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Archive for April, 2019

Objectives

1. As a tax, the real estate tax (RE) is essentially a wealth tax and the wealthy folks typically have a more valuable house and property. So do the large and wealthy corporations. A RE Tax is generally a progressive tax rather than sales taxes, license fees and the like that are regressive taxes, that is they hit the lower income people harder than the wealthy. The RE Tax is also a flat tax because the tax rate for all the property is the same and this enjoys a widely held sense of fairness: If you have a $1 million value property, you will pay ten times the RE Tax than another with a $100,000 property.

From the taxpayers’ perspective, a well-designed RE Tax should be understandable, fair and fairly applied and that the proceeds of the tax be exclusively applied to local K-12 public and/or public access charter schools as the voters decide. Hence the RE Tax uniquely among different taxes links the taxpayer and community directly to their local schools and their performance. This is a key to civic involvement that has, sadly, been waning in recent decades country-wide.

In Delaware, the county RE Taxes as presently implemented are not fair since they are based upon a cost of construction plus land value according to a 1974 survey and bear no relationship to market value and as such they are not understandable. They are not fairly applied since they have not be re-assessed in 44 years in Sussex and about 36 years in Kent and New Castle which has created gross distortions in the amount of real estate taxes paid by residents with new homes compared to much older homes since the actual taxes paid on a property do not get updated when the property is sold. Also, big distortions in regions of each county that have enjoyed widely different increases in property value over the past 20 years that are in no way reflected properly in real estate taxes paid.

And lastly, the county real estate taxes include a nearly automatic feature of school district budget increases as follows: each June each local school district submits its overall budget for expenses to the County Tax Assessor who proceeds to apply the new rates to the tax calculation. There appears to be no effective accountability to taxpayers and, as a consequence, the real estate tax rates in Sussex County for example have grown at just under 5% which is twice the rate of inflation over the past 25 years.

It’s worth noting that about 99% of Delaware tax payers are unaware that their county collects the real estate taxes and sends them to Dover. The State then sends back to the county the real total costs of the k-12 schools. At present the counties only remit about 40% of the total amount needed and the state supplies the rest from other sources of funds.

2. The design of a real estate tax that meets the above aims must include the following features:

a) Appraised property values should correlate very closely with market value of similar properties. Since real estate is often the largest portion of a family or business’ assets home and business owners pay a lot more attention to current real estate values that the government thinks.

b) Assessed property value for tax purposes is usually a lesser percentage than Appraised value in order to attenuate rapid up or down swings in market values. 80% of Appraised value should accomplish that.

c) Re-assessment of all real estate in Delaware is a bedrock issue of fairness, the uniform application of a government tax program and must be done. It probably should be paid for by the counties to keep the state out of the game since there is no supportable reason for a state real estate tax for financing schools since this is ultimately and clearly a local issue. Across the country, counties collect real estate taxes to pay for schools and the counties and localities within them run the schools.

d) Re-assessment updates. It’s this author’s opinion that the update of appraised property values should be done no more frequently than every 5-7 years- this allows for smoothing of swings in values up or down and lends some important stability for homeowners and businesses in budgeting their expenses. What happened in Maryland wherein the state used index math to annually update market values and then apply real estate taxes automatically on that data is insanity and cannot be permitted here. Whether to use real estate Index of value programs or manual assessments for updates is for discussion and a more uniform agreement on the accuracy of Indices. This author believes that a combination of both is the likely outcome in the near-term.

e) School Budgets. Nationally Delaware has the seventh highest spending per pupil and ranks 35th in student academic performance. Independent studies have placed the cause of the spending squarely on bloated administration staff (not teachers) in the schools, their rich benefits plans and the widespread duplication of people and effort expended in Dover at the State Dept of Education and the local school administrations. The State Dept of Education is redundant and should be disbanded . Delaware is either number 1 or 2 among the fifty states in the percentage of children going to private schools due to the very poor quality of public education throughout the state. Effective with the new real estate tax, the local school budgets of a county cannot, in total, exceed the rate of inflation. The County can move dollars around among its school districts.

f) Rates. Until a market value re-assessment is complete, any application of a percentage rate for RE taxes is largely guesswork. ALEC’s (American Legislative Exchange Council) most recent real estate tax review by state has Delaware with a median home value of $233,100 and RE tax at $1,274 or .55%. Recent new home county real estate taxes in Sussex approximate .50% of value. However, our sampling has confirmed that hundreds of both residential and commercial properties in Sussex and Kent don’t pay anywhere near that rate since there’s been no re-assessment in 44 years and real estate taxes only go up because school budgets go up.

New Castle is a different story due to a flattening or reduction in real estate values while real estate taxes continue their upward march. New Castle population has actually decreased over comparative census periods, the exodus of high-paying executive jobs to nearby PA, the county has billions of dollars of tax-exempt properties including several universities, private high schools, two major hospital systems, federal, state, county and city administration and court buildings. Add to that highly restrictive, anti-growth land use regulations and you have a bad situation.

So, the design of the county real estate tax scheme might look like this:

Tax rate set at .50% or if you prefer, .005 times 80% of property value (Assessed Value) which yields an effective tax of .004 times the market value (Appraised Value).

State Legislature passes a law that limits the real estate tax rate to .0075 or .75% of Assessed Value and cannot be raised without a supermajority vote.
School districts’ budgets in each county are limited to annual increases of the rate of inflation.

Real estate tax receipts can only be used for K-12 education and county administration costs

John Toedtman
Senior Advisor, CRI
April 2019

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