HomeMy WebLinkAboutCOM 0641.002 2010-2012SUBMITTED BY: COLLEEN SCHRANDT, LEGISLATIVE AUDITOR
PfrG
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UATION OF PROPERTY
OLIC1ES AND
ATIVE PRACTICES
N COUNTY
Authors:
Alan Dornfest, AAS
Richard Almy
April 3, 2012
ernational Association
Assessing Officers
This report was conducted as a Technical
Assistance Project under the auspices of the
International Association of Assessing Officers
(IAAO)
Comm. No.
Ref. Tot
Ref. Date jaiLa-242_,
641.z
IAAO
a The IAAO is a world - recognized membership
organization of property tax assessment
professionals.
o Its mission is to promote innovation and excellence
in:
• Property appraisal
• Property tax policy
• Assessment administration
Its role is to:
Improve the standards of professional practice
• Educate property tax administrators & appraisers
• Provide research & disseminate information on property
taxation to professionals & the public
Significance of IAAO Standards
o Provide broadly agreed upon goals and the
underlying basis for best practices:
Valuation system -
• Methods - Standard on Mass Appraisal
• Quality assurance - Standard on Ratio Studies
Taxation system (tax reform) - Standard on Property Tax
Policy
El Assessing officers are encouraged to use and
promote the standards
Policy makers are provided independent, largely
objective back up
o Represent a consensus of assessment professionals
Characteristics of High Quality
Property Tax Systems - Key Elements
(found in Standard on Property Tax
Policy)
o Equitable distribution of property tax burden
Efficient administration
Predictable (stable) revenue generation
Open and accessible (transparent)
Economically neutral -
• Should not encourage property owners to take otherwise
economically unsupportable actions
• Especially true when rates are low
preach to Evaluation
o On -site interviews
, Structured review of
• Chapter 19 of the HawaiDi County Code
• Real Property Tax Division procedural documentation
• Other relevant materials
o Follow -up questions and requests
o Submitted draft report for critique by an
independent IAAO reviewer
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s of Recommendations
This evaluation contains two types of
recommendations:
oRecommendations addressed chiefly to the
County Council
oRecommendations chiefly to the Finance
Department and the Real Property Tax Division
Of course, fully implementing some
recommendations would require actions by both
the Council and the administration
Setting
The economic, fiscal, and institutional setting of a
property tax system influences its development
and evolution. An understanding of the setting is
helpful in evaluating it.
oThe recession has affected the County
economically & the Real Property Tax Division
operationally
oThe history and geography of the State of Hawaii
influences government and tax policy
General Findings
1Zs measured by effective property tax rates
(property taxes as a percentage of market
values), property taxes are comparatively low in
Hawaii County — a feature that leads to
taxpayer acceptance
o Effective rates vary considerably
• There are several causes including the combination of
differing tax rates (based on property type) and
overlapping value constraints (i.e., the homeowner's
exemption coupled with value increase caps, etc.)
• The variations lead to different treatment of similarly
situated properties and to perceptions of unfairness
aierai Findings
g
(continued)
o Hawaii County's property tax system contains
many other elements that contribute to fairness
and taxpayer acceptance:
• Annual, current market value appraisal
• Measures and procedures to provide for exemptions,
appeals, and collection of taxes
• Minimum tax means that all taxpayers share in
funding government
• Quality control procedures such as ratio studies to
measure appraisal level and uniformity
• Conveyance tax and sale price disclosure
Valuation Systems -
s i s - MAO Commentary
"To maximize fairness and understandability in a property
tax system, assessments should he based on current market
value of property."
