Murray, William G.

English

Research Papers in Economics

Policies and Issues of
Tax Assessment Improvement
By William G. Murray
Improvement  in  tax  assessments  presents  an  opportunity  and  a
challenge  to  extension  and  research  personnel  in  our  land-grant
colleges and universities.  Until recently there  was little chance to get
a  program  started;  now  the  field  is  wide  open.
Several  reasons  account  for  the  slow  development  in  this  area.
Most  agricultural  economic  specialists  have  shied  away  from  tax
assessments  because  they  found  the  problems  were  not  strictly
agricultural  but urban  as  well.  It  is  practically  impossible  to  isolate
the agricultural  aspects of the  property  tax.  For example,  the  equity
of  farm  property  assessments  depends  on  the  level  of  urban  and
other  nonfarm  assessments  in  the  same  district.
Another  reason  for  slow  progress  is  the  peculiar  nature  of  the
property  assessment  problem.  To  make  a  successful  attack  on  the
problem,  it  is my judgment that a combined  research  and  extension
program  is  desirable,  and  both  phases  should  be  carried  on by  the
same  individual  if  possible.  The  best  way  to  get  research  started
on assessment  is  to  get the  interest  and confidence  of assessors,  state
tax commission  officials,  and other  officials  by assisting  in  an  educa-
tional program such  as state  or district schools or clinics for assessors.
A final reason  for  the  tardy development  of a program  has  been
the  lack  of  interest  shown  by  the  public.  As  long  as  John  Citizen
would  tolerate  archaic,  inefficient,  inequitable  assessments  nothing
much  could be  accomplished.  But  now that  the  property  owner  is
groaning under the  heavy load of school levies,  and state legislatures
are hard pressed to get uniform  assessment  among  counties through-
out  the state  so they can  base  grants-in-aid  on  property  values, John
Citizen  is  becoming  alarmed  about  the  assessment  situation  and  is
ready and willing to consider  suggestions  for improvement.
The big issue  in property  assessment  is equalization-how  to ob-
tain uniform  assessments locally  and between  districts  and counties.
The problem  divides  neatly into  the  local  inequalities  that  need to
be corrected  within the  assessor's  own district or county  and  the in-
equalities  between  counties  that  need  to  be  corrected  by  state  tax
authorities  with  or  without  the  aid  of  the  local  assessors.
There  is  one  other  issue  of  importance  which  should  be  men-
tioned  - this  is  the  dispute  over  the  assessment  level.  Most  states
25require  by  law  assessment  at  full  market  value  or some  percentage
of  this  figure.  However,  most  states  are  far  below  this  level,  any-
where  from  three-fourths  to  as  low  as  one-fourth  of  the  required
amount. This is a real problem but for our purposes not as important
as  equalization.
An  illustration  of  the  equalization  problem  may help  in  visual-
izing  its  complexity.  The  following  assumed  figures  provide  an  ap-
proximate,  although  simplified,  picture  of what exists in many areas:
LOCAL  EQUALIZATION
Market  Before  Equalization  After  Equalization
Value  Assessment  Ratio  Assessment  Ratio
County X
Farm  A  $20,000  $8,000  40  $10,000  50
Farm  B  10,000  6,000  60  5,000  50
All  farms  50  50
Residence  A  8,000  4,000  50  4,000  50
Residence  B  16,000  4,800  30  8,000  50
All residences  40  50
All farms and residences  45  50
STATE-WIDE  EQUALIZATION
Average  Ratio  Average  Ratio
~County  X~  ~Before Equalization  After Equalization County  X
All farms  50  50
All  residences  40  50
All farms and residences  45  50
County Y
All  farms  35  50
All  residences  25  50
All farms and residences  30  50
The illustration above  may seem relatively  simple since all that is
required  is  raising  up  to  50  percent  all  assessments  that  are  below
this level.  (We are  assuming  that the  state  law in  this  case  requires
assessment  at  50  percent  of full  market  value.)  But one  of  the  big
stumbling blocks is that state-wide equalization  is proceeding in many
cases  ahead  of local  equalization.
