We all know that local property tax revenues are what support law enforcement, fire protection, education, etc. But most folks don’t understand the labyrinthine formulas that go into the determination of their annual property tax assessments. For that they can be easily forgiven. At first blush the formulas have the complexity of a Rube Goldberg machine.
Oregon’s Ballot Measures. The history of taxpayer revolts[1] began with Howard Jarvis and California’s Prop 13 in 1978, and continued as a nationwide movement that eventually found its way to Oregon with Ballot Measures 5 and 50. According to the Oregon Department of Revenue:
Measure 5, which introduced tax rate limits, was passed in 1990 and became effective in the 1991-92 tax year. When fully implemented in 1995-96, Measure 5 cut tax rates an average of 51 percent from their 1990-91 levels. Measure 50, passed in 1997, cut taxes, introduced assessed value growth limits, and replaced most tax levies with permanent tax rates. It transformed the system from one primarily based on levies to one primarily based on rates. When implemented in 1997-98, Measure 50 cut effective tax rates an average of 11 percent from their 1996-97 levels.
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[Before Measure 5] Oregon had a pure levy-based property tax system until 1991-92. Each taxing district calculated its own tax levy based on its budget needs. County assessors estimated the real market values of all property in the state. Generally speaking, the full market value of property was taxable; there was no separate definition of assessed value. The levy for each taxing district was then divided by the total real market value in the district to arrive at a district tax rate. The taxes each district imposed equaled its tax rate multiplied by its real market value. Consequently, there was no difference between imposed taxes and tax levies under this system. Most levies were constitutionally limited to an annual growth rate of 6 percent, and levies that would increase by more than 6 percent required voter approval.
What follows is the Reader’s Digest version of Oregon’s current assessment process. For those folks having trouble getting a good night’s sleep, a more complicated and somnolent read can be found here.
Real Market Value. InOregon, all property is to be valued at 100% of its “Real Market Value” or “RMV.” The Multnomah County Tax Assessor’s office describes RMV as “…typically the price your property would sell for in a transaction between a willing buyer and a willing seller on January 1, the assessment date for the tax year.”
Per the Assessor, the RMV for each property is estimated by (ostensibly) “…a physical inspection and a comparison of market data from similar properties.” I say “ostensibly” because assessors have no legal right to physically enter your property or home. Whether they can look at Google Maps or Google Earth, to see if you built a large deck in your backyard last year, however, is quite another thing.[2]
Clearly assessors can review sale statistics of comparable properties (aka “comps”), in the same way that Realtors® do when establishing the listing price of a property. However, as any experienced Realtor® will tell you, one can find comps to validate almost any listing price.
A physical inspection is required every six years. During the “off years” the Assessor uses a process called “trending,” i.e. “…studying similar properties to update the RMV for your property.”
PCQ Note: Most experienced Realtors® are not going to be significantly influenced by the Real Market Value of a property, since it is not reflective of what the comparable properties are actually selling at during a specific period of time. Between the inexact science of “trending,” and the lapse of time from the January 1 assessment date, there can be significant differences between the fair market value for listing purposes, and the RMV for tax purposes.
Maximum Assessed Value. A property’s “Maximum Assessed Value” or “MAV” is the highest value a property may be assessed at for tax purposes. The first MAV for all existing taxable properties was first set in the 1997-98 fiscal tax year[3] at each property’s 1995-96 RMV, less 10 percent.
Example from the Multnomah County Assessor’s office: “1995-1996 RMV = $100,000. Thus, its 1997-98 MAV would have been $90,000.”
Thereafter, increases in the Maximum Assessed Value are limited by only two factors:
- A 3% annual increase per year; and
- Any new construction, rehabilitation, rezoning, or subdividing of the property.[4]
Assessed Value. This is the value assigned to a property for purposes of determining its tax bill. The Assessed Value is based on the lower of the prior year’s Maximum Assessed Value, plus 3% or its Real Market Value (RMV).
Tax Rates and Local Levies. Once the Assessed Value of a property is established, the actual tax is determined by using the applicable tax rate. Under Measure 50, taxing districts were given permanent rates to use. Once a permanent tax rate limit is established, it cannot be changed, except by one of the following two methods:
- Local Option Levies. These are limited to five years for general operations of the taxing district, and up to 10 years for capital construction projects. They are not available to education service districts. A “double majority” of voters is required to approve a Local Option Levy, i.e. at least 50% of affirmative votes at an election in which at least 50% of the registered voters cast ballots.
- General Obligation Bonds. These are bonds [i.e. IOUs given to investors by the local government] sold to raise money for capital projects. The bonds require the taxing district to annually levy sufficient assessments to pay principal and interest to retire the remaining debt. These bond measures also require a “double majority” approval.
New or Changed Property. New property, new construction, and new lots coming onto the tax rolls after 1992, Measure 50’s birth date, are assessed a tax determined by multiplying a certain percentage figure that is “…calculated annually for each class of property and it represents the average ratio of the Maximum Assessed Value to Real Market Value for all other properties in the tax district” times the current Real Market Value established by the Assessor. Per the Assessor’s office, “(t)he intent is to provide similar tax savings for new property that is applied to existing property.” Their example: “…for 2004, the ratio applied to new residential property was 66.42% of Real Market Value.”
