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Trying to set the record straight on property tax

citybillI want to set the record straight regarding a couple of misconceptions about property tax that I see being spread by public discussions about city and county budgets.

On the Oak Ridge Today website, citizen Andrew Howe posted a comment saying:

The property tax rate should NEVER have to increase. It is basically a percentage of the value of the home, right? And if the value of the home raises (as it should, in line with the cost of living), then the taxes will also raise.

I can’t quarrel with Mr. Howe’s logic, but his conclusions are wrong. This is because he makes an assumption that is valid in many states but isn’t valid in Tennessee.

Under Tennessee law, when properties are reappraised, state officials calculate — and publicize — the property tax rate that will give the local government the same total amount of property tax that it was getting from existing properties before the reappraisal. (This calculated rate is called the “certified tax rate”.) That’s the new baseline tax rate. If a local government in Tennessee wants to get more property tax revenue after a reappraisal, the governing body has to vote to increase the tax rate above the certified rate.

This means that property tax collections in Tennessee don’t automatically increase when property values go up (nor do they drop if property values go down). If the value of your home rises with the cost of living, your tax bill won’t automatically go up. (After any reappraisal, however, some people’s city tax bills do go up because their property values went up more than the city average.)

That law gives local officials an incentive to hold the line on property tax increases. Property tax revenues in Tennessee don’t rise along with property values — and probably don’t keep up with increases in the cost of living. In recent decades, property tax rates in Oak Ridge and across the state have generally trended downward — meaning that taxes are now a smaller fraction of property value than they used to be. After the last reappraisal in Anderson and Roane counties, in 2010,  Oak Ridge’s certified property tax rate dropped from $2.77 to $2.39 (per $100 assessed value). Our city tax rate is still at $2.39, so the only increase in property tax collections has been what came from new development. When you consider that the combined city-and-county property tax rate for the Anderson County part of Oak Ridge was $5.34 in 1997 but only $4.74 as of 2012 — 11% less than it was 15 years earlier, it should be clear that tax collections here don’t automatically track property values or the cost of living.

In another online comment, Mr. Howe put forth some more misconceptions about property taxation.  He said:

We also need to ensure that the appraisal values stay the same… If the city lowers the rate, but starts appraising higher, residents end up paying the same.

Those statements may have had some validity in the past and they may still be true in other  places, but they aren’t true in 21st-century Tennessee. As I explained above, because of the certified tax rate process in Tennessee, reappraisals don’t give the city more property tax. Furthermore, city government has no role in property reappraisals (appraisals are done by the counties, under the direction of the elected county property assessors) and nowadays the appraisal process is supposed to be done according to uniform statewide rules and procedures for evaluating fair market value. Any property assessor who tried to “ensure that the appraised values stay the same” would be violating state law!

The property tax appraisal process isn’t perfect (that’s one reason why appraisals can be appealed to a board of equalization that’s made up of citizens who own property in the county), but it isn’t arbitrary either, and there’s no call for blaming its imperfections on local city politics.

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5 Comments

  1. Thank you.
    I wanted to reply (when I saw this) and could not be polite so I deleted every thing I had typed.
    But thinking that “if the value of the home raises (as it should, in line with the cost of living), then the taxes will also raise.” you are completely missing ever market downturn in history. Home values do not always rise.
    My favorite reference here is CA back in the 1980’s when people were concerned with Japan buying up lots of commercial buildings then the market crashed and we bought them back cheaper. It has happened before and I am sure will happen again.
    It also does not take into consideration new technology that can create temporary needs for increased cash flow in certain years.

  2. Ellen Smith says:

    Your point about market downturns is an excellent one, David. What goes up does come down sometimes.

    In the last few years, many local governments around the country (in states that don’t adjust property tax rates after a reappraisal) experienced big drops in tax revenue when the bottom fell out of their real estate markets and greatly reduced the appraised values of their property tax rolls. Many of these were places that had windfall growth in tax revenues during an earlier boom period.

    The comments I was responding to were written from the assumption that property values always go up. Increases in value are never guaranteed. However, in the three decades I’ve spent in this region, property values have (on average) roughly tracked the rise in the cost of living, so that our local experience has pretty well matched that assumption. In this area, we haven’t gone through any big booms in real estate value, so we also haven’t experienced the busts that too often follow after a boom. (That’s not to say that some people haven’t lost value in recent years: If Zillow’s data can be believed, one in five homes in Oak Ridge are currently “under water” on their mortgages.)

    Tennessee’s practice of recalculating the tax rate after a reappraisal does cause the tax rate to go up when property values drop. I believe that’s happened recently, particularly in some of the state’s small rural towns.

  3. Andrew Howe says:

    Thanks, Ellen. That was great! I appreciate you taking the time to clarify things at a deeper level.

    When I wrote “as it should, in line with the cost of living”, I was speaking over the very long term, under the assumption that land is always increasing in demand but lessening in supply. Yes, in short term, it can rollercoaster. I attribute my sharp rise in appraisal value due to the recent bust in the market.

    Andrew Howe

  4. Myron Iwanski says:

    Excellent explanation Ellen. The relationship between reappraisals and taxes are very confusing and difficult to understand and explain. Well done.

  5. Mike Mahathy says:

    I generally like the system in Tennessee. It keeps local governments more accountable and guards against giant drops in revenue too like some locales witnessed, as Ellen commented.

    It is very true that the state pretty much guides reappraisals. We, residents in Rarity Ridge, found this out painfully when tax appraisals went up as much as 20% while property values fell by 30% on average. It took more than one year of appealing to the state who finally adjusted the appraisals down. If course by that time tax rates had already been set so the county and Oak Ridge actually lost some tax revenue. It’s not a perfect system.

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