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Property Tax Primer

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Title: Property Tax Primer


1
Property Tax Primer
Updated 9/4/03
2
Taxes Where do they come from and where do they
go?   
  • A simple question, but..
  • What taxes are you talking about? Federal,
    state, local, income tax, property tax, beer
    tax?
  • Do you mean fees too? What is the difference?
  • Taxes paid by whom? Individuals, businesses,
  • corporations, somebody else?

3
When talking about taxes it is important to do
two things
  • Ask yourself what perspective is being viewed.
    The view of the county commissioner is different
    from the view of the property taxpayer is
    different from the view of the administrator
  • Do not forget to associate taxes with services.
    Because I pay taxes, my street gets plowed, my
    employees are educated, my county has a
    sheriff

4
Statement to the Governor
  •  
  • We feel, however, that we should direct special
    attention to what continues to be our most
    serious problem that is the unfair part of the
  • tax burden born on property as applies
  • particularly to real estate.
  • Montana State Board of Equalization
  • to Governor Roy Ayers, December 1, 1936

5
State of Montana Constitution, Article VIII
  • Section 3. Property tax administration. The
    state shall appraise, assess and equalize the
    valuation of all property which is to be taxed in
    the manner provided by law.

6
Total revenue from all sources 3,167,353,000
7
Total revenue from all sources 3,199,601,000
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Department of Revenues Role in Property Tax
  • The state became responsible for overseeing the
    property valuation program under the 1972
    constitution. Since that time, the State of
    Montana has administered a cyclical reappraisal
    program.
  • The current reappraisal cycle is six (6) years.
  • The goal of reappraisal is to insure that
    property is valued at current market value. If
    this is done, then the state is in compliance
    with Section 3, Article VIII of the State of
    Montana Constitution, which reads as follows.
  • The state shall appraise, assess, and equalize
    the valuation of all
  • property which is to be taxed in the manner
    provided by law.

12
Functions of Property Taxation
13
Property Appraisal Process
14
Appraisal
  • Appraisal Judgment or estimation of value as of
    a
  • specific date. The Department of Revenue conducts
  • appraisals,which includes land and improvements
    (i.e.
  • structures and buildings). The department also
    values
  • personal property (i.e. business furniture and
    fixtures.)

15
Appraiser Qualifications and Certification
  • Department of Revenue appraisers are certified by
    statute and rule.
  • Five levels of appraiser qualification and
    certification
  • Residential Requires residential certification
  • Agricultural Requires agricultural certification
  • Commercial Requires commercial certification
  • Review Appraiser Same as commercial with
    additional experience
  • Appraisal Specialist Same as commercial with
    additional experience

16
Market Areas
  • Market Area The environment of a subject
    property
  • that has a direct immediate effect on value. A
    geographic
  • area defined by properties that are homogeneous
    and
  • share important locational and economic
    characteristics.

17
Market Areas
18
Valuation Methods
  • Market or Comparable Sales
  • Cost Approach
  • Income Approach

19
Market or Comparable Sales
  • Market or Comparable Sales Using sold
    properties
  • with similar characteristics, a review of the
    market is
  • performed where individual properties are valued
    using
  • 3 to 5 comparable sales. The sales are adjusted
    to the
  • subject for differences such as square foot of
    living
  • area, location, year built, time, quality grade,
    etc. The
  • adjustments for each comparable are then applied
    to
  • the sale price. The result is an estimate of
    value for the
  • subject property, based on the adjusted sales of
    the
  • comparable properties.

20
Cost Approach
  • Cost Approach The cost approach is accomplished
    by
  • determining the replacement cost new of a
    structure and
  • deducting any loss in value due to physical
    deterioration,
  • and functional or economic obsolescence, plus the
  • addition of the land value. It is the approach
    that can be
  • used on all type of construction on each type of
    property.
  • Its widest application is in the appraisal of
    properties where
  • the lack of adequate market and income data
    preclude a
  • reasonable application of the other approaches to
    value.

21
Income Approach
  • Income Approach The income approach requires
    the
  • development of basic data sets of income and
    expense
  • information dependant on the type of income
    producing
  • property under appraisal. Through use of a
  • capitalization rate, income is capitalized into
    an
  • estimate of value.

22
Mass vs. Single Property Appraisal
  • Mass Appraisal The process of valuing a group
    of
  • properties as of a given date, using standard
    methods
  • and allowing for statistical testing.
  • Purpose The equitable and efficient appraisal of
    all property in a jurisdiction for ad valorem
    purposes.
  • Mass appraisal uses the technique of statistical
    model creation.
  • Single Property Appraisal Appraisal of
    properties one at
  • a time.

