Topic:
REAL PROPERTY; PROPERTY TAX; MUNICIPALITIES;
Location:
ASSESSMENT;

OLR Research Report


THE MISPERCEPTIONS ABOUT PROPERTY REVALUATION

By: John Rappa, Principal Analyst

A TALE OF TWO HOMES

It is the best of times for Mary and Bob, who just sold their home for $360,000, $100,000 more than they paid for it in 1993. After deciding to retire, sell the home, and move to Florida, Mary and Bob hired a private appraiser to determine their home's value, which he determined was at least $350,000 in today's market.

But Mary and Bob's good fortune makes their next door neighbors anxious. Helen and Jim own an identical home, which they too purchased in 1993 for the same price. Their home will also be appraised this year, but not by a private appraiser working for them. The town will appraise their home and all other properties in town for property taxes, a process generally referred to as revaluation.

Revaluation concerns homeowners like Helen and Jim because they believe it will increase their taxes. Tax assessors—the town officials who track and record property values—often determine a property's value by comparing it to a similar, recently sold property. And that's why Helen and Jim are worried that Mary and Bob's good fortune will increase their taxes.

The anxiety revaluation generates also explains why mayors and selectmen approach revaluation like most of us approach root canals. The perception that revaluation could lead to higher taxes could mean trouble at the polls.

Rising property values cut both ways. They allow owners to make more money when they sell or give them more equity when they borrow. They also require towns to increase a property's assessment, which is the portion of a property's value that the town taxes. Property owners conclude that raising property assessments inevitably means higher taxes.

This Backgrounder addresses this conclusion, that revaluations necessarily drive up property taxes. It explains how and why towns revalue property and shows that the amount of taxes a person pays depends on three dynamic factors—a property's assessed value, the assessment of all the other properties in town, and the town's budget.

VALUE

Revaluation is the process for periodically measuring and capturing changes in property values. The value is a property's resale or fair market value, which changes over time (CGS 12-63). Taxpayers worry that taxes will increase if property values increase.

By law, towns must assess property for 70% of fair market value (CGS 12-62a(b)). Tax assessors are responsible for determining that value; identifying, recording, and valuing new taxable property; and granting tax exemptions, such as those for veterans and elderly and disabled people. They often hire private companies to perform some of this work.

THE RATIONALE FOR PERIODIC REVALUATIONS

Revaluations are meant to capture changes in fair market value. The fair market value of real property (i.e., land and buildings) tends to fluctuate while the value of personal property (e.g., cars, cash registers, and copiers) tends to decrease. Consequently, fair market values change between revaluations. As they change, properties' assessed values no longer reflect 70% of the actual fair market values. Revaluation captures the change in fair market value and adjusts the assessment to reflect 70% of that value.

To capture these changes, towns must revalue property at least once every five years (CGS 12-62b(1)). Towns that do not comply with the revaluation requirement risk losing 50% of their Mashantucket Pequot and Mohegan Fund grant and 100% of their Local Capital Improvement Program grant (PA 06-148). (The state can waive this penalty under specified conditions.)

A hypothetical example shows how periodic revaluations save owners from paying more or fewer taxes than they should. To understand how this could happen, one has to remember that a tax bill depends on the property's assessed value and the town's mill rate. (We discuss below how towns determine that rate.) Table 1 compares the tax bills for two properties in a town that revalues property after five years, as state law requires. It assumes that the mill rate did not change.

Table 1: Hypothetical Example of how Revaluations Prevent Disparities between Taxpayers

Property

Year 1 Assessment and Taxes

Year 3 Assessment and Taxes

Year 5 Assessment and Taxes

With Revaluation

Without Revaluation

Comment

1

Fair Market Value: $300,000

Assessed Value: $210,000

Assessment Ratio: 70%

Mill Rate: .035

Tax Bill: $7,350

Fair Market Value: $310,000

Assessed Value: $210,000

Assessment Ratio: 68%

Mill Rate: .035

Tax Bill: $7350

Fair Market Value: $350,000

Assessed Value: $245,000

Assessment Ratio:

70%

Mill Rate: .035

Tax Bill: $8575

Fair Market Value: $350,000

Assessed Value:

$210,000

Assessment Ratio:

60%

Mill Rate: .035

Tax Bill: $7,350

The owner pays $1,225 fewer taxes in Year 5 if the town does not revalue property

