Tax Rate Viewpoints — Taxpayer Versus Budget

This post explains why  tax rates on property tax bills can be somewhat higher than tax rates in municipal budgets.  This topic is a little more geeky than my usual post.

Around this time of year, local government officials in taxing municipalities (towns, villages, cities, fire districts, other special districts, and, yes, even Dutchess County government) prepare budgets for the next year.  (School districts do the same thing in the spring.)  As part of the budget preparation process, they set the tax levy — the amount of money the municipality decides to collect from property taxes in the next year.  The tax levy divided by the municipality's taxable market value — which is set on the previous July 1 by the town assessor — is the true value tax rate.  The true value tax rate expresses how steeply property owners' wealth — as measured by the market value of their properties — will be taxed by the municipality.  As such, it is a key parameter for municipal governments, taxpayers, and all other stakeholders.

When tax bills are sent out in January (or in September for school taxes), it is exactly this tax rate which appears on tax bills, and is used to calculate the amount of taxes for the municipality ... in an ideal world.  But we don't live in an ideal world, do we?

The Tax Situation in the Real World

In the real world, its not quite that simple.  In the real world, property owners sometimes don't pay their taxes.  And then they go bankrupt or disappear, and the money is never collected.  In the real world, taxable property can be sold at any time to a tax exempt organization, taking it off the tax rolls.  In the real world, property owners sometimes take legal action to reduce their taxable assessed value — sometimes even retroactively.  All these situations mean that the municipality doesn't collect as much tax in February as it planned for in the budget process the previous fall.  Not only that, but sometimes court decisions require that property tax that had been collected from a property owner in previous years “in error” must be given back.

All these real world situations pose a dilemma for the municipality.  There is the prospect that the municipality will not receive the full tax levy in its budget, or that it will need to refund money it hasn't budgeted for.  So when there's a shortfall of any of these kinds, who do you think is left in the lurch?  Who do you think loses out?  Who do you think gets left holding the bag?

If you guessed “the municipality”, you've just became the laughing stock of the party.  If you're a taxable property owner in the municipality, the correct answer is, ”You!”

How Taxpayers Get To Pay For Budget Shortfalls

Here's how this works in Dutchess County:  In February when property taxes are collected, if a municipality has a shortfall, the government of Dutchess County fronts the money to the municipality to make it whole.  That way, municipalities don't need to go through any painful re-budgeting process in the middle of the year just because some taxpayer went bankrupt, or some court ordered a refund.

But Dutchess County government doesn't eat these extra costs.  After all, it doesn't have any extra money to throw around either.  Instead, it remembers its generosity to the municipality, and demands full payback the next year.  Payback does not occur through the municipality's budget process.  Instead, the town which collects the municipality's tax adds an increment to the municipality's tax rate of just the right size to pay back Dutchess County.  By the way, Dutchess County, in its beneficence, declines to charge interest on the money it fronts.  It just eats those costs, which are small potatoes.  Well, I guess you get to pay even the interest, through county taxes.  See?  There's no escaping death and ...

This Is a Reasonable System

One advantage of this system is that the municipality is insulated from all these real world situations.  It can do its budgeting just once a year, rather than being whipped around by every court decision or bankrupt taxpayer.  But it means that taxpayers pay each year for all the extra costs incurred the previous year.  In other words, taxpayers pay at a slightly higher tax rate than what the municipality's budget says it's charging them.  This is why there's a taxpayer viewpoint and a budget viewpoint for tax rates. 

This Blog Focuses on Taxpayer Viewpoint

In my property tax investigations, I prefer the taxpayer viewpoint, because the taxpayer rates are the rates at which taxpayers actually pay taxes.  The taxpayer rates are readily available in tax rate pamphlets published each year by the Dutchess County Real Property Tax Service Agency.  But the thing is, the taxpayer rates for 2012 aren't available until, well, January 2012.   In the fall of 2011, the only 2012 tax rates available are those in municipal budgets.  I take these budget tax rates as the best available estimates of the (yet unknown) 2012 taxpayer tax rates.  Such tax rates will tend to underestimate the tax rates on tax bills, but generally not by much.

Tax Rate Increases

When the latest tax rate is only a budget tax rate, and not a taxpayer tax rate, the tax rate increase compared with the previous year will be reasonably close to the (yet unknown) taxpayer-view tax rate increase, but will tend to underestimate it.  Budget documents, if they show tax rate increases at all, will ordinarily use only budget tax rates, in keeping with the municipality's viewpoint.  The result is that these budget tax rate increases will tend to not reflect taxpayer experience as well as my approach.  The budget tax rate increases reflect municipality experience. 

Example — Arlington Fire District

An example of what I'm talking about can be seen in the Arlington Fire District's proposed 2012 budget.  I state here that this budget proposes a 10.1 percent tax rate increase over 2011.  The 10.1 percent is figured by comparing Arlington's proposed budget 2012 tax rate of $4.87 with the 2011 taxpayer-view tax rate of $4.43.  (Calculations carried to many significant figures, of course.)  On the other hand, if the tax rate increase percent is calculated using only budget tax rates, the budget tax rate increase would be 10.4 percent, as I describe here.  Both the 10.1 and the 10.4 figures are reasonable, depending on one's point of view.  From the taxpayer's viewpoint, the 10.1 figure is the more appropriate.

School Tax Rate Comparisons — Two Viewpoints

Long-time readers of this blog may wonder how the two tax rate viewpoints discussed above relate to the two tax rate viewpoints discussed in School Tax Rate Comparisons — Two Viewpoints.  The short answer is that they're unrelated.  The viewpoints in that previous post apply only to school districts, not to other municipalities.  Both kinds of tax rates discussed in that previous post are taxpayer viewpoint tax rates in the sense of this post.  On the other hand, the taxpayer and budget viewpoints of this post can certainly be applied to school districts, further complicating what starts out as a very simple idea.