Category: Tax Policy (page 1 of 2)

Journey to Assessment Excellence

All great journeys start by asking three questions:

  1. Where do I want to go?
  2. What is my current location?
  3. What path do I need to take to arrive at my desired location?

In instructing IAAO and Excel classes throughout North Carolina, I’ve had the pleasure of meeting many great assessment professionals. This article seeks to assist assessing professionals and assessing offices to chart their journey.  I hope you find this article helpful as you plan your journey to assessing excellence!

David Cornell, 2017: Journey to Assessment Excellence: Using the Assessor’s Maturity Curve Model as a Guide [PDF]

This article was published in the IAAO’s January edition of “Fair and Equitable”.

To Lower, or Not to Lower, That is the Question

Although there are no deaths to avenge in this story, it can be a tragedy to lower a  business personal assessment when it is not warranted. Reducing a value, is a de facto exemption. It is an expense to the county. Accounts (parcels) with the highest value in local governments are quite often business personal property accounts. When a BPP assessment is reduced without proper reason, it can create de facto classifications. This means your largest taxpayers could be assessed at a lower assessment ratio than the smallest residential taxpayers. That doesn’t sit well with me. There are certainly many variables to consider when faced with a request to lower an assessed value. Read on for this 5 act, I mean 5 question, blog post.

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Let’s play “Who’s Paying That Tax?”

In my last blog I talked about the limitations that we all have on decision making and how we satisfice and make decisions based on incomplete information.  That is all true, but it does not mean that we should not strive to have a more robust understanding of the landscape we are working in.  To that end, I am going to be devoting some of my blogs to topics that are both interesting and important to understand for those working in government, especially those in budget and finance positions.  This week: tax incidence!

 

Hopefully I have not lost you already.  Tax incidence is just the fancy way of saying “who pays the tax” or “who bears the burden of the tax.”  As you may have already guessed who pays and who bears the burden may not be the same person (or party).  These are actually the two types of tax incidence: statutory incidence and economic incidence.

Statutory incidence is determined by who actually remits the tax to the government or who pays the tax.

Economic incidence is who bears the burden of the tax or in econ-speak whose resources (money mostly) are affected by the tax.

So let’s use a quick example to make this a bit clearer.  Let’s look at property taxes.  Imagine you have a small home in your community that is owned by the Smiths and occupied by renters, the Baldwins.

 

The Smiths are the ones who write a check to the county every year for property taxes—so they bear the statutory incidence of the property tax.  Does that mean that they bear the burden of the tax though?  Not necessarily.  Under the right conditions the Smiths may be able to charge a high enough rent that they are pushing the burden of the tax onto the Baldwins. In that case the Baldwins may be bearing (or a portion of) the economic incidence.

 

 

Hopefully that makes intuitive sense to you.  For those of you who like visual aids (or graphs!) let’s go back to the microeconomics you took in school.

  This is the standard graph used to teach economic incidence (which I will just be referring to as incidence from now on).  What you can see is that the consumer is now paying more (the difference between P and P1) for the good and the producer is now receiving less money for the good (the difference between P and the lower line).  AND there is less of the good being consumed.

The pink and green rectangles are the tax revenue.  The pink rectangle is the portion of the tax paid by consumers (or in the example of property taxes the renter) and the green rectangle is the portion of the tax paid by producers (or in the example of property taxes the owner).  You can see that the incidence is shared by both groups.  This is the expected outcome for most goods.

***Note: the white triangle to the left of the tax burden (between the Q1 and Q lines) is what is called in econ-speak dead weight loss.  This means that the tax has created a loss for both consumer and producers that the government does not get in revenue.  This is bad and we want to minimize this loss as much as possible.***

However, it should not be assumed that most taxes are split evenly.  This goes to the idea of elasticity.  I am not talking about the importance of elasticity in your sweats after the holiday season is over, but instead the elasticity of the supply and demand of goods.  In normal (non-econ) speak this just means how sensitive you are to changes in price of a good.  ***Inelastic means less sensitive to changes in price and elastic means more sensitive to changes in price.***  So if consumers are very sensitive to the change in the price of the good then more of the burden will be shifted to the producer.  If the consumer is less sensitive to the price (i.e., they will buy it at similar rates even when it costs more) then more of the incidence will be passed to them.

Here you can see that the demand line (D) is more up and down.  This means that no matter the price most consumers that were going to buy it before the tax was imposed are still going to buy it.  Under this inelastic demand (not sensitive to price) consumers will end up paying more of the tax burden, thus the pink box is bigger.  In the property tax example, this may mean that there are a lot of people looking to rent a home and not buy.  So the Smiths can charge a higher amount because of the insensitive or inelastic demand for rental properties, leaving the Baldwins with higher rent.  The opposite would be true if there were a lot of rental properties and not many prospective renters.  Then renters/consumers would be sensitive to changes in price and property owners would be less sensitive and bear the larger portion of the tax incidence.

