Love Thy Affluent Neighbors!
An Analysis of Property Tax Assessments and their
Impact on Sustainability
That practice resulted in many years of renting apartments and then single family homes as the business became more established. When I finally decided to retire and sell the company my wife and I had spent several decades building, the first thing we focused on was home ownership in a community we fell in love with as renters and hope to spend the rest of our lives in.
After finding a house with all those things we wanted, during the closing procedures I learned about the role property taxes were going to play in my annual household budget. Yes, I knew they were coming, friends and family who owned homes often complained about them, but as a renter I never paid much attention, because whatever my landlord was paying was included in the monthly rental fee.
I
wasn’t able to pay cash for my new home but put enough down
that my bank gave me the option to pay my property taxes directly to
the town instead of adding them to my monthly mortgage payments and
passed on to the Town for us.
Chances
are, that if I had agreed to the bank collecting the taxes and
sending them in for me, this work might never have happened because
like most others, I would have just accepted it as part of my monthly
budget and only on occasion take note when my mortgage payment would
increase a bit now and then.
By
deciding to pay the real estate taxes myself, on the required
quarterly payment schedule, I became much more aware of the total
annual local tax burden and how much it increased year to year. I
also learned my total annual property tax burden was based on the
assessment that was in place when I bought my home and not the price
I purchased it for.
Once I settled in and began to make home improvements, I learned about Zoning laws and building codes. It didn’t take long before I realized that as my improvements moved beyond the interior to a larger overall living space, that there would be an increase in my property taxes the next year without having a new assessment done.
On the next expansion project, I decided to calculate the impact that it would have on my taxes in addition to the construction cost. That decision led me on a journey of confusion, disbelief and more awareness than I ever expected to have about the 220 year practice of taxing a citizen’s household for the value of the property they owned.
It wasn’t long after I started my “homeowner’s masters degree program” so to speak, that I learned most people really do not understand how their property tax bill is formulated. Every time I spoke to a fellow homeowner, I would seek help in understanding various tax related issues and learned that few of them could answer my questions, and those who did... often ended up being incorrect.
It’s been almost two decades since I purchase my house and consequently have completed my “masters of property tax awareness” and added to that a “doctorate” (in my calculations) of the Town’s budget process and how it impacts every homeowner’s financial burden, including the challenges in sustaining a long term existence.
Recently I’ve thought about doing something to pass on what I have learned to all those who have not been able to figure out the maze of confusion about assessments and their impact on property taxes. I am taking on the task with this writing because I have come to the conclusion that if property taxpayers don’t get up to speed with the pending Taxable Property issues then more of us will not be able to afford living in the homes we love and in the community we care for.
I’ll do my best to explain everything as clear as possible by avoiding the municipal terminology that... not only discourages the public, but makes it difficult to stay awake.
- The Reasons for Property Taxes...
Lets start by reviewing the reasons a community needs money, which mostly is... to pay for services that provide a safe and viable environment for it’s citizens to live their life in harmony with others, as they desire.
The basic services are public safety, which includes police, fire and other emergency services, Public Works that maintains roads and walkways, Administrative services that include maintaining town records, collecting taxes and implementing governing mandates and finally providing a School System to educate our youth.
Included in all that mentioned above would be other quality of life things things like recreational programs, senior services, social services, a library, Town property management and a variety of small hardly noticed budget items.
Each year the Town leadership, after going through months of analysis and review that includes public feedback, a total Budget amount for everything is approved and the citizens go about handing over the funds to pay for it all.
Throughout the Budget year money comes in from a variety of sources that includes some help from the State along with fees that have been established on the Administration side. Those include services like... the recording of real estate documents, building permits, business licenses and usage fees, State aid and grants that all together, in total, amount to about 20% of the revenue needed in the Annual budget.
The bulk of the Budget revenue comes from taxes on real estate holdings from the property owners of record. The official records for the real estate that is taxed, are kept and managed by the Tax Assessor’s office. Those records are identified by the Town’s tax map number that consists of a Plat and Lot identifier which is used to cross reference the person/persons or entity responsible for paying the assessed taxes.
I’ll explain that last paragraph a little simpler... Every piece of property in the Town is represented on a tax map and has a unique ID that is tied to the deeded records which indicates who owns it and has to pay the taxes.
