« Why I am not a Rawlsian | Main | Ron Bailey »
The real estate bubble, local government style
Over the last year, percentage increase in the tax assessment value of the land beneath our Fairfax house: > 50 pct. The new valuation arrived yesterday.
If the real estate markets gets any worse, our tax bill may not be able to stand it. Fortunately reassessments may be in order. The lesson is that when revenue is at stake, the rule of law is fragile indeed.
Posted by Tyler Cowen on March 1, 2008 at 09:00 AM in Current Affairs | Permalink
Comments
When was the previous increase-- last year or ten years ago?
Posted by: spencer at Mar 1, 2008 9:56:06 AM
Right. That reassessment downward will occur soon. The tooth fairy will do it.
Posted by: ZBicyclist at Mar 1, 2008 10:07:26 AM
Assessment values can and should be based exclusively on real characteristics (acreage, square footage, the presence of a chimney/pool/garage/etc.). The formulas could admittedly become complex and politically influenced, but they would still more reality-based than bubble-bloated assessments.
Only the tax rate upon the underlying (i.e., real not nominal) assessed value should be allowed to vary (i.e., the taxing authority should only be allowed to vary the tax rate, openly and notoriously, and should be prohibited from engaging in "assessment creep").
Is it unreasonable to change a tax burden on one property that has not changed physically for no other because it was sold at a certain price (or, worse, because a neighbor's property was sold at a certain price).
Posted by: KipEsquire at Mar 1, 2008 10:33:37 AM
Is it unreasonable to change a tax burden on one property that has not changed physically for no other because it was sold at a certain price (or, worse, because a neighbor's property was sold at a certain price).
You're missing the point: basing tax rates on the market value of land is what mitigates real-estate bubbles. China instituted this very policy fairly recently in order to deflate its own real estate bubble with no damage to the real economy.
Posted by: guest at Mar 1, 2008 11:09:13 AM
This is likely an attempt to re-define market value by de-coupling land value and house value.
1. Mark land value up to "scarce empty lot" value.
2. Reduce house value correspondingly, and hope nobody notices.
3. Slowly level up house value to match scarce newly constructed house values (McMansions anybody?), while leaving land value as is (or inflation adjusted).
Total valuation is then not based on market (real sales in neighborhood), but on a cherry picked market subset, which only our technocrat leaders understand.
Posted by: conrad at Mar 1, 2008 11:31:56 AM
Once again, the genius of Jarvis and Gann is vindicated. My property tax assessment went up 2% in each of the last two years. There's a small possibility that I will sell at a loss; at that point, the future owner of my house will be reassessed based on what he pays me. (If I hold onto the house long enough, I may apply for a reassessment downward based on comparable houses nearby.)
Posted by: Anthony at Mar 1, 2008 11:42:39 AM
Don't economists link zoning to the cost of housing so doesn't it make sense that the assessment of a house should reflect the cost of the land, and the zoning thereof?
(Speaking as someone who lives in the same county as Prof. Cowen and whose 2008 total assessment is down by about 25 percent but whose land value stayed about the same. My area saw inflated housing values because of purchases by immigrants, now they're retreating to more realistic levels though it's still hard to see how teachers or supermarket clerks find affordable housing in Fairfax county.)
Posted by: Bill Harshaw at Mar 1, 2008 11:51:07 AM
Prop 13 (Jarvis and Gann) and other such property tax caps and finagles re silly. Governments find revenue somewhere else (by approving strip malls for retail sales taxes) and distortions in the tax base get worse over time. Capping taxes without capping spending is a mistake. As another point, note the China tidbit -- if property taxes rose to reflect market prices, people would not have borrowed against their houses to buy new cars. If my comments sound odd, it is because I advocate property taxes as the only source of government revenue (more here).
Posted by: David Zetland at Mar 1, 2008 12:17:25 PM
The Assessor here (Bloomfield Township MI) seems to have done an honest job, because my assessment is down 6.5% from last year. Now, since local taxing authorities in Michigan have to put millage increases to a vote, I expect a flurry of millage elections this year from the township, the school district, the county, the park district, etc.
Posted by: Don K at Mar 1, 2008 12:49:42 PM
Tyler,
I suggest asking for a lower assessment from your assessor. See this paper, http://jross08.googlepages.com/assessor5.pdf, which is based on Virginia Assessors.
Posted by: Justin Ross at Mar 1, 2008 1:19:19 PM
My understanding of property taxes is that it is the total sum of tax revenue to be raised that is fixed, not the tax rate per assessed value. Assments are just used to determine the fraction of the total for which each property-owner is liable. So your assessment could double and your tax wouldn't rise at all, provided everyone else's assessment also doubled. Is this not how property taxes work?
Posted by: David Wright at Mar 1, 2008 2:13:24 PM
A couple of years ago I proposed that taxation amounts based on "increases" in assessed "values" be placed in deferred accounts of the tax records of the county to become due and collectable if and only to the extent that that increased valuation were to be actually realized upon sale or disposition of the property. That would be substantially similar to a form of capital gains tax. The amount due would constitute a potential lien collected at the time of transfer. Current revenue "needs" would be met by rate increases, rather than modest decreases in rates to offset "assessment creap." However, we continued to be "crept" on.