This issue of elasticity is the heart of tax incidence.  The question of who is most sensitive to price is what determines the incidence.  It is natural to ask “what if both groups are sensitive to price” is a fair question.  The answer is that the amount consumed of that good will drop a lot, not much tax revenue will be generated, and there will be a lot of dead weight loss.  The burden will still be greater on the more sensitive one though.  The flip side is what if neither party is sensitive to price?  Well then there will not be much dead weight loss (yay!) and as always the less sensitive party will bear greater burden.

So what if we want to tax one group (let’s call them Team A) more than another group (Team B)?  Well, then you have to find a good that Team A is less sensitive to changes in price than Team B.  This may be different in different jurisdictions.  It is not as simple as shifting the statutory incidence because it does not matter which side of the market you tax, the burden will end up on the same party either way.

 

There are almost no universal rules about who bears the burden for normal (typical) goods.  There are exceptions of course.  The classic being cigarettes.  Cigarettes are addictive and therefore the demand for them by the consumer is not very sensitive to changes in price.  Therefore the cigarette tax falls largely, if not completely, on consumers.

 

 

Are you thinking, well my community is going to depend on property taxes and it does not really matter if the burden is being passed on to renters or staying with property owners (or businesses/their employees).  Fair enough, but if you are living in a community and you believe that the burden is being passed on to one group, you may be able to change other fees and taxes to not disproportionately affect the same group.  It is also always valuable to understand how your taxes affect your citizens and if they affect different populations unequally.

In brief: What do you need to know about tax incidence?

  • That the person who remits the tax may not be the person who bears the burden of the tax.
  • The person who is least sensitive to changes in price is going to bear a greater portion of the tax burden.
  • The side of the market that the tax is imposed on (e.g., producer versus consumer) does not affect who bears the burden.

 

 

 

Planning for success (Part 2)

Last month, I started the discussion with Part 1 of this topic. Near the conclusion of Part 1, I hoped for some questions and what-ifs. I got ‘em, and I hope this month’s post will provide some insight.

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Planning for Success (Part 1)

In a previous post, I mentioned objective and subjective data along with the NCDOR’s new reappraisal standards. That information will be helpful when reading this post. The new reappraisal standards have been in development for over two years and have involved committees with members from the NCDOR, UNC School of Government, and NCAAO. In August, the NCDOR emailed a draft of those standards to all assessors for review and comment. Some comments from local tax officials have been related to the need for additional staff in order to meet the new standards. Chapter 5 of Assessment Administration. Chicago, IL: IAAO, 2003 is a well written chapter detailing the management tasks needed for an assessment office to meet requirements and goals.  This post focuses on how planning well includes an effective justification of the assessor’s need for staff and resources. Understand first that we all engage in planning almost every day. It’s either done formally or informally. So if we’re going to plan anyway, we should plan well and be exposed to the best practices. Regarding planning, Albert Einstein is rumored to have said, “If I had 20 days to solve a problem, I would take 19 days to define it.” Our objective in this post is really to turn staff and resource concerns into math problems, without requiring Albert Einstein’s help for the solution.

These new reappraisal standards, if followed, will alter your goals and plan objectives. For example, checking and updating property characteristics data at a designated level of accuracy is an example of a plan objective tied to the goal of meeting the NCDOR reappraisal standards. That objective requires specific activities. Activities require people and resources. We hope all local tax officials desire to do quality appraisal and reappraisal work for the public they serve. Our taxpayers deserve competency, fairness, and equity. No doubt, high standards are needed and the NCDOR should be applauded for issuing them. NCGS 105-273(10a) defines a local tax official as including a member of a county board of commissioners. And while all local tax officials most likely desire to do a good job and meet standards, raising standards undoubtedly can require more staff or other resources, which in turn requires adequate funding.

“[T]he budget becomes an expression of public policy in terms of the resources a government is willing to allocate for equitable property taxation. The budget is also a reflection of how much political support exists for accurate and equitable assessments. Legal and administrative responsibilities cannot be met if resources are inadequate.”  Assessment Administration, 119.

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Who you gonna call? A lawyer.

So I joke that when I get calls it is almost always someone wanting to see what the law says about the implementation of some revenue related issue.  To which I respond you need to talk to Chris, Kara, or Frayda.  The legality of government’s actions and the scope of the law are critical, but that is not what I am going to be able to help you with.

So what should you call me about?  Oh, the good stuff of course! In the next few blog posts I am going to discuss some of the non-legal issues surrounding financing government at the local level.  I will be blogging on issues like tax incidence (i.e., who is paying the tax), some of the perhaps unintended consequences of the policy, criteria that we should be using when we think about tax policy, revenue forecasting, and more!  Also, if there is something you would like to see discussed please let me know!

