Tuesday, December 21, 2010

Poughkeepsie Journal Misstates Property Value Data

The Poughkeepsie Journal has been remarkably consistent in its property tax analysis mistakes.  It keeps making the same mistake, but in different forms.  The mistake is to focus on assessed values when market values are the appropriate parameter.  For towns assessed at full market value, it makes no difference, because assessed values are market values.  But for towns not assessed at full market value, using assessed values can give garbage results.  On the good side, the Journal is reporting about important trends in property taxes, even if it gets the numbers wrong.

A front-page feature story in today's Poughkeepsie Journal by reporter John Davis is headlined, “Assessments lose $1.8 billion”.  The subtitle reads, “18 of 22 Dutchess County towns and cities have taxable real estate decrease from 2009 to 2010”.  (Headlines in print edition.)  As we will see, the $1.8 billion and the 18 towns are incorrect.  The story's first two sentences restate these numbers, and add two important facts:
  1. Tax rates are going up.
  2. Tax bills may not be going up.
I have to say, it's excellent that the Poughkeepsie Journal is calling attention to some of the important trends in property taxes in Dutchess County:  Property values down — check; tax rates up — check; tax bills flat — check.  Unfortunately, the story is marred by many misleading and incorrect numbers, including those in the headlines.  All the mistakes relate to the 7 Dutchess County towns not assessed at full market value. Most revealing of the Poughkeepsie Journal's misunderstanding about property values is the following story excerpt:
A reduction in taxable assessed values is most noticeable in the towns and cities that are committed to keeping them aligned with the current market values — qualifying them for a 100 percent equalization rate by the state. They range from a drop of 12.7 percent in the overall assessed values in the Town of Clinton to a 1.12 percent reduction in Amenia.  The towns that are not assessed at full market value will see either a slight increase or decline in their overall taxable values.  [emphasis added to original]
The reason a reduction in taxable assessed value is “noticeable” in towns assessed at full market value is that changes in assessed values are changes in market value.  That's the whole point of maintaining assessments at full market value.  It is market value (also known as “home value”, “full value”, “full market value”, and “property value”) that is meaningful in the real world — not assessed value.  The only people who need care about assessed value are assessors and other property tax geeks.

All Towns Have Dropped in Value

For towns not assessed at full market value, assessed values typically don't change year-to-year.  That's the whole point of not assessing at full market value!  For towns not assessed at full market value, the change in market values is reflected in the change in the equalization rate.   That's why it's not meaningful to compare assessed values.  To properly compare such a town's taxable value in 2009 and 2010, you must first convert the assessed values to market values by dividing them by the equalization rate for each year.  Once you do that, you find that in place of a “slight increase or decline” all towns had a decline, and for all but one town, the decline was double-digit.  The following table compares the Poughkeepsie Journal's numbers and those I obtained from the Dutchess County Real Property Tax Service Agency (RPTSA):

The Journal's mistake results in wildly optimistic market value increases for these towns.

Dutchess County's Property Values Are Down $2.7 Billion

Just as you can't compare assessed values across years for towns not assessed at full market value, you also can't just add together a bunch of assessed values of different towns not assessed at full market value.  It would be like adding together lengths measured in yards, meters, fathoms, rods, and cubits. You can't do that until you've converted them to a common unit of measure.  That's why the headline “Assessments lose $1.8 billion” is incorrect.  First of all, it makes no sense to talk about Dutchess County's “assessments” unless you mean that word as a loose term referring to market value.  Secondly, and more important, Dutchess County's market value declined $2.7 billion, not $1.8 billion.  Readers of my recent blog post Dutchess County 2011 Tax Rate Is Highest In Decade already know that Dutchess County's market value has declined 7.7 percent from last year (see table in that post).  That table also lets them calculate the $2.7 billion difference between Dutchess County's 2009 market value and its 2010 market value.  Once again, this data comes right from the RPTSA.

