By Mark Jamison • Guest Columnist
During the recent election for county commissioner in Jackson County, both sides made reference to property taxes. The challengers — who ended up sweeping out the incumbents — claimed, to some derision, that Jackson had seen a tax increase even though the marginal rate had fallen. Supporters for the incumbents made frequent reference to the fact that the county had the third lowest marginal tax rate in the state. Both sides were correct in their assertions and both were also somewhat misleading.
The issues surrounding revaluation and marginal tax rates are somewhat confusing and easy to distort for political purposes. The fact that this area of public policy is prone to confusion and misunderstanding is unfortunate because it is an essential issue that has a direct impact on not only every property owner but virtually every resident of the county.
North Carolina mandates that counties determine the value of property within their jurisdiction at least once every eight years. Beyond that, the frequency of the process, known as revaluation is up to the board of commissioners. Statute mandates that values reflect the market value of a property, i.e., the amount a property would sell for in an arm’s-length transaction.
The state allows counties to select among several methods for determining market value. The tax assessor may visit every property. This yields perhaps the most accurate valuation since it presumes that a specific visit will fully account for particular defects or attributes of the property which may affect market value.
This is also time consuming, expensive and may be subject to the art of personal judgment.
The other methods available rely on various statistical modeling techniques and may result in as few as 10 percent of the properties in a jurisdiction actually being visited. In all the methods there are choices in schedules of values that can be applied which might yield differing results. The governing body has some discretion in these choices and makes them based on technical factors which are analyzed and presented by the tax assessor.
The process is more difficult in a developing areas like Jackson and other mountain counties. It is further complicated when the area has market pressures resulting from second home or resort development. Mountain land may be even further difficult to value because the costs of development vary greatly. The presence and complexity of local land use ordinances may impact the value of land, especially steep land that costs more to develop in an environmentally responsible manner.
The process of evaluation is also complicated when large tracts of undeveloped land are part of the market, or when many lots are in the inventory of undeveloped land. One of the most compelling reasons for a subdivision ordinance is the fact that it standardizes the process for platting of lots and therefore provides some order and basis of comparison to the market.
Revenue neutral declaration
After a revaluation, North Carolina mandates (through GS 159 - 11(e)) that a taxing jurisdiction state a “revenue neutral” tax rate in its budget. The Local Government Commission gives a specified method for making this calculation. Essentially, one takes the total value of property within the county after the revaluation and determines what tax rate, when applied to that value, would yield the same amount of revenue as prior to the revaluation.
For example, after the 2008 revaluation it was determined that in order to raise the same amount of revenue as prior to the revaluation, Jackson County would need to charge a rate of 26 cents. The previous tax rate was 36 cents but the total value of property in the county was now valued higher, meaning that a lower rate would bring in the same revenue.
Twenty-six cents is not, however, the “revenue neutral” rate. The LGC calculations recognize that each year properties are added or improved thereby increasing the tax base. The “revenue neutral” rate therefore allows for the application of a growth-rate factor.
In the case of the 2008 revaluation that calculation yielded a “revenue neutral” rate of 27.05 cents. In other words, for every $1,000 of assessed valuation the property owner would pay 27.05 cents or $270.50 on a $100,000 property. Under the concept of revenue neutral, that means that if the value of the property had increased exactly at the same average rate as all of the property in the county that the owner would pay the same taxes as before the revaluation.
Of course, a county is made up of thousands of pieces of property. Not all can be expected to increase in value at exactly the same rate so the actual tax an owner may be assessed after revaluation depends on both the average increase in values for the entire county but also on how that particular property compares.
My friend saw her property in Frady Cove increase in value from about $300,000 to more than $900,000. Her property was valued significantly higher than the average increase, consequently she paid significantly more in taxes. My house in Webster saw an increase in value of about 30 percent, much less than the average. My taxes went down.
So who was right?
So, were the challengers right in claiming there had been a tax increase? Well, technically they were since the new rate set by the commissioners was 28 cents, which was higher than the revenue neutral rate of 27.05 cents. Those who argued that there was actually a decrease because the rate went from 36 cents to 28 cents were wrong — they didn’t understand the concept of revaluation and revenue neutral.
