Property Value Changes Affect State School Aid Equalization And County Tax Apportionment

EQUALIZATION ORIGINEqualization for State schoolin the equalization process --- lots of trouble. State
aid purposes is the process of determining thegovernment cannot hope to moderate the force of
aggregate true value of all real property in each of theinflation that impact on the changes in the sale prices
State's 566 taxing districts. This figure is established byof property which sale prices determine the
a program of assessment to sales ratio analysis. Theassessment to sale ratio that is used in the equalization
aggregate true value of real property, together withprocess.However, underlying the use of the
the value of second class railroad property and theassessment to sales ratio for equalization purposes
assessed value of locally assessed business personalhas been a tacit belief that most real estate values will
property, is known as the "equalized valuation."Thebe largely stable from year to year. As a matter of
present equalization program had its origin in 1954course the State relies upon an equalization process
when a considerably expanded State aid program forwhich is based on this assumption. Most changes in
education was enacted, with the distribution formulavalue for equalization purposes are expected to be
based on "equalized valuation," rather then upongradual rather than large or sudden.
assessed valuation. Equalized valuation has beenCAUSES OF INCREASES IN PRICES OF REAL
carried forward as a basic component of newerESTATEMany forces of demographic change, large
formulae set forth by the Legislature from time to timestock market capital gain realizations, desire to live in
to calculate the distribution of State school aidthe municipalities with the best school systems, trends
funds.The equalization process is intended to providein personal tastes for larger homes, an increase in real
stability in the total market value of a municipality overpersonal income, and so on, have been operating on
time. This is an important goal for the sake of stability,real estate prices. All of these wants of people raise
predictability, and fairness in municipal and schoolthe demand for housing and for places to work and
finance. It is intended to completely reflect changes inplay. And, they are not making any more land on which
market value each year, and thus to bring theto satisfy these wants. Therefore, the increase in the
assessments in all municipalities to a common standard.demand for space will continue to have a relatively
On the other hand, it is constrained not to change "toolarger influence on land prices. Also, the prospect of
much" by the averaging together of two years' trueinflation leads some investors seeking protection from
values to prevent large fluctuations in municipalinflation to acquire real property. While inflation at the
equalized values. This two year averaging is used insame time induces other owners to hold property
order to preserve stability in municipal and schoolwhen sale would have been the normal action, thus
finance.THE SALES RATIO PROGRAMThe saleshyper inflating property sale prices. Historically, through
ratio program is based upon a comparison of theinnumerable inflations, the possession of land and
assessed values of parcels of real property whichbuildings has preserved real value when money and
have been sold, and for which deeds have beenmay other assets have lost much of their worth. Our
recorded, with their sale values. It is assumed that theown recent history seems to confirm the principle.
assessments on the properties sold will beWithin a locality the specific changes can diverge
representative of the assessment practice in thesignificantly. These specific changes can create wide
taxing district. Thus, if the assessment of theswings in the price people are willing to pay for
properties sold average 90 percent of the sale prices,property and in particular land.State government must
the assumption is that all similar properties in the taxinglearn to live, somehow, with an annual equalization
district are being assessed at an average of 90process that conforms to a frequency of value
percent of their true value or market value.DIVISIONchanges that in the past were brushed aside because
OF TAXATION RESPONSIBILITYResponsibility forthe amounts involved seemed too small to be troubled
the sales ratio program rests with the Propertyabout.Perhaps one way to stabilize the annual
Administration Section in the Division of Taxation.equalization process would be to double weight the
Procedures of sales data collection and analysis haveprevious years' true value when the "Hyper Land
been developed by that section, but the success ofChange Factor"is one. A factor of one means that the
the process requires the cooperation of every countypercent change in land assessed values statewide
board of taxation and every local assessor. Thehave increased at a rate of growth twice the rate of
results of the section's work, in the form of the Tablechange in the State CPI in a particular year. During the
of Equalized Valuations, is certified by the Director ofperiod from 1971 to 1999, a period of 29 years, a
the Division of Taxation on October 1 of each year tofactor of one occurred ten times in New Jersey.
the Commissioner of Education for State school aidRemember, that 43% of the CPI index is comprised of
purposes, and delivered to each county board ofhousing. This periodic adjustment to the equalization
taxation for the purposes of apportioning the costs ofprocess would serve to stabilize the total market value
county government and of school districts coveringof municipalities in the State over time. This is an
more than one taxing district. This calculation ofimportant goal for the stability, predictability, and
equalized values is one of the most important tasks offairness in municipal and school finance. It would
the Division of Taxation. The results of the calculationremove the sudden increases in equalized values
have widespread ramifications for the fiscal conditionreflected in periods of hyper inflation as reflected in
of the municipalities and school districts in the State,land prices and thus bring the annual equalized values
and therefore (indirectly) the welfare of every residentin all municipalities to a more common stable standard.
of the State.THE SAMPLEThe utility of any propertyIn preventing large fluctuations in municipal equalized
equalization program, including the one used for Statevalues from year to year in this manner stability in
school aid, is contingent upon the extent to which themunicipal and school finance could be preserved.
sample of sales-assessment ratios is representativePerhaps many suburban and rural municipalities have
of all property assessments within the taxing district.their county tax apportionment costs increase rapidly
Although it is generally assumed that a large sample iswhen double digit land increases occur. Other
preferable to a smaller sample, this is not necessarilymunicipalities may lose State school aid dollars
true in all cases. The test concerns the randomness ofbecause of becoming property rich in short order.
selection in a manner to represent all areas of theStability has a lot of friends in local public
taxing district and all characteristics of property withinfinance.Biography: Gerald 'Jerry' Dowgin "The Property
the tax roll of the taxing district. The implied appraisalTax Doctor" and the author of the Homeowner's
of the sample requires information not presentlyAssessment Review Guide ( a former tax assessor
available in any centralized tabulation of "usable sales."worked in the field of public finance at the State and
One way to increase the randomness in the processlocal levels in New Jersey for more than three
of estimating market values is to use sales data fromdecades until his retirement in 2001. As a Supervising
a period of time longer than one year. The equalizationTax Analyst in the Office of Research and Statistics
process currently in place does exactly this byin the Division of Taxation in the New Jersey
averaging the estimated market values from both theDepartment of Treasury he worked principally on local
current and previous year when calculating theproperty tax issues. Then he joined the Office of
equalization ratio. More precisely, the current systemLegislative Services (OLS) in 1983 and served as the
averages two year's values each computed using oneSecretary to the New Jersey Property Tax
year's worth of useable sales data.INFLATION /Assessment Study Commission for four years.
DEFLATIONEither inflation or deflation assures trouble