Let  us  take  a  look  at  what  happens  when  the  state  changes  all
assessments  in  a  county.  If the  state  should raise  all  the  residential
assessments  in County  X by  25 percent  to bring  them  up even with
farms,  the effect on  Residence  A would  be  an increase  of $1,000  and
on Residence  B $1,200.  Residences  on the average  would be  brought
into  line  with  farms,  but  the  inequality  between  residences  would
persist. And the result would  also be  unsatisfactory  if all  property  in
26County  X  were  raised  10  percent  because  in this  case  farms  would
be  raised  above  the  average,  and  residences  would  not  be  raised
enough.
The state,  however,  is impatient  to equalize  because  the  average
assessment  in  County  X  is  45  and  in  County  Y  only  30.  If  each
county's property  is the basis for state aid to schools, with each county
levying a minimum millage to qualify, then it is evident that County
X is taxing property of the same value 50 percent more than County Y
in order  to qualify.
To  meet  this  situation  some  states  like  Illinois,  New  Jersey,
Pennsylvania,  and Wisconsin  are making their own state estimates  of
taxable  property  value  in each  district  and  distributing  the  aid  on
this  basis.  Although  this  provides  for  intercounty  equalization,  it
still  does  not  touch  the  fundamental  error  of  local  inequality.  A
much  more  desirable  goal  to  achieve  is  local  equality,  which,  if
accomplished on the  state-wide level set as  the standard, would auto-
matically  provide  state-wide  equalization.
Our major  goal,  therefore,  is  local  equalization.  In developing a
program  to reach  this goal,  two important  phases can be established.
One is a clinic or educational  project with the assessors, and the other
is an assessment-sale  ratio project designed  to train and to encourage
the assessors to use  this important  tool of measuring equality.
The clinic  approach  has  much  to commend  it.  It brings  to  the
attention of the assessor the "bull's eye"  on his assessment target when
all the assessors  assess the same  property.  It also  reveals some embar-
rassingly wild assessments far from the bull's eye. An essential feature
of the clinic is getting the local  assessor to allow the use of his assess-
ment for comparison with the group averages - group averages being
generally  preferred  to just  one  average  for  all  assessors.
In  Iowa  we  conducted  our  first  clinic  in  1951.  This  year  we
conducted our second clinic at the request of the assessors.  One of the
best means  of showing  you the  results  of this clinic  is  to reproduce
an editorial  from the September  30,  1955,  Des Moines Register.
SOME  GUESSING  NECESSARY  ON  TAX  VALUES
The  impossibility  of exact  agreement,  even  by experts,  on the  correct
tax valuation  of real estate  was shown in  the test made last week by mem-
bers of the  Iowa State Association  of Assessors.
Six groups determined what they thought should be the  assessed valua-
tions on four properties in Warren County.  The groups consisted of about 20
men apiece-all city and  county assessors  or deputies.
One group  put a tax value of $6,200 on a supermarket.  Another group
set  the value  at $8,200.  That was  the greatest  difference  of opinion  about
value.  The difference  between  high and  low on a  home  built in  1875  was
27$550.  It was  $600  on a  home built  in  1950  and it was  $1,770  on a  quarter
section farm. The actual assessed value, as determined  by the Warren Coun-
ty  assessor,  was  higher  than  the  average  on  the  1950  home  but lower  on
three other  properties.
These variations  can be interpreted  statistically  to make it appear  that
there are great injustices and unfairness in valuation. For example,  the valu-
ation set by one group of assessors on the supermarket was nearly  50 per cent
more  than  the  valuation  of the Warren  County  assessor.  On  a  taxes paid
basis on these properties,  the amounts involved are small. If the property tax
were  80  mills, for example,  the difference  between high and low valuations
on  the supermarket  would  be  only around  $16  a  year  in taxes.
Following are the valuation figures  on the various  properties,  the first
three  figures  being  the  high,  low  and  average  of estimates  made  by  the
groups  of assessors.  The  last figure  is  the one  set previously  by  the Warren
County assessor.
Actual
High  Low  Average  Assessment
Supermarket  $8,200  $6,200  $7,500  $5,530
1875 Home  3,100  2,550  2,750  2,624
1950  Home  5,500  4,400  4,900  5,556
160-Acre  Farm  9,720  7,950  9,000  8,603
Actually the surprising fact about this  test is  that the assessors came  as
near agreement  as they did. The reason that honest,  competent  men cannot
independently come up with the same valuation figures is that the standards
for  determining  tax  values  are  not-and  cannot  be-rigid  and  precise.
