DECEMBER
2003

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

Visit Larry DeBoer's Indiana Local Government Information Web site

Download the audio files or subscribe to our podcast.

 

 

12-24-03

Download the audio of Capital Comments: MP3, WMV

Getting It Right


I went to a meeting yesterday. A man talked about ratios and coefficients, distributions and logarithms. It was very dry. But, if Indiana is going to have a property tax system that works, it will be very important. It was a meeting of the Indiana Property Tax Equalization Study Steering Committee. Here's what it is doing and why.

In December 1998, the Indiana Supreme Court decided that Indiana's assessment rules were unconstitutional. We're trying to make the rules right is by using market value, which means assessing property at its predicted selling price. The difficulties we're having now are the result of these new rules and the short time the court allowed for applying them.

Once we work through our current troubles, though, we've got a chance to have an assessment system that's better than it was. Research on property assessment reveals that states that try to assess property at 100 percent of selling price have more uniform assessments than states that use other standards.

Uniform means that property is assessed correctly, consistent with the standard. Since the standard is the predicted selling price, uniformity means that most assessments are equal to the selling prices, or are pretty close.

Here's why market value promotes uniformity. The assessment is a prediction of selling price. Most property owners have some idea of what their property is worth. They can tell whether the assessment is correct, or at least close. If the assessment looks like the potential selling price, it's right. If it doesn't, it's wrong.

Suppose the assessment is too high. You know it's too high if you're tempted to shout at the assessor, "Find me a buyer who will pay that much, and I'll sell it right now!" If that happens, the taxpayer can appeal. Successful appeals fix assessment errors. They also pressure assessors to improve their methods to reduce the number of appeals in the future. Both results make assessments more uniform.

But what happens if an assessment is too low? You look at the assessment and say, "I'd never sell this property for that!" You say it in a whisper, though. Even the most public-spirited property owner can't be expected to appeal an assessment because it's too low.

That's where the equalization study comes in. The Department of Local Government Finance (DLGF) has hired some experts to look at assessments in Indiana counties and figure out where assessments are correct and where they aren't. They do this by comparing the prices of properties that have sold to their assessments. If the prices are close to the assessments for most properties, then the assessor has done well.

If the assessments are too low for a lot of properties, though, the study will find out. Then DLGF could take some action. It might be friendly action, like helping local assessors improve their methods. It might be not-so-friendly action, like ratcheting up the assessments of classes of property that are assessed too low.

Property owners with low assessments might think that the equalization study will work against them. Maybe, but maybe not. What happens if most property in a county is assessed too low, but your assessment is not quite as low as your neighbors'?  Then your tax bill is too high, but you won't know to appeal, because your assessment is less than market value. The equalization study should identify places where property is widely under-assessed.

Farmers have a big stake in the equalization study. That's because farmland assessment rules are so simple that farmland is hard to under-assess. Farmland assessment starts with a $1,050 base rate per acre, adds an adjustment for soil type and subtracts a percentage if the land is not tillable. And that's it. If farmland is assessed correctly, while other property is assessed low, farmers will pay higher property taxes than they should. The equalization study is needed to find those problems, and DLGF needs to act on the information.

Appeals from taxpayers--and oversight from DLGF--based on the equalization study. That's how we'll get a good property assessment system.

 

 

Writer: Larry DeBoer,
Editor: Olivia Maddox,