23
Cost Effectiveness of Mass Appraisal
  • Mass appraisal is efficient, effective and most
    importantly financially feasible.
  • If each home in Montana was appraised as a single
    property, at a cost of 450 per home, the cost
    would be approximately 148,500,000. This
    estimate does not include the more complex
    commercial properties.
  • Department of Revenues entire budget for all tax
    types is approximately 10,000,000.
  • Based on 330,000 residential homes and farm sites.

24
Appraisal Process
  • Discovery Discovering new properties, new
  • construction (garages, additions etc.) land
    subdivisions, etc.
  • Data Collection Field data collection is often
    the major
  • activity of a reappraisal project, especially one
    being done
  • for the first time in several years. This is one
    of the most
  • important phases of the appraisal process. The
    quality of the
  • appraisal is incumbent on the accuracy of the
    data collected
  • on each property. The accurate capture of a
    properties
  • physical characteristics is very important to the
    appraisal
  • process.

25
Appraisal Process
  • Analysis Successful mass appraisal development
    begins
  • with proper market analysis, including a profile
    of the
  • properties being appraised. During this phase the
    appraiser
  • or specialist identifies
  • Identifies appropriate units of comparison
    (square feet, condition, amenities)
  • Considers stratification of data (market area
    delineation, style of homes, etc.)
  • Decides which data elements and variables to use
    in model specification
  • Variable development (garages, full baths, ½ bath)

26
Reconciliation of Approaches to Value
  • The final step in the appraisal process is
    reconciliation of the three approaches to value
    or, in order words, resolving the differences
    that result from the application of the three
    approaches to value.
  • The appraiser looks carefully at each approach
    and considers why the value difference exists.
  • The differences are reconciled and a decision
    made as to which values and indicators should be
    given the most weight.

27
Equalization
  • Equalization of property values is an important
    step that ensures uniform treatment of groups or
    classes of property.
  • To maximize equalization and provide the best
    understanding of the property tax system,
    assessments should be based on current market
    value.
  • If all properties are at 100 of full market
    value, then equalization has been achieved.

28
Quality Assurance
  • Department ensures the quality control of the
    appraisal process.
  • Quality is the degree of excellence of a product
    or service the extent to which it measures up to
    certain standards.
  • The chief measure of assessment quality is the
    ratio study, in which appraised values are
    matched against validated sales.
  • The level of appraisal should be at or near
    market value and measures of dispersion should be
    low, which indicates acceptable uniformity.

29
Quality Assurance
  • Typical Statistical Measures of Quality
    Assurance
  • Coefficient of Dispersion (COD) The average
    deviation of a group of numbers from the median
    expressed as a percentage of the median.
  • Price Related Differential (PRD) Tests
    assessment progressivity or regressivity.
  • R-Squared Measures the strength or the
    relationship between the dependent variable and
    all the independent variables combined.

30
Property Assessment
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Calculation of Property Taxes  

33
Calculation of Property Tax Liability for Tax
Year 1993  
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35
Assessed Value for Taxing Purposes  
  • Determined based on law passed by the Montana
  • Legislature.
  • Department of Revenue annually sets the
    assessed
  • value of all property except class 3
    (agricultural land),
  • class 4 (residential and commercial
    property), and
  • class 10 (forest land).
  • Class 3, class 4 and class 10 are reappraised
    on a
  • cyclical basis. Currently, the reappraisal
    cycle is six
  • years. (Cycle length varies)

 
 

36
Property Tax Bill
37
Mill Levies
  • Mill 1/1000 (0.001) of a dollar. For each
    1,000 of taxable value, one mill will generate
    1 (1,000 x 0.001) of property tax revenue. For
    example, if property has a taxable value of
    2,000 and the mill levy is set at 30 mills, the
    property tax bill would be 60 (2,000 x 0.030).
  • Mill levies are set by
  • The Montana Legislature (95 mills for K-12
    education, 6 mills for the
  • university system and 1.5 mills for counties
    which have a vocational
  • technical center).
  • County commissioners annually set mill levies
    for counties and
  • miscellaneous taxing jurisdictions.
  • City commissioners set mill levies for
    cities.
  • School boards annually set local school
    district mill levies.
  • Counties, cities, and schools have some mill
    levy limits which, if
  • exceeded, require a vote of the people.
  •  

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