Assessed  valuation, under  Iowa law is  60  per cent of actual  value.  (In
practice  it's only  30 per cent or so of actual  value.)  The three factors which
Iowa law says  the assessor  must  take into  consideration  in determining  the
value  of properties  are:  (1)  the income  of the property,  past,  present  and
prospective;  (2)  the current market value;  and  (3)  "all other matters"  that
affect the actual  value of the property.
The biggest factor of all in determining  valuation  is the  judgment of the
assessor.  The  Iowa  law  gives  ample  leeway  for  the  assessor  exercising  his
judgment and common sense through the provision  that he take into account
"all  other matters"  in determining  the  value  of properties.  The  assessor's
judgment  also is  involved in determining such  things as  the prospective  in-
come of a property  and  its current market  value.
One  of the  best  guarantees  which  Iowans  have  of fairness  in  deter-
mining tax valuations  is in  the  1947  assessors law which did  away with the
popular  selection of assessors.  Iowa law  now provides  for their appointment
on  a basis of qualifications.
Assessors still need  all the help they can get in trying to get uniformity
and equality  in  assessing properties.  The  state  tax commission  recently set
up a new division for this purpose.  But the judgment of the individual  doing
the  assessing  will  continue  to  be  a  big factor  in  determining  valuations.
Rough  equality in  fixing  valuations  may  be obtained  but perfect  equality
isn't  possible.  With  the  property  tax,  you  can't  escape  some  "guessing"
about valuations.
One of the interesting  aspects of this  1955 clinic was  the attitude
taken  toward it by the  assessors.  In  1951  we were  an  outside  agency
28putting on the clinic. This year it was  a mutual project and we were
considered  as  part  of  the  assessor  group.
In the second phase,  assessment-sale  ratios, a number of the more
energetic  and far-sighted  assessors  are willing to carry  on a continu-
ing assessment-sale  ratio program in their districts  if they can  obtain
a  little  assistance  in getting  such  a  program  started.  We  find  that
when  an  assessor  gets  his  own  ratio  study  under  way,  he  becomes
interested  in tackling  his  inequality  program.
In addition  to clinics and  assessment-sale  ratio  studies,  there  are
many other needed  features such as improved legal organization,  soil
classification,  bench  mark  appraisals,  and  the  like.  To  provide  an
over-all  view  of the  various  improvements  that  should be sought  in
tax  assessments,  the  following  list  is  one  that  merits  consideration
for your area. This list was prepared by a subcommittee  of the North
Central  Land  Tenure  Research  Committee  after  a  study  of  the
property  assessment  situation  in  the  thirteen  Midwest  states.  How
many of these  improvements  would  be desirable  in your state?
SUGGESTIONS  FOR  IMPROVEMENT
I.  County  unit in  place  of township.
The  township  in  most  cases  is  too  small  to  support  an
assessor  who  has  the  ability  to  do  a skilled  job  of  assessing.
II.  County  assessor  in  place  of  township  assessor.
A  full-time  county  assessor  can  employ  competent  help
to  do  the  field  assessing  under  his  supervision  and  thereby
achieve  local  uniformity  throughout  the  county.
III.  High qualification  for the county assessor.
A.  Skill.  Since  local  inequalities  are  the  major  defect  in  the
assessment  system,  the  first  step  in  correcting  this  defect
is  a skilled assessor.  This means  that to be eligible  for the
assessor  position, an individual  should have certain quali-
fications,  the  most  important  being  appraisal  skill  and
administrative  ability.
B.  Examination. Some  test  or  examination  can  be  required
to  determine  which  individuals  have  the  desired  qualifi-
cations.  At present  both  Iowa  and  Kentucky  have  exam-
inations  to determine  eligibility.
C.  Salary. Unless a salary is paid in line with the qualifications,
the assessor position  will not attract the type of individual
wanted.
29D.  Appointment. An appointed  assessor may be able to come
closer to providing the impartial assessment  service desired
than an  elected  assessor.  The  results  of assessment  where
assessors are  appointed  should  be studied  closely.
IV.  Reassessment  or reappraisal program.
Most counties  if they  have  not  been  reappraised  by  com-
petent appraisers in recent  years need to be reappraised.  This
should not be done, however,  until a skilled assessor has  been
appointed  or  elected.  This  county  assessor  can  then  advise
the  proper  county  officials  on  a  recommended  plan  which
may involve  state  assistance,  an outside  firm,  or a reappraisal
made  under his  own supervision.  The county  assessor  should
be in on the reappraisal from start to finish in any case because
his  task  will be to keep  it  up to date  after  it has  been made.
