s environment taxing authorities are motivated for high assessments for two reasons: (1) the politician’s need for revenue to fund (and typically to expand) government services (because property taxes represent the primary funding mechanism for local government), and (2) so the elected officials can set a low tax rate to increase their chances for reelection.

Collectors

Tax collectors are empowered by law to collect the taxes due or to lien the property and eventually foreclose, if the taxes are not paid.

Taxpayers

Corporations and individuals fortunate enough to own property periodically pay taxes on an early payment plan, if available, to underwrite the operation of local government services.

The Trier of Fact

According to the Unites States Constitution, all citizens (i.e. corporate and individual taxpayers) are entitled to judicial fairness; this is why the Founders created an independent judicial branch of government. Conversely, at the administrative level in most jurisdictions, the local taxing authorities’ elected members, or their appointees, sit as the triers of fact, which some believe to be an inherent conflict of interest undermining public trust in the system overall. Further, in general, locally elected or appointed triers of fact are not trained in professional appraisal or valuation concepts.

Taxpayer Representatives

Most professional taxpayer representatives are licensed accountants, appraisers, attorneys, engineers, or real estate brokers. Many belong to professional associations. Only a handful of states require taxpayer representatives to be licensed professionals, because such a requirement undermines the affordability of the process for homeowners. Owners and operators with substantial property tax liabilities actively manage their exposure either with in-house resources or with the assistance of a professional representation.

The Institute for Professionals in Taxation (IPT) is a non-profit educational association serving over 4,400 members representing approximately 1,450 corporations, firms, or taxpayers throughout the United States and Canada. It is the only professional organization that educates, certifies, and establishes strict codes of conduct for state and local income, property, and sales & use tax professionals who represent taxpayers (government officials or organizations do not qualify for membership).

The Council On State Taxation (COST) is a state tax organization representing taxpayers. COST is a nonprofit trade association consisting of nearly 600 multistate corporations engaged in interstate and international business. COST’s objective is to preserve and promote equitable and nondiscriminatory state and local taxation of multijurisdictional business entities.

The Tax Foundation is a think tank founded in 1937 that collects data and publishes research studies on tax policies at both the federal and state level. The organization has three primary research sections: the Center for Federal Fiscal Policy, the Center for State Fiscal Policy, and the Center for Legal Reform. The Foundation’s stated mission is to “educate taxpayers about sound tax policy and the size of the tax burden borne by Americans at all levels of government”.

Citations

  1. Note: The authors thank Joryn Jenkins, Esq. for her legal insights and contributions to this article.
  2. Carlson, Henry, A Brief History of Property Tax, Fair and Equitable, 2005.
  3. Ely, Richard T., Taxation in American Cities and Towns, 1888 (hereafter “Ely”), page 110-111, discussing property tax in Springfield, Massachusetts after 1655. Also see Hellerstein citing Jens P. Jensen, Property Taxation in the United States, 1931, referring to a 1634 Massachusetts property tax statute; New Jersey League of Municipalities “Short History of the New Jersey Property Tax” (hereafter NJLM); and Fisher, Glen W., “History of Property Taxes in the United States,” Wichita State University.
  4. Ely, page 116-127.
  5. Lincoln Institute of Land Policy Report: Property Tax Assessment Limits—Lessons from Thirty Years of Experience.
  6. Mullane v. Central Hanover Trust Co., 339 U.S. 306, 314 (1950). See also Richards v. Jefferson County, 517 U.S. 793 (1996).
  7. Jones v. Flowers, 547 U.S. 220, 235 (2006).
  8. Goldberg v. Kelly, 397 U.S. 254, 267-68 (1970).
  9. Armstrong v. Manzo, 380 U.S. 545, 550 (1965); Robinson v. Hanrahan, 409 U.S. 38 (1974); Greene v. Lindsey, 456 U.S. 444 (1982).
  10. City of West Covina v. Perkins, 525 U.S. 234 (1999).
  11. Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961).
  12. McConnell, Campbell; Stanley Brue and Sean Flynn (2009). Economics. Boston: Twayne Publishers. p. G-22. ISBN 978-0-07-337569-4.
  13. The Accumulation of Capital, Economic Theories (url)
  14. O’Hara, Phillip (September 2003). Encyclopedia of Political Economy, Volume 2. Routledge. p. 80. ISBN 0-415-24187-1.
  15. http://www.iaao.org
  16. https://www.ipt.org
  17. http://www.cost.org

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