2

Fair Market Value: $200,000

Assessed Value: $140,000

Assessment Ratio: 70%

Mill Rate: .035

Tax Bill: $4,900

Fair Market Value: $180,000

Assessed Value: $140,000

Assessment Ratio: 78%

Mill Rate: .035

Tax Bill: $4,900

Fair Market Value: $150,000

Assessed Value: $105,000

Assessment Ratio:

70%

Mill Rate: .035

Tax Bill: $3,675

Fair Market Value: $150,000

Assessed Value:

$140,000

Assessment Ratio: 93%

Mill Rate: .035

Tax Bill: $4,900

The owner pays $1,225 more taxes in Year 5 if the town does not revalue property

Comment

Both owners pay their proportionate share of the taxes because the tax is based on 70% of their respective properties' fair market values.

By Year 3, the properties' values have changed, but the owners are still paying taxes based on the Year 1 assessments. Owner 1 pays proportionately fewer taxes and Owner 2 proportionately more.

By the fifth year, the properties' values have changed even more, but the revaluation resets the assessments to 70% of the new values. Both owners pay their proportionate share of taxes, as in Year 1.

If the town does not revalue property in the fifth year, it does not capture the changes in the properties' values and continues to tax property based on 70% of the Year 1 values. The disparity between the two owners increases.

Revaluation corrects disparities that arise between property owners as the values of their properties change. For this reason, revaluations often cause the tax burden to shift between property owners.

Revaluation eliminates the disparities that arise when fair market values change. In the first year, both owners paid taxes based on 70% of fair market value as the law requires. In the third year, their properties' fair market values changed but not the assessments, which the towns use to calculate the tax. Consequently, one property owner paid fewer taxes than he would have if the town revalued his property that year while the other paid more. Revaluation corrects these disparities by capturing changes in fair market values and resetting the assessments to 70% of those values.

HOW ASSESSORS MUST DETERMINE PROPERTY VALUE

The law specifies the methods assessors must use to collect property data and determine value. Some methods require them to collect data on structures by viewing them from the street while others allow them to enter and inspect the structure.

Collecting Data

The law specifies two methods assessors must use to collect property data. During a revaluation year, they must view each property in its neighborhood setting and record any changes they can see, such as a new addition to a home or factory. Such “field reviews” allow assessors to collect or update the data they have on a property by observing it from the street or sidewalk. For this reason, field reviews require less time and money to complete.

The law also requires assessors to collect property data by inspecting each property at least once every 10 years or surveying owners about their property. Inspections require the assessor to verify the property's exterior dimension and enter and examine the property's interior. He may do the latter only with the owner's or an adult occupant's permission.

An assessor can comply with this requirement in several ways. Because towns must revalue property every five years, the assessor can inspect half of the properties during each revaluation year and view the other half. Or, the assessor could begin inspecting properties in the years between revaluations. For example, he could inspect 10% of the properties each year and use the data for the next scheduled revaluation. But if he does so, he must view the ones he inspected during the four years preceding the revaluation year.

Alternatively, the assessor can ask those owners whose properties are scheduled for inspection to verify the information he already has on them. He can do this by sending them questionnaires about their properties and evaluating the quality of their responses. If he is satisfied with the quality, the assessor must inspect only those properties for which he received no responses or unsatisfactory ones.

Determining Value

After completing the field reviews or inspections, the assessor must determine the property's value by using “generally accepted mass appraisal methods.” These include comparing the recent sales of comparable property, estimating how much it would cost to replace it, or calculating how much income it generates. The method (s) he uses vary depending on the property's use.

For example, assessors usually determine the value of single-family homes by comparing the sales of recently sold comparable homes. They do so because single-family homes tend to sell more frequently than other types of property and thus provide a larger sample for making comparisons. Apartment buildings, on the other hand, sell less frequently than single-family homes. Consequently, assessors usually determine their value by comparing comparable sales, if there are any, and calculating the income the buildings generate.

The assessor often determines the value of factories, shopping malls and other types of business and utility property by determining how much it would cost to replace the property and, in some cases, how much income it generates. It is harder to determine the value of these properties based on comparable sales since they tend to be more diverse and sell less frequently than residential properties.

APPEALING ASSESSMENTS

Assessors do not have the last word on an assessment because the taxpayer can appeal it to the town's board of assessment appeals. An assessor must notify taxpayers about their new assessments no sooner than the revaluation's effective date (October 1) and no later than 10 calendar days immediately following the date when the assessor signed the grand list (i.e., the list of all property in the town). The notice must indicate the property's assessment before and after the revaluation, state that the taxpayer has the right to appeal the assessment, and explain the process for doing so (CGS 12-62).

