Property Revaluation 201: Quantifying Tax Inequity (A Simple Example)

This is part of an ongoing series about property revaluation in Jersey City. 

In my last post, I explained how Jersey City’s low equalization ratio was a cause for revaluation.  The reason: when a city’s equalization ratio is low, its market values have grown out of sync with its assessed values, and that opens the door to potential tax inequity.  In this post, I’ll dive a little deeper, and show how the door swings fully open. Tax inequity harms all taxpayers, albeit at different times and to different degrees depending on where they live.

Let’s get civic and start out with a simple example to illustrate what we mean by “tax inequity.”

An Example: Tortoise Town vs. Hare Hamlet

Let’s make up two municipalities: Tortoise Town and Hare Hamlet. Here are the relevant facts*:

  • Each town has a tax base consisting of three houses: Houses A through C in Tortoise Town and Houses D through F in Hare Hamlet.
  • In Year 1 each town performs a revaluation and it’s determined that each tax base has a market worth of $300,000.
  • By Year 3 the market worth of each town’s tax base has grown to $900,000.
  • Neither town has conducted a revaluation since Year 1.

The towns appear similar…except let’s look at *how* the towns grew:

  • Tortoise Town followed a “slow and steady” approach to growth.  As a result, Houses A, B, and C appreciated in market value at the same rate: each increased from $100,000 in Year 1 to $300,000 in Year 3.  In other words, Houses A, B, and C benefitted equally in Years 2 and 3.
  • But…Hare Hamlet grew differently.  It raced towards the future by concentrating investment in House F.   By Year 3, Hare Hamlet’s tax base was worth $900,000 (just like Tortoise Town), but its wealth was segmented differently: House D saw zero market appreciation, House E saw minimal appreciation, and House F realized the lion’s share of the town’s growth.

Click to enlarge in new browser window

Total town-wide growth is exactly the same in the charts above: $300,000 in blue value grew to $900,000 in red value…but there is a clear difference when we get to per-house market growth.

In Tortoise Town:

  • Houses A through C had an equal ratio of 33% (each has $100K assessed value to $300K market value = 33%).
  • What’s more, this per-house ratio is equal to the entire town’s equalization ratio ($300K total assessed value to $900,000 market value = 33%).  Tortoise Town is uniform in its tax assessments, meaning the assessment-to-market ratios are similar from house to house within the town.

But when we move to Hare Hamlet, we see non-uniformity.  By Year 3:

  • House D’s market value hasn’t grown since Year 1.  This is bad for House D…the town itself appreciated in market value, but House D realized none of that benefit.
  • House E’s market value has doubled from $100K to $200K…this result doesn’t match any of the per-house appreciation in slow-and-steady Tortoise Town, but it’s still better than House D.
  • But look at House F….it has accounted for more than 2/3 of the market appreciation in all of Hare Hamlet in Year 3, by appreciating from $100K to $600K.  In fact, House F had the best market appreciation out of all six houses in both towns.  Yet…its assessed value remains locked in at a Year 1 value.

So…Hare Hamlet’s assessment and market values are non-uniform.  Let’s understand why that’s such a big problem.

Don’t Miss the Forest for the Trees: Property Taxes are About Funding the Budget

The tax levy is the biggest chunk of cash that funds the city budget.  For our simplified example, let’s assume:

  • the tax levy = city budget for both Tortoise Town and Hare Hamlet.
  • a budget of $10,000 for each town in each year.

The key question becomes: how much does each property owner contribute in Year 1 versus Year 3?  And the point here is: what is the fairest apportionment of the tax burden over time, given fluctuating market values?

First, Tortoise Town.  In Years 1 and 3, we have each property owner owning one-third of the tax base.  So the apportionment of Year 1 assessments and Year 3 market values are the same: 1/3, 1/3, and 1/3.

TT Assessed vs Market Tax Base

So…to fund the $10,000 Tortoise Town budget, each property owner pays his fair share in Year 1 and Year 3 based on a 33% split. Pretty straightforward:

TT Budget v2

But now let’s look at Hare Hamlet.  It’s a bit more complicated, because the market value appreciation is different for each of the houses.  This means, for Year 3, we have two possible apportionments to pick from.  We have the statutorily required “assessment” values which are a 33% split among all three houses.  But…the town could choose to revalue (aka reassess) in Year 3, thereby updating the statutory numbers to reflect the market appreciation.  Here are the two options facing Hare Hamlet:

HH Assessed vs Market Tax Base

We can used assessed values from Year 1 *or* we can use market values from Year 3.  It would be fairer to use market values from Year 3 because (a) the budget is for year 3 and (b) property taxes are supposed to use “true” value, which is market value.

HH Budget v3

And here’s the inequity: because Hare Hamlet hasn’t conducted a revaluation since Year 1, it is stuck using the Year 1 assessments.  So…instead of House F paying 67% of the budget – as it should if the taxes were levied fairly – it instead gets away with only paying 33% of the budget.

Hare Hamlet is due for revaluation.

Post-revaluation, Houses D and E would see tax relief and House F would see an increase in taxes owed.  It would be a “revenue neutral” event…meaning the budget would remain as is…what would change is the apportionment of “who pays what.”

