May 7, 1973
Page 14495
INTERGOVERNMENTAL RELATIONS SUBCOMMITTEE CONDUCTS HEARINGS ON PROPERTY TAXES
Mr. MUSKIE. Mr. President, during 3 days last week the Senate Subcommittee on Intergovernmental Relations conducted hearings on a subject which is of concern to a great many Americans these days – the need for property tax relief and reform.
Most of us are fairly familiar by now with the inequities and inefficiencies of the property tax system. Low income households frequently face a property tax burden far in excess of their ability to pay, and far greater, relative to their income, than that of higher income households. Administration of the property tax is hampered by a lack of qualified personnel and other resources, a fragmentation of taxing jurisdictions, and out-of-date State laws which made efficient use of the tax an impossibility.
In this initial round of hearings, we concentrated on these problems, as well as on the broader question of whether the Federal Government has any role to play in bringing about relief and reform. The focus of the hearings was legislation I introduced with Senator PERCY– S.1255 – which would provide a program of limited Federal assistance to those States which undertake specified measures of relief and reform.
In addition, 1 day of the hearings was devoted to specific problems raised by the use of mass appraisal firms by States and local taxing jurisdictions.
During these hearings, we heard testimony from public officials at all levels of government, and from private citizens as well. Although there were differences of opinion as to how we should proceed, there was unanimous agreement that both relief and reform are urgently needed.
Because of the importance of this issue, I would like to bring to the attention of my colleagues some of the testimony offered at the hearings which clearly documents the need for action and which also outlines a number of the policy questions we are considering. I therefore request that the prepared statements of the following persons be inserted in the RECORD at this point: The Honorable Byron L. Dorgan, tax commissioner of North Dakota ; Mr. John Shannon, Assistant Director of the Advisory Commission on Intergovernmental Relations; the Honorable Kenneth M. Curtis, Governor of Maine, on behalf of the Education Commission of the States; the Honorable Steny Hoyer, State Senator from Maryland; Mr. Jonathan Rowe, of the Tax Reform Research Group; and Mr. Cyril Brickfield, legislative counsel for the American Association of Retired Persons and National Retired Teachers Association. In addition, I would like to ask unanimous consent to print in the RECORD articles from the Nashville Tennessean and the Nashville Banner concerning the testimony the subcommittee received on mass appraisal firms.
There being no objection, the articles were ordered to be printed in the RECORD, as follows:
STATE OF NORTH DAKOTA
OFFICE OF STATE TAX COMMISSIONER
(Testimony by Byron L. Dorgan, Tax Commissioner, State of North Dakota. Presented to U.S. Senate Subcommittee on Intergovernmental Relations on Senate Bill 1255)
Mr. Chairman & Members of the Committee: My name is Byron L. Dorgan and I am Tax Commissioner for the State of North Dakota, a position I have held for nearly 41/2 years.
Because North Dakota is one of the few states in which the position of Tax Commissioner is an elective position, I, perhaps more than some other tax administrators, have made it my business to be aware of the concerns and frustrations of the taxpayers and to try and do something about them. As a man in political life and as a former instructor in economics, I have been constantly speaking out for basic reforms in our tax structure with special emphasis on real property tax reform.
As State Tax Commissioner, one of my duties is to exercise general supervision over the assessment practices in the State of North Dakota. North Dakota, a state with a population of 620,000 has nearly 1,800 property tax assessors. Of those 1,800 assessors, I would estimate that no more than 75 would pass a minimum qualification test for the position of property tax assessor if such an examination were mandatory. Despite this knowledge, and despite the fact that the property tax is the single largest tax in North Dakota, the North Dakota Legislature has consistently failed to enact legislation that would establish minimum qualifications for assessing personnel. The fragmentation of authority and the decentralization of the assessment structure spells disaster for those who are concerned about establishing good, professional assessment practices in our states.
I believe people can and should expect their government to be run in a businesslike manner and yet property tax administration in North Dakota and many other states would, by comparison, make the U.S. Postal System a model of business efficiency. We are, in many instances, using 18th Century management practices to assess a property tax that has grown to 21st Century proportions.
Many local governments insist on clinging to an assessment function they can no longer afford to perform well and state legislatures in many cases steadfastly refuse to enact the sweeping law changes necessary to make the property tax a professionally administered tax. Indeed, there is plenty of blame to go around. The track record of state taxing authorities (including myself) is not much better than that of a housekeeper in a dwelling that needs remodeling.
Published sales ratio studies, minimum qualifications for assessors, full disclosure of estimated market value to taxpayers, and adequate training programs for assessing personnel are but a few of the areas in which state and local governments are falling sadly short of the needed initiative to clean up the property tax mess.
A British economist named Adam Smith said 200 years ago that "there are only two things wrong with property tax: (1) It is indefensible in theory and (2) it is unworkable in practice." I believe Adam Smith overstated his case, but his second premise has proven to be partly true only because of the lack of resolve of public officials to do something about it. I believe that the property tax is a legitimate part of a governmental revenue system that utilizes income, consumption, and wealth as a basis for distributing its tax burden. Frankly, I believe that many public officials have treated property tax as the ugly sister of the tax family and have used the recent state Supreme Court decisions as an excuse to run away from the challenge of making a respectable lady out of the property tax.
It does not seem reasonable that we should totally abandon the property tax. If it is proper to tax what people earn and what people spend, then it seems equally proper to tax what people own.
To leave untaxed the wealth of real property that people have accumulated would have a serious economic effect upon the free movement of real estate in the market.
One of the criteria of a "good" tax is its relationship to benefits received. While it is equally true that all services relate to people, many of the services provided for by taxes benefit people through the real property that they own. For example, a capital improvement such as a new school building in the neighborhood, a hard surfaced road by a farm, these make the real estate more valuable and hence are a proper charge against the property.
Property tax is here to stay and indeed it should be here to stay. I believe Senate Bill 1255 is an responsible approach toward solving some of the administrative problems in the property tax area.
I would like to address comments to two areas of Senate Bill 1255 and relate them to experience in North Dakota. First, Senate Bill 1255 in Title IV fosters a "right to know" concept. That is, citizens should be able to readily determine the estimated market value of their property as established by an assessor and relate that to assessments on surrounding property to determine whether they have been treated fairly. Nearly a year ago I was petitioned by a group of taxpayers to conduct an investigation of the assessment of farmland in Richland County, North Dakota. I assigned an investigative team from our Property Tax Division to review the assessments. We found that if you owned a quarter of farmland in Richland County, the same quality of land could have had 21 different pricing schedules attached to it and the price could have varied as much as 100 %, depending on where it was located in that county. Needless to say, I ordered a supervised reappraisal of all of the farmland in Richland County. This is the first time in the history of the state that this has been done. If the "right to know" philosophy had prevailed in North Dakota assessment practices, it wouldn't have been necessary for the State Tax Commissioner to point out and document property tax inequities in Richland County. Citizens would have been able to compare their assessments to assessments on adjacent property without making a trip to the county courthouse and trying to interpret fractional assessments. They would have determined for themselves that those inequities existed. At that point they could have sought relief from their levels of local government through their Board of Equalization or through an application for abatement of property taxes.
Assuming the states would adopt the reforms contemplated in Title IV of this bill, Richland County taxpayers and others like them will have two distinct advantages in the future. First, they will know the market value estimate placed on their property by the assessor and they will be able to readily compare it to other properties in the county. Second, the appeal procedure will be revised in order that the taxpayer will be sure of a fair, impartial hearing on his property tax assessment. In many jurisdictions a taxpayer who feels he is overassessed must appeal to the local governing board for relief. This is the same governing board that has hired the assessor and will very likely support the assessor's estimate of market value. An analogy is the dilemma of a man who gets a speeding. ticket and who shows up in court only to find that the presiding judge is the patrolman who issued him the ticket. Thus an adequate system of disseminating information to taxpayers and an improved system of appealing an unfair tax bill are two results that I think this legislation will encourage.
The second area that I would like to make comment on is Title III in Senate Bill 1255 which provides relief to property owners whose property tax bill represents an overburdening amount of their gross income. In North Dakota we have a law that allows limited property tax relief for low income senior citizens. Our law is not inclusive enough, but it is a start. Our state is one that is losing population and while many of our young people are moving out-of-state, older North Dakotans who have worked and lived in North Dakota all of their lives are spending their retirement years there. As our citizens reach retirement age, their income decreases and their property taxes continue to increase.
After these citizens have contributed through the income tax, sales tax and property tax all of their lives, they are finding that the home they struggled to pay for is being assessed a property tax that eats away 10, 20 and even 30% of their total income. The increasing property tax coupled with our current inflationary spiral is strangling the economic lives of many of our senior citizens.
Recently I received a letter from a lady in Flasher, North Dakota. She and her husband had managed over a 25 year period to completely pay for a home that she is very proud of. She is now 75 years old and her husband passed away four years ago. Her total gross income is $119 a month from all sources. She has not been able to pay the past two year's property tax bill and she cannot pay this year's property tax bill. This lady doesn't enjoy some of the government services that they do in other parts of the country. There is no dial-a-cab in Flasher. They don't even have meals on wheels, and even though North Dakota is full of intercontinental ballistic missiles we don't have adequate bus and train service to provide transportation to the senior citizen who so desperately needs it.
I'm sure there are millions of senior citizens and low income citizens in this country in the same predicament as the lady from Flasher. Many of them will go without adequate clothing, without adequate heat in their homes and without adequate food and nourishment in order to pay their property tax bill and hang onto their most cherished possession, their home. We can and should do more for these people.
The problem isn't limited to just senior citizens, it also affects the small farmers who have a bad crop year, a Mom and Pop business that suffers a disastrous financial year, the low income residential home owner. Many of them need a pressure relief valve to prevent property taxes from spelling their personal economic disaster.
The legislation you have introduced, Mr. Chairman, will, I believe, entice state governments to adopt meaningful programs of property tax relief for those citizens who so desperately need it. The ability to pay theory is and always will be a sound economic theory for tax purposes. As a rule I think property ownership does relate to ability to pay, but there are many exceptions to that
I believe this bill with the property tax relief feature provides the pressure relief valve that is necessary to prevent our property tax system from blowing up in our face in the coming years.
Senate Bill 1255 is a very measured response to an old plaguing problem. I have always been prepared to resist federal intervention in the property tax area. However, after studying your proposal I find that the type of limited federal help that this bill proposes represents the only meaningful way of encouraging local government to solve a problem that everyone has hoped would go away but won't.
In conclusion let me say that it is unfair if my remarks or those of other witnesses would paint with a black brush all of the efforts of property tax assessors in this country. In North Dakota, and I am sure in other parts of the country, we have some outstanding property tax administrators who I am very proud of. Also, it would be unfair to suggest that the failure of state legislatures to act is the sole cause of our property tax problems. The North Dakota legislature has enacted a law improving our appeal procedures and has just recently enacted a law requiring full disclosure of estimated market value on the property tax statement. So progress is being made, but it is not nearly rapid enough to attack those problems which are festering a tax revolt in this country.
Your legislation is substantial and will allow meaningful relief in our property tax system in the years to come. I will encourage North Dakota's Congressional delegation to support Senate Bill 1255. Senator Young, Senator Burdick and Congressman Andrews are interested, as I am, in an improved property tax system that responds to the needs and concerns of the people we serve.
PROPERTY TAXATION: REFORM AND RELIEF
COMMENTS ON S. 1255
(By John Shannon)
Mr. Chairman, let me express the appreciation of the Advisory Commission on Intergovernmental Relations for this opportunity to testify on Senate Bill No. 1255, "The Property Tax Relief and Reform Act of 1973."
Mr. Chairman, as you well know, the Commission on a closely divided vote recently rejected the idea of even a limited role for the Federal Government in the area of property tax relief and reform. Because you took an active part in the debate, it is not necessary to recite for you the reasons that led the majority to recommend that the Federal Government pursue a "hands off" property tax policy. However, I do think both the majority and minority views should be placed in the record. Therefore, if there is no objection, I will append to my statement Chapter I of the Advisory Commission's report, Financing Schools and Property Tax Relief – A State Responsibility. This seven page chapter sets forth the policy considerations that underpinned both the majority's contention that the property tax should remain the exclusive policy concern of the States and the minority advocacy of a limited Federal role.
