There are many issues in local government that are poorly understood and have little news appeal. We can count among these issues Medicaid, social services, revaluation, and anything related to courthouse operations. In other words, you aren’t likely to see a lot of coverage on these issues. They aren’t sexy.
Sales ratios fall in this category, but it is critical to the tax base of a county if officials are to have accuracy in matching the values they assign to property with the taxes collected on it.
In trying to understand sales ratio, (sometimes called sales assess ratio) the taxing authority calculates a percentage of what it considers to be the market value of a home. For example, if the assessed value were 80 percent, 0.80, of the market value, a house that might sell for $100,000 would be taxed at an assessed value of $80,000.
OK, you can yawn now.
But let’s put this into action. Let’s say county officials complete their revaluation and set the tax rate at 80 cents. So you pay your taxes based upon the value they assign your home. If they’ve done a good job, then the value assigned correlates with what a buyer would pay were you to sell. The sales ratio would be 1.0, meaning that it directly matches what the tax department established as worth.
That’s the easy situation. But if your revaluation was done poorly, your tax department could have inaccurately assessed value at way below market value. In that case, your home might be selling for $200,000 when the tax department established the worth at $150,000.
In that case, the sales ratio would be 0.75. That means the county is losing money. When multiplied by the hundreds of thousands of parcels in a county, hundreds of thousands of dollars in missing revenue are lost, or the tax rate is too high. With counties taking four to eight years to do their next revaluation, you get the picture.
County commissioners and city councilmen occasionally get upset when they find that their ratios, shortly after their revaluations, have dropped substantially, but they should really look at what is happening in their real estate markets.
If you looked at Brunswick County, residents had a revaluation in 2003, but their current sales ratio is down to 0.80. That means the property is selling for far more than it is valued for taxes. That isn’t because the tax department did a bad job, but probably because real estate in the coastal county has been hot for several years and is increasing in value almost daily. The county can’t keep up with the values.
The lowest sales ratio in the state is in Ashe County. Its last revaluation was in 1998. State law requires that every county have a revaluation every eight years, so Ashe County’s will be done this year. Currently however, the county’s ratio is at 0.5895, meaning that property is selling at almost twice what the county thinks it’s worth.
Ideally, counties want to be close to 0.99 when they finish their revaluations and then slowly tick downward until their next revaluation. That accuracy has a great deal to do with stabilizing the tax rate.
The problem is that revaluations are tedious, expensive, political, and contentious. One has to wonder whether there isn’t a better way to navigate this minefield.
Maybe a regional approach might be better and most cost-effective. Counties might consider doing their revaluations on the same cycle and pool their resources. If you’re going to have regional economic development, this might make some sense.
It’s always easy to look at the spending side of the equation and criticize local government for spending too much or lacking priorities. But we should be equally concerned at how accurately revenue is being calculated. While we might be yawning through these type of discussions, those inaccuracies can cost us all at tax time.
Chad Adams is vice chairman of the Lee County Board of Commissioners, director of the Center for Local Innovation, and vice president for development of the John Locke Foundation.