From the IAAO Standard on Property Tax Policy, 2010,
Section 4.2
System based on market value appraisals:
• 32 states (but some fractional assessment ratios)
• 26 states appraise at market value without fractional ratios
• Closeness to current market value depends on:
• Reappraisal cycle (if any)
• Adjustments between reappraisals - 6 states indicate this
practice (2008 Ratio Study Survey)
General Contentions
Fiscal analysis — there is insufficient analysis of
how tax burdens are distributed and how they
shift from year to year
o Some property tax system improvements will
require changes to the County Code
El There are opportunities to improve management
and use technology more effectively
There are opportunities to improve appraisals and
assessments by instituting programs and
procedures to ensure accurate data
rieral Contentions
(continued)
o The are opportunities to use additional, more
effective appraisal methods
o The approach to selective property tax relief in
Hawai'i County is overly complex and difficult to
administer uniformly and economically
o The appeal system could be made more accessible
o There is a lack of easily accessible information to
guide policy makers, administrators, and the
taxpaying public
cal Analysis and Property Tax
cation & Relief Policies
El] Differential property tax rates — the rate of tax depends
on the type of property
• There is a need to examine the purpose and effects of the
differentials - Recommendations 1 & 2
• There is a need to ensure that property is properly classified
o Residential property tax relief - Recommendations 33-
36
• Residential and homeowner class rates
• Valuing land as if agricultural based on zoning
• Partial exemptions
• Value cap and freeze
• Other safety -net approaches, such as "circuit breakers"
�t,
)-41 Classes and Rates
Class
A Residential
B Affordable Rental Housing
C Apartment
D Hotel and Resort
E Commercial
F Industrial
G Agricultural & Native Forest
H Conservation
I Homeowner
Levy Percentages Ordinance Rates
Land Buildings Land
0.1292 0.1609
0.0028 0.0015
0.1224 0.0527
0.0377 0.0318
0.0303 0.0386
0.0193 0.0253
0.0871 0.1115
0.0022 0.0157
0.0643 0.0667
9.10
5.55
9.85
9.85
9.10
9.10
8.35
9.85
5.55
Buildings
9.10
5.55
9.85
9.85
9.10
9.10
8.35
9.85
5.55
11 Percent Distributions of
» Taxes by Property Class
MAO Comments on
e Constraints (Caps)
t r i constrain changes in assessed or appraised
value of property may appear to provide control but
actually distort the distribution of the property tax,
destroying property tax equity and increasing public
confusion and administrative complexity.
Standard on Property Tax Policy (IAAO, 2010) Section
5.4.3, p. 21
Note: 18 states and DC use value increase
constraints; MN allowed such constraints to expire
in 2009 after studies showed increasing inequities
and tax shifting
scat Analysis and Property Tax
°cation & Relief Policies
(continued)
El Agricultural use -value assessment
• Preferential property taxation of farmland, forest
land, and open space is common nationally
• There is a need to clarify the objectives of use -value
assessment in Hawai`i County
ere is a need either to enforce current
requirements or revise them
• Agricultural use - values should be updated and
eligibility ensured as required by the Code -
Recommendation 27
2A I
Analysis and Property Tax
cation & Relief Policies
(continued)
E] Affordable rental housing - receives a 3% cap
on value increases
Golf courses - actual, not highest & best use
• Other incentives, such as qualifying historic
properties
o As a general matter, eligibility for exemptions
and other forms of property tax relief should be
verified periodically - Recommendations 30 &
31
Uato Improvements
D Programs are needed to ensure that property
descriptions are up -to -date
• Data errors lead to inaccurate, indefensible appraisals -
Recommendation 21
• Every property should be inspected at least once every six
years - Recommendations 24 & 25
D Property classes need to be defined better
o There needs to be less reliance on voluntary self
• orting when changes in ownership or property
pa may disqualify properties for agricultural and
residential property tax relief - Recommendations
30 -32
o Procedures for inspecting recently sold properties
and for screening and documenting sales used in
appraisal and ratio studies should be strengthened
- Recommendations 22 -23
sat Practice Improvements
o Base assessments on "market modeling" when
there are sufficient sales — the Real Property Tax
Division already plans to institute this — and
consider valuing improved properties as an
economic unit - Recommendation 29
o Use the income capitalization approach in the
valuation of rental properties — would require
authorization in the Code - Recommendation 26
o Lack of use of regional building cost modifiers
• Land is valued based on local sales markets
• Buildings are treated more uniformly county -wide - this
likely undervalues buildings in resort areas -
Recommendation 28
al System Issues
a The current appeal system has several questionable
features (see Recommendation 37), including:
• The 20% value difference hurdle is excessive —at least for
residential properties
• The Code's current limited ground for uniformity appeals is
not in harmony with a longstanding U.S. Supreme Court
decision
• The filing fee and link to condemnation proceedings could
deter otherwise meritorious appeals
• In valuation complaints, appellants should be allowed only to
challenge total value, not the value of a component
o IAAO standards recommend that the first level of
appeal should be to the Division - Recommendation
38
Information Accessibility
a More information is needed about:
• The rationale for such system features as the differential
tax rate structure
• Why appraised and net taxable values of similar and
neighboring properties can vary so much
• Appraisal procedures
• Why delinquent taxes are mounting - Recommendation
39
o Annual reporting to the Mayor, Council, and the
public could be improved - Recommendations 18
& 40
o There is a need for a formal procedure for
addressing complaints received by parties other
than the Board of Tax Review
of Annual Report
, / Iafe S4�o��aos y
Fiscal Year 2012 -2013
,innual Igport
to City Council
GROWTH MID APPRECIATION /DEPRECIATION
, m1 2005 2006 21477 2006 2002 ..10 20112012 20.