Poughkeepsie Journal's Record of Misunderstanding

It's been nearly a year since I wrote Poughkeepsie Journal's Incorrect Tax Rate Analysis.  That post outlined what is essentially the same misunderstanding as described above, but applied to tax rates, rather than to property values.  As I noted in that post, Poughkeepsie Journal management refused my request last year to speak with reporters, and it stood by its figures.  This year, the Journal has continued to publish a series of articles by different reporters, all with the same incorrect tax rate analysis.  My post last month describes four such stories.  So it's clear how today's story fits into the pattern.

I have two reasons to doubt that Poughkeepsie Journal reporters or management have vetted today's story or the previous ones with a third party knowledgeable about property tax matters:
  1. In my conversation nearly a year ago with Poughkeepsie Journal management, it became clear that management was dead sure they were right and I was wrong.  If you're dead sure, there's no reason to check things out with someone else, right?
  2. If they had consulted a knowledgeable third party, they presumably wouldn't keep making the same mistake.
I would like to think that a knowledgeable third party could be found just about anywhere.  I know I've found many.  On the other hand, I have to admit that I've also found many local officials — many more than I expected — who should know better, but who simply don't get it about property taxes.  On the third hand (yes, I have three hands), you can't go wrong talking with the good folks at Dutchess County RPTSA or the New York State Office of Real Property Tax Services.

Wednesday, December 15, 2010

Petito Elected Fairview Fire Commissioner

Local attorney Joseph Petito won reelection last evening as a commissioner in the Fairview Fire District. He received 58 out of 62 votes cast. (The other 4 votes went to various write-in candidates.) Petito began serving as commissioner last summer when he was appointed by Fairview's Board to fill out the term of Tom Ashline, who died on March 7, 2010.

This year's election was officially uncontested.  It also turned out to be uncontested in fact, unlike last year's “uncontested” election. Last year, 29 write-in votes — more than enough for victory in a normal election — went to Chairman of the Board John Anspach, but newcomer Bob Gephard won anyway because of a concerted effort to get out the vote.

Petito's reelection can be seen as completing the power shift, begun in 2008, from the old guard to the newcomers.  This year's election is the third in a row in which a newcomer has been elected to the board, thus establishing a solid majority over the old guard.  The lack of visible opposition to Petito may indicate an acceptance of newcomer Board Chairperson Jill Line by supporters of the old guard. 

Dutchess County 2011 Tax Rate Is Highest In Decade

In this second of two posts on property tax for Dutchess County government, I show how this tax has evolved over the last decade.  

In a previous post, I stated that market values in Dutchess County have doubled in a decade, but that the tax rate is about the same as a decade ago.  This does not mean that we've seen a steady increase in market value during the decade.  This also does not mean that the County's tax rate been constant during the decade.  In fact, as I show below, both of these assertions are false.  But why should we care about these details?  Isn't it enough to know where we stand now, and where we stood a decade ago?

I think not.  The trend in the past decade is not at all what one would expect from just looking at 2002 and 2011.  Therefore, the future cannot be extrapolated from just those two years of data. Unless you've just arrived here from Planet 10, you know that there was an economic meltdown two years ago.  Has this affected the County tax situation?  You betcha!  Let's see how.  Here's what's actually been happening to the Dutchess County government's property tax situation in the last decade:

I don't know about you, but looking at all these digits makes my eyes glaze over.  We can see better what's happening by charting each column.  The biggest part of the story is the trend in market value:

The above chart shows clearly that although market values have doubled from 2002 to 2011, they actually more-than-doubled from 2002 to 2008, and have dropped 15 percent in the last three years.  That's the economic meltdown right there.  Note that although real estate values began dropping in early 2008, the  effect is delayed from a tax viewpoint.  That's because the government figures market values a year and a half behind the property tax bill.  For example, your January 2011 tax bill is figured based on the market value of your property as of July 1, 2009.  The drop in market values since 2008 has actually been accelerating, as can be seen clearly from the following chart:

This decrease in the tax base is a major reason for the increase in the tax rate.  But there's another.  Since the tax base has been getting smaller, the cost of services from County government has been decreasing also, right?  Just kidding!  When does that ever happen?  Here's the trend in tax levy — the major source of income for Dutchess County government:

