A $450,000,000 Disagreement: Evidence against Full Value Equalization Rates

Abstract

The complex connections between a state and a municipality it has created are said to be like those of a parent-child relationship, thus describing ties that are interdependent and reciprocal, and implying ties that are fractious. It is not necessary to stretch this analogy far to remark that as in most families, strain appears over money. Tension has arisen not only because the state has long been a source of revenues for its jurisdictions, but also because states have imposed numerous restrictions on how local governments can raise and spend revenue. The subject of this essay is a mechanism most states use to apportion aid and a few states use to limit local revenues: the equalization rate for assessed valuation of property, as determined by a ratio study. Because a state government needs to have a common basis for determining the need for aid or for computing the maximum tax burden local jurisdictions can impose, and because local revenue systems are based on property taxes, a ratio study is made to systematically compare local assessors' estimates of the value of taxable property to its actual market value. The comparison is expressed for each local jurisdiction by an equalization rate, which is the ratio of assessed value to market value.' Thus, an equalization rate of 0.5 means that the state has found a locality's valuation of property to be one-half what the property is actually worth. The way equalization rates are used can be understood by an elementary example. If there are two towns, each with locally declared valuations of $10,000,000 but with equalization rates of 0.25 and 0.50, the state will determine that the towns should neither receive identical amounts of state aid nor be restricted by the same limitation on local revenues. There are 42 states which regularly perform ratio studies,2 and most such studies are conducted by a stateauthorized agency. In theory, the studies are necessitated because different jurisdictions use different methods to determine value, so that to act fairly the state needs to adjust local estimations to a uniform standard. This essay is concerned with instances of ratio studies leading to unfair state actions. For example, simply because of the size of the equalization task-the many jurisdictions involved, the disparate types of property being valued-the state's estimation of full value inevitably lags behind movements in local real * Most states use the equalized full value of local jurisdictions in order to apportion state aid and to limit locally imposed tax burdens. New York State determined the equalized full value for New York City, and based on this figure imposed the 1982 taxing limit on the city. This essay describes the limit and the methods New York City used to provide evidence that it was too severe. While this evidence argues for a more liberal tax limit, it argues more forcefully that a tax limit based on direct measurement of full value is a poor administrative device. Since full value is only a vaguely definable concept and the relevant data is sparse, it does not lend itself to accurate measurement. In fact, it mandates both expensive oversights of the tax limitation by states and displays of brinksmanship and unnecessary contingency planning by local jurisdictions.