The Challenging and Changing World of Property Taxes in the United States

Apr 11, 2014  |  Real & Personal Property

Over the last decade the amount of funds made available by the Federal Government and distributed to the State Government continues to dwindle.  As these Federal funds continue to dry up, there is less money made available to the individual states and therefore less available to local towns and cities. This continual trend is forcing towns and cities to come up with alternative ways to obtain those funds that the state used to provide in order to pay for the local public services.  As costs continue to rise at the local level and the deficit of these state funds increase, locally assessed property taxes has been and continues to be used as the major way to fund these revenue deficits in local budgets annually.

Property Taxes in the United States unlike many countries around the world are a locally assessed tax.  The Federal Government has no power or role in the assessing and collecting of these funds.  The individual states also play a small role in the governing of the Property Tax function.  Though it is listed in all State Statutes, it is left to the cities and towns to administer.  Therefore, the application of the statutes in many cases is subjective and how one town assessor (the individual in charge with the administering of the Property Tax function at the town or city level) reads a statute. There is usually a very different interpretation of how a statute is administered town-to- town and city-to- city in a given state. 

Property taxes have become a very large expense item for not only corporations but homeowners as well.  The average US property tax rate is 3% of owned property on a national basis.  Until recently, many businesses and individuals received their bill and basically paid it without reviewing it.  As property taxes have risen and have become a more expensive, more taxpayers are started to review their bill more closely.  In the United States owners of property have the right to appeal their property values if they feel it is unfair.  If the owner is successful they can recover some of their overpaid taxes.  However, it is sometime a long and arduous process that also cost a lot of money. 

There are two general types of Property in the United States subject to local property taxation, real and personal property.  Every state in the United States taxes real estate.  There are thirty one states in this country which tax personal business property.  Below is a very brief definition of each property and some comments concerning each property.

REAL PROPERTY:

Real Property is defined as land and any structure which is permanently affixed to the ground.  This would include a building or a house. The concept of taxing real property goes back a very long way.  In England during  the middle ages ones estate was a source of tax revenue to the King; in Ancient Rome the tax on the estates of the rich was a source of revenue for the Empire and the Emperor.  Similar taxes can be traced to the Far East as well.

Real Property taxes are in general assessed or valued every year on a specific annual date known as a lien date. This date is in most cases January 1.  That property value is considered fair market value at that lien date.  In some states that value does not change.  However in some cases the value will change annually by a predetermined increase. This increase is a way to cap values from rising out of control. For example in the state of California there is a rule known as Proposition 13 which limits an annual increase of 2%; the State of Massachusetts has Proposition 2 and a half which limits the increase to 2 1/2%.  New Jersey has a similar rule as well. 

A way many towns and cities have bolster their depressed revenues, particularly in times when properties values have dropped, is to do town wide or city wide revaluations.  Where the cities and towns revalue all commercial and residential properties in order to raise the total properties values in a given town and therefore have a higher property base to tax.  Though in the year of a revaluation tax rates may drop and some taxpayers appeal and get reductions in their property values, in the long run the towns will begin raising their tax rates and still have a higher property value base so they obtain more funds to pay their bills.  In the United States many states have built in their Constitution required revaluations.  Many require them every five years but North Carolina requires one every 8 years. 

PERSONAL PROPERTY:

As we mention  above thirty one of the states in the United States tax business personal properties. That is property used in the operating of a single business.  A chart has been provided at the end of this article identifying those thirty one states.  The definition of Personal Property is any property which can be removed without demising the real property.  These types of properties are office equipment, computer equipment and manufacturing equipment.  One will file an annual return in the town where the property is located similar to an annual tax return with the local town assessor.  Some industries like Public Utilities and Telecommunications companies will file an annual return at the state level.  The state will assess these special properties but then allow the cities and towns to assess their tax. 

All states have exemptions for personal property which vary by state. One needs to research the state their property is located in to verify the exemptions available.  It is critical to remember is that all exemptions are assertive in nature and that if one does not take advantage of the exemptions availablethe assessor will not provide it for you.  The return is the responsibility of the taxpayer not the assessor. 

There are heavy penalties imposed for those who have property in a given jurisdiction, if that jurisdiction resides in a state which requires the filing of personal property and the taxpayer does not file a timely return.  The assessor will assess a 25% assessed value penalty along with penalties and interest from the date the return was originally due.  As a note, in the United States penalties can be abated but not the interest because it is statutory.  Therefore it is imperative that one review the local rules in any state they decide to do business in. 

There is only one state in the United States that audit personal property tax returns statutorily.  That state is California who perform audits once every four year.  That rule has been relaxed in recent years due to manpower shortages at the local level.  California has a diminimus rule where if the assets are less then a specified amount they will not audit as it is not material enough.  However, to keep revenues up many local jurisdictions are hiring third parties to audit on their behalf.  These third parties are being paid on a value-added basis not a fixed fee, so they are very aggressive in what they obtain.  These audits are done electronically and usually the taxpayer finds out the results of the audit by either a letter or email and then has a statutory period to respond before the assessment becomes final. 

APPEAL PROCESS:

A taxpayer has the right to challenge their real or personal property tax assessments on an annual basis. Usually one has a stipulated period to appeal.  If one fails to act during that stipulated period then the assessment becomes final. If one does appeal the taxpayer should do their homework and come in with proper documentation to support their position.  Without the right documentation the likelihood of a reduction is remote.  It is also essential to get to know your local assessor as that relationship is important.  As an assessor told me once “I wish taxpayers, before they appeal would come in and talk to the assessor as a lot of appeals could be avoided that way”. 

CONCLUSION:

The property tax area is a very complex process in the United States. Each state has its own way of administering it.  The assessors are in a very tough position of being fair but they also need to protect the revenue the property taxes provide in light of the diminishing revenue base a town or city is operating with.  A taxpayer should only pay their fair share of taxes.  It is a delicate balance.  If one is starting to do business in the United States from a foreign country they should pay attention to this area.  It is usually the one tax that creates a heavy burden but often forgotten.