FIVE KEY QUESTIONS
In order to help assist the Senate Subcommittee with its property tax deliberations, I shall restrict my comments to answering five questions.
What is the current status of State effort to provide property tax relief for low and moderate income families?
What policy implications can Federal legislators draw from State property tax relief action?
If the Federal legislators become convinced that the National Government should encourage the States to move more quickly in the area of property tax relief and assessment reform, should the National Government condition its property tax relief grants on a showing that the States are making progress on the assessment reform front?
Can Federal incentive grants for property tax relief be designed in a way that will not unduly reward the States that force local governments to make relatively heavy use of the property tax and not shortchange those States that make relatively light use of the property tax?
If the National policymakers are convinced that they should encourage the States to pull the regressive stinger from the property tax, should they then take the next logical step and include the sales tax in their anti-regressivity program?
CURRENT STATUS OF STATE TAX RELIEF EFFORTS
The State "circuit-breaker" movement is now moving so rapidly that it is extremely difficult for the ACIR staff to keep up with the latest developments. Yesterday, for example, we were informed that the Michigan Legislature had just approved Governor Milliken's massive $250 million circuit-breaker plan designed to help every household in Michigan – the non-elderly as well as the elderly, the renters as well as the homeowners. For those under the age of 65, the relief comes in the form of a substantial rebate on that part of the residential tax that exceeds 31/2 percent of household income. For the elderly low-income households, the Milliken plan provides even greater aid.
This major breakthrough in Michigan comes hard on the heels of last week's news that Vermont had also adopted a universal circuit-breaker albeit with a somewhat different formula. The significance of these two State actions is that they represent "Phase II" of the circuit-breaker movement characterized by virtually universal protection for all low and moderate income families and with an estimated per capita cost of approximately $25 in both cases.
In sharp contrast, the typical "Phase I" State circuit-breaker was restricted to low-income elderly households with per capita cost ranging from $1 to $5.
In order to give the Subcommittee some feel for the momentum of State action in this area, we have prepared a detailed tabulation of State property tax relief action and placed it in the Appendix – Tables 5 and 6. Even the most casual examination of these tables will establish beyond doubt that the States are now moving decisively in the property tax relief area but in most cases, they still have a long way to go before they reach the Michigan and Vermont protection standards. For example the current State effort can be summarized as follows:
48 States now either finance, mandate or authorize property tax relief for low-income elderly homeowners. There is strong likelihood that the two remaining States – Arizona and Missouri – will soon take remedial action in this area.
12 States now finance property tax relief for low-income elderly renters.
7 States now finance property tax relief for low and moderate income-non-elderly homeowners.
3 States now finance property tax relief for low-income renters under the age of 65.
The point must be emphasized that most of this remedial State action has taken place since 1970.
STATE TAX RELIEF ACTION-POLICY INFERENCES FOR THE CONGRESS
There are several policy inferences that can be drawn from the dramatic upsurge in property tax relief action since 1970.
First, State legislators are not buying the new economic doctrine that claims that the property tax is a truly progressive tax if properly administered nor are State legislators buying the correlative policy implication – that property tax relief for low-income families should receive rather low legislative priority. Our evidence supports the State legislators' intuitive judgments. As a tax on housing, the residential property tax can and does impose truly extraordinary burdens on low-income families, both elderly and nonelderly. This pattern holds true for the Nation as a whole and for each geographic region (See Tables 2, 3, and 4 in the Statistical Appendix).
Because the States are now making such significant progress in the property tax relief field, the question of Federal involvement in this area boils down to one question – should the Federal Government "hurry history along?" Those who believe that the National Government should assume an "activist" role will say yes and point to the fact that 48 States still fall short of the protection standards now set by Michigan and Vermont. On the other hand, the traditionalist will emphasize the natural historical evolution from narrow to broad-gauged State tax relief action and argue that as an irreducible minimum, Federal policymakers should allow the States at least three or four more years to place their property tax relief houses in order.
If Federal policymakers decide to support the "activist" position, it would seem that the interest of federalism would be served better by Federal underwriting and encouragement of State tax relief programs rather than by the creation of Federally administered tax relief programs.
Underpinning this inference is the obvious fact that the State fiscal property largely determines the size of the local property tax rate. Therefore, the State, not the National Government, should be required to continue to play a primary role in underwriting local property tax relief.
If National Government policymakers decide to encourage the State to do more on the local property tax relief front, the Federal grant program should encourage the development of the "circuit-breaker" rather than the partial homestead exemption approach. The circuit-breaker is more efficient because it can maximize the local tax relief "bang" for the State expenditure "buck" – the amount of State aid decreases as family income increases. In striking contrast, the typical partial homestead exemption approach does not diminish as family income rises. It is, therefore, a far less economical method for shielding family income from extraordinary property tax loads.
The great variations in State circuit-breaker formulas argue against Congressional imposition of a rigid "boiler plate" type formula along the lines of that set forth in Title III of S. 1255. It is obvious that those who drafted the tax relief formula in Title III did not want to have Federal dollars subsidize the partial homestead exemption plan. They, therefore, erred in the opposite direction by constructing such a tight list of qualifications as to exclude the two best State circuit-breaker programs – those of Vermont and Michigan.
I would recommend the deletion of the circuit-breaker formula now set forth in Title III Subsection d and the substitution of a broad qualifying definition – a state-financed plan of residential property tax relief that phases out aid as family income rises.
FEDERAL TAX RELIEF AID LINKED TO STATE ASSESSMENT REFORM
Should the National Government condition its Federal tax relief grants to a State showing of assessment reform? It is quite understandable that frustrated property tax reformers would seize upon the popular tax relief issue as their "lever" for forcing States to reform their local property tax assessment systems.
I would recommend that the Subcommittee divorce the issue of property tax relief from that of assessment reform. Low-income families should not be used as the "hostages" by the Federal Government for effecting State assessment reforms. This "Federal stick" approach also reinforces the case of those who are opposed to any Federal involvement in the property tax area. They
argue that once the Federal Government moves into the property tax area, there is the irresistible temptation to impose coercive guidelines on State and local officials.
There is also a certain practical objection to this plan for denying Federal property tax relief aid to States that fail to measure up to the reform guidelines set forth in Senate Bill 1255. It might be difficult for the Federal administrator to obtain sufficient political support for rigorous enforcement of this carrot and stick approach to the property tax.
INTERSTATE TAX EQUITY ISSUE
As presently written, S. 1255 tends to reward unduly those States that make relatively heavy use of the local property tax and shortchange those States (located primarily in the South) that make relatively light use of this levy. This defect can be removed by adopting a flat per capita grant procedure – for example all States with a qualified property tax relief program would receive $5 per capita.
SALES TAX ISSUE
It can be argued that if Federal policymakers desire to pull the regressive stinger from the State-local tax system, they should take the next logical step and include the sales tax in their anti-regressivity program.
This argument illustrates the difficulties inherent in designing at the National level an equitable and comprehensive property tax relief program. Many States, particularly those located in the South, for all practical purposes, use the sales tax as a substitute for the property tax.
Mr. Chairman, our staff has examined the fiscal effects of various Federal aid proposals designed to encourage the States to pull the regressive stinger from both the property and sales tax. If your Subcommittee is interested in pursuing this matter, we shall be pleased to make our research findings available to your staff.
Again, let me express our appreciation for having been given the opportunity to testify on S. 1255.
[Reprinted from Financing Schools and Property Tax Relief – A State Responsibility, Report in Brief. ACIR Report A-40. January 1973.]
POLICY CONSIDERATIONS AND RECOMMENDATIONS
In response to President Nixon's request of January 20, 1972, the Advisory Commission on Intergovernmental Relations conducted a study of a proposal for a major Federal program of residential property tax relief conditioned on State assumption of most of the cost of financing local schools and underpinned by a new or expanded Federal tax such as a value-added levy. This proposal was designed to deal with two interrelated problems – growing public resistance in many areas to higher property taxes and the current legal attack on heavy reliance on the local property tax as the primary source of funding local schools.
Before this Commission completed its investigation it considered four separate proposals for Federal entry into the property tax-school finance fields. Specifically, the Commission considered the need and the desirability of both a major and a limited Federal property tax relief action. The Commission also considered the desirability of a Federal aid program designed to hurry history along on property tax assessment reform. Finally, the, Commission evaluated a proposal that called for a temporary and limited Federal incentive program designed to encourage the States to reduce fiscal disparities among school districts within each State.
CRITERIA FOR. NATIONAL GOVERNMENT
INVOLVEMENT
These proposals raised a critical intergovernmental issue – what criteria or tests should the Commission employ in order to evaluate the merits of proposals that call on the National Government to take remedial action in areas where the States have had exclusive policy responsibility? It is necessary to raise this hard question for several reasons.
With each passing day it appears easier to justify or at least rationalize a Federal "spillover" interest in areas for traditional State-local concern. Witness the proliferation of Federal categorical aid programs, which have grown in number from a handful ten years ago to well over 500 now.
In urging Congressional enactment of revenue sharing legislation, this Commission recently noted that heavy reliance on the narrow categorical aid approach had tipped the power scales in favor of the National Government:
"The Congress is now dangling almost 500 large and small conditional aid carrots collectively worth more than $25 billion a year before State and local governments. The hope was that each conditional aid would provide sufficient financial incentive to spur the States and localities on to greater action in some more or less narrowly defined field of "national" "interest." But there is overwhelming evidence that State and local governments cannot readily absorb such a large number of diverse programs over restricted periods of time ...
"Progressive loss of freedom of choice, therefore, is an additional price that must be paid by all State and local jurisdictions for categorical aid dollars. Professor Walter Heller, both a keen student of our intergovernmental fiscal system and a prominent member of the liberal establishment, has pointed up the dangers of this trend toward centralized power. "Unless this trend is reversed," he wrote, "Federal aids may weave a web of particularism, complexity, and Federal direction which will significantly inhibit a State's freedom of movement." The illusion of Congressional "control" has in reality disappeared into the dark jungles of bureaucratic red tape.
The uneconomical allocation of public sector funds is an additional price that often must be paid for Federal categorical aid. A public service (or tax relief program) at some nationwide level may be perceived as good national policy but when extended uniformly across the country is extremely costly and often represents the solution to a problem that is not universal. Furthermore, the high cost of providing national solutions in a nation of diverse regional and local attitudes and needs results in expanding the public sector, thus raising questions concerning its appropriate relationship to the private sector.
DETERMINATION OF NATIONAL INTEREST – TWO TESTS
If our federal system is to retain its integrity it is not enough for Congress to build greater flexibility into its present aid system by means of general revenue sharing and the consolidation of narrow categorical aid programs into broader and more manageable block grants. Congress should also scrutinize closely all demands for the enactment of new Federal categorical aid programs.
In evaluating each of the four proposals that called on the National Government to move into an area that heretofore had been the exclusive domain of State governments, this Commission employed two tests to determine whether the proposal could be justified on the grounds of a strong National Government interest.
The problem that precipitated the demand for Federal intervention stems from a head-on conflict – a serious undercutting of a major Federal program objective by policies of most States.
The intergovernmental conflict can be resolved only by Federal Government action.
The "irreconcilable conflict" test for detecting the presence or absence of a strong national interest is so rigorous that it screens out all but the most persuasive proposals for new Federal initiatives in areas of traditional State-local concern. It is necessary to use this rigorous test in order to check or at least slow down the steady growth of Federal categorical aid. Simply to allege that a specific categorical aid proposal will "promote the general welfare" does not sufficiently justify its adoption on the basis of a strong national interest.
THE MAJOR PROPERTY TAX RELIEF ISSUE
The Commission was asked among other things to evaluate a proposal that had two major objectives:
To cut the average residential property tax (approximately 50 per cent) by removing that part of the property tax that underwrites a local school operation.
To eliminate fiscal disparities among school districts in each State by encouraging the States to assume most of the cost of financing public elementary and secondary schools.
In order to accomplish these two objectives, the plan called for a Federal value-added tax designed to yield $18 billion the first year. Part of this revenue yield – approximately $5 to $6 billion – would be set aside to underwrite a system of personal income tax credits and rebates thereby removing the regressivity of the value-added tax for most taxpayers.
The remaining $12 to $13 billion was to be distributed by the Federal Government to the States for the support of public secondary and elementary education provided the States agreed to remove the local school tax on residential and nonresidential property and also agreed to refrain from levying a State tax on residential property for the support of local schools.
