NTF ISSUE PAPER: PROPERTY VALUATION RELIEF PLAN

NTF Issue Paper: Taxplan.1 doc. 3-17.
NEBRASKA TAXPAYERS FOR FREEDOM ISSUE PAPER:
PROPERTY VALUATION RELIEF PLAN.

BACKGROUND. Valuations of residential and commercial property spiral upwards because of laws passed by the legislature and rules and regulations promulgated by the NE Dept. of Revenue. County assessors must abide by these decrees or face criminal penalties. Moreover, several factors in the formula to determine valuation appear capricious and arbitrary, both among properties in the same classification, e.g., urban commercial, and between properties in different classifications, e.g., urban residential and ranchland. Levying taxes on properties continually evaluated by this skewed system only aggravates the unfairness. In many NE counties, a large percentage of homes sold remain valued at more than their selling prices, and especially during the recession. Although we must lobby elected officials of local taxing authorities to ratchet down our property tax rates, we must first reconstitute the valuation system whose present arbitrariness allows taxing authorities to reap additional windfalls in property tax collections when a tax rate factors in rising valuations. Reform must include all classifications of property to prevent burden shifting. NTF suggestions:

RESIDENTIAL PROPERTY. County assessors will assess all real property at its base market value at the same time during one or two calendar years. Each county assessor will record all base values he/she assigns in a county. The assessed value of an existing home purchased after January 1 of the target year will equal the base market value, determined by the assessor, divided by the total number of square feet of the structure as of January 1 of that assessment year. The assessed value of a new residential structure will equal the base market value of the structure, determined by the assessor, divided by the total number of square feet of the structure as of January 1 of that assessment year. Residential property taxes will base on this formula of assessed value, e.g., a residence assessed at $100,000 and having 2,000 square feet would have a square foot valuation of $50. County assessors will assign new base values only when ownership changes (value at acquisition) or when new construction or alteration occurs that substantially increases the square footage of a house. Only those additional parts of a property newly-constructed or that change ownership become subject to reassessment in this manner. The valuation of a structure will increase if the square footage increases. The increased valuation equals the amount of increased square footage times the value per square foot of the structure prior to the addition or modification. Property owners implementing additions or modifications will notify the county assessor on supplemental forms provided (Various California, Iowa, and New Hampshire legislative bills). A property will have multiple base year market values for both land and improvements assigned to it. The total assessed value of a property is its factored base year value. The law will allow an increase in base market value only of a per year inflation factor notated on the Consumer Price Index or comparable index. The law also will allow for a decrease in base market value, if something catastrophic affects a property, such as a tornado or fire. Surrounding home valuations will not continually rise based on home sale prices in a neighborhood, satisfying neighbors who otherwise would suffer if a house in close proximity sold for a higher than average price. Homeowners who plan to reside in their homes for many more years care little about the market value for purposes of selling their homes. From setting valuations at new ownership, buyers will see predictability and know if they can afford the property tax. Valuation smoothing would mitigate the tax shock experienced by taxpayers whose property valuations have spiked greatly. Annual differential assessments will disappear, greatly easing the workload on county assessors.

CRITERIA FOR VALUATION. Criteria proposed to peg base market value include the following: lot size and configuration, physical property size, current fair sale price, previous sale price not too distant, sale prices of neighboring homes of the same type, construction price, quality of and materials used in building construction, square footage, finished basements/attics, number of bathrooms and fireplaces, square footage added on according to building permit, location, and age and condition of home. The objective is to remove subjectivity as much as possible. Assessors should capture new growth for valuation as soon as possible.

COMMERCIAL PROPERTY. The assessed value of a commercial (including apartments) or industrial structure built after January 1 in a target year will equal the amount equal to the base market value of the structure determined for the assessment year beginning January 1, divided by the total number of square feet of the building as of January 1 of the assessment year. The assessed value of an existing commercial or industrial structure purchased after January 1 in a target year will equal the purchase price of the building, divided by the total number of square feet of the structure as of January 1 of the assessment year. The valuation of a structure will increase if its square footage substantially increases. The increased valuation equals the amount of increased square footage times the value per square foot of the structure prior to the addition or modification.

AGRICULTURAL PROPERTY. Agricultural land will assume a value determined on the basis of productivity and net earning capacity of the land determined on the basis of its use for agricultural purposes capitalized at a rate of 5 % and applied uniformly among counties and classes of property. A differential assessment program for rural areas will permit assessors to assess farmland and ranchland at its agricultural use value, rather than market value, which is usually higher. Ag use value is what farmers would pay to buy land determined by the net farm income they can expect to receive from it. Differential assessment has 3 purposes: 1) to help farmers remain in business by reducing real property taxes; 2) to tax farmland based on its value for agriculture rather than on fair market value, as if ready for a housing development, and 3) to protect Nebraska farmers and ranchers by easing financial pressures that force them to sell land for development. Spiraling land values make it more difficult for farmers to increase profits by expanding their operations. The combination of expensive real estate and high property taxes creates strong economic incentives for farmers to stop farming and sell land for other development. Country dwellers would not see their homestead valuations skyrocket when city folks from other states buy rural properties at inflated prices. Differential assessment helps to insure that farmers who wish to continue farming will not have to sell land to pay tax bills. Differential assessment also helps to rectify inequities in the local property tax system, because property taxes assess on a per-acre basis, and farmers often are the largest landowners in rural areas. The amount of land a family farm owns does not reflect income earned. Farm and ranchland owners pay more in property taxes than the value of public services received from local government, especially in taxable areas that include both rural and urban dwellings (Farmland Information Center Fact Sheet, 9-98). Regarding assessment of farmland bordering urban areas, assessors should use comparable sales of similar properties from the identical zoning class in their formulas. Currently, county assessors assess the acre of land under a rural home from between $20,000 (Douglas County) to $110,000 (Lancaster County). Therefore, farms adjacent to urban expansion would not suffer valuation increase shock.

ALTERNATIVE NTF PROPOSALS.
* Peg property valuations at a lower percentage.
* Exempt a percentage of property valuation from property taxation.
* Limit the increase in taxable value each year to a percentage of fair market value.
* Cap valuation increases by methods used in other states, e.g., no more than 15% in 5 years (S.C.).
* Peg valuation increases to the annual area CPI inflation rate.
* Extend homestead exemptions to all senior citizens over a specific age.
* Use different valuation increase criteria for different neighborhoods.
* More precise income capitalization approach estimating the value of an income-producing agricultural or horticultural property.