Tuesday, October 2, 2007

Property Taxes

The city’s main way to get money from you and me is property taxes, and there are 2 things that affect the property taxes that we pay every year: the assessed value or assessment of our house, and the property tax rate. (Counties collect property taxes as well, but also enjoy piggyback income taxes.)

The Way It Works.
Let’s start by explaining the assessment. The SDAT (State Department of Assessments and Taxation) comes to your house once every three years and decides what it is worth. The SDAT tells the city how much your house is worth, and the city taxes a certain amount per $1,000 of assessed value.

Now, let’s consider the case of rapidly rising assessments, like we had for the first 5 years of this millennium, where the assessed value of some houses doubled during the 3 years between assessments. In cases such as this, the property taxes you pay, by law, cannot double. The maximum increase in annual assessed value allowed by the state is 10%, and naturally, Annapolis uses that maximum value. Anne Arundel County, by comparison, caps it at 2% (I think. But it might be 4%. It’s definitely way less than 10%). So, if your house in Annapolis used to be worth $500,000, and 3 years later it’s worth $1,000,000, you will “only” have to pay taxes on an assessment of $550,000 ($500,000 plus 10%).

(The next year, you will pay taxes on $605,000, which is $550,000 plus 10%).

Now, for the rate. Maryland has a system called the constant yield rate, which is supposed to give taxpayers a voice in how their property taxes are determined. Once the SDAT has the total amount of assessments for a given year, they tell the county or city what property tax rate they should charge that will result in the same dollar amount of property taxes as the year before--a constant yield. So, if the city of Annapolis had $100 million in assessments last year and taxed them at $.50 per $1000 in assessed value, then this year’s assessments total $200 million, the property tax rate would drop to $.25 per $1000 in assessed value, because that would provide Annapolis with the same amount of property tax revenue. Over time, assessments increase, and rates decrease.

(Note that this can only happen theoretically, because assessments can only increase 10% per year for tax purposes. But you get the point.)

How, you might ask, would a city raise taxes under the constant yield system? If a municipality wants to collect more in property taxes than they did the year before—i.e. if they want to charge a rate higher than the constant yield rate—they have to notify the public and hold hearings. Then they can raise it to whatever they want.

The Policy Question
As we know, there are 2 ways to affect how much people pay in property taxes: increase in annual assessment and rate. So which one do we change when we want to affect tax policy?

I recently spoke with Bob Burdon, who is the commander-in-chief of the Annapolis/Anne Arundel County Chamber of Commerce. He has argued over the years that we should focus on the rate, because that is what determines how much we have to pay. He is at least partially right—whether assessments increase by 10% or 2% per year, if the rate is high, at some point we are going to have to pay the piper.

But AP is not convinced that we should spend all of our efforts focusing on the rate alone. And the main reason is that I just don’t trust politicians enough.

When assessments rise by 10% every year, property tax rates go down, but they rarely go down to the constant yield rate. So, we are paying more in property taxes. And have you every been formally notified by the government? Have you been invited to any hearings as required by law? Have these hearings even occurred?

Politicians can make the claim that taxes went down under their stewardship, because the rates go down according to constant yield principles. But we are paying more! If the increased assessed value was capped at 2% or 4%, the politicians would have to focus more on the rate if they wanted to raise taxes, and it will be easier for people like us to see what is going on.

This is slightly boring and confusing, even for a person with a high dork quotient like myself. But it is very important. My points are this:

-Don’t believe anyone who tells you that your property taxes are going down.
-10% increases in assessments are too much.
-We should focus on the rate AND the increase in assessed value.

1 comment:

Scott_api said...

Taking into account 'constant yield' - does that make any sense in the real world? I am over-simplifying, but tell me if I am way off in my argument.

I think the revenue HAS to go up. Firemen and Policemen are paid via property taxes. If the yield is constant, than there will never be an increase in pay for these people, nor will they be able to buy new equipment, because the amount the city takes in never increases. In theory the city takes a little extra to cover growth in expenses, and floats bonds to purchase new firetrucks, etc. But things get more expensive over time, so in theory the amount of money the city has to spend on those things has to grow concurrently, or you get deficits. Bear in mind, I only took the 2 required Econ. classes (and no Public policy was offered) when I was in school, so I admit my argument may be full of holes.