After a thorough examination of this proposal and the issues raised by it, this Commission concluded that a massive Federal effort designed both to cut the residential property tax substantially throughout the country and to encourage States to assume most of the cost for financing local schools was neither necessary nor desirable.
This negative conclusion is based on the following findings.
While there is clear evidence that some segments of the population – especially the low-income elderly are seriously burdened by the property tax, the evidence does not support the need for a Federal program designed to reduce substantially the property tax of every homeowner in the nation. The simplest illustration of this lack of evidence to support general property tax reduction is that use of the property tax ranges in intensity from $39 per capita in Alabama to $262 per capita in California.
Although there are areas of the country where the property taxes are burdensome, not all homeowners, even in the high property tax jurisdictions, are overburdened by this levy. In some areas State and local income and sales taxes now take a larger bite out of the budgets of the families with average incomes than does the residential property tax and in most areas State and local income and sales taxes are growing at a faster rate than is the property tax. The Social Security tax now places a heavier burden on the average family than does the residential property tax while the Federal income tax is nearly three times as burdensome.
Most significantly, our study fails to reveal a strong national interest in a program designed to provide across-the-board tax reduction for every homeowner in the United States. Specifically, there is no evidence to suggest that a massive residential property tax program is necessary to protect a vital Federal interest, nor can it be demonstrated that the relatively high property taxes imposed by States such as New Jersey and New Hampshire cause serious economic harm beyond their boundaries.
It would also be extremely difficult to develop a Federal program capable of distributing tax relief equitably across the nation. The tremendous variations in the use of the property tax would create unequal windfalls both between jurisdictions and among various classes of property owners within the same jurisdiction. The so-called urban land speculators would be twice blessed by a major property tax reduction. First, the vacant land, like all taxable realty, would have more value in the market, and second, the cash cost of holding land off the market would be sharply reduced. Moreover, a proposal that stresses residential property tax relief but not business property tax relief might influence States to place heavier tax burdens on business property.
A multi-billion dollar Federal program of tax relief-school finance cannot be justified on the grounds that States lack the fiscal capacity necessary to place their local school districts on an equal fiscal footing. Our analysis reveals that only a few States would experience fiscal difficulty in bringing per-pupil expenditures to the relatively high levels needed to comply with the principle enunciated in Serrano v. Priest, the California Supreme Court decision that first demanded equalization of school district fiscal resources. The great majority of States have the necessary untapped relative tax potential. New York, Vermont and Wisconsin, however, stand out as the States that would experience greatest fiscal difficulty because of their current heavy use of all State and local taxes.
In order to construct a truly effective property tax relief program, Congress would have to exercise unprecedented Federal control over both State and local tax policymakers. Not only would the National Government have to force the States to refrain from use of a tax on residential property for school purposes, it would have to go further and encourage the States to place specific restraints on local government so as to prevent cities and counties from moving into the property tax area vacated by the schoolmen.
The prospect for State-financed property tax relief is not entirely bleak. For example, late in 1972 California enacted a $1.1 billion property tax relief-school finance reform program financed in part with Federal revenue sharing funds and in part through more intensive use of non-property taxes. Governors in ten other States were reported to favor the use of revenue sharing funds for property tax relief.
In the final analysis, however, "property tax relief" is something of an illusion because it requires either a reduction of public service or a shift to other forms of taxation – intensified use of income or general sales taxes or the imposition of a new tax such as the value-added levy.
Early in 1972 ACIR conducted a public opinion survey that indicated widespread agreement on the proposition that the property tax was the worst tax; but there was far less agreement on what the National Government should do about it. Fourteen percent of the population favored an income tax substitute; 32 percent favored a consumer tax substitute (VAT); 44 percent opposed either the Federal income or consumer tax substitute; and 10 percent couldn't make up their mind.
The Commission concludes that the interests of our federal system are best served when States retain primary responsibility for shaping policies dealing with general property tax relief and intrastate equalization of school finances – two areas that traditionally have been within the exclusive domain of State policy-makers
LIMITED PROPERTY TAX RELIEF ISSUE
This commission considered a proposal for the National Government to provide an incentive grant to the States designed to encourage them to provide limited property tax relief to low-income homeowners and renters.
The majority of the Commission members rejected this proposal because it could not meet both national interests tests. Admittedly, there is considerable evidence to support the contention that this particular Federal aid proposal could pass the first test because to date most States have not shielded low-income homeowners and renters from property tax overload situations. This State failure, in turn, clearly undercuts a major national program objective of income support especially through the Social Security system. In the view of the majority of the Commission, however, the proposal failed to meet the second national interest test – that only Federal action could resolve this intergovernmental conflict.
The Commission reaffirms its 1967 recommendation that States shield basic family income from undue burdens imposed by the property tax.
Given a few more years, there is reason to believe that the States will resolve the problem of property tax overburden especially for the low-income elderly. This rather optimistic assessment rests on the fact that the "circuit-breaker" idea has such basic popular appeal that it should be adopted in those States where it is most needed in a relatively short period of time. Over the last few years, 25 States and the Canadian Province of Ontario have enacted programs designed to shield low-income elderly homeowners and, in many cases, renters from property tax overload situations.
The 14 States that have now enacted circuit-breaker laws each have chosen a unique plan. As long as States retain the initiative for providing property tax relief for low-income households, better circuit-breaker techniques will continue to be developed. (Table 12)
It can also be argued that Federal incentive grants should not have to be used to induce States to do something that is morally right, highly popular, and relatively inexpensive. All of the States have sufficient fiscal capacity to underwrite a limited property tax-relief program for low-income households.
Perhaps the most persuasive argument for allowing States a few more years to put their own property tax relief houses in order arises from the fact that State fiscal policies are largely responsible for the weight of the local property tax. These jurisdictions, therefore – not the National Government – should finance circuit-breaker programs designed to shield low-income homeowners from property tax overload situations.
Unless constructed carefully, a Federal incentive grant for property tax relief could create an inequitable intergovernmental situation. Specifically, it would reward those States that force their local governments to make heavy use of the property tax and shortchange those States that make above-average use of non-property tax revenue.
In all of its recent reports, this Commission's recommendations have underscored the need to build a greater flexibility into our Federal aid system. A Federal incentive grant with its own set of guidelines and controls would add to an already overburdened Federal aid structure. For these reasons, such a grant proposal should be opposed.
THE PROPERTY TAX ASSESSMENT REFORM ISSUE
Those who are most familiar with the operations of the property tax suggest that one reason for its unpopularity with the public is the widespread feeling that the tax is not administered fairly.
Put another way, inequitable assessments tend to increase public disenchantment with the property tax because they result in random and unwarranted tax burden differentials. Moreover, poor assessment practices lead to taxpayer confusion about, and distrust of, the property tax system.
Means for improving property tax administration are available. A decade ago this Commission, building on the work that had been done by professionals in the property tax field, submitted a comprehensive list of prescriptions for strengthening the property tax. Underpinning the 29 policy recommendations are the following basic principles:
1. The prevailing joint State-local system for administering the property tax can work with a reasonable degree of effectiveness only if the State tax department is given sufficient executive support, legal authority, and professional stature to insure local compliance with State law calling for uniformity of tax treatment.
2. Professionalization of the assessment function can be achieved only if the assessor is selected on the basis of demonstrated ability to appraise property.
3. The perennial conflict between State law calling for full value assessment and the local practice of fractional assessment can be resolved most expeditiously by permitting local assessment officials to assess at any uniform percentage of current market value above a specified minimum level provided this policy is reinforced with two important safeguards:
a. A full disclosure policy, requiring the State tax department to make annual assessment ratio studies and to give property owners a full report on the fractional valuation policy adopted by county assessors, and
b. An appeal provision specifically to authorize the introduction of State assessment ratio data by the taxpayer as evidence in appeals to review agencies on the issue of whether his assessment is inequitable.
Significantly, the Commission directed its recommendations to the States on the ground that they are unquestionably responsible for effective and equitable administration of the property tax. The question of whether the Federal Government should become involved in a matter of such clear-cut State-local concern was not even raised a decade ago and not one of the Commission's 29 policy recommendations called on the National Government to take remedial action.
The Commission reaffirms its recommendations of 1962 that call on the States to strengthen assessment administration and thereby make the property tax a more effective and equitable revenue instrument for local government.
Our current research reveals that many States have taken steps to improve assessment administration and, in particular, to broaden their own activities in this area. Still, progress is slow. Tax administration is an ancillary and unglamorous aspect of government activity and initiatives for spending additional funds to improve it are usually given the lowest priorities.
Indeed, the amounts that are now being spent by the State governments in supervising property tax administration are generally meager. Many States spend as little as one-twentieth or one- thirtieth of one percent of local property tax collections for this function.
The Commission considered, but turned down, the possibility of a small Federal categorical grant to encourage States to improve assessment administration. We could find no major Federal program objective that has been seriously undercut because of poor property tax assessment administration on the part of State and local governments. Moreover, both States and localities can use any portion of their Federal revenue sharing funds for financial administration – including property tax assessment administration.
As in the case of a proposed Federal incentive grant for property tax relief, this proposal would add still another narrow purpose categorical aid program with its own set of Federal guidelines and controls. Enactment of this proposal would represent still another Federal attempt to dictate State and local spending priorities and would, therefore, also work against the objective of building greater flexibility into our Federal aid system.
Furthermore, before launching a new Federal initiative for property tax assessment reform the Commission urges the President and the Congress to take steps to coordinate and strengthen existing Federal programs that have clear potential for stimulating improvement of State and local assessment practices. Examples of such activities are:
The Department of Housing and Urban Development, under its research and demonstration program, can make grants to, or enter into contracts with, States and localities for innovation projects aimed at improving assessment administration.
The FHA appraisal activities of the Department of Housing and Urban Development might be extended and coordinated with those of the local assessors.
Other Federal agencies – such as the Department of Transportation, the General Services Administration and the Department of Defense – are continuously involved in land acquisition and undoubtedly conduct appraisals in connection with these activities. Such appraisals should also be coordinated with local assessment work.
The various mapping operations of the Department of Commerce and the Department of Interior might be available to the State property tax agencies as they develop land use maps in connection with property tax assessment.
Treasury regulations and practices regarding depreciation of buildings for income tax purposes should be examined to determine whether such practices do indeed – as has been alleged – encourage over-assessment of improvements vis-a-vis the land on which the improvements stand.
The activities of the Civil Service Commission under the Intergovernmental Personnel Act might be expanded in the areas of assessor training and interchange of State and Federal personnel concerned with property appraisal.
The experience that has been gained by the Bureau of the Census in conducting sales assessment ratio studies might be built upon to help States strengthen and standardize their own studies.
INTRASTATE SCHOOL FINANCE EQUALIZATION
The Commission also examined the issue of whether and to what extent Federal financial aid was necessary to help States meet the problems of school finance that may stem from recent court decisions. Evidence provided in this report indicates that, with few exceptions, States have ample untapped tax potential for this purpose. Obviously, action on school finance that requires States to alter substantially the degree of reliance on the local property tax for school support takes time and would require public acceptance.
In order to minimize the time period for accomplishing school finance equalization and help the States surmount the obvious political obstacles, the Commission considered a proposal for limited and temporary Federal assistance. The assistance might take the form of a general purpose grant in the range of $20 to $40 per school age child that could be used for any purpose so long as a State met equalization objectives specified by the Federal aid legislation. These features assure that a State like Hawaii, which has eliminated inter-local fiscal disparities by opting for a statewide school system, would not be deprived of the benefit of the aid program.
The assistance would be equipped with a self-destruct mechanism. For example, the aid legislation could be drawn so as to insure that it phased out automatically as the National Government relieved States of financial responsibility in, say, the public welfare field.
The Commission rejected the idea of limited and temporary Federal assistance designed to encourage each State to improve the ability of its school finance system to equalize the fiscal capacity of its local school districts. No vital national program objectives are currently being subverted by existing intrastate school finance disparities. Moreover, Federal aid for this purpose would represent a return to the pre-revenue sharing philosophy that the National Government is in a better position to determine Statelocal budgetary priorities.
