Adapting a “Taxpayer vs Government” System to Resolve “Taxpayer vs Taxpayer” Disputes

By | July 5, 2014

The purpose of a property assessment system, at least here in New Jersey, is to provide a basis for fair and equitable allocation of local government expenses (county, municipal, school, etc) among the taxpayers.  In a properly functioning system, fluctuations in assessments to reflect changes in the real estate market should be “revenue neutral”, meaning that the tax rate (called mil rate or millage rate in some areas) adjusts to offset changes in the ratable base.

For this reason, the process of resolving disputed property assessments should have no impact on local government budgets.  However, since local governments in New Jersey have until now adopted their budgets before the current year assessment appeals are complete, failure to accurately estimate ratable losses from appeals have sometimes resulted in budget shortfalls.  A solution to this problem is currently being tested with the Monmouth Assessment Demonstration Program, in which the appeal calendar has been adjusted so that appeals are completed before budgets are adopted.

When an assessment system is “revenue neutral”, the tax rate will simply rise or fall to reflect changes in total ratables and increases or decreases in assessments that make up the ratable base should only impact the taxpayers within that district.  For example, if a property owner appeals their assessment and receives a reduction of $100,000, that will reduce the total ratable base and result in a “higher” tax rate.  Of course, there could be hundreds or even thousands of appeals in a municipality in any given year, which could have a significant impact on the tax rate.  Since the vast majority of appeals are from property owners claiming their assessments are too high, the burden of any resulting decrease in the ratable base will eventually have to be borne by all of the taxpayers in the district.

This illustrates a fundamental “design flaw” in the system for resolving disputed assessments that exists not only here in New Jersey, but anyplace where taxes based on property values.  Whether at the county tax board level or NJ tax court, disputed assessments are typically “Taxpayer vs Government” complaints, where the taxpayer is the “plaintiff” and the municipality is the “defendant”.  Occurring much less frequently are “Government vs Taxpayer” complaints, where the municipality needs to use the appeal system to correct an assessment.  The problem lies in the fact that the system requires local governments to be involved in what are really “Taxpayer vs Taxpayer” disputes.  Since a properly functioning assessment system is “revenue neutral” for the municipality and the other taxpayers within the district ultimately “pay” for lost ratables due to appeals, a “Taxpayer vs Taxpayer” system would better reflect the true nature of the dispute.

The clear benefit of such an approach is that much of the burden and expense of resolving disputed assessments would shift away from the public sector.  However, it’s unclear how such a system could even function since the “defendants” in this approach would be thousands or perhaps tens of thousands of taxpayers within the district.  Also, changing to a “Taxpayer vs Taxpayer” system would require a major revision to New Jersey tax laws, and would be further complicated by tens of thousands of “Taxpayer vs Government” cases already backed up in our Tax Court.

The alternative to a fundamental change in our approach to resolving disputed assessments is to modify the existing system to incorporate elements of a “Taxpayer vs Taxpayer” appeal system.  This could be done by using  Appeal-Guided Valuation™ as a “pre-valuation” tool, where data gathered from taxpayers or their agents challenging proposed assessments is used to make adjustments that will lead to more accurate final assessments.  Since prerequisites for using AGV would be current assessments and extensive online property data, many counties and municipalities in New Jersey would require significant updates to their systems before they could effectively incorporate it.  Although there may be individual municipalities that maintain current assessments and have extensive online property data, the only county I’m aware of that would be close to meeting the “system requirements” for  Appeal-Guided Valuation™ is Monmouth County.

Since fundamental changes at the State level are unlikely, it’s time for NJ counties and municipalities to consider common sense changes that will shift much of the cost of defending property assessments away from the public sector.  By incorporating elements of a “Taxpayer vs Taxpayer” appeal system, they will provide taxpayers with a greater role in determining the “fairness” of their property taxes.  An online “pre-valuation” system will enable property owners to monitor their own proposed assessments and challenge them if warranted.  It will also provide them with the ability to either challenge under-assessments or, in effect, continue to pay a “surcharge” to compensate for lost ratables resulting from incorrectly low assessments.  The likely result would be market-driven assessments that are much more likely to be “fair and equitable” than those developed under the “Taxpayer vs Government” approach.

Please post your comments here or on our Facebook Page.  We welcome your thoughts about property assessment and related issues in New Jersey.  Any personal attacks or otherwise malicious comments will be deleted.

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