Meal Tee
Change in A..e..ment
I
s
I
NA6
ax
2004 2005 2022 2002 2008 1004 .10 2011 2012 2012
Keel Ter
wow
county Code Changes
Changes may be needed to
°Improve the organization and clarity of the code
- Recommendation 3
°Implement changes to the property tax system -
Recommendations 3 -4,19, 25 -26, 30, 34, 37, & 38
'cal Oppor if �s
ecommendation 11 calls for:
°Upgrading the co peer- assistedrmass
apprais A system
ointegr
.: ; f_ ormatibr
iUtilYzing o
(Pictonl'e
nth tie County's geo p
IS)
otgraphy
erations
ematic map from GIS
- i,,}ortunities to Improve
Management
Better, more formal long -range or strategic
planning - Recommendation 5
o Better analysis of workloads and productivity to
support budget requests and allocate resources -
Recommendations 6, 7, & 8
Better internal controls & quality assurance
procedures, including
• Standards & procedures - Recommendation 9,17
• Ratio studies - Recommendations 12 -18, 20
• Training - Recommendation 10
• Communications & public contact - Recommendation 40
t are Ratio Studies?
a o s a es are statistical analyses that compare
assessed or appraised values and market values
with sale prices or independent appraisals serving
as proxies for market value).
$100,000 appraised value
$150,000 sale price = 0.667 = 66.7%
Is the jurisdiction appraising property at
market value?
atio Studies Tell Us?
here are two key aspects of assessment quality:
aLevel - How close assessments (or appraisals) tend to
• e to market value (or any other statutorily required
oal) on an overall basis.
'Uniformity - How much variability exists with respect
to individual assessment ratios compared to the typical
property in a neighborhood or larger area
• Vertical equity - similarity of assessment ratios over
different property value ranges (i.e., high and low priced);
• Horizontal equity - variability within and among property
groups or "strata"
d Ratio Study Results
Very Property Is Appraised
at Market Value?
Ratio studies are statistical tests providing
indications about whether properties generally,
or in certain groups or categories, are at market
value and are equitably assessed in relation to
market value.
o It is not necessary or expected for every ratio to
be near 100% or even within a given range such
as 90% to 110 %.
_eve i vs. Uniformity
xamp
Sale
Number
1
2
3
4
5
6
7
Totals:
Assessed
Value
Sales
Price
Ratio
$10,000
$ 25,000
40.00%
30,000
50,000
60.00%
22,500
30,000
75.00%
60,000
60,000
100.00%
37,500
30,000
125.00%
70,000
50,000
140.00%
40,000
25,000 160.00%
270,000
Mean =
Median =
Sales Wtd. Mean =
Geometric Mean =
Good level, but
poor
uniformity!
270,000 700.00%
100.00% Measures of
Assessment
Level
100.00%
100.00%
(COD) Coefficient of Dispersion =
90.98%
35.71%
(COV) Coefficient of Variation =
44.06%
Measures
Of
Uniformity
Although all of the level measurements indicate that market Nalue has been achieved on an overall
basis, significant variation is present and will prevent many taxpayers from being taxed equitably'.
Example 2: Taxes paid given poor equity (COD = 22.0 %)
ppr!i
ood
nifor�mity
Uniformity
equity (COD = 11.5%)
v. Taxes -
Example 1: Taxes paid given good
Taxes to
be paid
($)
Taxes per
$1,000
sale price
Parcel
Appraised
Value ($)
Avg. Abs. Taxes to Taxes per
Diff. from be paid $1,000
Median ($) sale price
Ratio
(AN)
Parcel
Appraised
Value ($)
Sale
Price ($)
Ratio
(AN)
1
100,000
130,000
0.769
0.229
$1,000
$7.69
2
110,000
135,000
0.815
0.184
$1,100
$8.15
0.298
3
125,000
145,000
0.862
0.136
$1,250
$8.62
$1,406
4
145,000
155,000
0.935
0.063
$1,450
$9.35
$10.08
5
170,000
175,000
0.971
0.027
$1,700
$9.71
7
6
200,000
195,000
1.026
0.027
$2,000
$10.26
282,805
7
235,000
215,000
1.093
0.094
$2,350
$10.93
285,000
8
275,000
250,000
1.100
0.101
$2,750
$11.00
9
320,000
285,000
1.123
0.124
$3,200
$11.23
9.008
10
370,000
320,000
1.156
0.158
$3,700
$11.56
Total
2,050,000
2,005,000
9.851
1.145
0.220
Median
COD
0.999
22.0%
Average difference
0.114
COD
11.5%
Tax
rate
0.01
Note: Taxes based on budget of $20,500
Example 2: Taxes paid given poor equity (COD = 22.0 %)
Avg. Abs.
