When counties adopt a base-year assessment system, they can lock in assessed values for very long periods. As a result, tax revenues cannot grow unless; (1) there is growth in total property value through commercial or residential development or (2) taxing bodies raise millage rates. Thus, school districts, which rely heavily on property taxes and where there are slow or no net gains stemming from new construction, face having to raise millage rates on a regular basis to fund spending growth. Some districts, in an effort to minimize millage increases, have turned to appealing assessments of recently sold properties whose selling price substantially exceeds the assessed value. Such an appeal is known as a "spot appeal."
A bipartisan group of lawmakers has been attempting to ban this practice, but have run into the Governor’s veto pen—twice. The Governor’s position is that the right of school districts and municipalities to challenge assessments should be preserved for properties that are dramatically under assessed. Now other bills to ban the practice are working their way through the Legislature. The question is who has the better case, the Legislature or the Governor? Our view is that with very few limited exceptions, the practice is unfair and can lead to negative consequences for communities in terms of the ability to sell homes and sales prices of homes.
An example will illustrate.
Consider a housing plan with similarly valued houses, all built at roughly the same time and each assessed around $150,000, the base year value. After a several years an owner decides to sell. The market is favorable and the owner is able to sell for $300,000. With an assessed value of $150,000, the school district decides to file an appeal on the property and wins getting the assessment raised to, say, $280.000. That means the new owner will be paying almost double the taxes of the other homes in the plan, even though their properties may well have a market value similar to the house that sold. In a typical Allegheny County school district combined millage (school, municipal, county) runs about 30 mills. That means yearly taxes paid by the new owner would be $8,400 compared to only $4,500 for the other owners.
Obviously in this case a great injustice would be done to the new owner. But the ramifications extend beyond that injustice. Other potential buyers, seeing the treatment received by the first buyer, might well decide that the $4,000 in additional taxes is too much and decline to buy in that community. Enough such decisions could begin to depress market values in the plan as demand for homes in the community falls off because of "spot appeal" concerns.
This example illustrates the Legislature’s rebuttal to the Governor’s veto rationale. They note that spot appeals can restrict a community’s ability to attract and retain residents. The opposing positions on spot appeals point out yet another problem with Pennsylvania’s practice of allowing base year property assessments that have no termination date.
Spot appeals might have some validity in cases where, after a countywide reassessment, there are properties whose assessment is clearly far below market value. Such an owner would have no incentive to appeal the assessment, so there must be some procedure that allows the low assessment to be addressed. In this case, a school district or municipality should have the authority to bring the property to the attention of the county assessor to get an explanation for the low assessment and seek remediation if the assessor cannot justify the discrepancy. Taxing bodies other than the county also have a duty to try to ensure fairness in assessments. But that does not mean taxing bodies should be allowed to spot appeal simply on the basis of a recent selling price being above assessed value while other nearby unsold properties are allowed to continue with assessments that are below fair market values.
And while the Legislature’s effort to ban spot appeals has merit, it is not the best way to address the underlying problem. A far better solution is to put a statutorily mandated end to base year assessments that have no expiration date. All properties in all counties should be reassessed at least every three years. If that law were in place with a zero windfall provision, spot appeals would largely disappear since property market values and assessments would track reasonably closely and recent sales prices would be reflected in assessments within a couple of years. Thus, there would be no need for school districts to pursue a spot appeal.
Not only will regular reassessments eliminate the need for spot appeals, they provide more stability and accuracy so that the burden of property taxes is shouldered more fairly. Once taxes are being shouldered fairly, taxpayers can focus their attention on the real cause of high tax bills, i.e., the cost of government.
Jake Haulk, Ph.D., President Frank Gamrat, Ph.D., Sr. Research Assoc.
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