Notice that the tax levy has doubled in the past decade.  But unlike for market value, there is no dip in tax levy after 2008.  This fact is Bad News for the tax rate, as we'll see shortly.  Here's a closer look at how the tax levy has changed year-by-year:

The tax levy increase for 2011 isn't missing — it's zero!  The goal of zero tax levy increase for 2011 was proposed by County Executive William Steinhaus in his original budget message in October, and the County Legislature essentially concurred with this spending limit.  A year ago, Steinhaus also proposed a zero tax levy increase for 2010, but the legislature chose to increase the tax levy by 7 percent.  In both cases, Steinhaus and the legislature cynically focused on the change in the tax levy, rather than on the tax rate, which they knew (or at least Steinhaus knew) would tell a more sobering story.  And here is the story, which Steinhaus has gone out of his way to hide:

The tax rate is simply the tax levy divided by the taxable market value.  As you can see, the 2011 tax rate is the highest in 10 years, though admittedly by only a few cents.  Still, the trend of the last three years is ominous.  The tax rate increases can be seen more clearly in the following chart:

You did know that Dutchess County's tax rate is up 8.4 percent, right?  Although Steinhaus has made a major effort to hide this information, the Poughkeepsie Journal has been doing a good job to inform its readers of the 8.4 percent tax rate increase.  The Journal has reported this fact frequently this season, including in today's story, which announces the final budget outcome.  This is a big improvement for the Poughkeepsie Journal, compared with last year at this time.  As I've blogged here and here, Steinhaus was silent about the tax rate increase last year, and the Poughkeepsie Journal just went along with it.  Once again, a big improvement in reporting by the Poughkeepsie Journal.

So what does this all mean?  To start, the trend of the last three years is drastically different from what one would think looking just at 2002.  The county tax rate hit a low in 2008, and has been increasing at an average of more than 10 percent per year since then.  The 2011 tax rate is up 34 percent over that in 2008.  In other words, holding the tax levy constant, as Steinhaus has been proposing, isn't good enough to keep the tax rate from rising significantly.  That's because the economic meltdown has caused property values to fall dramatically in recent years.

The economic meltdown of 2008 is the worst economic event in the memory of most people alive today.  It doesn't just affect real estate values.  It affects us in 100 different ways.  The 8.4 percent increase in the Dutchess County property tax rate is just one more of these ways.

Acknowledgement:  Many thanks to the Dutchess County Real Property Tax Service Agency for providing most of the data used in this report.

Monday, December 13, 2010

Dutchess County Taxes in 2002 and 2011

In this first of two posts, I show how property taxes of Dutchess County government today (well, next month) compare with those of a decade ago.  Briefly, they're equally as steep as a decade ago, but the charges are twice as high because we're twice as wealthy.  In a subsequent post, I'll detail the path taken by Dutchess County property tax throughout the last decade.

In order to pay for the services it provides, Dutchess County government charges every taxable property in the county.  This charge appears on your January property tax bill, along with charges for other local governments (town, fire, etc.).  By New York State law, the county charge is a fraction of the current market value of your property, and is the same fraction for every taxable property in the county.  Every year, the fractional amount changes.  But every year, the market value of your property changes too.  So the amount you pay each year changes, because of changes in both the fractional amount set for that year and your market value for that year.

Fraction Is Tax Rate

Although the fraction charged could be expressed as a decimal value or as a percentage, it is traditionally measured as a tax rate in dollars per thousand dollars of market value.  For example the 2011 Dutchess County tax rate is $3.07 per thousand dollars of market value.  This is the same as the fraction 0.00307, or as 0.307 percent.  For a taxable property with market value of $100,000 for the 2011 tax year, the county tax is $3.07 x $100,000 / $1,000, or $307.  If you used the fraction or percent representation, you'd get the same result.  That's because $3.07 = 0.00307 x $1,000.