Diff. from
Median
Taxes to
be paid
($)
Taxes per
$1,000
sale price
Parcel
Appraised
Value ($)
Sale
Price ($)
Ratio
(AN)
1
45,249
130,000
0.348
0.652
$477
$3.67
2
72,398
135,000
0.536
0.464
$763
$5.65
3
101,810
145,000
0.702
0.298
$1,073
$7.40
4
133,484
155,000
0.861
0.139
$1,406
$9.07
5
167,421
175,000
0.957
0.044
$1,764
$10.08
6
203,620
195,000
1.044
0.044
$2,145
$11.00
7
242,081
215,000
1.126
0.126
$2,551
$11.86
8
282,805
250,000
1.131
0.131
$2,980
$11.92
9
325,792
285,000
1.143
0.143
$3,433
$12.04
10
371,041
320,000
1.160
0.159
$3,909
$12.22
Total
1,945,701
2,005,000
9.008
2.200
Median
1.000
Average difference
0.220
COD
22.0%
Tax
rate
0.010536
Note: Taxes based on budget of $20,500
Effects of Poor Uniformity
of Assessments
Wha about Price Related
Inequity?
Occurs if higher and lower priced property is
appraised at different percentages of market value
$100,000 property at 50% = $50,000 ass'd. val.
• $50,000 property at 100% = $50,000 ass'd. val.
Known as vertical inequity
ID Measured most often with an index statistic known
as the Price- Related Differential (PRD)
• More statistically precise tests are covered in Part 1,
sections 5.6 and 5.7 of the 2010 Standard on Ratio Studies
Examp es 1 and 2 compared
Comparison of overall tax equity
Example 1
Example 2
Example 1
Example 2
Parcel
Taxes per
$1,000
sale price
Taxes per
$1,000
sale price
Difference
($ per $1,000 SP)
Total
Tax ($)
Total
Tax ($)
Difference
($)
Percent
( %)
1
$7.69
$3.67
-$4.03
$1,000
$477
- $523.26
-52.3%
2
$8.15
$5.65
-$2.50
$1,100
$763
- $337.21
- 30.7%
3
$8.62
$7.40
-$1.22
$1,250
$1,073
- $177.33
-14.2%
4
$9.35
$9.07
-$0.28
$1,450
$1,406
- $43.60
-3.0%
5
$9.71
$10.08
$0.37
$1,700
$1,764
$63.95
3.8%
6
$10.26
$11.00
$0.75
$2,000
$2,145
$145.35
7.3%
7
$10.93
$11.86
$0.93
$2,350
$2,551
$200.58
8.5%
8
$11.00
$11.92
$0.92
$2,750
$2,980
$229.65
8.4%
9
$11.23
$12.04
$0.82
$3,200
$3,433
$232.56
7.3%
10
$11.56
$12.22
$0.65
$3,700
$3,909
$209.30
5.7%
COD
11.5%
22.0%
11.5%
22.0%
Example 2
poor
uniformity
has
Note: Parcels in both examples have identical sale prices, but assessments are
uniform as a percentage of sale price in Example 2.
less
Wha about Price Related
Inequity?
Occurs if higher and lower priced property is
appraised at different percentages of market value
$100,000 property at 50% = $50,000 ass'd. val.
• $50,000 property at 100% = $50,000 ass'd. val.
Known as vertical inequity
ID Measured most often with an index statistic known
as the Price- Related Differential (PRD)
• More statistically precise tests are covered in Part 1,
sections 5.6 and 5.7 of the 2010 Standard on Ratio Studies
Price - Related Differential
Examples
Rattc
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
Fa■ ors Loss L
•
•
•
INO Bias
•
•
' Favors High
10
20 30 40 50
Sales Prices (51.000)
60
♦PRD = 0.85 PRD =1.13 •PRD =1.00
'0
80
and Conclusions
Fundamentals are sound in both policy and
administration
o Greatest needs are:
• A systematic review of tax policies to determine
whether original goals remain valid and are being
met
• Programs to ensure that data used in property
appraisal are accurate and that exemptions (etc.) are
granted to eligible recipients
• Improved internal controls & oversight
• Investments in training and technology