EYE ON THE PIE: Trending will rot out property tax deal

March 24, 2008

"They" have gone home. "They" are the neighbors we asked to serve in the Indiana General Assembly. They are reasonable, pleasant, well-intentioned people who act like irresponsible, ignorant and fearful children when organized into caucuses. Legislators in a caucus are similar to slaves in a galley ship, coerced to move to the beat of a single drum, rowing in unison, not knowing where their efforts will lead.

Our legislators spent months chanting old sea ditties about property tax reform. Now the ship has docked and they are returning home. They will give us the old, "Aw, shucks," and tell us they are not perfectly satisfied with the results. "Yet," they'll say with a wink of knowing conviction, "compromise is the name of the game."

They will tell us they have achieved what the governor proposed, changes that are "fair, far-reaching and final." But no changes could be fair, far-reaching or final without starting at the beginning of the property tax process-assessment.

"Fair" assessment is at the heart of the property tax issue. But, as far as I can tell, they let stand the practice of "trending," which has been introduced to update assessments. Trending is a good idea on the surface that may make little sense in practice.

In its simplest form, trending compares the selling price of properties over time in individual neighborhoods and applies the resulting average percent change to all other similar properties.

Jack and Jill each moved into identical houses next door to each other last year. They paid the same amount for their properties. Since then, Jack (who watches HGTV on cable) painted every room in his house, installed new carpets, refurbished the bathroom, and put new appliances in the kitchen and a new water heater in the basement. Now he is ready to sell to a buyer offering 20-percent more than what Jack paid for the house.

Jill did nothing to fix up her house. Is her house also worth 20-percent more? In this simplest form, trending would increase Jill's assessed value by the same percentage that applies to Jack's house.

Trending makes sense for those factors that are common to all similar properties in a neighborhood. If a school is built or a firehouse opened, if old sidewalks are repaired or crime is reduced, then each property gains value. It is the land, the location, not the house that is at issue in such matters.

How can you separate a house from its site for valuation purposes? It is done all the time. We insure cars, varying the rates by where the car is parked at night. A house in Elkhart and the very same house in Goshen will not sell for the same price. Twin houses separated by a school district line will not sell for the same money. No two homes are identical after a few minutes of occupancy, but we can differentiate land values if we make the effort.

The sales tax is based on the actual amount of the sale. The income tax is based on documented income. Neither is collected on the basis of a statistical model equivalent to the old saying, "A rising tide lifts all boats." What is true for boats on the water may not hold for property values on land.

An inadequate trending approach has been left as part of our property tax assessment procedures. If assessments are not appropriate, the entire system is corrupted. That's how the Legislature left it. Are we expected to live with it?

Marcus taught economics for more than 30 years at Indiana University and is the former director of IU's Business Research Center. His column appears weekly. He can be reached at mmarcus@ibj.com.
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