The Tax Rate Is What Matters

As I have argued elsewhere, the tax rate — not the amount of your tax — is the most meaningful measure of how steeply you're being taxed.  That's because the tax rate takes into account the fact that market values change.  Follow me here:  If your neighbor's property is worth $200,000, you'd expect her to pay twice as much tax as you at $100,000.  This is fair and reasonable because your neighbor is twice as wealthy as you, as measured by the market value of her property.  Now suppose your own property is worth $100,000 in 2002, but appreciates to $200,000 in 2011.  If nothing else changes, that is, if the tax rate is the same in 2011 as in 2002, then you'd expect to pay double the tax in 2011 as in 2002.  After all, you're twice as wealthy as you were then.

Market Appreciation Is Like Getting a Second  House

Think of it this way:  Suppose you owned a $100,000 house in 2002.  Somewhere along the way, somebody just gave you a second house of equal value.  For free.  No mortgage.  Now you own two $100,000 houses instead of just one.  Great deal, right?  Only problem is that you need to pay property taxes on both houses.  So your property taxes have doubled.  Of course, nobody actually gave you a second house; it's just that your current house is worth twice as much as before.  But you really are twice as wealthy, as you'd realize if you go to sell your $100,000 house and find that you can get $200,000 for it. 

Yes, I know, you might not be planning to sell, and you can't really afford the double taxes — the “free” house you were “given”.  Unfortunately, there's no way to decline your market appreciation.  And consider that you probably wouldn't “decline” to take the extra $100,000 you'd get for selling your house.

This Is Real

Folks, the above dynamic is not a hypothetical example.  It is pretty close to what's been happening.  Property values in Dutchess County have nearly doubled in the decade from 2002 to 2011.  And the tax rate in 2002 was $3.02, just a few pennies less than the 2011 tax rate of $3.07.  So the typical property owner in Dutchess County may be paying twice as much county tax as ten years ago.  But that's because the typical property owner is twice as wealthy, as measured by the market value of the property.

Well, this analysis is a little oversimplified.  It doesn't take into account the significant increase in Dutchess County market value caused by new development and property improvements.  So the typical property owner isn't quite twice as wealthy in 2011 as in 2002.  But close enough to establish the general idea.

What Has Been the Trend?

Since Dutchess County's market value for 2011 is double that of 2002, does that mean we've seen a steady increase in market value during the decade?  No, it does not.  Since Dutchess County's 2011 tax rate is about the same as in 2002, does that mean that the tax rate has been constant for the entire decade in between?  No, it does not. Both inferences are incorrect.  In a subsequent post, I'll show the trends in property tax for Dutchess County government in the last decade.

Wednesday, December 1, 2010

Why Should Property Taxes Fall When Market Values Do?

I was glad to receive the following thoughtful anonymous comment today on my post Town of Hyde Park Misunderstands Property Tax Rate Increases:
All of Mr. Rubin's charts and discussions are rather confusing and redundant. His point is that even if your tax bill stays the same from one year to the next, tax amount as a percentage of market value has increased since your property value has decreased. His gripe has nothing to do with budget methodology but instead is focused on the decline in market value of the property.

One's mortgage payment doesn't fall when the home price falls. One's heating bill doesn't fall when the home price falls. One's car payment doesn't fall when the home price falls. One's food price doesn't fall when the home price falls. Why exactly should property taxes be any different?

Using Mr. Rubin's rationale, property tax bills should have doubled from 2001 to 2009 simply because home prices doubled in that time period.

Municipalities have no control over the market value of property. They do have control over expenditures and assessments.
I welcome the above comment for a number of reasons:
  1. The commenter appears to understand and accept my argument.
  2. I agree with most of what the commenter says.
  3. His/her comment gives me a great opportunity to clarify some things.  Here goes:
“The Charts and Discussions Are Confusing”

Hmmm.  I did my best.  Please say more specifically what needs clarification.

The Charts and Discussions Are Redundant

I couldn't agree more!!!  I feel like I've been writing the same thing over and over, in numerous posts spanning more than a year.  It's only recently that a few people have shown that they understand what I'm saying.  Hopefully, I'll not need to keep doing this much longer.

Why Should Property Taxes Be Different From Mortgage, Heating Bill, etc.?