The States have plenary powers in the education field and they also have an overriding self- interest in adequate provisions of this single most costly State-local function. States have at least four options in responding to any court decision invalidating a school finance system that relies too heavily on the local school property tax. They can reorganize their school districts to make each local district more in the image of the State as a whole. They can mandate a uniform school property tax rate the proceeds of which could be used to equalize financial capacity among districts. They could enact State property or non-property taxes the proceeds of which could be used to equalize local fiscal capacity. They could finance schools from non-property tax sources as does Hawaii. The States alone have the capacity to take any or all of these options should the need arise as a result of court action. Thus, Federal intervention is not a prerequisite to State solution of the intrastate school finance disparities issue.
The Commission concludes that the reduction of fiscal disparities among school districts within a State is a State responsibility.
Yet, in concluding that the reduction of fiscal disparities among school districts within a State is a State responsibility, the Commission hastens to emphasize four points:
The Commission is not addressing itself to the role the Federal Government should play in supporting public elementary and secondary education but to the narrower question of whether and to what extent Federal aid is necessary to encourage States to reduce fiscal disparities among school districts within each State.
The Commission believes time is needed to assess the impact of revenue sharing, particularly the extent to which it will enable the States to come to grips with the intrastate school finance question. California, for example, has already earmarked its State allocation of revenue sharing to finance part of its $1 billion school finance reform-property tax relief program.
The lower courts have lit warning signals on the intrastate school finance problem but the appropriate future path for State action will not become clear until the Supreme Court renders a decision on a case now pending before it.
The uncertainty surrounding the effectiveness of dollars earmarked for education, as it is presently delivered, illustrates the need for State systems to measure the effectiveness of school spending and to rebuild citizen confidence in public education.
SUMMING UP.
The most significant and positive reference that can be drawn from the Commission's policy recommendations is this – it is not necessary to buck every problem up to Washington for resolution. Strengthened by revenue sharing and with the strong prospect for shifting an increasing share of the welfare expenditure burden to the National Government, the States can and should be held accountable for their traditional property tax and school finance responsibilities.
But revenue sharing and Federal takeover of welfare are not enough. If States are to play a strong role in our Federal system, Congress must resist the constant temptation to solve problems that should be handled at the State level. Congress would be in a far better position to resist this pressure if it subjected to a rigorous national interest test all proposals calling for new National Government initiatives in areas of traditional State-local concern. Only by applying a'"tough" test can we strike a reasonable balance between National and State interests.
The Commission concludes that there is no need to enact a Federal value-added tax to provide revenue for property tax relief and to ameliorate fiscal disparities among school districts within each State, and therefore recommends that such a tax not be adopted for this purpose.
In view of our conclusion that no Federal aid should be extended for general property tax relief or intrastate school finance equalization, it follows that the introduction of a major new source of taxation for these purposes is not warranted.
This Commission, however, has conducted a thorough study of the value added tax and has also examined certain other means for strengthening the National Government revenue system and will release an information report on this subject.
[Footnotes omitted]
TESTIMONY OF GOV. KENNETH M. CURTIS, BEFORE THE SENATE SUBCOMMITTEE ON INTERGOVERNMENTAL RELATIONS, FRIDAY, MAY 4, 1973
Senator Muskie and members of the committee, as one of the Nation's Governors, I am extremely grateful to have this opportunity to appear once again before the subcommittee on intergovernmental relations.
In the nearly seven years I have been privileged to serve as a Governor, I have developed great respect and appreciation for the work of this subcommittee in searching for solutions to the severe revenue problems that have plagued the States and municipalities.
In many instances, I am afraid we seek new sources of revenue at the State and local levels, while failing to make efficient use of existing tax sources.
It has been most encouraging to see the states move to the income tax as a greater source of revenue.
However, nearly 40 percent of all State and local revenues still come from the property tax.
Nation-wide, it is probably the poorest administered of all taxes.
Undoubtedly, hundreds of millions of dollars could be collected through a reform of the property tax without a raise in the current rate of taxation.
In fact, reform of the Federal income tax, and property taxes would go far in relieving the almost uncontrolled increase in taxes for most Americans.
So, I am delighted this subcommittee is addressing itself to property tax reform.
I am also here representing the education commission of the States, who have concluded in a recent research brief that "the real property tax is the single most important revenue source for State and local governments in the United States."
Their report also concluded:
"Popular discontent with the property tax is caused to a great extent by poor administration of the tax, including unfair assessments and exemptions.
"This discontent adds to the difficulty school boards face in getting their budgets approved."
Because I am more familiar with my own State and know of its typically poorly administered property tax, I will use the situation in Maine as an example.
It is very much apparent in Maine that the property tax system is both poorly administered and grossly overburdened.
Furthermore, reliance on the existing property tax system to fund local schools has resulted in significant inequalities in educational opportunities for our children.
If we are to have meaningful property tax reform, we must deal with all of these problems.
The tax must be professionally and fairly administered.
The burden of property taxes on low and fixed income families must be reduced through a general reduction in property taxes or through a "circuit-breaker" provision.
And finally, we must insure equal educational opportunities for our children.
The administration of Maine's property tax system has not been substantially changed since the State separated from Massachusetts more than 150 years ago.
The system is administered in 496 separate assessment districts with State valuations ranging from $100,000 to $270 million.
Most of Maine's 1,500 local assessors are elected.
The only qualification to hold office is that one must be 18 years of age.
The State does have a certification and training program but assessors are not required to be certified.
In addition to the above, there are only 5 assessors to cover more than 10 million acres of Maine's unorganized territories.
Less than 1 percent of the 1,500 assessors are considered to be professionally qualified.
This is due in part to the nature of the assessor
He is an elected, part-time official, who generally has other part-time municipal duties, but who, at the same time, must earn a living for himself and his family.
None of the institutions of higher learning in the State offer any formal programs oriented toward the training of assessing personnel, although the subject is aired from time-to-time in the training programs presently being conducted for municipal officials under title I of the Higher Education Act of 1965.
Formal State activity to train assessors is primarily evident in 12 week courses conducted at several of the vocational training institutes and the assessor's training school which has been offered for one week during the summer for a number of years under the auspices of the State Bureau of Taxation, in cooperation with the Maine Municipal Association and the Maine Association of Assessing Officers.
These programs have been worthwhile for a limited number of persons but have obvious short-comings in terms of the long range needs.
As you might expect, unqualified personnel generally results in substandard assessing.
If the goal of quality assessing is that the determination made by the assessor should be as nearly equal to the current fair market value as is possible, then one can measure the quality in terms of deviation from this standard.
The statistical measure used for this purpose is the coefficient of dispersion – the ratio of the average deviation to the average assessment ratio.
The lower the coefficient of dispersion, the more uniform are the assessments in the area under study.
When the coefficient of dispersion is greater than 20, the quality of assessing can be considered substandard and probably when it is greater than 15 it should be suspect.
A study completed in 1969 indicates that 86 percent of Maine's municipalities have coefficients of dispersion greater than 20.
57 percent have coefficients greater than 30.
The other statistic which is important in evaluating the effectiveness of the assessment program is the average assessment ratio.
This statistic is discovered by indicating the ratio between the assessed value of each property in the sale-ratio study and its sales price, adding the ratios, and dividing by.the number of items.
The average assessment ratio indicates generally how much the community's assessment differs from fair market value.
In 1965 through 1967 over 50 percent of the municipalities had assessment ratios less than 40 percent of fair market value.
When the majority of assessment ratios are below 40 percent of fair market value and when a majority of coefficients of dispersion are so great as to require immediate revaluation, it cannot be denied that the quality of assessing is generally substandard.
And, yet in 1972, Maine's property tax generated more than 200 million dollars in revenue, nearly twice as much revenue as any other tax.
The inescapable conclusion is that Maine's largest and most significant tax system is being administered generally by untrained, part-time, amateurs in 496 separate assessment districts with little in the way of uniform standards or procedures.
Unfortunately, the Maine Legislature has shown little inclination to remedy the situation.
The property tax currently provides approximately 60 percent of the funds for local education.
The poor administration of the property tax, therefore, has a direct impact on the quality of education offered to our children
Poor administration reduces confidence in the tax and increases discontent of the taxpayers who often vent their anger and frustration by attacking school budgets.
Furthermore, substandard assessment practices may reduce the valuation of a municipality and in turn reduce the funds available for education.
But, perhaps more important than the above, increasing costs of local education have resulted in massive increases in property taxes.
During the last ten years, property taxes have increased nearly 100 percent.
Increasing property taxes have been particularly burdensome on Maine's low and fixed-income populations.
These increases have also exacerbated a very serious problem that has existed for many years.
Reliance on the property tax to fund local education has resulted in significant inequalities among our municipalities in the money that is available for education.
Maine, like every State, has its so-called wealthy and poor municipalities.
Per pupil valuation varies from as low as $3,000 per pupil to $145,000 per pupil.
The poor towns make a very great tax effort to raise grossly insufficient amounts of money to educate their children, while the wealthier towns make very little tax effort, but are still able to raise large amounts of money per pupil.
As an example, I will use 2 towns in Maine which I will refer to as town. A and town B.
Town A raises $1,500 per pupil with a tax effort of 6.3 mills.
Town B raises $700/pupil with a tax effort of 18.4 mills.
Thus, town A is generating twice as much money per pupil as town B with one-third the tax effort.
I'm sure none of us would argue that availability of funds has a direct relationship to the quality of education offered.
I am also sure none of us would argue that every child in Maine and in every State throughout the country is entitled to equal educational opportunities.
Clearly, any effort to reform our property tax system must deal, not only with the burdensome property tax levels, but also with educational funding.
In Maine, efforts have been underway for several years to reform our property tax system.
To date, these efforts have been only marginally successful.
During the 105th Maine Legislature, a bill was enacted providing a "circuit breaker" type of property tax relief program for low income elderly citizens.
The last three sessions of the legislature have considered proposals to reform the finance of local education.
I have included in my legislative program for the current session of the legislature, a comprehensive tax reform package.
The main features of this package are the reform of the finance of local education and improvements in the administration of the property tax.
I have proposed that every municipality have the opportunity to contribute at an equal rate to the support of education.
Each municipality would be assessed a uniform school tax of 13 mills, based on State valuation adjusted to 100 percent.
This is much less than the current State average of 18.5 mills.
To make up for this reduction in the average property tax rate, the State's share of operating costs for non-property sources would be increased from 33.3 percent to 46 percent.
The State treasurer would issue warrants to each municipality to assess the required amount and remit them to the general fund for subsequent distribution under a new school aid formula.
The proposal would limit the amount of increased subsidy each year until the local system reaches the average per student level of $733, $630 per elementary student and $945 per secondary school student.
In addition to this distribution, the school units would be reimbursed for excess costs for vocational and special educational programs.
To ensure that our additional State funding will result in property tax decreases in most communities, municipalities would be subject to expenditure limits for education.
Each municipality would be allowed to increase its expenditures but only if approved by their town meetings or councils.
This proposal would also establish a State bureau of property taxation and a property tax appeals board to provide administrative review of local assessments subject to court appeal by either the taxpayer or the municipality.
Collection of property taxes has traditionally been left to the states, counties and municipalities.
Undoubtedly, there are those who will oppose Federal participation even in the limited manner envisioned in S.1255.
But, I don't believe it is particularly useful to quibble about tradition or philosophies of government when the need for reform is so apparent and solutions so readily available.
We need only to determine who, at this particular time, can best implement the kinds of reform that are so desperately needed.
I believe that in this instance, the most logical course of action is a cooperative effort with the federal government.
Clearly S.1255 does not threaten state control of property taxes.
It does provide financial incentives to improve the administration of the property tax system and to reduce the burden of property taxes.
The major provisions of the act are contained in titles III, IV and V.
Under Title III, the federal government would fund one-half the cost of a qualified program of real property tax relief, up to a limit of $6.00 per capita.
This provision would provide up to $6 million in federal funds for the state of Maine and would serve as a major incentive to expand our existing property tax relief law to cover all low income homeowners and renters, regardless of age.
Title IV would encourage states to provide property tax payers accurate information about property assessment and appraisals, uncomplicated appeals procedures, and detailed data on the value of real property exempt from taxation.
At this time, Maine law does not provide for the publication of data relating to assessments and appraisals.
In addition, a valuation of exempted property is conducted only at 5 year intervals.
Finally, there is no state-level appeals mechanism other than superior court which is costly to both the taxpayer and the municipality. Although I have already introduced proposals to solve many of these deficiencies, title IV would greatly assist us in this effort.