Now, it’s important to understand, that the only people who pay that 80% of the Town’s Annual Budget are those listed as the owners of the taxable properties. That means, the people living on the property are not taxed directly by the Town and that is why the Tax Assessor has no official record of who is living at any of them.
It doesn’t matter to the Assessor how many people live on a Taxable property. The Assessor does not know if anyone there attends our School system or uses our senior services or any other of the services that are paid for in the Budget. The Assessor only knows who must pay the owner’s percentage of the total money the Town needs to collect.
The interesting and confusing thing here is... how the percentage taxed is arrived at because, although most all property tax payers know and accept that... the more valuable their property is... the more their annual tax will be, what they don’t really understand is how the overall “town wide total” of all taxable property is used to calculate how much their “bill” will be.
- The Mill Rate Formula for Property Taxes...
Here is how the formula works… The Assessed Value of “all” the taxable property in the Town is totaled and that figure is divided into the majority of the Budget amount needed. I’ll use an example with general numbers from a recent budget document provided by the Town Administrator.
We start with a grand total or
TTPV (Total Taxable Property Value) being
$2,250,000,000 (two billion, two hundred fifty million dollars).
Since it is typical to establish what is called a “mill rate”
or the tax per $1,000 of value, that number is divided by 1,000 which
becomes $2,250,000. Then that is divided into the budgeted amount
needed which, for our example, it works out that the Town would need
$18,000,000 from the property owners.
By dividing $2,250,000 into $18,000,000 we end up with a “mill
rate” tax of $8 (eight dollars) for every thousand dollars of
assessed value of a property.
Now, with the mill rate established, the tax bills go out to all the owners of record on that two and a quarter billion dollars of assessed property in the Town and... that’s how the Annual Budget is covered.
A property owner of a house valued at $400,000 will get a bill for $3,200 which is calculated at $8 for every thousand dollars of assessed value which would be, in this case, 400. ($8 x 400 = $3,200).
Unfortunately, there are not many property owners who really know the formula I just explained and that’s where the potential for problems regarding our ability to sustain long term ownership is hiding. This next part is going to bring us one step closer to understanding what that is… so here goes.
- The Rules of Revaluation...
Without going into a lot of boring details about how it all came about, in short, a Rhode Island law was passed that said... beginning on December 31, 2000, all cities and towns will establish a schedule for re-evaluation of the property in their community. The law dictates that property assessments shall be updated every three years with the following schedule… a “statistical update” every third and sixth year and a “full property revaluation” every nine years.
A Full Property Revaluation is where a certified real estate appraiser actually walks on to the property and where possible, enters into buildings, takes measurements, counts rooms and checks that everything is in line with what the Tax Assessor’s office has on record about the property. That ends up with a computer generated computation that includes the most current neighborhood value records from sales and other adjustments to determine the desirability of its resale potential.
The Statistical Updates, done the third and sixth years, uses information from sales of homes in a neighborhood to establish value, including its resale potential. Although there is a bit more work done than appears on the surface of this description, in general, the process is faster and less costly for the Town to comply with because there is no on-site visit required.
So apparently, back just before the turn of the century, enough people complained that they were being assessed differently than their neighbor who had a bigger home, which had kept it’s original building cost as an assessment and not updated in a way that was fair to the newbies who just purchased or built.
The real variable of the computation is what I’ll call the “neighborhood value” which, on the surface, is usually considered to be things like... average lot size, road condition, side walks, crime rate, traffic patterns, open space, parks, shoreline access and the like. But as far as assessment dollars are concerned, it’s what people are “willing to pay” to be in that neighborhood... in “that” city or town. Simple supply and demand is the dominate factor.
If the supply of homes are abundant, but the neighborhood is not desirable or the entire community is not considered as desirable... then the assessed value of every property on the tax records is lower because buyers are not paying higher prices than the original purchase amount.
On the other hand... if the supply of homes is limited in a very desirable neighborhood or community, then the assessed value ends up being higher because buyers will pay more to live there.
Now it’s not often an entire city or town has just one “neighborhood value” factor, usually there are several areas throughout the community that are “more desirable” than another and attract more affluent, motivated buyers but… those towns that have restrictions on building permits or have exhausted their supply of buildable properties... eventually will face significant budget challenges.