Before getting in to any one of those topics I want to open up a dialogue about why we need to talk about some these issues.  I think there is a temptation to be very pragmatic, which is not a bad thing, and to focus on what we have control over and what we can do.  I believe this largely explains why so many of the questions folks have are with regard to the legality of actions.  Budget officers, finance officers, managers, etc are tasked with difficult jobs—to find a way to provide the services their constituents want and need with limited resources.  Often this means that we have to get creative and think outside the box (so we ask “can we do this?”) and it always means saying no to some requests.  Unfortunately, there is no one right way to make those decisions once we move past the legality of them.  In 1940 V.O. Key asked his fellow economists how we can decide to spend money on activity A rather than activity B?  This question is still posed in every budgeting class in public administration courses.  We still do not have a scientific rational answer.  There are a lot of considerations, possibilities, and concerns that need to be weighed and they are often very value laden.

Can we think of all of them? Nope.  Not to immediately get too academic with you all, but I would say the budget process is an exercise in bounded rationality.

 

Bounded rationality is an economic theory that simply says that people are not able to make completely rational decisions.  This is because we are constrained by incomplete information, limited time, and frankly our brains cannot process all the relevant data, figure out all the alternatives, and calculate the potential outcomes of different decisions.

I can’t get no satisficing

Therefore we do something called satisficing.  Satisficing leads us (humans) to outcomes that are good enough.  “Good enough”, hmm.  That does not sound great, but it is actually not an inherently bad thing as long as people are considering some of the most relevant information and alternatives.

I suspect you can already see why this is potentially an important topic for budgeting.  We CANNOT consider every possible expenditure item, cut, consequence of our actions… So we live in a bounded rationality and satisficing world (like everyone else).

Imagine trying to create a budget for your community.  Imagine that you have a budget office of 2 or 3 people.  Now imagine trying to understand every EVERY single possible option for appropriations.  Completely eliminating certain areas, increasing property taxes and increasing expenditures, creating new programs, overhauling departments, etc.  I cannot even imagine all the ways you could do it!  Imagine how hard it would be to make the list of possibilities.  Now imagine how hard it would be to evaluate them all—including the ridiculous ones!  Think of the man power, the time, the resources that an exercise like that would require.  It is completely infeasible and foolish!  We do not want to live in that reality.  Bounded rationality and satisficing are our friends, the trick is to consider the right information, alternatives, and consequences.

**If you want to see an outcome that I was not considering, look at what you get when you google images of satisficing ridiculous.**

This series is going to highlight some of the information that is relevant and should be a part of the satisficing exercise.  That does not mean that you have control over some of these issues.  It does not mean that this knowledge will ultimately change what you choose or are able to do.  Many of these topics are out of your control, but by understanding them hopefully you will be able to foresee some problems, understand how these choices effect your community, and help you to discuss finances with elected officials, managers, departments, and citizens.

This series will be a mix of practical knowledge that impacts revenues and budgeting and hopefully thought provoking considerations involved in how we pay for government.  I am exciting about this series and hope that you will continue to pop on over to Death & Taxes over the next few months to see the next few installments.

Are all North Carolina County Property Tax Appraisers Subject to USPAP?

This is the exact question that I was asked recently.

“Are all North Carolina, county, ad valorem, real estate appraisers subject to the Uniform Standards of Professional Appraisal Practice (USPAP)?”

This could be a very short blog post. The answer to the question is, “no”. But a different question, “Should all North Carolina county ad valorem appraisers comply with USPAP?” leads to a more in depth discussion.  The answer to that question is, “yes”.  I believe if you act as an appraiser, you should comply with USPAP.

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LOST: Finally explained! Mysteries Solved! Secrets Revealed! Part 3

Previously on Death &Taxes, we learned that LOSTs and North Carolina’s local governments have a complicated relationship and that LOSTs favor some counties more than others.

There are many important characters in the story of LOSTs and North Carolina.  There are the earmarks, the revenue that goes to the municipalities, the revenue that is distributed on a per capita basis, and the tax on food.  I will let you decide which is Jack, Kate, Sawyer, and Locke.  However, I am going to just come out and say, the black smoke monster is the issue of equity across the counties. Continue reading

The Increasing Difficulty in Financing Cities

It’s getting harder to fund city government in North Carolina.

On the one hand, that might seem hard to believe. People continue to flock to many cities and towns across the state. More than half of the state’s population lives in a municipality. One recent projection from American City Business Journals sees the Raleigh and Charlotte metropolitan areas alone adding nearly 3 million people in the next 25 years. Those newcomers who choose to live in city limits will join existing city residents in paying city property taxes, and join all those who shop in North Carolina in paying sales taxes that cities receive a share of. Continue reading

Speaking the Same Language with Data

It is comforting to know that as assessors and appraisers, we speak the same language. We had a great learning experience last week in IAAO 331, Mass Appraisal Practices and Procedures. Our instructor was David Cornell, CAE, MAI. David is from New Hampshire and brought fantastic discussions to our group of 23 North Carolinians. The discussions and examples we experienced can be used for improving appraisal equity and uniformity in individual jurisdictions throughout our state. One of the items that we discussed was a worthy repeat from other mass appraisal courses: The importance of data in the assessor’s office. Not only do we need to collect the right data for model specification, but we have to collect it accurately.

At the upcoming NCAAO Fall Conference, the NCDOR will be conducting sessions on their new reappraisal standards, to be published later this year. Continue reading

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