Tax Assessment Administration

Ted Gwartney

[Reprinted from the Henry George News, January, 1968]

At the time this article was written Ted Gwartney was the City Assessor of Southfield, Michigan, where the mayor, James Clarkson, campaigned and won on a platform that included land value taxation. Mr. Gwartney's articles appeared regularly in the Southfield Record. On December 9, 1967, he delivered this address at a meeting of the Northwestern Realty Board.

PUBLIC dislike of and resistance to taxes is an up-hill fight and must be overcome by better understanding. The chief responsibility of the assessing department is to value every parcel of real estate so that taxes can be distributed justly in a manner reflecting the benefit people receive from the city and school services. Assessing is the least understood function in city government.

The assessor doesn't value land - people do. The value opinions of all the people within a community are intrinsic in the assessor's conclusions. This valuation is constantly changing to correspond with the value of community services provided and the demand which individuals make for the use of land.

Historically neighborhoods and cities were established to satisfy basic human desires like safety, companionship, cultural advantages and commercial pursuits. Land value represents a combination of physical, social, economic and government factors. The convenience and attractiveness of the physical advantages are related to location. Social features are related to the interests, and standards of the resident. Economic factors are determined by the amount and type of new construction and degree of home ownership. Government factors apply to zoning, building codes, tax rates and special assessments. The effect of government restrictions is an important consideration which was not as restrictive in Henry George's day.

As neighborhoods change, the people set land values by paying competitive prices which reflect the upward or downward trend. An assessor observes these sales prices and the market activity, and correlates them to each parcel of land. Thus assessments do reflect the general opinions of all the people in a community as to the value of their property.

The assessor arrives at the fair market value by considering the price a plot would bring in a normal sale, and this should represent the amount of cash a buyer, who is fully informed about the property and not under pressure to buy, would pay. In order to do this the assessor must be continuously informed on all sales. Records of sales and descriptions of all properties are kept, and these are observed for uniformity of assessment. Similar properties are compared to assure equitable valuation, and adjustments are made when necessary, based on differences between corresponding properties.

The assessor is concerned solely with uniformity of assessments throughout the city, although his opinion may differ from that of a buyer who naturally hopes for the lowest possible price.

One of the accepted methods used in appraising for assessments is based on an attempt to determine the fair cost of reproducing a building. The appraiser subtracts accrued depreciation to determine an adjusted reproduction cost, and adds to this cost the current land value. Reproduction cost is determined by comparing a building with similar ones where the costs are known and have been reduced to an average cost per square foot of floor area. The State Tax Commission manual provides assessors with construction costs for various types of buildings and methods for making type and quality adjustments.

Buildings begin to depreciate from the time they are built. Depreciation is a deduction from the cost-new which reflects the loss in value at the time of assessment. Increased construction costs are also taken into consideration in determining reproduction cost. When the current land value is added, the result is an estimate of the present-day value of real estate. The assessor correlates this information with market data and other information to arrive at a fair current assessment.

The most accepted method of valuing property for assessments is the market data approach. Market value is determined by collecting many sales. The sales which are typical are used as a guide to determine cash value. A sales price is not usually used as the market value of a piece of property. It becomes part of the sales data which is compiled to serve as a guide to establish equitable assessments throughout the city. Property values are then uniformly adjusted within the city so that all are treated equitably. In determining valuations, each sale must be examined to determine that it is a representative one, adjustment may be made for comparison with other properties. Three major adjustments are normally made:

• 1. Time of sale - the value of property varies over a period of time. The Assessor must consider the value of property as of December 31 for each tax year.
• 2. Quantity of property - the value of property varies depending on the size. People will pay more for a big house or a big lot than for a small one.
• 3. Quality of property - the value of property varies according to its comparable desirability. Houses which are built better, have more desirable features, or offer additional benefits, sell for a higher price. Lots which are well located, convenient to good shopping, schools and churches, bring a higher price than poorly located lots.