The taxpayer has until February 20 to file a written appeal with the board, which, by law, cannot hear appeals filed after that date. The board must notify the taxpayer by March 1 about the date, time, and place of the hearing. It must mail the hearing notice no later than seven calendar days before the hearing.

The board must hold a hearing on any assessment except those over $500,000 for commercial, industrial, utility, or apartment property. If, in these cases, the board chooses not to hold a hearing, it must notify the appellant about its decision by March 1. It must hold the hearings in March and decide the appeals by the last business day of that month. It can meet as often as it wants, but not on Sundays.

TAX BILLS AND ASSESSMENTS

Calculating Tax Bills

The amount of taxes a person pays on a property equals a percentage of its assessed value. The percentage is commonly referred to as the mill rate, which the town sets after finalizing its budget. Because the municipal fiscal year runs from July to June, most towns finalize their budgets in June.

In determining the total budget, the town weighs the amount of funds it needs to run the government against the revenues it expects to receive during the subsequent fiscal year. It subtracts the revenue it expects to receive from state and federal sources from the total estimated budget. The difference represents the amount it must raise from the property tax in order to balance the budget.

The town divides this amount by the total value of taxable property shown on the grand list (i.e., the net grand list) to determine the mill rate. It multiples the mill rate against each property's assessment to determine the tax bill. For example, if the town's budget is $18 million and the grand list is $600 million, the mill rate would be 30 mills. The tax on a home whose market value is $100,000 home would be $2,100:

Home's Fair Market Value: $100,000

Property Tax Assessment (70% of Fair Market Value): $70,000

Mill Rate: .030

Tax Bill: .030 X $70,000=$2,100

Tax Bills after a Revaluation

Many taxpayers believe revaluations automatically trigger tax increases because their taxes are based on the property's assessment. If the assessment increases, so will the tax bill. But they do not consider the role the mill rate plays in determining taxes. Unlike the assessment, which does not change between revaluations, towns may change the mill rate each time they prepare the annual budget.

The above example shows how the town could reduce the mill rate and still generate the same amount of taxes when the property's fair market value increases. Assume that the property's fair market value increased to $150,000 between revaluations and its assessment consequently increased to $105,000. If the town reduced the mill rate from 30 mills to 20 mills, the owner would still pay $2,100 in taxes despite the higher assessment.

WHY TAXPAYERS BELIEVE REVALUATIONS TRIGGER TAX INCREASES

Overlapping Fiscal Cycles

Taxpayers may misperceive the relationship between revaluations and taxes because they are confused by the multiple, overlapping cycles that create this relationship: property assessment, tax collection, and budgeting. As Table 2 shows, some taxpayers receive notice of their new assessments around the time that they pay the second installment on their tax bill. Consequently, they may assume that the mill rate shown on the tax bill automatically applies to the new assessment. But the town will not set the mill rate on that assessment until July, after it adopts the new fiscal year's budget.

Table 2: Cycles for Assessing Property, Collecting Taxes, and Setting the FY 06-07 Tax Rate

Month

Assessment Cycle

Collection Cycle

Rate Setting Cycle

October, 2005

October 1 marks the start of the assessment year. Property on the grand list as of that date is subject to taxes that are due July 1, 2006.

   

November

     

Table 2: -Continued-

Month

Assessment Cycle

Collection Cycle

Rate Setting Cycle

December

     

January, 2006

Assessors finalize 2005 grand list

Taxpayers pay the second installment on the taxes due on the October 1, 2004 grand list.

The tax rate for these payments was set in June 2005.

The taxes fund the FY 05-06 budget.

February

Taxpayers may file applications to appeal their assessments before the board of assessment appeals.

 

Town begins preparing the budget for the next fiscal year, which runs from July 1, 2006 to June 30, 2007.

March

The board holds hearings and adjusts the assessments.

 

The town estimates the amount of revenue the 2005 grand list will generate.

April

     

May

   

The town holds hearings on the proposed budget.

June

   

The town finalizes and adopts the budget and sets the tax rate.

July

 

Taxpayers make first payment on taxes based on the October 2005 grand list.