As to FFX County Assessment, I challenged mine twice, and they were "adjusted." Never to "real" (appraisal) values, but to a level that after being reduced by a 5% fee would yield the seller a bit less than the "real" value. Tricky eh!
Also, in examining the description of the basis, I found continuous and repeated errors: A non-existent in ground pool; a non existent finished basement and recreation room; erroneous square-footage; inclusion of drainage easement in lot size ....Wonder what others will find?
In the separate valuation of land, I raised the issue that the valuation did not take into account the costs of clearing the existing structure in order to prep for resale as Raw, improved, buildable land. But, of course, that is not how the "model" of the computerized assessment program is configured.
Now, at selling, the sales price (Great Falls) on what I am selling is $115 less than the last "reduced" assessment.
At least the VA Supreme CT. has decided (2/29/2008) the "Grantor Tax" of 40 cents per $100 of sales price I would have to pay to NVTA from the sale proceeds, is unconstitutional. That would have been on top of all the excess assessments.
Basically, it is all phoney, and it will get worse.
Posted by: R. Richard Schweitzer at Mar 1, 2008 2:54:31 PM
Oh - may I remind all that you are not taxed on your ownership,your equity, , which is probably something net of a mortgage. So, you are basically "renting" the use of proerty form the county.
Posted by: R. Richard Schweitzer at Mar 1, 2008 2:57:52 PM
Dear me. That was $115,000 less
Posted by: R. Richard Schweitzer at Mar 1, 2008 3:01:15 PM
Tax assessments should come with an offer to buy the property at the assessed value (at least after a failed appeal). That should reduce the incentives for the government to overassess, and will also reduce complaints about overassessment (if you really think your house is worth less, sell it).
Posted by: Anthony at Mar 1, 2008 4:24:03 PM
I'm confused. I also live in Fairfax. As I understand it, they're slightly lowering my total (land+house) estimate, but reapportioning it so that my land carries much more of the total. I haven't done the math, but doesn't the homeowner's insurance, required by my mortgage lender, say something about the replacement cost of the structure? I wonder how the insurance assessment compares to the tax assessment for the structure. Maybe I'll go look ...
Posted by: Paul at Mar 1, 2008 4:32:29 PM
Such dramatic changes in land & building valuation could have significant tax implications for those who own rental property. The portion considered depreciable is often based on the tax bill, and the IRS rarely challenges it, but this massive revaluation might give them an incentive to do so.
Posted by: RW Rogers at Mar 2, 2008 12:00:22 AM
Ask for a hearing, just before the hearing a clerk will scurry around and offer you a deal on lower rates. Take that. If you go into the hearing and stand on principles and data they raise your rates :(. 2nd time I got it right. Jarvis makes me spit, they effectively raise the rates on newer purchasors. At one time I was paying more on a condo in the barrio than a friend's Brentwood estate! Another friend is paying 790/year while the house next door pays 8,000..
Posted by: edwardseco at Mar 2, 2008 1:59:30 AM
Anthony: Good idea, although I'm sure that's highly abusable by clever or corrupt people.
Posted by: jb at Mar 2, 2008 3:35:24 AM
.
So you have now discovered the real owners of your home -- local county politicians.
And you are dismayed to learn your landlords cleverly use an almost automatic system that sharply increases in your rent ("Property Tax").
Perhaps it's a good time to contemplate this overall political concept of real estate ownership.
(One might also reflect upon the famous 'Proposition 13' property-tax movement in 1970's California)
Posted by: RobinsonD at Mar 2, 2008 7:25:43 AM
Tyler's property tax tale reminds me of a famous question posed by legal philosopher john austin, one I always pose to my students as well: what is the difference btw a tax collector and a thief?
Posted by: enrique at Mar 2, 2008 9:14:58 AM
You're missing the point: basing tax rates on the market value of land is what mitigates real-estate bubbles. China instituted this very policy fairly recently in order to deflate its own real estate bubble with no damage to the real economy.
I am not sure if this is really effective - market can't be managed by government so easily. Here in Vancouver condo real estate is the situation quite firm, but if any problems occure on the market, tax tools will hardly save the day...
Posted by: Vancouver condos realtor at Mar 2, 2008 10:15:15 AM
what is the difference btw a tax collector and a thief?
A thief doesn't wrap himself in the flag, invoke the Keynesian multiplier, and tell you about your patriotic duty to pay your taxes.