But those who argued there was a tax increase in terms that made it seem immense were perhaps stretching a point. The increase was about $9.50 per $100,000 of assessed value, or $95 on a million dollar property — not nothing, but not a political point scored either.
And what of the incumbents, who pointed with great pride to the “third lowest marginal tax rate in the state.” Well, if you’ve followed the discussion so far you may have noticed that marginal rates might not mean much in an area with a very hot real estate market. Since 2000 there have been three revaluations in Jackson County resulting in property values increasing by about 200 percent on average.
Mega increases avoidable
Of all the things the commissioners who lost in the last election could be criticized for, the most serious error is the one no one talks about. The 2008 revaluation came at the height of a sizzling real estate market. It was apparent that because of some of the gated developments and very high lot and land prices that the revaluation was going to reflect some astronomical increases.
Contributing to that problem was the use of a statistical method in the process that had the potential for allowing some of the prices in places like Balsam Mountain Preserve to leak out and impact other areas — something that generally should not happen if the process is to be equitable and truly reflect market value.
One didn’t have to be especially prescient or have a crystal ball to see that we were on the cusp of a real estate bubble. I wrote about that potential in 2006. By 2008, when we were on the cusp of the bubble bursting, it was evident that there were serious problems in the market.
Jackson County had done a revaluation in 2004. The increases in that cycle were alarming. Jackson County had been on an eight-year cycle prior to 2000 and had justifiably shifted to a shorter cycle to minimize the impacts of the hot market. The idea was to reduce sticker shock and made good sense. The downside was that short cycles can lock in huge increases in market values right on the edge of a slowdown. The ordinance process the county engaged in may have exacerbated this, although certainly not in the way the alarmists in the Cashiers market claimed.
It was reasonably predictable that the ordinance process would at least pause the market while developers adjusted to the new regulations. That was a good thing, but it was also something that needed to be accounted for in the revaluation process — both in the methods chosen and in the schedule of values.
By mid-2008 when the revaluation was completed it was clear that the market was seriously challenged. By accepting the 2008 revaluation, higher land values were locked in and the distribution of the increases was clearly troubling. Valuing steep land in larger tracts at $16,000 an acre or more was not sustainable.
The problems were foreseeable and predictable. Going ahead with the 2008 revaluation was a serious mistake, and we’re about to see the consequences. We are scheduled for a revaluation in 2012. The complete collapse of the real estate market will have some serious consequences for that revaluation. It will be difficult to find “comps” — comparable values — needed to establish a shape to the market. How do you determine market value when there is no market?
Currently, much of the land that was slated for development in 2008, land in the former Legasus developments for example, is now virtually worthless. Lots that may have been worth $400,000 may now be in foreclosure. Land that was slated for gated development and relied on developers for community wide infrastructure may now only be saleable as lots or tracts having substantially less value and potential.
Who’s going to pay?
The county may have a current dilemma collecting revenues from some of these lots. That could have an immediate impact on budgets and require tax increases, but even worse consequences occur if a revaluation shows the true current value of some of the land previously targeted for development. It is possible that a huge slice of tax base has virtually disappeared, meaning that the next revenue neutral calculation would result in the marginal rate going up significantly to 35 or 50 cents.
I want to make perfectly clear that this discussion in no way endorses development. It isn’t about how we develop or preserve land or what we may want our communities to look like. It is solely about state mandates and current processes that have tremendous impacts and consequences.
The immediate solution may be deferring the 2012 revaluation. That does nothing to remediate the values locked in from 2008, but it may allow the market to recover and mitigate some of the foreseeable problems. Over the long run though we must rationalize the property tax system in a way that accounts for these systemic problems. The state must recognize that a system that works for stable developed areas like the Triangle has hugely negative consequences on rural areas.
Some will say that given the current state budget crisis that now is not the time to address these issues. I would argue that now is the best time to address these issues. I would like to see the rural counties of the state through both boards of commissioners and the representatives in Raleigh convene a planning group and design some specific changes in state law and policy that give local jurisdictions the tools they need to raise revenues in an effective and fair manner.