March 20, 2010

Postponing the Storm or Why You Should Thank Your Commissioner

If you own property in Dare County the odds are you got a tax cut on Monday night. The Dare County Board of Commissioners postponed the county-wide property tax revaluation from next year to 2013. If you don't own ocean front property you can call your Commissioner and say thanks. The odds are very good they just saved you a bunch of money.
Here's the skinny, when the county last revalued property for tax purposes the value of ocean front property was at an all time high, both in absolute terms and relative to other coastal property.   This means that ocean front property assumed a major share of the property tax burden.  In Nags Head, under the current valuation, property east of the beach road accounts for about more than third of the total property value for the town.  Even though it is about 20% of the total parcels in the town.   Ocean front owners felt the sting of revaluation in 2005 when their bills jumped substantially more than the 10% that tax revenue was increased.
Now the situation is reversed.  In the declining real estate market ocean front and other high value properties will result in a tax bill decrease for those owners whose property has dropped in value much more than the more affordable homes in the County and an increase for the majority of non ocean front owners. While ocean front homes are seeing prices drop by as much as 50%, homes in the lower price ranges have only declined 10% -15%.
So what does this mean for revaluation?  Its pretty simple, if the county uses current values a much greater share of the ad valorum tax burden will fall on residents and non ocean front owners.
To try to get a handle on just how much I worked up an example.  I used 3 properties. An oceanfront with an old value of $1,000,000, two Westside properties valued at $500,000 and $300,000 respectively.  For the purpose of the example I used a tax rate that generated a total $1,000 in taxes from the properties.  Then I adjusted the values to reflect the new reality, decreasing the Ocean front value by 50% and the Westside by 25% and 10% respectively.  This results in a tax savings of over 20% for the oceanfront and a tax increase of over 40% for the lowest value property.  The table at the close of this piece lays out the numbers,  The chart below shows the change in dollar amounts for each property.
This chart does not perfectly reflect the distribution of value from oceanfront to the west side but it does provide a sense of the potential impact of revaluation. You can make your own calculations if you desire.
Imagine the storm of protest when the Commissioners adjust the tax rate to reflect the new values 70% plus see increases ranging from 10% to 40%.   The county staff noted that revaluation "will result in a small tax increase for a significant number of Dare County residents" (see Note 2 for the staff's full discussion)  No one knows exactly what the impact would be but there is not doubt that for the lowest value properties in the county the increase could be substantial.
The Commissioners made a decision to postpone the storm for a few more years. Interestingly, both the initial postponement from 2010 to 2011 and the second to 2013, had the effect of placing the change in a year with municipal elections rather than county commissioner balloting.   If there is going to be a storm, I guess it will fall on town leaders.  You will have to wait a year to let the county board know what you think at the ballot box.
Revaluation is often combined with effective tax increases.  Many years ago it was pretty easy to hide this effect but the state now requires that local governments publish the revenue neutral tax rate - the rate that would maintain the amount of tax levied.  Any increase from the revenue neutral rate is a tax increase.  In the last revaluation the county had a significant tax increase that was hidden from most tax bills by the effects of revaluation.  This time it will be different.  Any revenue enhancement (tax increase) will come on top of the shift in relative value to bulk of the taxpayers.
Thanks Commissioners.  I appreciate the tax break but you can't postpone the storm forever.   I hope you have your slickers on.

Note 1:
This table lays out the calculations I used for the chart.

Impact of New Property Values on Tax Bills
Old ValuesNew values
Total tax revenue$2,000$2,000
Tax rate$0.111$0.175
LocationOcean FrontWest side 1West side 2
Property Tax$1,111$556$333
Change in Value50%25%10%
New Value$500,000$375,000$270,000
New Tax$873$655$472
Tax increase or decrease-$238$99$138
% Change-21%18%41%

Note 2: This is the text from Commissioners board packet explaining the current situation regarding revaluation.
Back in the fall the Board postponed until 2011 the ad valorem tax revaluation that was scheduled for 2010. At that time the Board discussed the possibility of revisiting this issue and further postponing the revaluation until 2013 when revaluation is required by the state statutes. Since the fall real estate values have not changed significantly. As such, using a revenue neutral rate for a 2011 revaluation will result in a small tax increase for a significant number of Dare County residents and will generate no new revenue for Dare County. We are at a point in the revaluation process where, to avoid added expenses and unnecessary work, the Board needs to decide whether to postpone revaluation until 2013 or continue with the revaluation for 2011.


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