Property Tax Snapshot: Mechanics and Trends

In an economy transition year, it is prudent to ask: what is happening to property taxes?

The annual property taxes, in most states, are a mathematical function of the assessed value times a tax rate. A simple formula, with plenty of room for jurisdictional nuances. Terms like equalization ratios, multipliers, assessment and sales ratios–as well as alternative definitions of common words, like market value–can alter the levels of complexity.

Market value and the existence of any state mandated ratio sets the assessed value. The frequency in changing the market value is a function of the assessment cycle, a/k/a revaluation cycle. Cycles vary, and can occur annually, biannually, triennially, etc. Some are at the jurisdiction’s discretion. In Pennsylvania or Delaware, for example, revaluations may not happen for decades. Montgomery County (outside Philadelphia) went more than 40 years, while Philadelphia focuses on an annual revaluation cycle.

There are some exception states that cap value increases on existing property. Arizona, California, Michigan and Oregon are the most visible, with other states looking at a similar process this year, like Colorado. Cap states can create material equities over time between owners and new buyers of comparable properties as well as with new construction.

The more frequent revaluations occur, the quicker changes in market values appear. Jurisdictions that are not annual will lag the actual market either up or down. New York City phases valuation changes in over five years, unless an assessment is decreasing, which is then recognized in the taxes paid for that year. Since not all real estate assets change in value at the same pace, inequities commonly occur during intermediate years between asset types. Although most taxpayer equitable cycle is annual, it is also the most expensive to implement and maintain.

During the COVID-19 pandemic, housing prices increased in most parts of the country. Ten, twenty and thirty percent increases in sale prices are not uncommon. In the interim, other property types (like hotel, retail and office) have not experienced the same appreciation. Industrial, cold storage, distribution centers, manufactured housing and multifamily have experienced their own cycles. It is property type and location-specific that are not always visible to local assessment administers.

During the remainder of 2022, expect residential appreciating property will be picked up and likely transferred to other property types. This may be driven by jurisdictional efforts to keep the tax base participation balanced (not shifting to residential/voters), an absence of transactions in the asset types or the inadequacies of the local valuation staff. That means more valuation vigilance ahead for owners, asset and facility managers.

The other formula component is the tax rate (i.e., a millage rate and effective tax rates). Many jurisdictions received COVID-19 funds from federal or state sources. How these funds are spent will impact future tax rates. One-time projects compared to funds spent on new annual entitlements is a major differentiation point. Jurisdictions that need funds, COVID-19 expenses or inflation in legacy costs could trigger higher tax needs.

There is also the risk of jurisdictional funding grabs that often can accompany large growths in tax bases. Levying authorities pad their needs as it can be overlooked by taxpayers during times of assessment increase. Some states have imposed caps limiting growth, but many are flawed. Remember that schools normally compose 40-60% of any tax rate and rates are set annually by each taxing authority. Local monitoring of tax rate setting is a tedious process. Often rate increases, or lack of decreases when assessments increase, do not reach public scrutiny until the tax bills are issued and are too late to challenge. Jurisdictions not revaluing in 2022 could still face higher tax rates.

We will continue to see assessment increases and opportunities for tax rate increases. Taxes should be shifting to residential properties that will put pressure on assessment officials to try and redirect them onto investment grade real estate now and in future years. Most assessment notices have not been issued for this year. Attention, diligence and the retention of property tax professionals are prudent fiduciary steps.