V.  Real estate  appraisal  practices.
A.  Maps.  A  system  of  maps,  plats  and  aerial  surveys  is  an
essential unit  in a good  assessment  office.
B.  Soils and  cost data. Soil  and yield  data  for  land  and  cost
data  for buildings are  standard  tools in modern appraisal.
C.  Bench mark appraisals. An excellent  way  to build  a  good
system  of  assessments  is  to  make  a  detailed  appraisal  of
several  key  or  bench  mark  properties.  Other  properties
can  then  be  compared  with  these  key  units.  The  bench
mark  units  should  be  located  in  different  parts  of  the
county and represent  typical units in  these  subareas.
D.  Card system. Good assessment requires  a  system of record-
ing data  on building  dimensions,  building  characteristics
and value calculations;  and on land quality and land value
calculations  for  each  tract  assessed.  This  information  on
each unit provides the assessor and the individual taxpayer
with  the basic  data which  indicate  the impartiality  of  the
assessment.
E.  Assessment-sale ratios. The county  assessor  is  in an  excel-
lent position to use the assessment-sale  ratio. He can check
the  sales  to  determine  if  they  are  bona  fide  and  he  can
use  the  ratio  results  to  measure  the  uniformity  he  is
achieving.  With a little  assistance  from  the state  tax com-
mission  the county  assessor  can  do most of the  work him-
self.  In  some  cities  and counties  assessors  are  carrying  on
their  own  assessment-sale  ratio  studies.  Actually  the  pro-
30cedure  is  a natural  one  for the  assessor  since  he gets  the
name  of  the  purchaser  to  change  his  ownership  record.
F.  Border checks.  An efficient  method  of inter-county  equal-
izing  is border  checking.  In  doing this  the  assessors  con-
cerned  drive  along their  common  boundaries  comparing
the  assessments  on either  side  of the  line.
G.  Advisory committees. The  assessor can  use  to advantage  a
citizens  advisory committee  to explain  his methods and to
get public  reactions.
VI.  Personal  property  revisions.
A.  Exemptions.  A  wide  diversity  in  exemption  practice  in
the different  states justifies a special study of this problem.
B.  Household property. Difficulty  of  getting  this  property
listed and valued  equitably suggests  a limitation to a rela-
tively  few  large  items  of  the  luxury  or  semi-luxury  class
such as television  sets or the complete elimination of house-
hold  property.
C.  Business property. Use of an average  inventory  appears  to
be more  equitable  than  the one  date  assessment.
VII.  Between-county  equalization.
A.  Assessment-sale ratios. These  have  proven  to  be  the  best
basis for an equalization  of real estate assessments.  Success-
ful  inter-county  equalization  requires  good  equalization
within the county  first. Eventual  equalization  of all prop-
erty  groups  is  attainable.
B.  Personal property. More  techniques  are needed  as  a  basis
of comparing  one county  with another.
VIII.  Educational  activities.
A.  Assessors. Schools and assessor clinics should be encouraged
as  a means  of professional  training,  picking up  ideas  and
comparing notes with other assessors.  Regional group meet-
ings  are  excellent  means  of  in-service  training and  com-
munication.  State  colleges  and  universities  should  be
invited  to participate in educational  activities jointly with
state  assessor association,  National Association  of Assessing
Officers, and state tax commission.
31B.  Public. Assessors should have  a continuing  program of ac-
quainting  citizens  with  their  assessment  system.  This  can
also include sessions in the schools to inform young people
of  the  functioning  of  the  assessment  process  and  other
phases  of  the  property  tax.
IX.  Research.
Assessors and state  tax commissions  can benefit from more
research  on assessment and related  phases of the property  tax.
In addition to the colleges and universities that are interested
in cooperating on research programs, there are various founda-
tions and groups such as the National Association  of Assessing
Officers, American Institute  of Real Estate Appraisers,  Ameri-
can Society of Farm Managers  and Rural Appraisers,  National
Tax  Association,  and Federation  of Tax  Administrators.
32PART  II
Water Problems
and Policies

POLICIES AND ISSUES OF TAX ASSESSMENT IMPROVEMENT

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