You Decide: What’s the best timing for valuing property?

Dr. Mike Walden
North Carolina Cooperative Extension

Recently Wake County, the state’s second largest county in population, reduced the time between property revaluations from eight to four years. The change has created some confusion as well as claims the move is a veiled way of increasing taxes.

To fully understand why the change happened and what its implications are, we need to first step back and review property taxes. The property tax is a major source of public revenues for counties and cities in North Carolina, as well as in the nation. The monetary value of property (mainly land and buildings) is taxed each year, with the revenues used for public services like police and fire protection, trash collection, local parks and public school construction.

The reasoning behind taxing property for local public services is that property owners benefit from such services. Numerous academic studies have demonstrated a significant link between property values and the quality and quantity of local public services. Those who don’t own property, such as renters, are not given a free ride, because the size of their rents will reflect the property taxes paid by the property owner.

Any tax has two key elements – the monetary value of the tax base and the tax rate applied to that tax base. For example, for the retail sales tax, the tax base is the dollar amount of sales, and the rate is an amount per dollar of sales. So if I spend $100 at my favorite clothing store and the sales tax rate is 5 cents per dollar of sales, then I pay $5 in sales tax.

For the sales tax, it is obvious what the tax base is – the dollar amount of sales. And whereas for the income tax there are many complications from deductions, exemptions and credits, at least the starting point – income from working for most people – is obvious.

But it’s another matter for the property tax. Only if the property has recently been sold is there a current monetary value of the property tax base. If the property was last sold several years ago, today’s value could be much different from the last sales value.

For example, my wife and I bought our current home 30 years ago. So the last time a sales value for our home was established was in 1986. Certainly the sales value today is different, but how much different?

This is one of the problems faced by local governments in using the property tax. Their solution has been to estimate the sales value of property, such as my home, when a recent market sale is not available. The governments do this by comparing the major characteristics of the property – in the case of homes, features like square footage, number of rooms, presence of a garage – to properties in the same neighborhood with similar characteristics that have sold recently. The average sales value of these matches is then used as the estimated current property value.

While this seems like a sensible solution, there is an issue. The estimation process can be costly and time-consuming. In Wake County there are 350,000 owner-occupied homes, but less than 10 percent will be sold in any year. So the values of 90 percent have to be estimated. The county also uses over 4,000 individual neighborhoods for developing the matches. The result is a property valuation system that carries a major cost.

As a result, North Carolina does not require local governments to revalue properties every year. Properties must be revalued at least every eight years, but local governments can – at their discretion – do more rapid revaluations.

However, the fact that properties are not revalued every year creates another issue. It arises from the fact that once a property is revalued, that value remains until the next revaluation period, or until the property is sold. For localities using long revaluation periods – like eight years – this means property values can quickly become out-of-date. In areas where property values are rising, “sticker shock” can then occur for the owner when a revaluation shows a big jump in value.

Localities often lessen the shock by lowering the property tax rate to prevent a big increase in property taxes.

In situations where property values are falling – as was the case in many localities during the Great Recession of 2007-2009 – the opposite situation can lead to property owners’ frustration. If the most recent revaluation was done before the decline in values, the result is that owners pay a tax on a value they know is higher than the current sales value. Needless to say, this wouldn’t put a smile on property owners’ faces.

It’s for these reasons that some localities in North Carolina prefer revaluing property more frequently – even if it costs them more. This is what Wake County has decided to do. If the intent is to tax the current value of a property, then more rapid revaluations will get closer to this goal.

In the future this discussion may become obsolete. This is because the development of massive real-estate data sets combined with high speed analytical computer programs can potentially give local governments the ability to constantly and inexpensively update property values. There would therefore be ongoing real-time estimates of everyone’s property value with virtually the click of a mouse. Would this make property owner and taxpayers happy? You decide!

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Dr. Mike Walden is a William Neal Reynolds Distinguished Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of North Carolina State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks.

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