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Evidence from Current County Reappraisals of the Impact of Recent Property Value Declines on Future Reappraisals and Taxable Assessments1

by Stanley Chervin, PhD and Harry A. Green, PhD

Twenty-four counties reappraised property in 2010, and 20 counties reappraised in 2011. These reappraisals were based, in most part, on property sales and prices during 2009 and 2010, respectively. The declines in residential market values since their peaks in 2008 and early 2009 (see Chart 1) are expected to have a clear negative impact on taxable assessments beginning with reappraisals in 2011 (based on sales during 2010) and thereafter.

Housing chart

Falling property values do not affect assessments immediately. In fact, they may not affect assessments for several years because local governments in Tennessee do not reappraise taxable property every year, but rather every 4 to 6 years. Declines in taxable assessments will continue as long as property values continue to fall.

Housing price data in Chart 1 reflects price trends for the state and several metropolitan statistical areas (MSAs). There is no consistent index of housing prices for Tennessee counties, and data for the MSAs provide only general guidance on trends within each MSA. The Nashville MSA, for example, includes 13 counties, each of which is likely to have different housing price trends.

Since housing prices peaked beginning in 2007 and ending in 2008, the true litmus test of the effect of the housing value slump on reappraisals will first come when counties who last reappraised in 2008 and in 2009 (based respectively on sales in 2007 and 2008) reappraise in 2012 and 2013.2 While no county that last reappraised in 2008 is on a 4-year cycle, several that last reappraised in 2009 are, including Tennessee’s four largest counties.


Tentative Evidence from Reappraisals in 2010 and 2011

Examination of total assessments following reappraisals in 2010 and 2011 are analyzed for evidence of the effect of the housing slump on total assessments. Twenty-four counties reappraised in 2010. Total local assessments increased in all 24 counties. The median increase was 13.8%. Increases ranged from a low of 3.5% in Maury County to a high of 34% in Wayne County. Ten of the counties that reappraised in 2010 last reappraised in 2004 (on a 6-year cycle); 9 last reappraised in 2005 (on a 5-year cycle); and 5 last reappraised in 2006 (on a 4-year cycle). In general, the longer the reappraisal cycle for the counties reappraising in 2010, the larger the increase in total assessments.

Chart 1 helps explain the growth in assessments for the 24 counties that reappraised in 2010. Counties that last reappraised in 2004, 2005, and even 2006 continued to enjoy property value growth until values peaked in 2008. While all counties probably experienced declines in property values beginning in 2009, the market value of homes in 2009 (the basis for 2010 reappraisals) were, on average, still above values established in the previous reappraisals in 2004 (based on 2003 sales), 2005 (based on 2004 sales), and 2006 (based on 2005 sales). Thus while all counties may have experienced declines in property values since 2008, the gains in values in previous years for these counties appear to have been greater than the market value declines experienced more recently.

In contrast, reappraisals in 2011 show some clear evidence of the negative effect of the continuing decline in property values with several counties experiencing actual declines in total assessments following reappraisals.

Table 1 summarizes data for the 20 counties that reappraised in 2011. Only 1 of the counties is on a 4-year reappraisal cycle (Carroll), 10 counties are on a 5-year reappraisal cycle, and 9 counties are on a 6-year reappraisal cycle.

The effect of the recession and declining property values is clearly evident for this latest group of reappraising counties (see Table 2). Total local property assessments declined in 7 counties, including De Kalb (-2.1%), Humphreys (-0.7%), Jackson (-1.0%), Meigs (-2.5%), Sequatchie (-0.6%), Sevier (-4.2%), and Wilson (-0.7%). Table 2 reflects the results of the 2011 reappraisals on total local assessments for all 20 counties.

The largest declines occurred in DeKalb, Meigs, and Sevier counties. While residential home values have declined in most counties, the effect on assessments has been greater in some than in others.

The somewhat early negative effect of the recession on total assessments in 2 of these counties appears to be partly the result of 2 factors:

  • Market values of owned and rented resort homes in both counties declined significantly, and such homes are a relatively larger component of the tax base in those counties than in most. In Sevier County, the attraction of the Smokies explains the large number of owned and rented vacation properties; in DeKalb County the explanation is recent increases in resort home developments around Center Hill Lake.3
  • Much of the development boom in these counties was recent, much since 2000. Many of the properties built during the boom years became initially taxable in 2004 through 2009 at inflated and often speculative prices. Such properties entered the tax rolls at peak prices, while pre-existing non-resort properties saw more modest gains. When the housing price bubble burst, recently built resort and rental homes fell in value more precipitously than other properties, and reappraisal valuations in counties with a relatively higher concentration of such properties fell more than in other counties.

Reappraisals that result in a decline in total local assessments are unusual, given historically rising property values in conjunction with 4-to 6- year reappraisal cycles. Declines, when they do occur, will result in certified tax rates that are higher than previously levied tax rates, creating difficulties for local governing bodies that must deal with a decline in the tax base of their major tax source.


Truth in Taxation

State law establishes the following process following a reappraisal:

  • T.C.A. 67-5-1701 et seq. requires local assessors, following a reappraisal, to certify the new total assessed value of taxable property in their jurisdiction, and to provide an estimate of the total assessed value of new property that was not included in the previous year’s assessment for the jurisdiction.
  • The local governing body then determines and certifies a tax rate (certified tax rate) that when applied to the new total local assessment (excluding new construction and improvements) would generate the same property tax revenue as in the previous year.
  • The local governing body, if it chooses to set a new tax rate above the “certified rate,” must first advertise its intent to do so in a newspaper of general circulation in the county.

This procedure is generally known in Tennessee as the “truth-in-taxation” law.4

Table 3. Effect of 2011 Reappraisals on Certified and Actual Tax Rates

Table 3 reflects some trends that will likely be repeated as counties reappraise in the future. Declines in local assessments will automatically force or place great pressures on most counties (and cities) to raise nominal tax rates above those imposed in the previous year.5 As Table 3 shows, 3 of the 7 counties that experienced declines in total assessments increased their actual property tax rate to the certified tax rate (Meigs, Sevier, and Wilson), while the remaining four (DeKalb, Humphreys, Jackson, and Sequatchie) increased their property tax rate above the certified tax rate.6

Table 4. Counties Reappraising in 2012

Ten counties will reappraise in 2012 based on sale values for 2011 (see Table 4). Seven of these counties will be reappraising properties last reappraised based on sale values during 2006. While housing values in most locations continued to climb after 2006, values today (2011) for homes that existed in 2006, are on average at their 2006 levels. The implication for these 7 counties is that reappraisal values next year for properties last reappraised in 2006 will change little.


Endnotes

1Most of the report deals with the effect of declining residential values on current and future reappraisals. While industrial and commercial property values also affect the results of reappraisals on taxable assessments and tax rates, there are significantly fewer sales of such properties, and as a result, less available data with which to track changes in such property values.  Conversations with individuals who specialize in commercial and industrial properties suggest that their values have declined in tandem with housing values.

2See schedule at http://www.comptroller1.state.tn.us/PAnew/Schedule.asp.

3Based on conversations with local tax authorities. Meigs County has also experienced recent development around Watts Bar Lake, but no definitive effect of such building and recent falling prices could be identified.

4For an expanded description of certified tax rates, go to http://www.comptroller1.state.tn.us/sboe/sbcert.asp.

5 Expenditure cuts offer an alternate solution.

6 In addition, twelve of the fourteen cities (that levy property taxes) located in these seven counties increased their tax rate to the certified tax rate, while two Pigeon Forge (in Sevier County) and Watertown (in Wilson County) increased their property tax rate above the certified tax rate.


December 2011