Why my school tax bill is actually too low to be fair
A report issued this month by the Council on State Taxation and the International Property Tax Institute ranks Delaware as among the worst jurisdictions in the world for its property-tax administration based on three criteria: transparency, simplicity and consistency, and procedural fairness.
The good news is that Delaware's overall D+ grade isn't quite the worst in the world: Pennsylvania and Puerto Rico both got straight Ds, and five other jurisdictions in the U.S. and Australia also earned D+ grades.
The bad news is that Delaware's grade should actually be worse than D+. Our overall grade was inflated because the researchers mistakenly gave us a B for annually updating property assessments to ensure that equal-value properties pay equal taxes (this basic standard of fairness in taxation is called "horizontal equity" or "consistency").
But in reality, we deserve an F for this: New Castle County has not updated its assessments since 1983, Kent County's assessments are still based on 1987 property values, and Sussex County's assessments are based on 1974 values. This can result in significant disparities from one taxpayer to the next that violate basic standards of fairness.
For example, my neighbor's house, in the same school district but across the street, is worth 27 percent more than mine, yet her school tax bill for 2014 is more than a third lower than mine. I will pay an effective school tax rate of 0.4 percent, while my neighbor pays only 0.2 percent. How can this be? In 1983, before either of us lived here, my side of the street was further from the ugly abandoned piers behind my neighbor's house.
Today, however, my neighbor's side of the street enjoys beautiful views of a riverfront park and commensurate real estate values, but tax assessments have not kept pace.
But wait, there's more! Even with this neighborly inequity, my school tax bill is actually too low to be fair. The assessed value of my house is 21 percent of what I paid for it, but the overall ratio for our school district when my neighbor and I bought our houses was over 36 percent. We both pay too little compared to the average tax burden for property owners in our school district as a whole: 0.2 percent and 0.4 percent, versus an average of more than 0.5 percent.
Again the story is that, like my neighbor's, my home has increased in value more than the average property in our school district has since 1983, thanks to its location.
We already know how to fix this. A one-time re-assessment, followed by regular, professionally administered updates of tax assessments, can correct these inequities and prevent their recurrence. All that is required is the political will to adopt this widely recognized good practice.
A 2010 study by the League of Women Voters of Delaware endorsed the recommendations made in 2008 by a committee of experts appointed pursuant to the 144th General Assembly's House Joint Resolution 22. Those eminently sensible, best-practice recommendations lay out a model for a system of accurate, annual county assessment updates, with guidance and support provided by the state, based on the Uniform Standards of Professional Appraisal Practice.
Property taxes are a political hot potato. Any correctly performed re-assessment will result in large changes to some individual households' and businesses' property-tax bills, and legislators are reluctant to be perceived as raising taxes. But remember that by law in Delaware property-tax rates must be adjusted after re-assessments so that the overall effect is revenue-neutral: the increases in some taxpayers' bills will be exactly offset in total by the decreases in other taxpayer's bills.
My property taxes go up a little bit, my neighbor's taxes will go up quite a bit, and many of our less affluent neighbors will see their tax bills reduced to a fairer level.
Much of our state's prosperity is based on our being perceived as well governed and well managed in ways that make us an attractive business location. The 2008 committee report observed that inaccurate, outdated assessments are a nuisance for businesses as well as homeowners, and result in considerable legal expense and fiscal uncertainty for taxing authorities in Delaware.
Might the 2015 legislative session be the one in which we can get this fixed? Why should the first state continue to be among the worst for property taxes?
Note: The LWV report is available at http://lwvdelaware.org/files/reassessment_report -_lwvde.pdf and includes as an appendix the 2008 committee report. The full COST/PTI report is at http://www.cost.org/WorkArea/DownloadAsset.aspx?id=88125 and a summary by Bloomberg News is at http://www.bna.com/property-tax-post-b17179894994/.
Jonathan B. Justice teaches public budgeting and finance in the School of Public Policy and Administration at the University of Delaware.