- A Few "What If?" Examples...
Before we cover that situation lets look at a sample town that, for some reason or another, becomes less desirable to live in and loses its entire curb appeal. To use a few extremes to show how that might be possible... lets say the entire drinking water system is determined to be contaminated from an underground source of some kind, or the wild animal population is found to spread a disease that is transferred to pets and those who come in contact with them or a gang of criminals sets up shop to prey on an aging affluent population.
OK enough of that thinking, you
get the picture I'm sure. So here is what would happen using the numbers of the
Town Budget example from above. There was a budget requirement of $18,000,000
from property owners and the mill rate tax, based on the value of all properties
was $8 per thousand dollars of assessed value because the TTPV (Total Taxable
Property Value)
we used was $2,250,000,000 (two billion, two hundred fifty million
dollars). With one of the situations imagined above let’s say
that it reduced the value of the entire Town’s total assessment
in half.
So
that would mean the value of all taxable properties combined would
now be $1,125,000,000 which would be 
used to calculate a new mill
rate of $16 per thousand dollars of assessed value. So using the
example of a $400,000 home, it would seem that they would now be
asked to pay $6,400... ($16 x 400) of the Budget, instead of the
previous $3,200.
It does not matter what the total TTPV is because the $18,000,000 Annual Budget requirement still needs to be paid by the property owners. The interesting fact, using this example, is that if the entire town’s property value is reduced in half... all the properties on record would lose 50% of their value and so our $400,000 home will now be worth just $200,000. When we calculate the tax bill using the mill rate of $16 per thousand, then our tax obligation on that house and all the others in town... would not change. ($16 x 200 = $3,200).
So what would be the impact of the Town wide loss of it’s assessed value if the Budget does not change and the property owners pay the same? Well think about it for a moment. Get it?
Every property owner in the Town would be losing 50% of their home’s cash value. If the $400,000 home in our example is mortgage free, fully paid for... the owners have lost $200,000 of their net worth. With the typical home owner having some amount of mortgage debt, they would be paying out on a loss of equity.
Remember, the Town Budget still needs to be paid by all the property owners and more than likely will continue to increase a bit each year with labor cost increases and inflation of materials etc. If we were to put that value loss scenario into high gear, there would be many more financial impacts that would likely end up with total bankruptcy that unfortunately we have witnessed not too long ago in Central Falls, RI.
Next we will turn to the opposite side of the coin in this “What if?” discussion... a community that becomes so desirable that the property values double!
Well by now you should be able to compute the impact pretty quickly... the taxable property value would be $4,500,000,000 (four billion, five hundred million dollars) and using the same Town Budget of $18,000,000 the mill rate would be just $4 per thousand of assessed value. Meaning that our $400,000 home owner would be paying just $1,600 in annual property tax instead of $3,200. Wow!
But wait, you’ve probably figured it out already. The $400,000 property would then double and be worth $800,000... an even bigger WOW! That means that the family living there would increase their wealth or home equity 100% percent over what it was purchased or built for. It also means that their share of the Budget (Tax Bill) would remain the same at $3,200 ($4 x 800 = $3,200).
“So what’s wrong with that happening?” you might be asking right now. “They are paying the same taxes but they are $400,000 richer.” Well those who have lived in a community for a long time have seen the impact of property values increasing on a smaller scale and what they point out is that the family vision of living with their adult children and friends in the community they all grew up in is... crumbling from prosperity.
Although we’d like to think that all of our family will have the greatest financial successes, the facts are that most will not be able to afford to live in a community with that much property value growth. The home owners are "asset rich" but less likely to be joined by their family members and as time goes on, with the elderly, incomes usually decline and sustainability gets more difficult.
Even a stable property tax bill becomes difficult to pay for those of us retired and on fixed incomes. So selling out and moving to a less affluent community becomes a tempting option and the decision to leave behind all the familiar places and joyful moments and memories is the sacrifice many of us will have to make.
- Higher TTPV does NOT give the Town more money to spend!
This is probably a good place to clear up another misunderstanding about the impact of assessments on the budget. The Town budget is not impacted by the TTPV (Total Taxable Property Value) in the way some think.
