Topic:
LEGISLATION; REAL ESTATE; STATE BOARDS AND COMMISSIONS; TAX CREDITS; COURT PROCEDURE; PROPERTY TAX; MUNICIPALITIES; STATISTICAL INFORMATION; REAL PROPERTY;
Location:
TAXES - PROPERTY;

OLR Research Report


October 17, 2006

 

2005-R-0751

(Revised)

PROPERTY TAX REVALUATION

By: John Rappa, Principal Analyst

You asked us to summarize the laws for revaluing property, determine when the legislature set the deadlines for boards of assessment appeals to act on appeals, and explain why courts conduct new trials when hearing these appeals. This report summarizes the revaluation laws; we will address the questions regarding assessment appeals in a subsequent report.

SUMMARY

Towns tax property based on its fair market value, which fluctuates over time. For this reason, local tax assessors must revalue all property at least once every five years or their town forfeits state aid if they do not. Assessors can revalue property by inspecting it or examining the recent sales of comparable properties, calculating the cost of replacing structures on the property, or, in some cases, estimating the income the property generates. Assessors must physically inspect each property at least once every 10 years or, during a revaluation year, update the data they have about each property by surveying each owner and checking the quality of the responses.

Towns can cushion a revaluation's impact by phasing in fair market values or until 2010, providing tax credits to people who own and occupy their homes. But they must recover the cost of doing the latter by imposing a surcharge on real and personal business property.

FAIR MARKET VALUE

Revaluation refers to the process for periodically determining the fair market value of real property. CGS 12-62a requires towns to tax property based on its present true and actual value, which, according to CGS 12-63, is the property's fair market value, not its value at a forced sale or auction. Towns must then assess all properties—residential, commercial, and industrial—at 70% of its fair market value (i.e., the assessment) and tax it at a uniform (mill) rate.

TIME FRAME FOR REVALUING PROPERTY

Because a property's fair market value will change over time, CGS 12-62 (b) requires towns to revalue all property at least once every five years or risk losing 50% of their Mashantucket Pequot and Mohegan Fund grant and 100% of their Local Capitol Improvement Program grant until they revalue property as CGS 12-62 (d) requires. But the Office of Policy and Management (OPM) secretary can waive the penalties under specified conditions.

A hypothetical example shows how a postponing a revaluation could affect owners' tax bills. To understand how this could happen, one has to remember that a tax bill depends on the property's fair market and assessed values and the town's mill rate. Table 1 compares two properties whose fair market values changed over five years. It shows how a revaluation in the fifth year affects the property's tax bills. It assumes a constant mill rate over the five-year period.

Table 1: Hypothetical Example of how Delaying a Revaluation Could Affect Tax Bills

Property

Year 1 Assessment and Taxes

Year 3 Assessment and Taxes

Year 5 Assessment and Taxes

With Revaluation

Without Revaluation

Comment

1

Fair Market Value: $300,000

Assessed Value: $210,000

Assessment Ratio: 70%

Mill Rate: .035

Tax Bill: $7,350

Fair Market Value: $310,000

Assessed Value: $210,000

Assessment Ratio: 68%

Mill Rate: .035

Tax Bill: $7,350

Fair Market Value: $350,000

Assessed Value: $245,000

Assessment Ratio:

70%

Mill Rate: .035

Tax Bill: $8,575

Fair Market Value: $350,000

Assessed Value:

$210,000

Assessment Ratio:

60%

Mill Rate: .035

Tax Bill: $7,350

The owner pays $1,225 fewer taxes in Year 5 if the town does not revalue property

2

Fair Market Value: $200,000

Assessed Value: $140,000

Assessment Ratio: 70%

Mill Rate: .035

Tax Bill: $4,900

Fair Market Value: $180,000

Assessed Value: $140,000

Assessment Ratio: 78%

Mill Rate: .035

Tax Bill: $4,900

Fair Market Value: $150,000

Assessed Value: $105,000

Assessment Ratio:

70%

Mill Rate: .035

Tax Bill: $3,675

Fair Market Value: $150,000

Assessed Value:

$140,000

Assessment Ratio: 93%

Mill Rate: .035

Tax Bill: $4,900

The owner pays $1,225 more taxes in Year 5 if the town does not revalue property

Comment

Both owners pay their proportionate share of the taxes because the tax is based on 70% of their respective properties fair market values.

By Year 3, the properties' values have changed, but the owners are still paying taxes based on the Year 1 assessments. Owner 1 pays proportionately fewer taxes and Owner 2 proportionately more.

By the fifth year, the properties' values have changed even more, but the revaluation resets the assessments to 70% of the new values. Both owners pay their proportionate share of taxes, as in Year 1.

If the town does not revalue property in the fifth year, it does not capture the changes in the properties' values and continues to tax property based on 70% of the Year 1 values. Consequently, the disparity between the two owners increases.

Revaluation corrects disparities that arise between property owners as the values of their properties change. For this reason, revaluations often cause the tax burden to shift between property owners.

Revaluation eliminates the disparities that arise when property values change. In the first year, both owners paid taxes based on 70% of the respective properties' fair market values. In the third year, the fair market values changed, but not the assessed values, the values the town uses to calculate property taxes. Consequently, property one's owner paid fewer taxes than he would have if the assessment was based on the year three value while property two's paid more.

By year five, the values had changed even more. If the town revalues property, both owners pay their proportionate share of the taxes. The revaluation captures the fluctuation in fair market value and changes each property's assessment to reflect 70% of the property's fair market value. If the town does not revalue, the disparity between the two owners increases. Property one's fair market value increased to $350,000, but the owner pays taxes on 60% of that value ($210,000, the year one assessment.) Property two's fair market value decreased to $150,000, but the owner pays taxes 93% of that value ($140,000, the year one assessment).