Market value of property, which the assessor is required to determine, has been well summarized by the American Institute of Real Estate Appraisers as being "the highest price estimated in terms of money which a property will bring, if exposed for sale on the open market, allowing a reasonable time to find a purchaser who buys with knowledge of all the uses to which it is adapted and for which it is capable of being used."

The market approach to value is a process of comparing property for which we do not have sales information - making adjustments for differences and determining the fair price for which a property should sell.

Special assessments are not a tax but charges for public improvements which, because they benefit only certain properties, are not included in a general property tax. The most common public improvements paid for by special assessments include sewer lines, water lines, street paving, curbs, storm drains, sidewalks and street lights. Generally a group of homeowners who have a common need, say for water, will petition the city to set up a special assessment district, so that only those who will have access to the improvement will share in the cost.

It would be unjust to spread this cost generally on the tax roll because not all owners will benefit. The costs must however be levied against locations according to the degree of benefit received, irrespective of whether such plots are vacant or improved. Usually the value of the land will increase by approximately the same amount as the cost of the improvements. This is a direct application of the principle of land value taxation.

Assessors are faced with a real challenge in the years ahead, and we of the assessing field must accept that challenge. Dedication, hard work and communication with the public to enlist their support, will result in a fair program for all. It is the stated policy of assessing offices to reveal all public records in the expectation that pertinent data necessary for developing equitable assessments will be forthcoming from the taxpayers.

Land values are being assessed higher and more equitably, due to the pressure of homeowners and businessmen. The time is approaching when the common sense of land value taxation will be better understood and applied. Southfield, Michigan can certainly place a part of its economic success upon equitable assessments, assessing land at its full value.

Economic Characteristics of the Property Tax

A great amount of interest is focused in the differences between the property tax and other types of taxes, i.e., the sales tax, excise tax and income tax. The property tax is distinguished by six characteristics:

• 1. Stability - property tax has been considered the most stable source for financing the tasks which local governments perform. In times of economic uncertainty, revenues from sales, income and excise taxes drop off faster than revenue from this tax.
• 2. Elasticity - the property tax base grows in direct proportion to the public services offered within the city. As more homes and businesses are added, assessed values increase and public services become more abundant.
• 3. Simplicity - easy to understand and simple to apply. Property tax rates are not progressive, as are the income tax rates. The taxpayer does not face the problem of filling out complicated returns, because the job of assessing is performed independently and objectively. The average taxpayer merely receives a bill bearing the assessed valuation.
• 4. Economy of administration - although the job of assessing and maintaining records on properties is complex, the property tax is cheap to collect. There is less need to have a large staff reviewing, auditing and sorting papers as is necessary with the income, sales and-excise taxes.
• 5. Convenience of payment-property taxes are assessed on an annual basis and reflect property valuation. Many loan organizations impound taxes on a monthly basis.
• 6. Certainty - property, or land at least, is permanent in duration. It is difficult to escape paying the property tax because one's asset is immovable. The tax on property comes under close (Continued from page 4) scrutiny by taxpayers because it can easily be compared from one parcel to another, and it is easy to criticize a mistake which the assessor makes.

A large portion of the property tax, the land portion, has these additional characteristics:

• 1. Equality - the tax on land reflects the value of community services an owner receives and the demand of people within the community for use of the land. The land tax is based on the principle of paying for what you receive. The income, sales and excise taxes are based more heavily on the principle of ability to pay. The property tax expresses the principles of American free enterprise by requiring payment for what customers receive, rather than giving them a free ride.
• 2. Uninhibited production - a basic economic principle is that a tax should bear as lightly as possible on production. A tax on land values tends to promote production whereas a tax on income, excise and sales tends to discourage production by adding to the cost of goods and eliminating sales volume. John Keith, author of assessing textbooks, repeatedly demonstrates that there could not be a free market in land without the property tax.
• 3. Non-inflationary - income, sales and excise taxes tend to be passed on directly to the consumer in the form of a higher price. Land values tend instead to be stabilized by a tax on land. Sometimes excessive land taxes will even lower the sales price of a piece of property, without reducing the economic producing value of land.