The budget is established by the needs of the Town to operate and must be voted on by the Town Council and approved by the voters at the Financial Town meeting. It does not matter what the TTPV is, because that number is only used to calculate what share of the budget is paid by each of the property owners, using the "mill rate". It's total is a "divider" not a "multiplier". If the TTPV doubles, as it did in our example above, the Town Budget does not and can not automatically double.
Hope that makes everyone relax a bit and clears up the confusion and concerns over that ever happening.
Now let’s take a look at an impact that is more “plausable” than those mentioned before… a neighborhood drop in value that will impact “just a portion” of the Town’s TTPV (Total Taxable Property Value). Let’s say 25% in all.
Using
our original value of $2,250,000,000 and cutting that down, we would
end up with a lower TTPV of $1,687,500,000.
In this example, we have a double impact... the mill rate will go up and consequently the taxes for the 75% who did not lose the value because... everyone would still have to pay the $18,000,000 budget required to run the Town.
The math works out like this… we divide $1,687,500 (Total Town assessed value divided by 1,000) into the $18 million budget making the tax mill rate $10.67 per thousand of assessed value... higher than the original $8 in the first example.
That means our $400,000 home owner who does not live in the reduced value neighborhood... would now be paying $4,268 ($10.67 x 400) instead of $3,200 ($8 x 400) which is a 33% increase. Those homes in the neighborhood that lost 25% of their value would be paying almost the same because their $400,000 home would be down 25% in value to $300,000 and they would pay the new mill rate against a lower assessment ($10.67 x 300) that would total $3,201. Yes, just one dollar more than before but... their wealth has dropped by 25%... giving them an equity loss of $100,000. Ouch!
- What's more likely this time around...
Now
let’s go back to what is actually happening today in a more
normal scenario. After a round of a town wide Full Re-valuation and a couple of
Technicals, since the State Law was enacted in 2000, things have begun to settle down to where
neighborhood assessment spikes are less likely to surprise property owners with unexpected
tax increases, which
was common during the beginning of the implementation cycle.
However,
that doesn't mean that when new evaluations are sent to home owners, there is no
pause or even a little panic. Seeing an assessment notice that is higher... usually
gets a moment of "wealth-happiness", but somehow often turns into grave concern when
the homeowner tries to estimate their new bill by using the current mill rate on
that new assessment. That's bad to do because it's not the way
their bill will be calculated.
Only until after the "New" TTPV (Total Taxable Property Value) is divided into the next year's budget, approved at the Financial Town Meeting, will the new "mill rate" be calculated and applied against the new assessments. Fortunately for Jamestowners, chances are, this time around, there's not much to get all worked up about.
Looking at things for the future however, there’s still something important to be mindful of and that is... the growth potential of the “town wide” property value increases.
In the best case situation, new home construction and neighborhood values from sales, increase enough each year to account for the inevitable rise of the Town’s Budget.
So if there is a 1% budget increase, in order to keep the mill rate from going up, there would have to be a growth in the TTPV (Total Taxable Property Value) of $22,500,000 from new home construction and/or improvements to existing homes in order to maintain everyone’s property taxes at the same level.
To accomplish that from just new construction means the Town would need 22... one million dollar homes built each year, or about two per month, to be completed and put on the tax roles. But it’s more likely new homes would be in the $500,000 median price range, which would expand the new construction goal to 44 per year or about 4 a month.
How about lowering the mill rate? Well that’s a good question so let’s give it a look.
Between the three year town wide assessments, the total taxable property value does increase from new construction projects. When a new home is complete or an addition to an existing home is recorded, the value will show up as “extra income” to the Town because that property tax revenue increase was not projected nor expected in the previous budget approval... the mill rate will be impacted in the following year’s budget.
So if the budget does not increase and there was, let’s say $22,500,000 of new taxable property recorded for this year’s totals, then the mill rate will decrease. Using our original figures of $2,250,000,000 and adding the $22,500,000 for a new grand total of $2,272,500,000, the computations against the $18,000,000 needed from property owners will be lowered from $8.00 per thousand to $7.92.
Unfortunately that type of adjustment is not commonly noticed and is absorbed into the revenue stream without much attention. However, when looking at Re-evaluation history from the Town Administrators’ 2018 Budget message to the Town, we see that it can make a noticeable difference if the increase is large enough. That happened a few years ago with the Re-evaluation increasing Taxable Property values by $69,251,211 and ultimately lowered the mill rate by 20 cents per thousand.
