Monday, May 26, 2014

Property Valuations, HB920 and the Adversarial Process

Over the years, I've had a few conversations with a commercial property owner here in Hilliard about property valuations. He has appealed the valuation of those properties in hope of reducing his property tax bill, the bulk of which represents revenue for the school district.

He is angry that the school district has opposed these revaluations, saying he doesn't understand why the school district spends his own tax dollars to oppose his tax reduction request.

Part of this has to do with the technicalities of a provision in Ohio law often called "HB920," after the 1970s legislation which causes the dollar amount of property taxes collected to remain constant on the set of parcels in existence when the levy was passed. The original purpose of this legislation was to prevent rising valuations from automatically raising taxes, which at the time were particularly burdensome for folks in poor urban neighborhoods that were being regentrified, such as The Flats in Cleveland.

So if that original set of parcels were given a market value of $1 billion by the County Auditor, and a property tax of 1 mills were passed, the amount of money generated by that levy would be:
Tax = ($1 billion * 35%) * (1/1000) = $350,000
In other words, property collectively worth $1 billion would generate $350,000 in property taxes if a 1 mill levy is passed. The 35% is the fraction of a property's value which is considered taxable.

Let's say that 10 years later, those same parcels would have risen in value to $1.25 billion, as determined by the County Auditor. HB920 would still restrict the total tax collected to $350,000. This is implemented by way of a "Reduction Factor" applied to the tax calculation.

In this case, the reduction factor would be 0.800000, applies as follows:
Tax = ($1.25 billion * 35%) * (1/1000) * 0.8 = $350,000
All this works in the other direction as well - when property values decline. Let's say that instead of going up 25%, property values went down 25%, to $750 million:
Tax = ($750 million * 35%) * (1/1000) * 1.333333 = $350,000
This same calculation is applied to every parcel in the school district. But over time, individual properties do not necessarily change in valuation as the same rate as the whole district. Some may have greater increases, and some may have decreases. All get the same reduction factor applied, and in the end the total amount of tax collected remains the same.

Here's the subtlety built into this:  when one property owner is successful in getting their valuation reduced, the consequence is that everyone else has their property taxes increased in order to keep the total amount collected constant. As the value of one property is decreased, the overall Reduction Factor applied to everyone has to be increased to compensate.

So who represents the "everyone else" when a property owner files an appeal for a reduction in valuation?

In most cases, it's the school district. As with so much of our legal process, the various sides in a case present their arguments to an impartial "court," who listens to the arguments and renders an opinion. Whether the case is a capital murder or a property revaluation, the theory is that justice is best reached when opposing parties argue vigorously, and an impartial judge makes the final call.

That's what's going on here. Nothing evil or unfair - just the wheels of justice turning as designed.

But someone has convinced some of our lawmakers that this approach needs some tweaking. Language has been inserted into House Bill 483, the midterm budget bill, modifying section 5715.19 to prohibit parties such as school districts from opposing reappraisals unless the reappraisal was requested by the property owner.

In other words, if the County Auditor changes the valuation (remember all the arguments about the valuation of Nationwide Arena?), the school district has no right to argue in opposition.

Who then represents the interests of the property owners who will have their taxes raised as a consequence?  No one.

Contact your state legislator if you think this isn't fair. For those of us in the Hilliard School District, this is:

6 comments:

  1. I'm confused, am I to understand that the law only guarantees that the total tax collected in a district remain constant, not that the individuals' taxes remain the same?

    In other words, lets say you and I own the only 2 parcels in the district, each valued at $100K and taxed at 10% making our taxes $10K each, $20K total. (I'm deliberately making the math easier than I think it is.)

    If I successfully petition that my property is only worth $50K, since yours is still valued at $100K, my 'share' of the $20K tax burden is now only 2/3 instead of 1/2, so I would pay $6,666 while you'd now have to pay $13,333? In other words, because my bill went down yours would have to go up to make up the difference?

    I thought the law covered individual taxes, protecting individual taxpayers from tax increases simply because the property values went up. I what I understand above is correct, then it's not really much protection at all.

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  2. That's correct. It's a subtlety that I hadn't understood either until recently. And your example math is exactly correct: the devaluation of your property would cause the "Reduction Factor" to be set to 1.333333 for all property owners in the taxing district.

    This is an extreme example of course. In the real world there are tens of thousands of parcels, making the impact of a change in valuation of any one parcel relatively minuscule (unless it's a nuclear power plant or a hockey arena).

    However, between the periodic reappraisals by the County Auditor, when the new reduction factors are set, a successful lowering of value on one parcel results in a reduction of revenue to the entities collecting property taxes.

    I've found that the attorney we retain to pay attention to this stuff will also file in opposition on behalf of the school board when a commercial property sells for significantly more that its appraised value. Clearly the actual price paid for a piece of property is the most accurate valuation. The language in the mid-term budget bill now being considered by the General Assy would prohibit taxing entities from taking this action. Again, the impact is that the property owner with the undervalued property essentially gets a discount, and the rest of us have to make up the difference.

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    Replies
    1. I got word today that this change has been removed from the budget bill, meaning taxing authorities retain the ability to challenge reappraisals.

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    2. Boy Paul if I am the individual you are referencing then you really missed my point by a mile. Some day in the future I would love to expand on salguod's June 2, 2014 example and try to get my point across.

      Actually I was attempting to keep this on the down side in hopes the Administration and Board would think about it. Guess not and I see as a Board Member you prefer to address this issue in a public format.

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    3. Sorry, I get so much spam on this blog that your message was lost in the noise.

      I wrote this article not just because of the conversations we've had over the years about this process, but because HB483 had been introduced in the Ohio House, and I felt it was going to disrupt the process in a way not beneficial to the whole community of taxpayers.

      I have no particular opinion about your case - I don't know the facts. But that's the reason we have this adversarial process - so both sides get to make their case before someone empowered to make an impartial decision. It's the way the American justice system works.

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  3. Property tax is assessed against residential and commercial real estate according to each state's tax assessment policies. Property taxes are used to pay for needs within county communities such as law enforcement and firefighter salaries, improvements to existing schools, building of new schools, and road and infrastructure repairs.property tax appeal nj

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