Title V would encourage the states to improve the professional qualifications of property appraising and assessing officials by providing interest-free loans to state programs which meet the requirements of this title.
I have already referred to the desperate need for qualified personnel.
I would only emphasize here that no system can be effective without trained personnel available to administer it.
Although I would prefer a matching grant rather than loan provision, I also support this feature of the bill.
Although the education commission of the states has not yet taken a position on this legislation, I would like to express my support for S.1255, the property tax relief and reform act of 1973.
I would welcome the technical and financial assistance of the federal government in reforming the property tax and, thereby, providing a better life for the people of Maine.
With the assistance envisioned in S.1255, I believe we will finally be able to achieve the kinds of reforms we have so long sought.
Senator Muskie, I want to commend you and your colleagues for introducing this bipartisan legislation.
I respectfully urge this committee and Congress to act favorably upon it.
PROPERTY TAX REFORM
(Statement of Alan C. Stauffer and Thomas Laverne)
PREFACE
The following statement is testimony by Alan C. Stauffer, staff member of the Education Commission of the States (ECS) Finance Project, before the U.S. Senate Subcommittee on Intergovernmental Relations, May 4, 1973. The subcommittee is studying S.B. 1255, a bill providing for property tax relief and establishing incentives for state property tax reform.
ECS recently released a report on exemption and assessment practices in the states. The citation of the report is: Alan C. Stauffer, Property Assessment and Exemptions: They Need Reform, Research Brief No. 3 (Denver: Education Commission of the States, March 10, 1973). The report will be referred to in this statement as Research Brief No. 3.
STATEMENT
Schools suffer because of the haphazard and unjust system of property tax administration. School districts are often over or underpaid by the states because of errors in calculating local assessed valuations. Municipal competition to expand tax bases through annexation impairs school district long range planning ability since boundaries are constantly changing. Spiraling tax rates coupled with spreading discontent with local assessment practices and tax appeals procedures make it difficult for local school boards to get their budgets approved.
Property taxes are here to stay despite efforts in four states to outlaw them constitutionally (or severely restrict mill levies) and despite challenges in state and federal courts. The tax simply produces too much revenue (nearly 40% of state and local taxes) to abandon lightly. Removal of the tax would have a massive effect on the real estate market and on other taxes.
The Supreme Court decision in San Antonio Independent School District v. Rodriguez means that locally raised dollars will continue to pay a major share of the school finance pie. This development makes it imperative that the administration of the tax be cleaned up in order that the services it supports (especially education) are not jeopardized.
The ECS Finance Project undertook a study of the property tax assessment and exemption practices because of the effect they have on school finance. We were convinced that no matter what the Rodriguez decision might be, education had nothing to lose and a lot to gain from property tax reform.
Our main concern in the study was property tax reform, rather than property tax relief. We took this approach because: (1) property tax relief is politically popular and is catching on in the states. Fifteen states have already adopted "circuit-breaker" property tax relief programs. I am aware of property tax relief legislation in fifteen other states. While there is a definite need for property tax relief, we are concerned that relief proposals will divert attention from the need for real reform. If relief is granted without reform, old inequities still exist, only sometimes in a lesser degree. Our idea was to encourage state legislators to focus their attention on the politically unpopular area of property tax reform. There is a group of economists and tax reformers who claim that the property tax would not be regressive if it were administered properly. The tax does not have to be burdensome. If the tax were administered uniformly and if exempt property owners paid for property services received and exemption loopholes were plugged up it would be possible to lower the tax rates considerably. Reform brings with it tax relief.
Research Brief No. 3 brings under one cover material on the property tax compiled by the Advisory Commission on Intergovernmental Relations (ACIR), the Bureau of the Census, the Russell Sage Foundation, the International Association of Assessing Officers (IAAO) and an original ECS survey. The survey was sent to all state property tax administrators. We got a 100% return. We also followed up the written survey with telephone interviews. The study found that the States have not taken the necessary steps to regulate the local assessor and to insure tax uniformity. For example, in one Louisiana tax district property assessments range from 1 to 550% of market value.
Our original survey discovered that:
1. 17 states regularly assess exempt properties and publish the results for taxpayer use;
2. The majority of assessors in the United States are elected. Only 7 states appoint assessors. In two other states assessors are appointed under the merit system.
3. Assessors are required to be certified in only 9 states;
4. 22 states require assessment maps with no minimum standards; several states require maps but have not provided funds for the program;
5. 20 states require assessor training either before or after the assessor takes office;
6. Uniform assessment manuals are required in 26 states, 11 other states publish manuals but do not require their use;
7. State sales ratio studies are not conducted in 9 states;
8. 34 states do not grant financial aid to upgrade local assessment practices;
9. 28 states can order reassessment of local properly or cause omitted property to be assessed;
10. Most states have far too many assessment jurisdictions to achieve economies-of-scale or to implement modern computer assisted appraisal systems. Consolidation has taken place only in Minnesota, Georgia, Tennessee, South Dakota, and Florida.
A major part of Research Brief No. 3 deals with the problems caused by property tax exemptions.
One study claims that one third of the taxable real property in the United States is exempt. Exempt properties range from church cemeteries to the 77 story Chrysler Building in New York. Thirty-three percent of the nation's land mass is owned by the federal government and is tax exempt.
Many exemptions were written into law with the intention of bringing tax relief to certain groups of people. Because of substandard assessment practices the exemptions actually relieve many property owners who can afford to pay. The way some exemptions are administered grossly violates the equal protection of the law principle. Under a single type of exemption, one individual may end up being relieved of 10% of his tax bill while another individual in the same jurisdiction is relieved of 30% or more. This problem can only be corrected by insuring uniformity of assessment both in and among tax jurisdictions.
We found in our study that the proper use of computer technology could revolutionize property tax administration. Computers have been used with considerable success to assist the assessor in determining the market value of individual properties. The bias of an assessor in determining property value can be reduced and countless hours can be saved. In California, computerized assessment of single-family homes has produced coefficients of dispersions half as small as the nation's most accurate assessors have been able to achieve. There are two problems associated with the implementation of computer technology. First, assessment jurisdictions have not been able to afford electronic data processing equipment. The assessor usually has the lowest priority in jurisdictions where computer time is shared. Second, computer assisted appraisals have been found to work best in residential neighborhoods where there are frequent sales. There is a great need for research to develop the technology to apply to older neighborhoods and to complex industrial and commercial properties. Federal or state incentive programs in assessment administration should make provisions for implementation of computer technology and for further research into computer applications.
After analyzing the information available to us, we have presented the following alternatives to the states as ways in which property tax administration could be improved.
EXEMPTIONS
Review and clarify exemption laws.
Require the regular assessment of exempt property and publish the results.
Adjust the assessed value of property to compensate for differing assessment levels before applying exemption formulas.
Require that exempt organizations pay direct charges for specific property-related community services.
Reimburse local governments for mandated exemptions
Use "circuit-breakers" rather than exemptions to give tax relief.
ASSESSMENT
Require assessors, elected or appointed, to meet minimum professional standards.
Consolidate assessment jurisdictions to allow for economies-of-scale and regional mass appraisal systems.
Publish and require assessors to use uniform assessment manuals.
Require assessors to use assessment tax maps that meet minimum standards.
Conduct and publish the results of ratio studies.
Establish effective state property tax supervisory agencies that have the power to:
1. Establish a mandatory local assessment reporting system;
2. Grant financial and technical aid to local assessors;
3. Assess complex commercial and industrial properties;
4. Order reappraisals;
5. Locate and cause to be assessed property omitted from local assessment.
Avoid the use of local assessed values for purposes other than property tax administration.
Enforce existing laws providing for uniform property assessment.
Audit property tax reform laws when enacted to insure local conformity.
Similar alternatives were presented to the states following ACIR's 1963 study of property tax administration. What is needed to achieve reform is an incentive. The recent court cases involving schools and property tax systems are an incentive for reform. A program of federal and state loans and grants would provide another needed incentive.
TESTIMONY BY THOMAS LAVERNE
Chairman of the Education Commission of the States Advisory Committee on School Finance concerning Senate Bill 1255, legislation that:
1. Establishes the Office of Property Tax Relief and Reform within the Department of the Treasury to administer the property tax relief and reform programs established in the legislation (Title II);
2. Pays one half (but not more than 6 dollars multiplied by the population of a state) of the cost of qualified state property tax relief programs (Title III);
3. Authorizes grants and interest-free loans to states (up to 60%) for the purpose of providing property tax information to the residents of the states and for upgrading taxpayer appeals procedures. In order to qualify states must: (a) conduct annual assessment ratio studies and publish their results; (b) guarantee that coefficients of dispersion fall in a certain range; (c) provide a speedy tax appeals procedure; (d) assess and publish the value of exempt property within each tax jurisdiction (Title IV);
4. Provides for interest-free loans for state programs to train and certify property tax officials and for tax maps and other assessment improvement activities (Title V);
5. Provides for federal technical assistance to local assessors and for a survey of all federal exempt land (Title VI);
6. Allows standards to be set pertaining to mass appraisal firms (Title VII).
STATEMENT
"Over the years, no tax has been more bitterly denounced than the property tax. Adverse criticism of the tax dates back at least 5,000 years to the Egyptian pharaohs when the first use of the property tax was recorded." Recent court cases, and our ECS Research Brief No. 3 have reminded us that 5,000 years later we still suffer from inept, inadequate and unjust administration of local property taxes. Local assessors have not been able to keep up technologically with the rapidly changing American scene. We still select assessors the way we did a hundred years ago and require no more of them in the way of qualifications. Local special interest groups exert tremendous pressure on the assessor to keep tax values down. The assessor who withstands these pressures may find himself out of office the next year. The blame for the property tax mess should not fall completely on the local assessor or local government but rests also with the states.
Most states have never rewritten their tax laws. States require uniform assessments but don't require the assessors to use the tools that would bring about that goal. Most important, the states have failed to exert leadership to bring about the needed change. Political pressure to keep the status quo has been most effective. There is a need for state and federal reform mandates to relieve the elected official from this political pressure.
Perhaps the area of greatest neglect has been that of financial assistance to aid local assessment reform. It is ironical that the tax that is hated the most and raises the majority of local revenues is neglected the most in the way of resources necessary to make a sound system. There are four areas where federal or state aid to local assessment administration would make a difference. They are: 1– mapping programs; 2 – ratio studies; 3 – uniform assessment manuals; 4 – training and certification of assessors. While all four of these are important, I would like to focus my remarks on tax mapping, to illustrate where aid is needed and how it would pay off.
Property tax assessment is the process by which real property is: 1 – discovered, 2 – given a tax value, and, 3 – listed on the tax rolls. The first requirement of a good assessment system is a complete set of tax maps. An accurate assessment map insures that all taxable land is discovered by the assessor. Mapping also facilitates the process of discovering and inventorying land improvements. Millions of parcels of property escape taxation simply because assessors do not know that they exist.
Assessment maps must meet certain minimum standards in order to be useful to the assessor and in order to promote assessment uniformity. Important criteria include: .
1. Maps must contain a reference to a grid system
2. Maps must give location and name of all streets, highways, railroads, alleys, rivers, lakes, etc.
3. Location of lot lines and property lines – preferably both – drawn to scale, together with dimensions, bearings, areas and acreages must be given
4. The map number or other designation for each parcel of property; or township, range, and government lot number where areas are under government survey must be given.
5. Maps must meet acceptable standards of accuracy (standards depend upon the use to which the maps will be put).
6. Scale of the maps should be readily convertible from English to Metric systems.
7. The mapping process should depend upon aerial photography if accuracy is to be obtained.
Our ECS study of assessment practices showed that in only 22 states are tax maps with minimum standards required. In eight states maps are required but no minimum standards are imposed. A recent study by the International Association of Assessing Officers of state activity in assessment mapping showed that there are statewide mapping programs underway in only 10 states.
Unfortunately, mapping, the first requirement of a sound assessment program is also one of the most expensive elements. The cost of aerial photography alone ranges between $10 and $20 per square mile. Often monuments on the ground used to determine precise scale of aerial photographs are inaccurately placed. The cost of re-monumenting may equal or exceed all other mapping costs. The costs of complete assessment maps vary geographically. Project costs of $2.20 per parcel have been reported in Alaska as compared to $22.50 per parcel in Tennessee. In Kentucky it costs an average of $300 per square mile while Virginia reports costs of up to $1,000 per square mile. Some specialized maps where topographical information is needed cost around $2,000 per square mile.