PCQ Note: This is an outdated example, since, as discussed below, the ratio during and after the recession that began in 2008, could result in the MAV being higher than the RMV. This means could mean that when a new property comes onto the tax rolls, its RMV is less than the MAV, and therefore becomes the Assessed Value.
Points To Keep In Mind:
- If you did not significantly improve or change your property, this year’s assessment will be the lower of 103% of last year’s Maximum Assessed Value or its Real Market Value.
- If the Real Market Value drops below the Maximum Assessed Value, the latter will not increase at all.
- If the Real Market Value drops below the Maximum Assessed Value, then Real Market Value becomes the Assessed Value. As discussed below, this can have some surprising and inconsisten consequences for homeowners.
Property Taxes, Before, During and After the Great Recession. Prior to the Great Recession, as property values were increasing, RMVs were typically higher than the MAV [since the latter could increase by only 3%, while RMVs could increase based upon market appreciation, which was well over 3%/year]. And since Assessed Value was pegged at the lower of the MAV and RMV, homeowners benefited by the tax limitation consequences of Measure 50. Back then, absent some special circumstances, there were not a lot of homeowners appealing their tax assessments, since the MAVs were consistently lower than the RMVs. Thus, their home’s Assessed Value [against which the property tax rate was applied], was routinely less than the RMV. This is what most homeowners saw on their tax bills each October back then.
During the recession, homeowners saw their market values decline sharply. But as long as their MAVs were still lower than the declining RMVs, homeowners continued to see their property taxes go up by 3% per year. Now, the shoe was on the other foot. Homeowners began appealing their assessments in droves, complaining that it was unfair for their taxes to be increasing, while their market values were decreasing. Problem was, this anomaly would continue – it was imbedded in the formula. So long as RMVs did not drop below the MAV, the Assessed Value would continue to climb by 3%, based upon the Measure 50 formula.
Of course, once the RMVs finally dropped below the MAVs, there would be a corresponding reduction in the Assessed Values upon which the property taxes were calculated.
Now that we’re coming out of the recession, and new construction has picked up, Measure 50 has created another anomaly. Once a home is built and its assessed value is first determined [using the average ratio of the Maximum Assessed Value to Real Market Value mentioned above] this could mean that the RMV on a new home starts out less than the MAV; in that case, the Assessed Value becomes the RMV. But Measure 50 placed the 3% limitation only on a property’s MAV [presumably based upon the now-debunked theory that homes never depreciate in value so RMV would not drop below MAV] – not on the RMV. Thus, during the recovery, which began in 2012 in Oregon, as long the RMV was less than the MAV, the taxable Assessed Value of a new property could increase as fast as market forces dictated. This means that in those areas rebounding quickly, say, 12% to 18% over twelve months, the Assessed Values, and the resulting property taxes, could skyrocket. Until RMVs exceeded MAVs, those annual increases would continue; once the RMVs exceeded the MAVs, then the 3% limitation kicked back in, and there was a cap on the increases.
For a fun U-Tube video produced by the Deschutes County Tax Assessor, called “The Tax Fairy” go to this link. It shows graphically how these various results can occur between similar properties.
Personally, I can’t help but feel there is a lighthearted message in the video of “I told you so” to the voters who enacted Measures 5 and 50 in 1990 and 1992. However, if Alan Greenspan didn’t envision the collapse of the financial markets when they were right under his nose as Chairman of the Federal Reserve, I can’t hold the Oregon voters at fault in 1997 for any lack of foresight. The tax limitation measures were right for the times.
Epilogue: The Frankentax. With 20-20 hindsight, some critics of the earlier tax limitation measures believe the laws were a bad idea. I’m not sure I agree. Certainly, today, their effect is producing incongruous results. It appears that Measures 5 and 50 were predicated on certain principles that are no longer valid, i.e. that real property doesn’t depreciate. But as long as that principle held, Maximum Assessed Values were always going to be less than Real Market Values – which apparently was the basis of the original hypothesis. To that extent, from a homeowner’s perspective back then, Measures 5 and 50 worked just fine – until the Great Recession.
According to a Pamplin Media article [“Property tax season produces unique questions“], the Portland City Club and the League of Oregon Cities are reviewing possible solutions to the anomalous results we are now seeing with Oregon’s property tax system. Among them are:
- A ballot measure asking voters to repeal Measures 5 and 50;
- A law establishing base tax levies and regular review process for them;
- A property tax rate based on a rolling average of real market values.
But one thing is for sure – any solution will have to pass the double majority test for Oregon voters. Then we’ll see if the new drafters’ crystal ball is any better than the one used by the drafters of Measures 5 and 50 back in 1990 and 1992. ~PCQ
[1] The “revolt” was not against the public services, but the politicians that continued to fund them without voter input.
[2] Keep in mind that for those complying with the law by obtaining building permits, the tax assessor already has a pretty good idea what’s going on at the property. And for the scofflaws, who don’t get building permits, here’s a warning: There have been recent anecdotal reports that assessors visit Realtor® websites, and if there is a listing touting that “all-new deck and patio,” for which permits were never taken out, they go back and reassess for each year of the concealment, which can wreak havoc at the closing table when it is first discovered.
[3] The real property fiscal tax year is July 1 through June 30 of the following year.
[4] Per the Assessor’s office: “(M)inor construction projects (less than $10,000 in one year or less than $25,000 over five years) and on-going maintenance and repairs are *** not added to a property’s maximum assessed value.”