 

August

     

September

     

October

October 2007 assessment year begins

   

Assessment Cycle

The assessment cycle or year refers to the period during which assessors update the grand list. Although towns must revalue all property at least once every five years, assessors must update the grand list throughout the year and annually produce a revised list. They must do so because the list could expand or contract during the year and the tax rate is the ratio between the town's total annual budget and the grand list. If the assessors did not add or remove property from the list, then the town would set a mill rate based on an inaccurate measure of its taxable property.

To help towns prepare the budget, assessors record the value of the grand list as of October 1, eight months before the start of the next fiscal year. Property owners can appeal their assessments to the board of assessment appeals, which must hear them in March. The board has until March 31 to decide the appeals and make any changes to the assessments. Taxpayers who appeal their assessments in between revaluation years are generally those whose properties were added to the grand list before October 1 and those whose assessments were changed before that date. The latter include owners whose property values declined because the property was closed or destroyed.

Changes to the grand list affect the amount of taxes each property must generate to cover the town's budget. For this reason, towns try to “grow the grand list” by encouraging new development, which could reduce the tax burden on the other properties. But the opposite happens when homes are abandoned and stores and factories close.

Tax Collection Cycle

Most towns allow taxpayers to pay their property taxes in two installments, in July and January. The payment periods straddles two assessment years. For example, the July 1, 2005 payment applies to the October 1, 2004 grand list, which the assessors finalized last fall. During January 2006, the assessors finalized the October 1, 2005 grand list. Around that time, taxpayers make the second payment of taxes on the 2004 grand list. The cycle begins again on July 1, when taxpayers make the first payment on the October 1, 2005 grand list.

Fiscal Year

The town's fiscal year does not align with the assessment and collection years. The fiscal year runs from July 1 to June 30. The taxes paid on July 1 fund that fiscal year's budget but are levied against the grand list that was finalized during the previous fiscal year.

EASING THE BURDEN OF HIGHER ASSESSMENTS

Higher assessments will increase taxes if the town must increase its revenue from the property tax and, consequently, maintain or increase the mill rate. To cushion the shock, state law allows the town, acting through its legislative body, to phase in the increase for up to five years. There are four ways the town can do this.

Dollar Phase-in

The town can simply phase in the dollar increase in assessed values in equal increments during the phase-in period.

Ratio Phase-in

The town can phase in the rate (i.e., percentage) at which the assessed values increased after the revaluation. The percentage equals the difference between two ratios:

1. the ratio of the property's assessed value before revaluation to its fair market value after revaluation, and

2. the ratio of the property's assessed value to its fair market value after revaluation, which is always 70%.

For example, assume that a property's fair market value increased from $100,000 to $250,000 between revaluations. For this reason, its assessed value correspondingly increased from $70,000 to $175,000 (70% of $250,000) after revaluation. To calculate the phase-in percentage, the town:

1. calculates the ratio between $70,000 (the assessed value before revaluation) and $250,000 (the fair market value after revaluation) and

2. subtracts this percentage from 70%.

The ratio between $70,000 and $250,000 is 28%. The town must subtract this percentage from 70%, which yields a difference of 42%. The town must then phase in 42% of the increase in assessed value in equal increments over the term of the phase-in. If the town chose to phase in the rate over five years, it must increase the property's assessed value by 8.4% (42 divided by five) per year. Table 3 shows how the ratio increases the assessed value each year.

Table 3: Phase-in Based on Rate of Increase in Assessed Value

Phase-in Year

Ratio

Assessed Value

1

36.4%

$91,000

2

44.8

112,000

3

53.2

133,000

4

61.6

154,000

5

70.0

175,000

Ratio Phase-in by Property Classes

In 2006, the legislature authorized a variation of the percentage phase-in method. It allowed towns to divide properties into classes and phase in the rate at which the assessment increased for each class (PA 06-148). In other words, instead of equally phasing in the rate at which all properties' assessment increased, a town could phase in separate rates for all properties within a class. As with the other methods, the phase-in period is up to five years.

The classes are residential, commercial, and vacant land. The commercial class includes apartments containing at least five units, industrial property, and public utility property. The method works if there are sales records for a class or enough sales within each class to extrapolate a rate of increase for the entire class. For this reason, the town must use the full percentage phase-in option when these conditions cannot be met.

Partial Phase-in

In 2006, the legislature authorized a fourth phase-in option. It allowed towns to use the dollar value or ratio phase-in option to phase in just a portion of the increased in assessed values or the rate at which they increased. If a town chooses this option, it must phase in at least 25% of either increase. The amount or portion the town phases in is called the “phase-in factor,” and the town must uniformly apply it to all types of properties.

JR:ts