The states have not helped local government pay for the tremendous costs of mapping. Only seven states have financial assistance available for this purpose. If local government took it upon itself to pay for mapping programs it would either have to float more bonds or raise local taxes (property taxes). It is politically difficult to ask property taxpayers to increase their burden in order to assure that all their property is being taxed.
If loans or grants were available to pay for mapping programs, local government would be immediately financially rewarded. In most cases 10% of local taxable properties will not be on the assessment roll prior to a mapping program. The most complete case study found dealing with the value of assessment maps concerns a suburban township in Cook County, Illinois. Aerial photographs of the township were made in 1956-57 and again in 1961-62 survey. These maps were compared with information contained on property record cards maintained by the assessor. As a result of the survey 3,600 additional assessable improvements were discovered.
The improvements were not appraised in the study. The 1956-57 study resulted in 232 properties being reappraised with a resultant increase in tax revenues of $432,673. The study cost $26,000.
Mapping programs also produce many indirect benefits. One assessor reported that before maps were made it took seven months and over 2,500 miles of driving to assess an area. But after the maps were completed it took three months and 1,200 miles to complete a reassessment. One authority holds that accurate assessment maps allow the assessment process to proceed at least thirty percent faster.
It is plain to see that the cost-benefit factor for investing money in tax mapping programs is very favorable. The same could be said for the three other areas needing financial support (training, ratio studies, assessment manuals).
One reason why tax rates are excessive in some jurisdictions is that up to one third of the real property is tax exempt. Many of the exempt properties belong to the federal government. Often federal property receives the benefits of local services such as fire protection, sewer and water systems. The federal government could relieve local tax rates by paying local governments a tax equivalent for property it owns within the jurisdiction. The level of government that requires the exemption should pick up the tab for that exemption.
I would now like to turn my remarks to some areas where the federal government could assist the local assessor without spending significant amounts of money. One of the most difficult tasks that faces an assessor is the appraisal and assessment of complex business and industrial property. In half of the states, local assessors receive no help in assessing such properties.
The owners of complex and industrial property often hire consultant firms to help keep their assessed valuation down. Industry often lists a much different value figure on their federal income tax return than they supply to local assessors. Local assessors would be aided immensely if the federal government required that each corporation or firm which owns property in more than one taxing jurisdiction to list such properties and values separately on federal tax returns and make this information available to local and state assessors.
The federal government has several agencies that are involved in property appraisal work. Among these are the Dept. of Housing and Urban Development programs in urban renewal and community development, the Federal Housing Administration, and the Bureau of the Census. The information these agencies generate would be an invaluable supplement to local appraisal data and would serve as a check of local assessment accuracy.
SUMMARY
In this statement I have discussed the mess of our local property tax systems. Local assessors are caught between the pressures of assessing uniformly and of keeping assessed values down. The federal and state governments could partially relieve this pressure by mandating certain reforms. Reforms such as the establishment of tax mapping programs would make a difference in local assessment uniformity. Such programs are very expensive: Federal loans or incentives would help the situation.
One method of acquiring tax relief is to expand the property tax base. The federal government. could help do this by paying tax equivalents on exempt property it owns. The level of government that requires property tax exemptions should pay for the exemption.
There are two areas in which the federal government could aid local assessors without spending a significant amount of money. One is by requiring corporations to list separately the value of property in a particular state on the federal tax return and make this information available to the assessor. The second is by making certain federal statistics and appraisal information available to local assessors.
I am pleased to note that there are provisions in Senate Bill 1255 that cover the points I have raised.
TESTIMONY OF STATE. SENATOR STENY H. HOYER, ON S. 1255, MAY 4, 1973
Mr. Chairman, members of the committee. I want to thank you for this opportunity to appear before you to testify on S. 1255. I am pleased to do so for many reasons, not the least of which is the fact that I am a constituent of one of the co-sponsors, Sen. Charles McMathias of Maryland.
My name is Steny Hoyer. I am a resident of Prince George's County, Maryland, and represent the southern half of that county in the Maryland Senate. During the seven years that I have been a member of the Senate, I have served on the Senate Finance Committee, which has the combined responsibilities of your appropriations and Finance Committees in that it is concerned with both budgetary and tax matters. In addition, I serve as Chairman of Maryland's Joint Commission on Intergovernmental Cooperation and represent our State on the Executive Committee of the Council of State Governments. I also serve on the National Legislative Conference's Intergovernmental Relations Committee and I am a member of its subcommittee on government operations. Let me add at this time that I am not here today representing either the views of my Commission or of the National Legislative Conference. The latter groups Intergovernmental Relations Committee will meet in June to make recommendations which will be considered in the mid-summer by the annual meeting of the NLC in Chicago, Illinois.
First, let me say that I am not one who believes that the property tax as such has enough redeeming virtues to justify its retention. I believe that even assuming completely equitable and efficient administration of this tax that it would still be an anachronism left over from the days when property owners did, in fact, send part of their property, be it wheat, or cattle or the like to the central government in exchange for the protection that that government could provide.
Notwithstanding my personal prejudice, it is apparent that this tax will be with us for a long time to come.
Indeed, from recent election returns throughout the country, it would appear that although the voter abhors the property tax, he may well fear the alternative increase in sales and income tax even more. This concept was stated by Mason Gaffney in his presentation to the President's Advisory Commission on Intergovernmental Relations on September 14, 1972, when he observed that that property tax relief was in reality "Sales tax aggravation, or income tax or payroll."
In light of our inability or unwillingness to abandon or substantially decrease the property tax, it is necessary to increase, to the extent possible, the equity of that tax.
I believe that S. 1255 is a step in that direction.
In the past session of the General Assembly of Maryland, more than a score of substantive bills dealing with the property tax were introduced and considered. These bills dealt with both the administration and the relief of the burden of that tax.
The most substantive of the bills to be enacted was H.B. 531, which by 1976 will have transferred full responsibility for the administration of the assessment function from its currently shared status to a fully state operated and funded one. We believe that this will move Maryland toward the end of realizing uniformity in its assessment procedures and policies throughout the state. It will also remove the cloud of suspicion over the assessor's head that local officials pressure him to raise assessments so that they need not raise the rate. (Parenthetically, I would say that as long as the base of property appreciates at the rate it is today, no amount of equity in assessment policies is going to give relief to the majority of property tax payers.)
P.G. EXAMPLE
In addition to legislation dealing with the administration of the property tax, there were a number of bills which were introduced to adopt the circuit breaker concept. One of those bills, S.B. 1090, was a major piece of legislation dealing both with reform and relief, and was sponsored by the Chairman of the Senate Finance Committee, who is also the majority leader. Had this bill passed, it would in my opinion, have substantially met the criteria for State Action established in S. 1255.
The cost of S.B. 1090, which as introduced extended relief to both owners and renters, would have been approximately $31 million. Although the relief granted was minimal to all but those below the 10,000-dollar income level, and therefore, politically not an answer to the cry for property tax relief, which comes most forcefully from the middle income homeowners whose household income it my area is between $10-20,000.00, it was a necessary step.
There was another similar bill introduced which authorized local subdivisions to adopt a circuit breaker, provided they funded it themselves. For all but a few subdivisions, this would have been an illusory act in that they could not have afforded to extend the relief because it would have simply meant a shift to those in a slightly higher income bracket.
It is imperative, therefore, for the states to fund any relief program proposed. In order to achieve that end, I believe funding incentives, such as are included in S. 1255, are essential.
Under the funding provisions of your bill, Maryland would be entitled to approximately $24 million. While that amount is certainly helpful and desirable it is not substantial in light of total revenues in 1970 of $561 million in property tax.
Contrary to the views of the ACIR, which I understand was closely split on this question, I believe the federal government does have a role to play in property tax reform: I believe the State can beneficially use both the technical assistance available from the central government and the fiscal assistance necessary to preclude a mere shifting of the state and local tax from property to the local jurisdictions income or sales tax.
The efforts at reform and relief that I have observed in our State have convinced me that the fiscal magnitude of the problem and the complexity of the administration of this tax demand and need the efforts of every level of government, if meaningful results are to be realized.
S. 1255, nor any other single piece of federal or state legislation, is not a full solution to the problem. But it does address itself to some very fundamental and needed reforms. Its provisions for full disclosure of procedures and practices in assessments is necessary and I know is supported by the Maryland General Assembly.
The need for its provisions for checks on mass appraisal firms has been very cogently demonstrated to the NLC's Government Operations Subcommittee, by Clifford Allen of Nashville, Tennessee, whom I understand has already testified before this Committee.
My only fear and the fear of so many state officials is that there will be a slip between the cup of authorization and the lip of appropriation. Notwithstanding that fear, I would hope that the Congress would take the step proposed in S. 1255.
PREPARED STATEMENT BY CYRIL F. BRICKFIELD, LEGISLATIVE COUNSEL, NATIONAL RETIRED TEACHERS ASSOCIATION AND AMERICAN ASSOCIATION OF RETIRED PERSONS, BEFORE THE SUBCOMMITTEE ON INTERGOVERNMENTAL RELATIONS OF THE COMMITTEE ON GOVERNMENT OPERATIONS, U.S. SENATE, ON S. 1255, MAY 4, 1973
NRTA-AARP STATEMENT: PROPERTY TAX RELIEF AND REFORM
I am Cyril F. Brickfield, Legislative Counsel of the National Retired Teachers Association and the American Association of Retired Persons, affiliated nonprofit organizations representing a combined membership of over five million one hundred thousand older Americans. I am accompanied this morning by James M. Hacking, a member of my staff.
Our Associations appreciate the opportunity to appear before this Senate Subcommittee in order to present, on behalf of older persons in general and our membership in particular, our comments with respect to the correlative needs for property tax relief and administrative reform and with respect to the merits of S. 1255, the Property Tax Relief and Reform Act of 1973, as a means of achieving those ends.
I. Introductory remarks
Our Associations fully appreciate the ascendancy and inevitability of the property tax among the revenue-raising mechanisms available to local government. Historically, it has helped to perpetuate our federalized system of government by promoting local autonomy. Through jurisdictional variations with respect to rates, the tax base and the manner of administration, it has manifested its responsiveness to local needs and interests. Above all, it has demonstrated a uniquely reliable capacity to generate revenue – currently at the rate of 40 billion dollars per annum – and at little cost. While it, therefore, appears necessary to accept the continued existence of the property tax, it is not, however, necessary to accept its more egregious deficiencies – its disregard of taxpaying ability and its administrative inequities.
II. The property tax burden on the elderly and other low-income groups
Our Associations, in a September 18th letter to Mr. William R. McDougall, Executive Director of the Advisory Commission on Intergovernmental Relations, vigorously concurred in the Commission's characterization as a "national scandal" the property tax burden on the elderly homeowner and renter. While his income is relatively fixed, there is nothing fixed about the property tax. Since January 1969, this tax has increased by 36 percent, nearly twice the rise in the overall cost-of-living. In some communities, this regressive tax has doubled and even tripled within the last decade.
More than any other age group, the elderly, with reduced taxpaying ability, have been burdened by this anachronistic revenue-raising mechanism. Aged homeowners pay, on the average, about 8.1 per cent of their incomes for real estate taxes. In contrast, the non-aged homeowners pay, on the average only 4.1 per cent. The ACIR has disclosed that aged homeowners living in the Northeast on an income of less than $2,000 a year pay almost 30 per cent of their income into this tax system. On a nationwide basis, the property tax collector is the recipient of 15.8 per cent of the annual income of elderly homeowners in this same income class. Even more outrageous is the realization that almost one out of every five elderly homeowners – or approximately 1.3 million persons – falls within this category.
The accuracy of these statistics and the dimension of the need they describe, are supported by the empirical evidence our organizations have received over the years through membership correspondence, a representative sampling of which is contained in appendix I. Repeatedly, members have described the personal sacrifice endured by them in purchasing and attempting to retain a home, and the anxiety, frustration and utter desolation felt by them in their retirement years as that home is gradually, but inexorably taxed out of their possession. There is obviously little fairness and no flexibility in a revenue raising mechanism which requires the payment of the property tax bill, determined without regard to the homeowner's ability to pay, or the sale of the property to someone who can. Moreover, the deficiencies inherent in this tax mechanism are aggravated by the often haphazard, irrational, inequitable assessment administration.
