Property Tax Primer

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Property Tax Primer
Updated 9/4/03
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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?

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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

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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

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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.

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Total revenue from all sources 3,167,353,000
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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.

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Functions of Property Taxation
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Property Appraisal Process
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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.)

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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

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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.

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Market Areas
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Valuation Methods

• Market or Comparable Sales
• Cost Approach
• Income Approach

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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.

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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.

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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.

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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.

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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.

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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.

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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)

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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.

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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.

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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.

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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.

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Property Assessment
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Calculation of Property Taxes  

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Calculation of Property Tax Liability for Tax
Year 1993  
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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)

 
 

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Property Tax Bill
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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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