The Equalization Ratio: The Curveball of the Property Tax System
The most counterintuitive aspect of the property tax system is the equalization ratio. If a taxpayer has very reliable information that the assessed value is significantly higher than the market value of the property, it would seem that the taxpayer should be entitled to a refund of property taxes. However, even if a taxpayer can prove that its property is assessed at a higher value than the property is worth, it is not sufficient to establish that the taxpayer is entitled to a reduction in its property taxes. Why? Because there is one more piece to the puzzle, and that it is the equalization ratio.
In order to be entitled to a reduction in property taxes on a property it is not sufficient to prove that the assessed value is higher than the market value of the property. In order to be entitled to property tax refund a taxpayer must prove that a property is assessed at a higher level of assessment than the general level of assessment for a jurisdiction. If a property is assessed at a higher level than the general level of assessment for the jurisdiction, it results in a disproportionate assessment. In other words, the taxpayer with a disproportionate assessment is paying more than its fair share.
A critical component of determining whether an assessment is disproportionate is the equalization ratio. The equalization ratio is determined for a jurisdiction by conducting a ratio study in which the sales prices of properties that sold in certain time period are compared to the assessed values of property. The equalization study is often conducted by the state or county government because it is often used for inter-jurisdictional taxes. The resulting statistic, the equalization ratio, provides the general level of assessment for the jurisdiction.
If the assessment is divided by the equalization ratio, it gives you the equalized assessment. If the equalized assessment is higher than the fair market value of the property, then the assessment is disproportionate, and the taxpayer has grounds for a reduction in property taxes. If the equalized assessment is equal to or less than the fair market value of the property, the taxpayer does not have grounds for a reduction in property taxes.
To give an example, Town A has an equalization ratio of 90%. If a taxpayer in Town A owns property that is assessed at $1,000,000, and the owner is able to prove that the market value is $1,000,000, the taxpayer would naturally believe that he or she would not be entitled to reduction in property taxes because the assessed value is equal to the market value. However, the equalization ratio tells us that on average property in Town A is assessed at 90% of market value, so our taxpayer is disproportionately assessed. The equalized assessment, the assessed value divided by the equalization ratio, in this example is $1,111,111. By comparing the market value, $1,000,000, to the equalized assessed value of $1,111,111, we can see that the taxpayer in Town A is paying more than its fair share of taxes.
Now let’s assume Town B has an equalization ratio of 110%. This means that on average properties in Town B are assessed at 110% of market value. If a taxpayer in Town B owns property that is assessed at $1,100,000, and the owner is able to prove that the market value of a property is only $1,000,000, the owner would not be entitled to reduction in property taxes even though the assessment is higher than the market value by $100,000. This is because the equalized assessment is $1,000,000 which equals the fair market value of the property.
While the property tax system has its advantages, it is filled with complexities like the equalization ratio. The equalization ratio serves a valuable purpose by providing information about the level of assessment for a jurisdiction. It is also an aspect of the property tax that creates confusion about whether or not a taxpayer should seek a property tax refund.
For more information or advice on whether you may be eligible for a property tax refund, please visit Allobar Strategies or call (603) 333-2211.
By: John F. Hayes, Esq., General Counsel to Allobar Strategies.