Property Revaluation 101: the Equalization Ratio

This the first post in a series about property revaluation in Jersey City.

Jersey City has been growing at a breakneck speed for the past fifteen years.  As a city grows, it is required to stop along the way and revalue its real estate.  This process is termed “revaluation.”  Revaluation is about ensuring that tax assessed values – the number you see on your tax bill – are equal to current market values.  As Jersey City has grown, it has failed to revalue itself. As a result, current market values have been allowed to grow grossly out of synch with outdated tax assessed values.  But in November 2015, Jersey City’s 15-year joyride was put on notice: NJ treasury officials turned on their proverbial police car sirens and ordered Jersey City to pull over.  The charge: Jersey City was deemed to be “dramatically out of compliance with Constitutional and statutory provisions requiring fair and uniform property tax assessments.”

It is imperative that the public have an educated dialog about this issue and understand what a revaluation is (and isn’t), the merits for revaluation, and context as to why elected officials have failed to revalue Jersey City over the years.

Let’s get civic and start to break it down.

Property Tax Basics: The Equalization Ratio

When the state announced that Jersey City was noncompliant with state tax law, it cited Jersey City’s equalization ratio as evidence.  The equalization ratio is a key concept to understand; it measures a city’s current market value as compared to its assessed value.

All of Jersey City’s taxable property, when added together, is called the tax base.  The tax base has two values: (1) current market value and (2) assessed value.

(1)  Most of us are familiar with current market value. If you went to a realtor and said “I want to sell my home,” the current market value is what a reasonable third party buyer would pay for it.  According to state tax data available here, the 2014 market value of Jersey City’s tax base was $19.6 billion.

(2) Assessed value is different from market value.  Assessed value is used to compute your tax bill.  It is a moment-in-time-valuation, generally established during a citywide revaluation.  Jersey City’s last citywide revaluation occurred in 1988. You can look up the assessed value of your home at the NJ Assessments Records database.  Your home’s assessment value is subject to “re-assessment” in specific instances, like when you make major renovations.  Otherwise, your assessment value is “frozen in time” from when it was last assessed in 1988.  At the time of the last revaluation in 1988, the total assessed value of the tax base was $5.6 billion.  In 2014, the assessed value of Jersey City’s tax base was $5.9 billion. (Note: new properties do get added to the tax base over time, but they are valued, roughly speaking, using 1988 base year dollars.  Also, Jersey City’s 146 PILOTed buildings are not part of this assessed value since they are not part of the tax base.).

So Jersey City’s tax base has two values: a market value of $19.6 billion but an assessed value of only $5.9 billion.  If you divide $5.9 billion by $19.6 billion, you get 30%.  This 30% is Jersey City’s equalization ratioEqualization Ratio v2

The equalization ratio is one gauge the state uses to determine if a city is compliant with state tax law.  When a city’s equalization ratio dips below 85%, it is noncompliant(1). The last time Jersey City had an equalization ratio of 85% or greater was 1999.  So the city has been noncompliant since 2000.
JC Equalization Ratios - 1998-2014

Let’s view the equalization ratio from another angle. The chart below shows Jersey City’s tax base, bifurcated over time by assessed value (the blue bars) and market value (the green bars).

Jersey City - Equalized vs Assessed Value v2When market value (green) starts to grow above and beyond assessed value (blue), the equalization ratio starts to go down, and revaluation needs to occur.

The reason revaluation needs to occur: fairness.

Property Tax: It’s About Paying Your Fair Share

NJ’s property tax system is premised on everyone paying their fair share.  In NJ, “fair share” is measured by the current market value of your home.  For example, a person who owns a house with current market value of $1 million should pay a larger share of the tax burden than a person who owns a house with a market value of $100,000.  But if both homes have outdated assessments of $100,000, those two homeowners will pay the same amount in tax.  And this is unfair.

When compared to other towns in NJ, Jersey City is ranked among the most noncompliant municipalities.   In 2014, Jersey City had the 13th lowest equalization ratio among all 565 municipalities in NJ.

Lowest 15 Equalization Ratios in NJ - 2014 Data v2

Additionally, the state has another metric, called the coefficient of deviation, which measures how uniformly the equalization ratio is applied throughout the city. Meaning, is every home assessed at a third of its market value, or are some homes assessed at only 10% of their market value and others at 90% of market value?  In Jersey City, the data tells us that we are dealing with the latter; our equalization ratio is not uniformly applied throughout the city.  NJ Education Aid, a local blog, reports:

The Department of the Treasury’s guideline is that any a town with a Coefficient of Deviation greater than 15% should reassess.  Jersey City’s Coefficient of Deviation is 39%, this is the highest in the state of New Jersey, and is virtually an outlier.   The town with the next most unbalanced tax assessment, Newark,  has a Coefficient of Deviation of 35.39% and there is not a third New Jersey town with a Coefficient of Deviation above 30%.  Counting Jersey City and Newark, there are only 27 towns (out of over 560) with Coefficients of Deviation above 20%.

I will dive into the coefficient of deviation in greater detail in my next post.

Revaluation as Remedy

Revaluation is clearly required, but challenges abound.

First, local officials do not seem inclined to deal with this issue, as evidenced by Jersey City’s 15 years of non-compliance. And on January 27th of this year, Mayor Fulop announced at a Ward E community meeting that he was opposed to revaluation, claiming that those advocating for a revaluation were motivated by a “hatred” for him personally. We need our public officials to face this issue, not spin away from it.

Second, taxpayers will have divergent priorities and interests depending on the current market value of their homes.  For instance, taxpayers living in housing that has appreciated the most in value since 1988 will see an upward correction in their tax obligation.  But on the flip side, taxpayers living in housing that has not appreciated as much since 1988 will see a downward correction in their tax obligation.  All homeowners would have been better served by a government that revalued their appreciating values incrementally over time.

