Property tax assessments: evaluating the system

What would happen if a supermarket charged different customers different prices for the same item? What if the differences became steadily larger? And usually favored well-to-do customers? Undoubtedly there would be objections or maybe even lawsuits. The chances of getting away with such discriminatory practices would be slim. Yet this same kind of discrimination has been applied to many Illinois property owners through the state's property tax assessment system. A study by the present authors of tax assessment practices in all Illinois counties except Cook shows that over the last 12 years the system has produced unequal assessments of residential property, undertaxing some homeowners and overtaxing others. Furthermore, the inequities tended to hit lower income property owners the hardest: In approximately one-third of the counties owners of low-priced homes tended to be increasingly overtaxed compared to those owning expensive homes.

Other findings by the study are equally disturbing. Across Illinois an overwhelming majority of counties violate professional standards. Assessors in fewer than 5 percent of the 101 downstate counties presently achieve uniformity levels that entitle them to a statutory reward of $3,000. In only about 5 percent of the counties did assessments significantly improve, so that differently priced parcels were being treated more equally. In terms of overall assessment quality, which was already low, assessments significantly deteriorated in about one-quarter of downstate counties, while improving in only 10 percent.

These findings suggest that state and local officials may soon be facing severe political problems: Citizen knowledge of such inequalities could fuel greater public distrust and, at the same time, endanger referenda for bond issues dependent on general obligation funding via the property tax. Yet, improving the system might involve sweeping departures from present practice, such as requiring annual reassessments, assessment at full value and a different classification scheme for downstate properties.

Illinois' assessment apparatus is primarily organized along county lines. Several assessors in each county are under the direction of a property tax supervisor. The assessors' objective supposedly is to achieve absolute uniformity in determining market value, so that all taxpayers pay their "fair share" of property taxes. The greater the degree of nonuniformity, the more likely it is that property owners will pay more or less than they actually should.

Illinois Department of Revenue officials use two statistics that sound ominous to measure assessor performance. The coefficient of dispersion (COD) measures the degree of overall assessment uniformity, that is, whether, on average, taxpayers are likely to be significantly over- or under-taxed. The price related differential (PRD) shows whether higher or lower priced units are being overassessed.

The International Association of Assessing Officers (IAAO) recommends a maximum COD of 20. In a hypothetical county with a COD of 20 and a median assessment level of 35 percent, taxpayers could just as easily be assessed at 28 percent (20 percent below the median), at 35 percent (the median), or at 42 percent (20 percent above the median). At a hypothetical tax rate of $5 for every $100, the owner of a $40,000 property would be just as likely to pay an annual tax bill of $700 as he or she is likely to pay either $560 or $840 - an obviously unwelcome situation for those interested in fair and equal taxation. In other words, even IAAO's maximum acceptable level of 20 results in wide variations in taxation.

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A PRD of 1.00 means that lower- and higher-valued properties are being treated equally (fairly). PRDs over 1 indicate that lower valued properties are more likely to be overtaxed, compared to higher priced properties. Likewise, values below 1 mean that higher priced properties are being overtaxed, relative to lower priced parcels. Assuming that wealthier persons more often purchase higher priced properties, PRDs above 1 suggest that the tax is being regressively applied. IAAO's upper and lower PRD thresholds are 1.10 and .95 respectively; values beyond either figure are considered a violation of professional standards.

The Illinois Department of Revenue uses COD and PRD to determine quality of assessment for urban parcels (Illinois, like many other states, applies separate procedures to farm properties) and publishes an annual report listing PRDs and CODs by county. The present study tracks Illinois' county COD and PRD scores over 12 years to determine whether assessment uniformity has been improving or deteriorating. Data were supplied by the Department of Revenue for 1974-85, the most recent available. Cook County was omitted because, for all practical purposes, it has its own system of property tax classification and administration. The present findings are important for two reasons. They allow citizens to determine how well certain public officials are fulfilling their oath of office, and they can suggest whether state officials should consider changing current policies in order to improve property tax administration in Illinois.

Tables 1 and 2 display the findings for COD and PRD respectively in downstate counties registering significant changes (.05 percent probability) in assessment uniformity.

The findings for COD reveal an overall deterioration in general assessment uniformity. Only 11 counties show significant improvement while 23 have significantly worsened, roughly a 2 to 1 ratio. The sample mean scores for the period suggest that many of these counties were considerably beyond IAAO's maximum acceptable level of 20. The entire COD sample contained 1,212 observations (101 counties with 12 values each). A further look at these data reveals the extent of nonuniformity. In particular, it was determined that only 4 percent of the entire sample was at or below IAAO's acceptable boundary of 20.

The PRDs indicate an overall trend toward greater overtaxation of lower priced parcels, compared to their higher priced counterparts. In approximately one-third of all downstate counties there has been a significant increase in regressive application of assessments. In only five counties have assessments been applied significantly less regressively. While the mean values of the table suggest that assessments have been regressively applied in most of these 36 counties, the picture across the state is even worse. Applying IAAO standards to the 1,212 observations for the entire 101 counties shows the following: PRD too low (less than .95) — 1 percent; acceptable (.95 to 1.1) —36 percent; and too high (above 1.1) — 63 percent.

There are several reasons why Illinois' assessing system has deteriorated so. For one thing, probably few citizens understand assessing procedures well enough to decipher their own tax bills, let alone being able to use COD and/or PRD to judge assessment uniformity. Few high school or college classes provide instruction in these matters. Second, reform is costly, and state and local officials cannot be expected, without considerable citizen prodding, to budget the monies necessary for improving things. Property tax reform is not a very sexy campaign issue. Finally, the present arrangement tends to benefit the politically influential, so how could one expect rational public officials to advocate property tax reform strongly when changing the system would probably most harm those citizens whose support these officials are soliciting?