REVALUATION METHODS

PA 06-148 makes several technical and substantive changes to the way assessors revalue property. Some reflect current practices and methods. Prior law required assessors to revalue by comparing sales statistics (i.e., statistical revaluation) or inspecting each property (i.e., physical inspection). In practice, assessors often use both methods when revaluing property. PA 06-148 conforms the law to practice by eliminating the notion that they do so by using one method or the other.

The act also conforms the law to practice in other ways. It explicitly authorizes assessors to use mass appraisal methods, which include determining a property's value by comparing the recent sales of comparable properties, calculating how much it costs to replace buildings on the property, and, in some cases, estimating how much income a property generates. The act requires assessors to update or correct the information they already have about each property by viewing it in its neighborhood setting (i.e., field review). In doing so, assessors compare that information with the property's observable attributes, correct the information or add to it, and verify that the valuation includes those attributes.

The act still requires assessors to physically inspect each property at least once every 10 years and use the data for the next revaluation. This rule gives them the option of physically inspecting properties on different 10-year cycles. In other words, it allows them to inspect a different group of properties each year between the revaluations and use the information they gathered to determine value for the next scheduled revaluation. When inspecting property, the assessor must verify the property's exterior dimensions and enter and examine the property's interior. The assessor may enter and inspect the property only with the owner's or an adult occupant's permission.

A new provision, though, allows assessors to skip the inspections due in any year. An assessor can do this if he sends a questionnaire to each owner requesting information about the property's acquisition and asking the owner to verify the accuracy of the information the assessor already has. The assessor must then evaluate the quality of the responses. If satisfied with the overall results, the assessor must inspect those properties for which he received no responses or unsatisfactory ones.

TAX RELIEF AFTER A REVALUATION

Phase-ins

As explained above, increases in fair market value between revaluations could trigger higher tax bills. To cushion this shock, the law allows towns, acting through their legislative bodies, to gradually phase in the increase for up to five years. The law, as amended by PA 06-148 authorizes four methods for phasing in a revaluation.

A town can phase in the dollar increase in a property's assessed value after revaluation in equal increments during the phase-in period. Alternatively, it can phase in the rate (i.e., percentage) at which the property's assessment increased after a revaluation. The percentage equals the difference between two ratios:

1. the ratio of the property's assessed value before revaluation to its fair market value after revaluation and

2. the ratio of the property's assessed value to its fair market value after revaluation, which is always 70%.

For example, assume that the property's fair market value increased from $100,000 to $250,000 between revaluations. For this reason, its assessed value correspondingly increased from $70,000 to $175,000 (70% of $250,000) after the revaluation. To calculate the phase-in percentage, the town:

1. calculates the ratio between $70,000 (the assessed value before revaluation) and $250,000 (the fair market value after revaluation) and

2. subtracts this percentage from 70%.

The ratio between $70,000 and $250,000 is 28%. The town must subtract this percentage from 70%, which yields a difference of 42%. The town must then phase in 42% of the increase in assessed value in equal increments over the term of the phase-in. If the town decides to phase-in the rate over five years, it must increase the property's assessed value by 8.4% (42% divided by five) per year. Table 2 shows how the ratio increases the assessed value each year.

Table 2: Phase-in Based on Rate of Increase in Assessed Value

Phase-in Year

Ratio

Assessed Value

1

36.4%

$91,000

2

44.8

112,000

3

53.2

133,000

4

61.6

154,000

5

69.7

174,250

In 2006, the legislature authorized two additional methods. PA 06-148 authorizes a variation of the percentage phase-in option. It allows towns to divide properties into classes and phase in the rate at which the assessment increased for each class. In other words, instead of equally phasing in the rate at which all properties' assessment increased, the town can phase in separate rates for all properties within a class. As with the other methods, the phase-in period is up to five years.

The classes are residential, commercial, and vacant land. The commercial class includes apartments containing at least five units, industrial property, and public utility property. The method works if there are sales records for a class or enough sales within each class to extrapolate a rate of increase for the entire class. For this reason, the act requires towns to use the percentage phase-in option when these conditions cannot be met.

PA 06-176 authorizes a fourth phase-in option. It allows towns to use the first or second option to phase-in just a portion of the increase in assessed values or the rate at which they increased. If a town chooses this option, it must phase-in at least 25% of either increase. The amount or portion the town phases in is called the “phase-in factor,” and the town must uniformly apply it to all types of property.

Tax Credits

Until October 1, 2010, towns can provide tax credits to people who own and occupy one- to three-family homes if the town's effective tax rate on residential property after revaluation is 1.5% or more. (Hartford is the only municipality that currently does this.) The town's legislative body must determine the effective tax rate by dividing the total tax on all residential property by such properties' total fair market value. It can grant the credits for five years.

The legislative body must decide whether to (1) give an equal credit to each residential owner or (2) link the size of the credit to the property's tax. Under the first option, the maximum credit is $750. Under the second, the credit is the amount by which the property's tax exceeds 1.5% of its market value. But the maximum credit can be no more than 2.5 times the average credit. Under both options, the credit remains constant over the five-year period.

The legislative body must recover the cost of the credits by imposing a maximum 15% surcharge on commercial, industrial, and public utility real and personal property (except motor vehicles) taxes. It must maintain the surcharge for five years without change.

The town must also study how it assesses taxes, manages its finances, and spends it funds within one year after authorizing the credits. It must hold at least two public hearings and prepare a management plan, which it must file with OPM and the legislature. The town stands to lose 10% of its statutory formula grants if it fails to comply with this requirement (CGS 12-62d, as amended by PA 06-183).

JR:ts