III. Response of the ACIR – Property tax relief
Our Associations are dismayed that the Advisory Commission on Intergovernmental Relations, having acknowledged the scandalous proportions of the property tax burden on the elderly, failed to recommend in its report on school finance and property tax relief the enactment of legislation to make federal funds available to the states as an incentive to provide limited property tax relief for lower income groups and to improve tax assessment and administration practices.
As the rationale for rejecting a federal incentive grant program for promoting property tax relief, the report of the ACIR states:
"Given a few more years, there is reason to believe that the states will resolve the problem of property tax overburden especially for the low income elderly ...
"Federal incentive grants should not have to be used to induce States to do something that is morally right, highly popular, and relatively inexpensive. All of the States have sufficient fiscal capacity to underwrite a limited property tax relief program for low-income households.
"[Federal incentive grants] would reward those States that force their local governments to make heavy use of the property tax and shortchange those States that make above-average use of non property tax revenue ... [Such an incentive grant program] with its own set of guidelines and controls would add to an already overburdened Federal aid structure."
Our Associations concede that some progress has been made at the state level, especially in recent years, in establishing property tax relief programs for elderly homeowners. Indeed, some relief provision has already been adopted by forty-four states. Twenty-three of these states have programs that are solely state-financed.
We also concede the apparent fiscal capacity of the states to finance property tax relief programs for low-income groups. Moreover, we are cognizant of the difficulty involved in drafting federal incentive fund legislation that will not inadvertently reward those states which have forced their local entities to rely heavily on the property tax, and we share the ACIR's concern over adding yet another burden to the federal aid structure.
Our organizations are not, however, persuaded by the ACIR's rationale, that the issue of property tax relief should be left to the states. Nor was the Administration which has elected to include a property tax credit for the elderly among its federal tax reform proposals. The fact that progress has been made at the state level with respect to providing property tax relief does not mean that such progress will continue. Moreover, the relief programs that have been established are not of consistently high quality and effectiveness. Income ceilings for eligibility vary greatly. Some are quite low.Only nine states provide some form of relief to elderly renters and only three to low income groups regardless of age.
The mere fiscal capability of a state to finance acceptable property tax relief does not automatically convert such relief into a state expenditure priority. Nor does the popularity of such relief or its moral or equitable justification convert such relief into a legislative priority. In the absence of a federal incentive, our organizations believe that effective, state financed, property tax relief programs for low-income groups are far less likely to be enacted.
In view of the extent to which the property tax tends to undermine the goal of providing adequate income security for the poor and the elderly through federal assistance and social insurance programs, our concern over adding the burden of another federal aid program is dissipated. We believe that such a program has the potential to assure high quality property tax relief and fundamental administrative reform on a nationwide basis. The dual prospects of lessening the burdensome impact of this regressive revenue-raising mechanism on low-income groups and of promoting more equitable treatment of taxpayers through assessment and administrative reform persuades us that such a federal aid program is both desirable and necessary.
IV. NRTA-AARP position with respect to title III of 5. 1255
Our Associations enthusiastically support the federal aid program of Title III of S. 1255 as an acceptable means of effecting property tax relief and reform. An amendment to the Internal Revenue Code to provide a credit against federal income tax liability (or in the absence of such liability, a refund) for property taxes paid would also provide relief and, in the absence of a preferable legislative alternative, would enjoy our support. However, we believe that the federal aid program of Title III is preferable, since the continued availability of federal funds under the program would be contingent upon conformity with the assessment and administrative reform of
Titles IV and V.
We note with approval the minimum standards of section 302 of Title II under which relief would have to be available to both homeowners and renters. We also approve the graduated income schedule of subsection (d) of section 302 under which the amount of relief available would diminish as income rises. We find the standards of this section are more liberal and flexible than those of section 3 of S. 471, the Emergency Property Tax Relief Act 18
V. Response of the ACIR – property tax assessment and administrative reform
If the property tax is ever to become an acceptable means of financing the residual cost of local government, it must be administered equitably and at not more than moderate cost. The report of the ACIR on school finance and property tax relief acknowledged that:
"[I]nequitable assessments tend to increase public disenchantment with the property tax because they result in random and unwarranted tax burden differentials. Moreover, poor assessment practices lead to taxpayer confusion about, and distrust of, the property tax system."
Obviously, the ACIR recognizes the relationship between inequitable assessment practices and taxpayer hostility to the property tax. Indeed, in 1963 the Commission issued recommendations for strengthening the administration of property taxes in the states. Since that time most states have taken some action to strengthen and reform property tax administration. However, the ACIR concedes that progress is slow and cites the following as the reason.
"Tax administration is an ancillary and unglamorous aspect of government activity and initiatives for spending additional funds to improve it are usually given the lowest priorities. Indeed, the amounts that are now being spent by the State governments in supervising property tax administration are generally meager. Many States spend as little as one-twentieth or one-thirtieth of one percent of local property tax collections for this function."
Despite these findings, the Commission recommended against the enactment of legislation to provide federal funds to encourage the States to improve assessment administration stating:
"Enactment of this proposal would represent still another attempt to dictate State and local spending pricrities."
In the opinion of our Associations, the very fact that property tax assessment administration has received such a low priority by state governments during the last decade, despite taxpayer discontent, the ACIR assessment reform recommendations, and the argumentss of equity, makes it an ideal subject for a federal categorical aid program. Our support of federal legislation designed to induce assessment reform is, however, tempered by cost considerations. It is probably not possible for every taxing jurisdiction to achieve acceptable assessment administration within the limits of reasonable cost. Centralizing the assessment function or the resources available therefor, on a multijurisdiction or state-wide basis may be necessary, in instances where the taxing jurisdiction raises inadequate per capita property tax revenue.
VI. NRTA-AARP position with respect to titles IV, V, and VI of S. 1255
Our organizations wish to express their support for the grant and loan programs of section 401 (a) of Title IV. Their availability should accelerate state compliance with the data gathering, publication and appeal procedures of sections 402, 403 and 404 and should be considered a necessary adjunct to the provisions of section 305 of Title III which predicates the continued availability of federal funds to otherwise qualified state relief programs upon such compliance.
We feel that the provisions of Title IV will promote more equitable treatment of property taxpayers and will assuage taxpayer dissatisfaction with irregular assessment practices and appeal procedure. We consider the provision of paragraph 1 of subsection 403 (a) to be essential to achieving more uniform assessment and greater equity. Furthermore, we consider the publication requirements of section 402 and 404 (requiring annual publication of, and access to data with respect to assessment-sales ratios in each taxing jurisdiction) and the notification requirements of paragraph 2 of subsection 403 (a) essential to the effectiveness and fairness of the assessment appeals procedure required by paragraph 3 of subsection 403 (a). Requiring the assessment and separate public listing of tax-exempt properties under paragraph 1 of subsection 405(a) and the publication of revenue losses attributable to the exemption of such properties under paragraph 2 thereof should aid in restoring the credibility of the present system by exposing to public scrutiny an avenue of potential abuse.
While the position of our organizations with respect to Title IV is highly favorable, we believe that paragraph 3 of subsection 403(a) should be revised to specify in greater detail the means by which assessments may be appealed.. The 1963 recommendations of the ACIR called for review machinery having a two-level organization, with both the local and state agencies serving only an appellate function and being professionally staffed by persons performing only this function. This would serve to reduce the possibilities for conflicts of interest and thus assure objectivity and fairness.
The loan program authorized by section 501 of Title V of the bill should, as with the grant and loan programs authorized under section 401, accelerate state compliance with Title V's objectives. Considerable progress in improving the quality of assessment should result from inducing, through the authorized loan program of section 501 and coercing, through the penalty provision of section 305, conformity with the certification, training and cost-sharing guidelines of section 502. Since improved assessment practice will add, perhaps considerably, to the cost of administering the property tax, and since individual taxing jurisdictions may lack the necessary resources, the cost-sharing guideline of paragraph 4 of section 502 is obviously essential. With respect to the certification guideline of paragraph 1 of section 502, however, it would appear desirable to require, as suggested by the ACIR, that appraisers and assessors be appointed to office and that no person be permitted to hold such office in the absence of state certification.
The state assistance described in paragraph 4 of section 502 should contribute to the maintenance of accurate, current and complete data with respect to property, improvements and valuation and, in turn, contribute to improved assessment practice. Property assessment within a taxing jurisdiction can only be as accurate, fair and complete as the data on which such assessment is based.
As described in Title VI, the federal assistance to training and technical programs appears consistent with the limited federal role contemplated in the bill. Since federal assistance in the training of appraisers and assessors and in conducting assessment-sale ratio studies should reinforce the immediate objective of Titles IV and V and the ultimate objective of improved assessment practice, such assistance merits our support and the support of this Subcommittee.
CONCLUSION
The dual objectives of S. 1255 – property tax relief and reform – are issues of paramount concern to the combined membership of our organizations. Too many of our own members have suffered the gradual erosion of their limited retirement incomes by ever increasing property tax levies. If the volume of our correspondence on this issue is any indication, their willingness to accept ever higher property tax levies and their patience in waiting for effective state relief are at an end. Too many states have failed to enact relief programs, and many of those which have acted, have enacted programs of questionable quality, fairness and effectiveness.
Our Associations appreciate the need for intervention by the Federal Government, in a limited and well defined manner. We feel that a program of federal aid, designed to induce the states to enact effective property tax relief for low-income groups, would minimize the federal role in achieving the objective of property tax relief. The initiative would rest with the states.
Our Associations support the approach adopted in S. 1255 as the means of effecting property tax relief at the state level. The program in this bill would leave the states the option of acting as the initiators of relief and reform and would provide the limited financial stimulus necessary to induce the states to exercise that option.
By making the continued availability of federal funds to qualified state property tax relief programs contingent upon assessment administration reform, S. 1255 would serve to accomplish a second, an increasingly desirable objective – property tax reform.
Our Associations urge that S. 1255 be considered by this Subcommittee in the light of the testimony offered during the course of these hearings, be strengthened and improved where desirable, and be favorably reported to the full committee.
APPENDIX 1 SEPTEMBER 13, 1972.
BERNARD E. NASH,
Executive Director, NRTA-AARP, Washington, D.C.
DEAR MR. NASH: Your article in September issue of "News Bulletin" is very interesting.
I am in the position of many other oldsters. My years were planned with view of self-support if retirement age was reached. A home was purchased and some years later paid for; kids went to college; took part AP local affairs; obligations cared for and on June 16th, last, reached my 81st birthday.
In1940 I purchased a home (built in 1916) for $6,000.00, assessment was on basis of $5,000.00, taxes $126.00. Valuation of the property was gradualy increased until it reached $18,000.00 in 1970. Last year a corps of outside assessors was brought in and my assessment was increased to over $41,000.00.
I will "weather the storm" but thousands of other aged have not, and will not. Many of us seek but one situation; a reduction in real estate taxes or a moratorium. Of the many mistakes in a long life there are two glaring ones; I could not forsee or avoid; inflation, nor refrain from becoming 81 years of age.
Thank you.
Sincerely,
SEPTEMBER 18, 1972.
Re 160-65-16.
Mr. KEN R. DUNES,
County Assessor,
Phoenix, Ariz.
DEAR MR. KUNES: On Sept. 8, we received our tax statement. We were shocked to see the tremendous increase.
In 1970, the tax was $334.72
In 1971 371.06
In 1972 462.66
The answer we received at the visit to the tax offices on 111 S. 3. Ave., Monday 9, was, that the property was reassessed, as the prices of the homes increased. This was partly understandable, but in our section the sales value has not increased in proportion to the new assessment.
We bought our homes as a retirement home and do not intend to sell it, so there is no profit for us to gain. We did not build any addition to the property.
We keep our place in ship-shape order. Your assessor, no doubt was impressed and punished our hard work with an excessive revaluation and higher taxes.
We live on a very modest income and don't believe your office is trying to tax elderly, retired people out of their homes.
Kindly look into this matter and oblige.
Very truly yours.
October 5, 1972.