As Lysander Spooner put it:
But this theory of our government is wholly different from the practical fact. The fact is that the government, like a highwayman, says to a man: 'Your money, or your life.' And many, if not most, taxes are paid under the compulsion of that threat. The government does not, indeed, waylay a man in a lonely place, spring upon him from the roadside, and, holding a pistol to his head, proceed to rifle his pockets. But the robbery is none the less a robbery on that account; and it is far more dastardly and shameful. The highwayman takes solely upon himself the responsibility, danger, and crime of his own act. He does not pretend that he has any rightful claim to your money, or that he intends to use it for your own benefit. He does not pretend to be anything but a robber. He has not acquired impudence enough to profess to be merely a 'protector,' and that he takes men's money against their will, merely to enable him to 'protect' those infatuated travellers, who feel perfectly able to protect themselves, or do not appreciate his peculiar system of protection. He is too sensible a man to make such professions as these. Furthermore, having taken your money, he leaves you, as you wish him to do. He does not persist in following you on the road, against your will; assuming to be your rightful 'sovereign,' on account of the 'protection' he affords you. He does not keep 'protecting' you, by commanding you to bow down and serve him; by requiring you to do this, and forbidding you to do that; by robbing you of more money as often as he finds it for his interest or pleasure to do so; and by branding you as a rebel, a traitor, and an enemy to your country, and shooting you down without mercy, if you dispute his authority, or resist his demands. He is too much of a gentleman to be guilty of such impostures, and insults, and villanies as these. In short, he does not, in addition to robbing you, attempt to make you either his dupe or his slave.
Posted by: Bill Stepp at Mar 2, 2008 12:50:15 PM
Here in Michigan, the house we bought three years ago was given a property tax appraisal that was about 5% more than we actually paid, and more than any similar house within a mile radius had sold for. On appeal, two of the three people hearing the appeal sided with us--but we still lost! Which supports this political science professor's basic view of government.
Fortunately our property taxes did drop considerably this year. Maybe they reconsidered? Nice government bureaucrats?
Posted by: James Hanley at Mar 2, 2008 10:03:55 PM
Value of the Whole is Less than the Sum of the Parts
Fairfax county splits out
a. Value of Land
b. Value of House
They then add these two (land and house) to get the resale value of the property.
Above, C. W. Clark clarified that the two add only for newly built homes.
For used homes, land and house add to resale price
only when one value gets set conditional on the other price.
Living in Fairfax County, my land value was assessed up from $200,000 to $300,000.
Meanwhile, my house was assessed at about $100,000 less:
$300,000 rather than $400,000.
So, the sum in both cases is correctly $600,000 for the property (land and house).
However, the land unconditional on the house property does have the value $300,000,
and the house unconditional on the land does have the value $400,000.
Try to add the two and you get $700,000, not $600,000.
This property will not sell for $700,000,
but only for $600,000.
If you set one of the two components prices correctly,
the other must be set "incorrectly" or conditionally.
Fairfax County now chooses to set the land value correctly,
but set the house value conditional on the land value.
Unfortunately, Fairfax County never even hints at this conditional value for the house on their assessment.
Those who take a real estate test know
that property assessment is cross checked by two methods,
a. Resale value of similar properties nearby
b. Cost to build the property from scratch
If the land cost plus (real plus, not conditional plus)
rebuild cost is less than nearby properties resale prices, you might then guess something is amiss (land values have probably been undervalued).
Bottom line: Fairfax County needs to sum values conditionally,
otherwise it adds the pure land value and the pure house value,
so the whole becomes greater than the sum of the parts.
But in fact,
the whole is LESS than the sum of the parts.
I continue to be baffled by big cities' enormous prices for condos in skyscrapers. For example, in Hong Kong [recently reduced its maximum income tax to 17%], a 700 square foot flat might cost you $600,000 (U.S.). Flats are easily assessed since they are nearly identical (no yard) and most lie within a couple blocks of the circular metro (MTR) line (perhaps 50,000 people within a few blocks of each metro stop). Since these flats get built in 60 story buildings (often 4 flats at each level), you would suppose the included cost of land lies near $0. Since Coolies from mainland China build the flats, you'd suppose the construction cost about $150,000 (U.S.). Something is amiss. Perhaps Hong Kong restricts building, otherwise flats would sell for $150,000 not $600,000. But more: those born in Hong Kong (opposed to being an immigrant) are often quite wealthy, so they invest in many flats. Perhaps it is this ownership of numerous flats that inflates flat prices. Oh my, could a free market induce an oligopoly in flats, promoting more rentals, and greatly increasing flat sale prices? How does one account for the exorbitant costs of big city flats, whose cost to build is but $150,000.
Posted by: jamesonburt at Mar 3, 2008 11:02:29 AM
Posted by: 燈光音響 at May 23, 2008 11:24:35 PM
i paid 54'000 for my home in chesterfeild va.23803 12 years ago.it has been assessed evey year increesed10'000to 14'000on personal property.no updates or improvements.what can be done?the county asseser has came out and looked and said it is due to home sales in area.house now appraised 2006 135'000.what a rippoff.maybe the county would like to buy it as a dicount?not likley.when will federal agency put local county assesesments in check .make them liable for their actions and penalize these gov.affisials.better yet raise tax or impose leaves on these who come from ny.cal. mass.tat will pay astronomical outrages prices that are a drop in the bucket from what it cost to live upstate. god help us all.
Posted by: richard talley at Nov 15, 2008 3:50:51 AM
