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.

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.

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:

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:

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.

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.

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:

• Property Revaluation 101: the Equalization Ratio
• Property Revaluation 301: Estimating Your Post-Revaluation Tax Bill
• Property Revaluation 401: Tax Appeal Math (Chapter 123 Law)
• Property Revaluation 501: Mapping & Color Coding Jersey City Home Sales by Assessment-Sales Ratio

* 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’s “Jersey 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.