Jersey City = Hare Hamlet

On April 30, 2010, the NJ Department of Treasury ordered Jersey City to conduct a revaluation due to several factors, including an equalization ratio of 26.75 and a coefficient of deviation of 31.14. The coefficient of deviation is used by state tax officials to track non-uniformity of assessment-to-market values.  The higher the coefficient of deviation, the higher the swings in market value as compared to assessed value.

Since 2010, the state-mandated revaluation was cancelled.  What’s more, the disparity has grown worse:  Jersey City’s equalization ratio is now 27.4 (so roughly the same as in 2010), but the coefficient of deviation has increased further, to 39.17 in 2015.  In fact, in 2015, Jersey City had the highest coefficient of deviation in the entire state.

Coeff of Deviation List - NJ 2015 v2

What this high coefficient of deviation tells us is: Jersey City looks a lot like Hare Hamlet. Jersey City poses a more complex fact pattern, but the principle is the same.

In Case You Missed It…

The other posts in this series include:

* The Tortoise Town / Hare Hamlet example is extremely simplified.  I didn’t touch on complexities around the “how” of establishing market values (i.e. sales data) or the “how” of establishing assessment value (i.e. myriad details factor into this).  I will be writing about these topics in future posts.

Many thanks to NJ Education Aid and Mia Scanga of Talking Politics for sharing their expertise which helped me better understand this issue. 

For further reading, I recommend:

  1. NJ Education Aid’sJersey City’s Property Taxes Are State’s Most Unfair (Anyone Surprised)?
  2. NJ Department of Treasury’s April 2010 Letter to Jersey City re: Ordering a Revaluation
  3. NJ Division of Taxation – Coefficients of Deviations tables.

4 Comments

  1. I would presume that a more accurate way to determine current property values would be to use sales of comparable properties on your block rather than using zillow alone. Some blocks are uniquely higher valued or sought after.

  2. I find your use of the term “fair property tax payment” quite interesting in your simplified examples. By your reasoning, House F in Hare Hamlet is not paying their fair share of property taxes because the market value of their home is greater than the market value of Homes D and E. So you reason that the owner of Home F should pay more because they either by luck or by skill purchased a home in a more valuable area of the town and therefore now owe it to the others who did not have such fortune or intellectual wherewithal. If that is the reasoning to surmise then since the purpose of the property tax, so we don’t forget, is to fund the budget, will the owners of House F receive 66.7% of the police, fire, school and other city services to equal their payment? So if Hare Hamlet has 3 cops, 3 fire fighter, 3 teachers, 3 town workers, etc., will House F get two of those in each category solely dedicated to service their needs? Since they are now paying their “fair share”? Or will the other houses receive a free ride for their lack of luck or skill and receive town benefits equal to others despite their unequal contribution? Would the town even have any officers, firefighters, teachers or public service workers if it was left up to the support of those in Houses D and E? Such is the reality to the fictitious term of “equality”. While we should leave the burdens of supporting the costs of public services to those who actually use it the most, the reality is there would be no public services at all based on the limited contribution to society made by those very such individuals. Greatness isn’t created by the average citizen it’s merely consumed by them.

    Looking forward to the reval.

  3. I’m in agreement with SD. How is it fare to make House F pay for 2/3 the taxes when they will only receive 1/3 the benefits? Just because House F appreciated the most means that they have to support their neighbors? What if House F has no intention of selling for 5 years, why should they be penalized for other people’s hypothetical desire to buy their house?

    I think tax evaluations should be done based on prior sales only. That way, every time a property changes hands, the taxes are adjusted respectively based on a set formula.

    • If residents/taxpayers want to change the rules (by, for instance, changing assessments based on prior sale vs. citywide revaluation all at once) then that’s a fair (and existing) debate to be had. But…for now, the rules / framework are in place and it’s based on periodic, citywide re-assessments. It’s within that framework that we have to evaluate the fairness of the system.

      Within this framework, revaluation will re-establish a balance of fair assessments. I understand why Ward E / “House F” residents don’t want the revaluation. The imbalance is currently most beneficial to those residents…but…conversely, that imbalance is harming other residents (notably in Wards A, B, and F).

      To attribute House F’s success to “luck” or “skill” but take no stock of government investment like tax breaks or government inaction vis a vis outdated assessments is grossly unfair to the residents who do not directly benefit from those govt actions / inactions. When the government pumps investment into one area of the city (as JC has notably done in Ward E), it’s the private capital and all that goes along with it that will have a ripple effect on surrounding properties in the form of appreciating value. Downtown has about $2B+ in PILOTed investment…I’d argue that, more than anything, is what has driven up Ward E home values, because it’s made Ward E a more attractive place to work, live, and commute from into NYC. IN fact, this is the argument the city makes as to why PILOTs are needed…because they help improve the city. We’re seeing a similar trend now in JSQ with massive PILOT-driven investments. The new investment also makes the city more expensive, because you need more services to meet the demands of the new residents. New and improved roads and infrastructure, new fire dept equipment, new police officers, etc. Until the city does a revaluation, places like Wards A/B/F will unfairly shoulder Ward E’s growing share of expense.

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