Tax Assessment and How It Affects Your Budget

It is the time of year when city, township, and county assessors set current market values on property within their taxing district. Whether or not this task is part of auditor/clerk duties, a basic understanding of how this process affects the mill levy value, and consequently the budget, is very important.

Determining Total Market Value
A political subdivision’s total market value is determined each year as the final outcome of the property tax assessment and equalization process.  The local tax assessor compiles the market value for each property within a political subdivision to determine total market value for the upcoming tax year.  For the most part, property values are finalized at local tax equalization meetings. Common exceptions to this would involve valuations for centrally-assessed properties, agricultural land, and any property for which values are protested to the State level.   The tax base for a political subdivision and final tax levy request from the budget will determine the property tax rate.

Calculating Property Tax Levies
States vary on methods to calculate tax levies.  For example, in North Dakota, the total tax levies are calculated by adjusting the market value of each property, partially based upon the property type, to determine its taxable value.  The individual property taxable values are totaled for the political subdivision to represent the total tax base.  One mill has a value of one-thousandth of one cent (tax base / 1,000 = 1 mill).  To calculate the number of mills necessary to cover the city’s tax funding needs, divide the mill value into budgeted property tax dollars requested.

In Minnesota, property taxes are derived from total tax capacity.  The total tax capacity is determined by multiplying individual property market values by a system of rate class percentages determined by the State.  These calculations are totaled to determine the total tax capacity of a political subdivision.  The local tax rate is determined by dividing the total property tax dollars requested by the political subdivision by its total tax capacity.

Mill Value Impacts on City Budgets
Before beginning to prepare the annual budget, city auditors/clerks need to estimate the mill value or local tax rate to determine the approximate property tax revenue during the budget period.  The county auditor or county tax director can provide a reliable estimate of the new mill value, local tax rate, or equivalent measure for the city.  Property values rise and fall, subsequently affecting the city’s taxing power. For example, if the mill or local property tax rate value decreases, it will negatively impact the amount of levy that the city can request.  In this case, the county auditor would reduce the available city tax dollars, thereby creating a budget shortfall. Conversely, if the mill or local tax rate levy value increases, the available tax dollars will increase. Cities need to be aware of this in order to ensure that budget requests maximize the levy potential.

Fluctuations in Taxable Valuation Can Affect a City’s Tax Revenue
The following two case studies illustrate the effect that decreasing or increasing taxable valuations can have on a city budget.  These examples demonstrate potential scenarios for a city in the State of North Dakota.

Decreasing Taxable Valuation Example
Assume the 2011 mill value for a city was $1,000.  The city residents approved a street maintenance levy of 20 mills utilized for necessary annual repairs. Based on the $1,000 mill value, the 20 mill levy could create a street maintenance budget of $20,000 ($1,000/mill x 20 mills= $20,000) for the 2012 budget.  The 2012 tax assessment process, however, resulted in a new mill value of $900 based on the changes made during the 2011 tax assessment year. When the County Auditor receives the city’s budget request for $20,000, it would be divided by the $900/mill levy value, resulting in a request for 22.22 mills. Because the maximum mill levy was limited to 20 mills, the request would be adjusted to $18,000 ($900/mill x 20 mills). This decrease in taxable valuation would result in an unplanned budget shortfall of $2,000 for street maintenance.

Increasing Tax Valuation Example
Now consider the same example with a positive change to the mill levy. In 2011, the mill value was $1,000.  Based on the last mill levy value, the city requested $20,000 ($1,000/mill x 20 mills). The 2012 tax assessment process, however, resulted in a new mill value of $1,200 based on the changes made during the 2011 tax assessment year. When the County Auditor receives the city’s budget request, the new mill value of $1,200 will be applied. This mill value is divided into the city’s request ($20,000 / $1,200/mill).  The city’s request is converted to 16.67 mills, or $20,000 ($1,200/mill x 16.67 mills). If the city had been aware of the increase to the city’s levy, it could have requested as much as $24,000 ($1,200/mill x 20 mills). In this situation, the city missed an opportunity to obtain funding for additional repairs and underutilized the mill levy. If a city is not aware of mill levy value changes, the implications on the city’s budget can come as a surprise.

Proactive Measures Can Minimize Negative Budget Implications
It is also essential to understand how auditors/clercks can help throughout the valuation process to maximize the tax base of their political subdivision. Within the jurisdiction, the addition, removal, or revaluation of residential, commercial, and industrial properties can have a great effect on the levying power. As an auditor, it is important to stay informed of the steps being taken by the tax assessor and Equalization Board.

Proactive steps auditors can take to create the optimum tax base include:

  • Provide assistance to the tax assessor during the assessment process. Auditors have access to vast amounts of information on properties within the jurisdiction. Any knowledge that affects individual properties or sections of property within the political subdivision can help set land and structure values. For example, documentation of new subdivisions planned, water and sewer districts, new road construction, and residential or business incentive programs being offered in the jurisdiction can be valuable information in the assessment process.
  • Provide accurate and complete building permit records. Building permits are usually issued at the local level.  Establishing clear guidelines on building permit requirements and enforcement thereof is important. Building permit information needs to be organized and ready for the tax assessor, as it is the best means available to evaluate property value changes.
  • Provide the tax assessor with a list of all properties utilizing incentive programs, as well as information on those programs. Any of these programs, such as housing incentives, Renaissance Zone, or New Business Tax Exemptions, will have an effect on the tax base and must be watched carefully. It is essential to keep good records on these items.
  • Communication with the tax assessor is critical. Discuss the anticipated total taxable valuation with the tax assessor, as well as the reasoning for any changes. Being actively involved in the assessment process will provide an avenue for input as well as being apprised of anticipated changes that will impact the budget process.

As cities and other jurisdictions begin the budget process, the County Auditor should be able to provide an estimate of the city’s tax levy ability for the upcoming budget year. Maintaining and referencing a list of historical values will help to anticipate the impact that any changes to the property valuation will have on the budget.

In conclusion, no matter the size or location of your political subdivision, knowledge of how your taxation system works and an understanding of the effect of adjustments made during the equalization process are key components in managing the finances of your political subdivision.