Some states, such as Wisconsin and Florida have nevertheless implemented policies leading to greater property tax uniformity. Reform requires the state to play an active role. For example, a recent analysis of CODs in Virginia concluded that ". . . more state supervision and technical assistance could improve [local] assessment performance." If the Illinois Department of Revenue and other state officials decide to involve themselves in such activities, suggestions for action abound.

Professional organizations such as IAAO and students of property tax reform traditionally suggest some far-reaching and potentially effective changes, but they have yet to be adopted in Illinois:

• Use full market rather than fractional assessments. Under Illinois law property is assesed at 33 1/3 percent of market value. Since few taxpayers fully understand exactly how assessments are determined, let alone the difference between full and fractional values, even the overassessed are likely to assume they are being underassessed when their $45,000 house is valued at "only" $20,000. In other words, the current practice is misleading. According to John Shannon, formerly senior analyst with the Advisory Commission on Intergovernmental Relations, ". . .the lower the assessment level, the larger becomes the administrative graveyard in which the assessor can bury his mistakes." The legislature should require that all assessments be listed at full market value.

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• Change to annual reassessment. Illinois' quadrennial assessment system means that most properties go at least four years before being reassessed. When the economy is highly volatile, real estate prices can change significantly in a short period, causing large differentials between assessed and market values. For example, someone may sell a home at a very low price simply because the economy is in a recession and the parcel could not be sold otherwise. Or announcement of construction of a large, new manufacturing plant in some community can significantly inflate property values. Such conditions can cause the estimated and actual market values to differ widely. Annual reassessment would stay closer to market conditions. The availability of large memory personal computers makes this recommendation even more attractive and practical.
• Use only professional, full-time assessors. Taxing districts should be required to have all assessments made by full-time, adequately paid professionals. The use of professionals entails strict training standards. All taxing officials should complete both basic and ongoing (continuing education) assessing classes. The latter would keep officials abreast of technological developments in the field, especially the use of computer assisted mass reappraisal techniques.
• Another drastic suggestion appears in a recent study for the Illinois Tax Foundation. Authors Fred Giertz and David Chicoine recommend that the state increase the size of assessing districts to units of at least 4,000 persons, in territories with at least 25 nonfarm sales in three of the last four calendar years preceding the reorganization. The authors found that the larger the assessing district, the greater the uniformity ". . .until the size of the district reach[es] 4,000." Where such consolidations are not possible, the taxing jurisdiction should contract either with another district, so that it becomes part of a service area meeting these population criteria, or with the county supervisor of assessments.

For an earlier study the authors interviewed a cross section of assessing officers. Among their suggestions were the following:

• Expand property classifications. Many taxing districts around the nation use separate categories, such as "residential," "commercial" and "not-for-profit," for various types of parcels. This is preferred. It is easier to appraise residential properties than commercial because there is less variation among the former, and other nearby sales can be used to make inferences about the value of residential parcels. Illinois classifies all downstate properties as either urban or rural, meaning that commercial properties and private residences are combined when calculating COD. The result is unreliable because of the distorting effects of commercial sales. Use of separate classifications would call attention to jurisdictions where there is a need to upgrade assessments for residential and/or commercial properties.
• The Department of Revenue should establish a board of advisers composed of local officials. This board could offer suggestions for improving the present system. Since those who actually conduct assessments are probably most aware of what should be done to achieve greater uniformity, department officials should actively solicit their opinions.
• The state should require that all county board of review members become Certified Illinois Assessing Officers after a certain period in office or be replaced. Professional assessors would not then face possible changes in their assessments by an untrained board, as is now the case. The state would also monitor action by each board of review on claims for tax relief. If it found a pattern of ignoring valid claims, the state would assume responsibility for making such determinations, at least until appointment of a new board.
• The Department of Revenue should greatly expand its local and regional educational offerings. These would not only improve operation at the local level but also bring department officials into closer contact with problems that exist there. In addition to devising its own regional programs of education and dissemination of information, the department should assist local communities in paying for certain private sector training courses, such as those offered by IAAO. In many cases local assessors complain of difficulty in convincing their county boards to pay for such training. Some assessors pay for courses out-of-pocket.
• The Department of Revenue should assist local districts in purchasing computer equipment, possibly through matching funds. In this regard, the state should serve as a mass purchaser for these technologies, taking advantage of lower prices associated with bulk buying.
• The Department of Revenue could develop informational advertising in various media to inform citizens about assessment procedures and practices. It could also develop an educational module for high schools and colleges to show how the property tax is administered, including discussion of the importance of obtaining uniform appraisals.

There is no doubt that reforming administration of the Illinois property tax will be fiscally and politically expensive. The PRD and COD findings suggest that while some people operate efficiently under the present arrangement, assessing accuracy has significantly improved in fewer than 13 percent of the state's 101 downstate counties. If state officials are really committed to the constitutionally guaranteed concept of "equal treatment under law" and want more closely to approach this goal, they must finance the necessary research on improving property tax administration and adopt the policy recommendations suggested by the findings.

If public officials are unwilling to adopt and support policies designed to achieve greater uniformity, then it may be up to the taxpayers. If overassessed property owners or their representatives decide to challenge the constitutionality of existing practices, the courts might well rule that substantial nonuniformity violates the guarantee of equal protection.□

Kenneth Oldfield is assistant professor of public administration at Sangamon State University and a research affiliate with the Center for Policy Studies and Program Evaluation. Donald Escarraz is professor of finance at the University of North Dakota.

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