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ECONOMIC ANALYSIS: It's time to use mass-appraisal model on state's homes

November 5, 2007

In the 10 years since Indiana's property-appraisal system was ruled unconstitutional, taxpayers have spent perhaps $1 billion to remedy the situation. That's more than $350 per household, and more than we spend on environmental protection each year. "Wowser" is the only printable exclamation I can muster.

Among other things, Gov. Mitch Daniels' tax plan proposes the elimination of the township assessors (there are 1,008 offices statewide). According to a 2004 Chamber of Commerce study, streamlining the system would result in a little more than $10 million in savings each year. This still leaves our assessment costs in excess of $200 million per year. There is another way to reduce costs and provide a uniform market-based estimate of property values.

Since I was in fifth grade, economists have been using pretty straightforward techniques to value homes by their individual characteristics, location and regional amenities. These techniques have been adopted by most states, and virtually all commercial enterprises. Indeed, a number of Indiana townships have contracted for these services through commercial vendors. Sadly, the statewide cost on this service would be only a fraction higher than the cost for an individual township. Statewide, the cost would be a small percentage of the current appraisal expense.

Opponents of Daniels' plan will argue that such an important function of government can't be left to the private sector or that the contractors cannot be expected to do as good a job as local appraisers. I disagree, and here's why.

Mass appraisals of Indiana property would be based on a 40-year-old methodology that has been widely proven both in practice and in particulars. Economists even have used the technique to value parklands, good schools and to discount property based on proximity to airport noise and registered sex offenders.

Fairly established criteria-such as home and parcel size, construction, number of rooms-will work. The models can be recalibrated each year based on updated sales information of homes in the area. In the end, any mass appraisal effort will be imperfect. But for a fraction of the cost than the current system.

Most important, Hoosiers are used to mass appraisals. When I moved to Indiana, I bought a home that was priced by a real estate agent using a mass-appraisal formula. I received a home mortgage from a company in Florida that used a mass-appraisal system to evaluate my home's value. I then contracted for homeowner's insurance, with my rate set using a mass-appraisal model of the home's value (minus the land).

The value of my automobile was established using a mass-appraisal program. The only transaction I've been involved with that did not employ a mass-appraisal was in the tax valuation of my home.

It's time to fix our appraisal system and let taxpayers spend the savings on something else.



Hicks is director of the Bureau of Business Research at Ball State University. His column appears weekly. He can be reached at bbr@bsu.edu.
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