Great question! The question can be rephrased as, “Since mortgage payment, heating bill, car payment, etc. do not fall when the home price falls, why should property taxes be any different?”

Unlike other household expenses, property taxes are directly coupled to your current home price.  The coupling is through the tax rate.  The ratio of your property tax to your home price is essentially your tax rate in dollars per thousand dollars of market value.  The tax rate measures how steeply your property is taxed.  If your tax amount does not fall in proportion to the drop in your home price, then your tax rate goes up, and you are being taxed more steeply than before.  In other words, your wealth, as measured by the market value of your property, is being taxed at a higher rate than before.  This is bad because you're paying more tax, in proportion to your wealth, than before.  Also, if you sell your house, your house will be less attractive to a buyer than a similarly valued house in a jurisdiction with a lower tax rate.  Tax rate is also a measure of how steeply your municipality is charging taxpayers for its services.  Perhaps the worst thing about increasing tax rates when property values fall is that it is tempting for municipalities to maintain the higher tax rate even after property values rise again.  When this happens, your tax bill will increase in proportion to the increase in your property value at the same time that the municipality is (correctly) saying, “We're not increasing the tax rate.”

By Your Reasoning, Property Tax Bills Should Have Doubled From 2000 to 2009

That's right! Or almost right.  It's really 2008 when home prices stopped increasing, so let's go with that.  And there are some technical issues with fairly comparing taxes before 2001, so let's look at the interval 2001 to 2008:

Doubling of property tax bills is exactly what has happened in some municipalities from 2001 to 2008.  For example, my report, The Big Three Fire Districts of Dutchess County, shows that in the Arlington Fire District, the LaGrange Fire District, and the Fairview Fire District, taxable market values more than doubled from 2001 to 2008, but the tax rates in each of these districts stayed very close to constant during this period.  This implies that the tax levy (roughly proportional to tax bills) has doubled during this period.  See my report for detailed charts of market value, tax levy, and tax rates for each of these fire districts for this decade.

Admittedly, the Town of Hyde Park has not followed this pattern.  Although property values have doubled there from 2001 to 2008, as they have in most jurisdictions in Dutchess County, the Hyde Park tax rate as shown here has actually decreased quite substantially during this period.  Therefore, Hyde Park's tax levy has only increased 31 percent from 2001 to 2008, rather than doubling.  In my view, this is actually a pretty good record.  (For what it's worth, the records for the Town of Pleasant Valley, the Town of Beekman, and the Beekman Fire District are similar to that of Hyde Park.)

In summary, doubling of tax bills has occurred in the high-priced fire districts, but not in the three towns I've looked at in detail.  Thus, the record is mixed. 

Municipalities Control Expenditures and Assessments, Not Market Value

A interesting observation, but only two-thirds right!  Obviously, municipalities control expenditures (to the extent they can be controlled, what with mandates, union agreements, and many other “locked in” costs).  And obviously, municipalities do not control market values.  But a municipality does not “control” assessments, not as long as the Town Assessor lives up to his/her oath of office.  According to New York State Real Property Tax Law, assessors are sworn to assess properties in such a way that every assessed value divided by the Town's equalization rate is equal to the market value of that property.  The assessor gets to set the equalization rate for the Town, but has precious little leeway in doing so.  In fact, if the State thinks the assessor's equalization rate is “wrong,” it will overrule the Town and set the equalization rate to what the State thinks it should be.  The rules for assessing individual properties are quite elaborate, and leave only a small amount of leeway to the assessor.  It is more accurate to say that the assessor administers the assessment process, rather than “controlling” assessments.

At least that's the theory.  Obviously, in the real world there are all kinds of inaccuracies, errors, delays, mistakes, and disputes, many of which are only settled in court.  But the basic principle of how assessments work is simple, fair, and fundamentally driven by market values.  In summary, the only way a municipality has for controlling the tax rate is by setting the tax levy, which is primarily controlled by expenditures.

I hope I've shed some light on the matters raised by the anonymous poster.  I encourage others (or the same poster!) to post comments that can further the discussion.