To: The American Association of Retired Persons
From: The people on pension from Roselle City, N. J.:
We worked all our life, we raised our children and we helped to raise our grandchildren, we could not save much money, but we bought small (mostly 4 rooms) houses with the small gardens in order to enjoy the old ages and have the place to sit in the garden and to breath the fresh air, when we will not be able more to work. We payed off the houses.
Now we are not able to work more and our city raised the property tax on our houses (from 300 dol. to 900 dol.) that we will not able more to pay this tax. To sell the houses, where we lived so many years and where to go? The apartments are so expensive, that in couple years all our money that we will get from our houses will go. The situation is so desperate that many of us getting sick.
Please help us to save our small houses to stay there and to die there in peace blessing our government and our country.
Henry R. Juschtemo and my all neighbours on pension.
I wrote a letter to our Senator Barry Goldwater. Asking if there is not some way we oldsters can get some tax relief. Explaining the enclosed reply. I live in a modest desert lot and mobile home.
I just recently lost my wife (of 53 years). That, of course cut our S.S. severely but we were surviving on it. I just got my tax notice which had been raised 200% in the past year. I am 79 years old and totally disabled.
You no doubt have many such letters, but surely there must be some relief for such as us. We had never taken a cent from any branch of relief.
That petty no sales tax on perscriptions means nothing. Locally they merely raised their prices. In one month our prescriptions were over $100.
Just so you know what is going on in some places.
DEAR SIR: I don't know where it is best to send this. Will you please see that it gets into the hands of those it will do the most good.
DeKalb is a small town and the population of the school exceeds ours. Something should be done about this quickly. It is bad enough that whenever either city state or county find a few extra dollars the first thing they do is raise their wages.
In every way the raise for senior citizens was quickly taken up by taxes. I'm paying $1,150 on a 43 year old home that cost $16,000. I know you can and do help. Thank you I'm a member
AMERICAN ASSOCIATION OF RETIRED PERSONS, To Whom It May Concern:
I am writing to ask if there can be anything done about the big school tax older people have to pay. We are members of AA. R.P. Number 3706572. (Violet & Arthur Ketchel) I realize it is properly a State affair but we just wondered. We do not care about land tax at our home but we pay a few cents less than $700 for school tax. We don't mind a little but our taxes are nearly $1000. We have a small swim resort that has paid off very poorly the last 5 years due to our wet cold weather. We have worked hard to save our place for a home in our old age and only reply we can get from some is "Sell it if you can't manage." Is this fair after you worked so hard and long to save yourself a place for old age? We sent our children to school and no one helped us.
Why does one have to pay such a large school tax? If there is anything you could do to make them let up on older people we would appreciate it and could we have a answer on this please? One way or other. The state won't seem to do anything. Thank you in advance.
Mr. BERNARD E. NASH:
DEAR SIR: There is something which concerns the elderly, and should get immediate attention. (Real Estate Taxes) It seems to get a passing remark once in a while but that's all in spite of the fact that nearly every one in authority believes something should be done about it. Including the Governor of my State of New Jersey, Mr. Chilli. Even the President says something should be done but nothing is being done about it.
I am 70 now and by the time they do get around to it I will either be dead or forced to sell my home, and there must be a million others in the same position.
They claim its unconstitutional but they keep on trying just the same. Maybe the A.A.R.P. can do something to help push this along.
FEBRUARY 24, 1973.
DEAR Sir: I am one that wants tax relief for the elderly people. So true elderly people are being taxed out of their homes and put in nursing homes and county and hospital insurance caring for them.
There should be a better way out for me. I got double homestead tax and paid 112.78 per year 1971. The federal government freezes your tax and the state or county come along and raises the value of your house so they raise your tax and it's more than I paid before the freeze now $139.18 per year.
That's a lot when you can't work anymore and have been a widow for 30 years.
Is there anything that can be done about it? (Tax for elderly.) I don't want to sell my home and be on County and in a home for elderly.
SIRS: I joined A.A.R.P. a few months ago and am pleased with the news bulletins and would like to add my voice to the protests against high taxes.
My wife and I retired to this section of Cape May County in 1962. My taxes then were $120.00 a year on a small 4 room ranch type home. They have gone up every year until now. My 1972 taxes were $351.00 of which 75% were school taxes. I have been paying school taxes for 44 years to put 3 children thru High School and I think I have paid my share of education and helped build enough schools. I don't think I should have to pay any more school taxes. I am paying more now than I did in my working years and it is coming out of my Social Security, and I have no other income so you can figure what we have left to live on. So I am asking the Asso. to work for the abolition of school taxes for the elderly.
[From the Nashville Tennessean, May 4, 1973]
MUSKIE RAPS APPRAISAL FIRM CONFLICT
"Look"
(By Elaine Shannon)
WASHINGTON. – Sen. Edmund Muskie, D-Maine, admonished yesterday the president of a property appraisal firm employed by Nashville for displaying "the appearance of conflicts of interest" through its affiliation with a privately employed appraiser.
"The appearance of this is almost as critical to public confidence as the reality," Muskie told William Gunlock, president of Cole-Layer-Trumble Co. (CLT), a mass property appraiser whose sister firm, American Appraisal Associates, serves private business and industry.
Muskie, who is investigating property tax procedures, expressed particular concern about disclosures that E. Randall Henderson, former assistant director of Tennessee Division of Property Assessments, had been paid $60,000 by CLT for his interest in a bankrupt mapping company four months after he left state government.
Henderson had signed approval of contracts for several county jobs for CLT, the largest of which was a $2.5 million jobs in Knox County, Muskie's committee, the Senate Subcommittee on Intergovernmental Relations, was told in testimony by Albert Gore Jr., a reporter for the Tennessean.
In response to Muskie’s statement about the appearance of a conflict of interest, Gunlock said:
"Under no circumstances was there any conflict of interest, was any wrongdoing, no matter how it looks."
"If I'd been in Mr. Henderson's shoes," Muskie replied, "I'd never got myself in that situation."
Earlier in the day, CLT officials and Metro Tax Assessor Clifford Allen exchanged barbs about the quality of the firm's work. Allen is suing CLT, alleging conflict of interest on the grounds that the firm, the nation's largest mass appraisal company, had given "consistently low" assessments to major industries and businesses.
Allen pointed to reports that CLT appraisals of service station property averaged "less than 44% of what the companies had paid for them." He said that he had been refused information on whether the stations were owned by oil companies who used the services of American Appraisal Co., an affiliate of CLT.
He also noted a Monday decision by Nashville Chancellor Ben Cantrell that CLT had violated state law in its appraisal of rural property, a decision which would affect 40% of the land in Davidson county.
Gunlock, in turn, accused Allen of laxness in his own past assessments. The tax assesser had consistently valued farm and residential land at rates far lower than those required by state law, he said.
"I'm not criticizing what Mr. Allen did." Gunlock said, "other than to say we corrected that situation which set off a chain reaction that was at least partially politically motivated."
Gore, who has written a series of articles about general appraisal procedures in the state, summarized his findings before Muskie's committee.
Gore said he had found that:
Following 1967 court decisions which ordered reassessment of property, the state spent $22 million. "And much of it was wasted," he said, through defaulted contracts and delays.
Assessment firms, lured by the prospect of "an entire state full of lucrative contracts," lobbied for jobs with "whisky, country hams, and free wheeling campaign contributions," Gore said, "an unpromising situation for a program whose goal is equity."
CLT bought the debt-ridden Tennessee Mapping Co. and Engineering Services company from Henderson and Robert C. Johnson, both former state property assessment officials, for $120,000.
Henderson, deputy head of the state office which controls local assessment work, had signed approval of jobs for CLT.
Henderson had signed approval of mapping contracts for L. Robert Kimball, who was associated with him in a venture called Outdoor Resorts.
Property owners dissatisfied with their assessments were forced to appeal to a state government hearing office directed by Henderson, "the same man administering the mapping and reappraisal program."
After Gore's testimony, Muskie took two state officials to task for failing to initiate their own inquiry into the allegations of conflicts of interest and collusion.
William O. Beach, vice chairman of the state Board of Equalization, contended that neither the board nor the state attorney's office had the power to launch an investigation. He said that the matter should be settled through litigation, now proceeding in Nashville and Knoxville courts.
"It would seem to me to be a prima facie case of mishandling of this whole case that would merit further inquiry," Muskie said.
"What have you done about it?"
"What can we do about it?" Beach replied, explaining that the equalization board is "not equipped to handle such inquiries."
"I would have done something more about it than you appear to have done. You could default on contracts, couldn't you?" Muskie continued.
"You have a board, you can ask questions."
Beach said the board had decided that some of the allegations were "unfounded" and "in some cases, politically motivated."
"How can you make that decision without a formal inquiry," Muskie persisted.
"'The State Board of Equalization," Beach said, "has never conducted a formal inquiry of this kind."
[From the Nashville Banner, May 5, 1973]
MUSKIE INCLINED TO AGREE WITH ALLEN ON CLT TIES
(By Frank Van Der Linden)
WASHINGTON. – After hearing both sides of the argument, Sen. Edmund Muskie, D-Maine, is inclined to agree with Metro Assessor Clifford Allen's claim of an improper tie between the Cole-Layer-Trumble Co., and the American Appraisal Co.
Muskie, as chairman of a Senate subcommittee studying property tax law reform, heard Allen thundering his charges Thursday afternoon, and then listened to CLT president William L. Gunlock's emphatic denial of any conflict of interest.
Allen, who dramatically left a Nashville hospital bed to testify, said that "in the parlance of the international spy thrillers we see on TV," the American Appraisal Associates, Inc. of Milwaukee has two subsidiaries – the CLT company of Dayton, Ohio, appraising real estate for local and state governments, and the American Appraisal Co. which "acts as a secret double-agent" for property owners seeking lower valuations.
Thomas Wardlaw Steele, Nashville attorney for CLT, said Gunlock was "prepared to say he didn't know a single private client of the American Appraisal Co."
Steele said Allen was "wholly unable to substantiate his charges or to show that any revaluation by CLT favored the clients of the American Appraisal Co."
Muskie, noting that both were affiliates of the same Milwaukee concern, asked: "Isn't the association improper on its face?"
The Maine senator also asked, "Do you think it's a healthy arrangement that might compromise the objectivity of one side or another?"
Gunlock insisted that the two companies never became involved in ad valorem cases on "opposite sides of the table."
But Muskie said, "I don't think the public will be satisfied" with that assurance."
Gunlock retorted that Allen himself "has a conflict of interest because he owns property in Davidson County."
Allen waved Monday's Nashville Banner with its front-page streamer headline on Chancellor Ben Cantrell's decision overturning CLT's appraisals of Davidson County rural property.
"This means that 40 per cent of all the land in Davidson County will have to be reappraised by the local board of equalization because CLT violated both its contract and the laws of Tennessee," the assessor said, "These five men do not have the strength and endurance to hear all those people."
He predicted the resulting "mess" would "stop bona fide farming" and drive the rural land into the hands of real estate speculators.
In reply, Steele said "the chancellor specifically found that while the so-called conflict of interest seems serious on its face, there is nothing in the record to prove it."
"The chancellor issued a gratuitous advisory opinion on the validity of the rural land values," the lawyer said. "Yes, he said they violate the law but he did not issue any injunctive relief."
Gunlock said "Allen did not really want the revaluation done by a professional firm, but he was told by the state to have it done." Gunlock said that when CLT was hired to make the mass appraisals, Allen told Mayor Beverly Briley, "You have selected the finest appraisal firm in the country."
The CLT president quoted Briley as saying: "Mr. Gunlock, those are the last kind words you'll hear from this man's mouth during the life of this contract."
"I know now what he meant," Gunlock commented.
"UNFAIR ATTACKS"
Gunlock also complained that his firm, the largest in its field, is being unfairly attacked by Ralph Nader's "crowd" and by "a politician who uses CLT to advance his cause."
Contrary to Allen's charges, the appraisal firm's president insisted there was "no wrongdoing" in his company's purchase of the bankrupt Tennessee Mapping and Engineering Services, Inc., for a $120,000 cash payment to its owners, E. Randall Henderson and Robert C. Johnson.
Henderson was involved in this transaction while still assistant director of the State Division of Property Assessments, Allen said, but Gunlock denied knowing anything about any conflict of interest.
Muskie said this episode showed "a certain naivete which we in politics don't embrace."
"If I were in Henderson's shoes, I would not have allowed myself to get into that situation" the Maine Democrat said.