Recently neighboring Wake County reduced the time between property revaluations from eight to four years. The change has created some confusion – and claims the move is a veiled way of increasing taxes.
The property tax is a major source of revenue for counties and cities in North Carolina. Each year, local government tax the monetary value of property, mainly land and buildings, with the revenue going for public services like police and fire protection, trash collection, local parks and school construction.
The reasoning for taxing property to pay for public services is that property owners benefit from such services. Numerous academic studies have shown a significant link between property values and the quality and quantity of local public services. Those who don’t own property, such as renters, don’t get a free ride, because the size of their rents will reflect the property taxes paid by the property owner.
Any tax has two key elements – the monetary value of the tax base and the tax rate applied to that tax base. For example, for the retail sales tax, the tax base is the dollar amount of sales, and the rate is an amount per dollar of sales. So if I spend $100 at my favorite clothing store and the sales tax rate is 5 cents per dollar of sales, then I pay $5 in sales tax.
For the sales tax, it is obvious what the tax base is – the dollar amount of sales. But it’s another matter for the property tax. A monetary value of the property tax base is available only if the property has sold recently. If the property last sold several years ago, today’s value could be much different from the last sales value.
This is one of the problems faced by local governments in using the property tax. Their solution has been to estimate the sales value of property, such as my home, when a recent market sale is not available. Governments do this by comparing the major characteristics of the property to recently sold properties in the same neighborhood with similar characteristics. The average sales value of these matches is then used as the estimated current property value.
While this seems like a sensible solution, it is not without issues. The estimation process can be costly and time-consuming. Wake County, for example, has 350,000 owner-occupied homes, but less than 10 percent will be sold in any year. So the values of 90 percent have to be estimated. The county also uses more than 4,000 individual neighborhoods for developing the matches. The result is a property-valuation system that carries a major cost.
As a result, North Carolina does not require local governments to revalue properties every year. Properties must be revalued at least every eight years, but local governments can – at their discretion – do more rapid revaluations.
However, the fact that properties are not revalued every year creates another issue. It arises from the fact that once a property is revalued, that value remains until the next revaluation period, or until the property is sold. For localities using long revaluation periods – like eight years – this means property values can quickly become out-of-date. In areas where property values are rising, “sticker shock” can then occur for the owner when a revaluation shows a big jump in value.
Localities often lessen the shock by lowering the property tax rate to prevent a big increase in property taxes.
In situations where property values are falling – as was the case in many localities during the Great Recession of 2007-2009 – the opposite situation can lead to property owners’ frustration. If the most recent revaluation was done before the decline in values, the result is that owners pay a tax on a value they know is higher than the current sales value.
It’s for these reasons that some localities in North Carolina prefer revaluing property more frequently – even if it costs them more. If the intent is to tax the current value of a property, then more rapid revaluations will get closer to this goal.
In the future this discussion might become obsolete. This is because the development of massive real-estate data sets combined with high-speed analytical computer programs can potentially give local governments the ability to constantly and inexpensively update property values. There would therefore be ongoing real-time estimates of everyone’s property value with virtually the click of a mouse. Would this make property owner and taxpayers happy? You decide.
Dr. Mike Walden is a professor at N.C. State University.