NH’s property tax practices: Should counties play a larger role?
Current system raises issue of equity and proportionality in assessments
Without a broad-based income tax or a sales tax, New Hampshire chooses to rely on property tax as primary source to fund education placing it in the top property tax states in the U.S. The state, through judicial and legislative effort, works diligently to achieve equity and proportionality in an ad valorem scheme.
Ratio studies are employed to assure these goals are met. The process starts at the local level, where each municipality or local governmental entity employs an assessor and/or an approved assessment company and applies valuation methods and techniques following New Hampshire Department of Revenue Administration rules. In New Hampshire, local control is jealously guarded as the beginning point for assessment, with the state in the support role. There are states where the county level is the initial oversight of assessment.
When it comes to setting local tax rates, the largest portion is at the town or city level. Determination of how the rate is calculated is at the state level, where some have legislated split rates among property classes. Others tax at a fraction of assessed value, employ limits, exemptions, circuit-breakers, current use, homestead deductions and credits for engineering tax liability.
Each property tax jurisdiction is required to maintain and report a current real property assessed value for each taxable and non-taxable parcel using recognized approaches to value. This is segregated between land and improvements.
State law requires that each parcel be valued as if vacant at its highest and best use. The assessor must inventory all recent vacant land sales, and design a sales comparison matrix around the elements of value and apply to each taxable parcel, improved or vacant. Where there are improvements to the land, they are valued using a combination of sales comparison and cost approach to value.
Improved property sales are researched, and each valid arm’s-length property sale is partitioned by subtracting the estimated land value from that market sales price, leaving a residual value to the improvements. The assessor then estimates the cost new of the same improvements. The differential is an implied reductive ratio between the two.
Applying this so-called market abstraction method to the population of improved taxable parcels and adding back the estimated value of the site as-if-vacant, the assessor sets assessed value estimates which are within prescribed ratios of market value.
Methods used to test variability include price-related differential and coefficient of dispersion. Complete reassessment cycles every five years, or less, or some other form of rolling reappraisal should result in current assessments that are within close tolerances of market value. Unfortunately, this is usually not the case.
A simple review of the previous year’s newly assessed values of property that sells in subsequent months will show the disparity. There are superior valuation methods to achieve the equity taxpayers deserve.
The property class of commercial, industrial, utility and telecommunication are a sought-after source of tax revenue. To the cost and sales comparison approaches to value the assessor seeks to employ the income approach to value. This method requires an understanding of how much operating income is attributable solely to the property. Estimates of the net operating income before tax and depreciation are capitalized into an indication of property value.
Documented buyer calculus of these various properties, such as a hydroelectric facility, may include Federal Energy Regulatory Commission licenses and supply contracts. In commercial retail property, goodwill, going-concern, personal property, reservation systems and other intangibles are items that may be reported in the sales price record. As these intangibles are not included as taxable in real property tax law, errors in capitalization rates and operating income employed will result in over-valuation and disproportionate assessment.
Given the increased complexity of valuation and application of court decisions, a case is postulated to modify some of the assessment and appeals processes now in place. The entity employing sophisticated geospatial techniques with statistical methods and large databases is best equipped to achieve equity and proportionality in the assessment process.
The Property Tax Department in the Department of Revenue Administration should acquire, or be able to, the tools necessary to assist the 10 counties with the valuation process for each of the 221 towns and 13 cities, diminishing redundant systems and costs for each town, or city. Local assessors are able to perform field data collection with the assistance of the county.
Initial informal review would be with the local assessor limited to recording or amending factual property data. The first level of formal appeals would be at the county level. Appealed county decisions would be at the state level, either through the Board of Tax and Lane Appeals or the courts. Administrative methods of review between the state and the county/town level would be established. Data needed to assist local government in setting their tax rates would continue to come from local permitted construction data and county/state source.
Stephen Wheelock is CEO of Whelok Group Property Tax Surveyors LLC, a cohort of real estate and tax consultants specializing in commercial, institutional and industrial properties. He can be reached at email@example.com.