In my next post I’ll dive into the coefficient of deviation, or “statistical measure of unfairness” in the tax code (I like this layman’s term coined by NJ Education Aid). Then I’ll look at the mechanics of revaluation and the impact to individual homeowners.

For more information on property taxes, please see:

  1. Handbook for NJ Assessors issued Department of the Treasury State of New Jersey. See page 554, “903.04 Ratios and Coefficients-Assessment-Sales Ratio,” for information on the 85% Equalization Ratio requirement.
  2. Hudson County Website
  3. NJ Department of Treasury – Table of Equalized Valuations
  4. NJ Department of Treasury Announces Initiation of Property Revaluation Investigations, Nov 18, 2015.
  5. NJ Department of Community Affairs – Property Tax Data
  6. NJ Administrative Code (NJAC) Title 18. Department of Treasury–Taxation Chapter 12A County Boards of Taxation

 

 

8 Comments

  1. The NJ Treasury officials who are ordering the reval justified it primarily in terms of the huge gap between Jersey City’s assessed value and its Equalized Valuation, but they did make a reference to Jersey City’s Coefficient of Deviation, which is the better measure of tax unfairness.

    If a town never does a reval but all properties increase in value at a uniform rate, then the tax assessment is still fair, since everyone’s property differs from the assessed value by the same ratio.

    For instance, Westfield hasn’t done a reval in decades, but Westfield doesn’t have a location that stands out as a “hot neighborhood,” and Westfield’s Coefficient of Deviation is 15%.

    There might be people in Westfield in badly overassessed or underassessed properties, but not many.

    By contrast, Jersey City’s Coefficient of Deviation is 39%, the highest in NJ.

    http://www.state.nj.us/treasury/taxation/lpt/devtab.shtml

    Steve Fulop claimed that some JC property owners might get a few hundred off their tax bills but this is crap.

    There are people for whom this will mean paying thousands less. When Paterson did a reval its Coefficient of Deviation was in the low 20s and it still led to hundreds of property owners paying thousands less.

    http://www.northjersey.com/news/city-report-shows-wide-disparities-in-tax-impact-of-paterson-property-revaluation-1.1437630

    • Thank you, this is a great point. I think I (and others) take for granted what we see in JC, which is downtown JC (where, full disclosure, I live) has seen the lions share of market appreciation vs. the rest of the city. What we see with our eyes is borne out by the coefficient of deviation.

      • I’ve incorporated your comments into my post as I think they provide critical context. I’ll also be writing about this in a separate post. Thanks again!

  2. This why I’m such a D’Souza fan….next stop city council?!!! Please. Thanks so much. I’m really getting a better understanding of this matter….priceless.

  3. Thanks for the blog, very clear and informative. I have a question regarding the reevaluation process. Why the taxes are not adjusted according to the real market value after each property sale? It seems a much simpler approach.

    • Hi Fatih – Thank you for your comments and question. Our property tax is an “ad valorem” tax meaning “tax according to value,” meaning market value. It’s also supposed to be “uniform,” meaning market value is uniformly applied to all houses at the same time. Re-assessing each time you sell a property goes against this “uniformity” concept. Here’s the issue you run into if we re-assess upon re-sale:

      – Let’s say you buy a house for $1M house tomorrow. And the tax rate is 5%. So your tax is $1M * 5% = $50K.

      – Now let’s say the person next door to your house has owned since 1988. Their market value in 1988 was $100K. But their market value in 2016 (now) is same as yours – $1M, because the house has appreciated in value since 1988. Your two houses are basically the same: the same block, same # of floors, same # of rooms, etc. Your neighbor realizes the same benefits as you do – street maintenance, police presence, garbage pickup, etc. But because his assessment is from 1988 ($100K) he only pays $100K * 5% = $5K in property tax.

      This is unfair – you paying $50K and your neighbor paying only $5K. Your neighbor should pay as much as you, and vice versa. This “pay the same tax according to market value” is uniformity.

      So because the city doesn’t re-assess after each sale, the county and city (per state law) instead keep the assessments locked into the assessment values from the last citywide revaluation (there are some exceptions leading to re-assessment but I won’t veer into that right now). So this is why taxes aren’t adjusted upon resale (and in fact it’s illegal…it’s called a “spot assessment”). Instead, what the city does is have you, the new buyer, take on the older assessment value (e.g. from 1988 in this example) – putting you in parity with your neighbor. You end up paying $5000 in tax instead of $50,000. As assessments grow outdated and city spending goes up, the city raises the tax rate to bring in more funds. This is what’s happened in JC.

      This ad valorem / uniformity system requires regular re-assessments to keep the $100K properties current with $1M market values. When this doesn’t happen, we see imbalances creep in over time in different ways, like we now see in Jersey City, with the disparities between downtown and other areas of the city, as the map in my “Revaluation 501” post clearly shows (https://civicparent.org/2016/06/property-revaluation-501-mapping-color-coding-jersey-city-home-sales-by-assessment-sales-ratio/).

      • thanks for the response. I understand that the evaluation needs to be uniform, however that doesn’t work for new constructions. Similar to your example. Two houses for sale, both $1M, but one is a new construction; has the assessed value equal to market value pays much higher taxes compared to the old house with old valuation. Another case is the person who bought the house when it was $100K may not have the funds to pay the reevaluated tax and may need to move out just because of the tax increase, seems very unfair. Spot assessment will fix both of these issues. Most of the public service expenses don’t correlate with the value of your property. Garbage collection/street cleaning/school/firemen/police etc is the same regardless. I understand that this is a policy issue but wondering whether cities can set their own rules…

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