For all intents and purposes, to maintain our current property tax bills, we need to be sure that the taxable property totals from new construction and home improvements, are large enough to cover any increases to the budget, that will inevitably occur. Yes, if the budget decreases or new revenue sources show up, then our property tax bills would also decrease but that, more than likely, is not going to happen.
- Update on Jamestown 2018 Revaluation
In
March of 2019 the numbers from the 2018 Technical Revaluation made a
huge impact on the Mill Rate...
The new TTPV (Total Taxable Property
Value) of Jamestown increased $348,000,000 for a grand total of
$2,600,000,000 (billion) resulting in a reduction of the rate from $8.90
per thousand of assessed value to $8.05.
In our example from above of a $400,000 home, the owners tax bill will be lowered from $3,560 (400 x 8.90) down to $3,220 nearly a ten percent decrease. If the value of that home increased 10% since the previous assessment in 2015 then their tax bill will be $3,542, practically no change, but they are $40,000 wealthier.
The 2019/2020 Town Budget, that was approved at the Financial Town meeting, had a 5% percent increase over the previous year but... the increase in TTPV was so large, that the mill rate still was reduced.
- Where do we go from here...
Now that we know how all the Property Tax value impacts our ability to sustain the affordability to live here, it leads us to the question of “What happens in the future?”, especially if we don’t have a plan to manage the growth rate of new construction and home improvements to provide that increase of taxable property revenues.
You see, when a community runs out of tax role lots... due to a 100% build out, then the only way the base of Taxable Property can grow is through increases in measurable property values from property sales or improvements to existing properties. The challenge is... to find a formula with just enough Property Value growth to absorb Town Budget increases and hopefully build up other revenue sources not related to real estate transactions.
Jamestown has done an admirable job of managing growth and protecting resources but, unfortunately, it has set up a pending shortage of buildable lots and will put pressure on long term sustainable Taxable Property growth mentioned in the above strategy.
With limits to the future amount of new homes, it's important that we consider a plan to get the most out of the remaining new construction opportunities. It makes sense to consider a pro-active strategy that will support budget growth, by encouraging high end development that serves and attracts affluent buyers.
Every community can benefit from a healthy amount of multi-million dollar homes, not only for the added assessment growth but for the nearly invisible strain on Town services.
Affluent households usually send their children to private schools, don’t need social services and bring a dynamic of support to local businesses that might not otherwise be there.
Many affluent families believe in supporting the community with volunteer efforts and financial contributions to important causes and "wish list" projects. We have benefited in recent years with a significant donation to the Conservation Commission’s efforts to protect the dunes at Mackerel Cove, as an example of extra help from an affluent property owner.
There are many others who have helped add value to the community beyond their large Property Tax payments throughout our history and it’s likely we will continue to benefit from their generosity. Perhaps contributions to the goal of building affordable housing for our workforce needs. Truly, there is no downside to having a good supply of affluent, multi million dollar households.
The Town's
2015
Comprehensive Plan (page 263) indicates
that south of Hamilton Avenue, there are 214 "high end" buildable lots,
averaging $1 million dollars of assessments, in
the Dumplings and Beavertail (Plats 10, 11, 12 & 13,
page 23). Being South of Hamilton
Avenue, their impact to the Village culture and appearance will present
no change nor interfere with neighborhood activities and support the
development of lower priced housing for us normal taxpayers. Large lots
along Beavertail Road have their homes set back, usually out of sight,
to be closer to their waterfront views. Their potential for sustainable
Tax Revenue being added to our Town Wide taxable property total is
enormous and worth fostering with incentives.
With
an ever increasing older population, many who are affluent and will be
downsizing, we could include in the
plan incentives for building a limited number of very upscale senior living condo
projects, and together with the “Build Big” welcome sign
out, we can sustain a “no tax increase” community for a
very long time.
Getting
the most out of what’s left for new construction is a winning
strategy for solving the challenges of the Town Budget and Tax Bill
sustainability.
Yes, there is a sound reason to... Love Thy Affluent Neighbor!
Sav Rebecchi – 2019 Property Tax Analysis