The Acquisition Method vs. Ad Valorem Residential Property Taxation

By Theodore R. Smith
ESTA Technical Director
Alpine, Wyoming

Wyoming's system of determining property taxes is characterized by a complicated system for determining value, is poorly administered, and threatens the ability of families in the state to meet the challenge of the resultant fast-rising taxes.  It is built on the fallacy that a computer assisted mass appraisal (CAMA) system can accurately infer the “Fair Market Value” of properties that have not sold.  In reality the only reliable indication of a property’s “Fair Market Value” is its actual sales price as reflected by a market transaction between a willing buyer and a willing seller.  Such a system, known as Acquisition Valuation, has been developed and implemented in 29 states throughout America.  The time has come for Wyoming to recognize the need for transparency, fairness and equity in its property tax system and for it too to adopt Acquisition Valuation as the basis for its residential property tax.

Property taxation is the most widely used source of revenue for local governments throughout the United States.  At the same time it is one of the most difficult to administer in a fair and equitable manner.  Wyoming courts have ruled that the property tax has not been correctly administered, and the State’s Department of Revenue has attempted to remedy these deficiencies through its adoption of a Computerized Assisted Mass Appraisal (CAMA) system, which unfortunately was developed and refined for tax jurisdictions with more homogeneous property compositions and where property tax administration was more fully staffed by professional assessors. 

The Wyoming court ruling declared it was inappropriate for county assessors to rely on strict replacement cost estimates when assessing properties.  In selecting the CAMA system the State believed there would be three elements that could contribute to the determination of property values, those were:

1. Replacement cost as calculated by the Marshall & Swift computerized cost routines;

2. Simple and Multiple Regression estimates that inferred values through the use of mathematical equations drawn from sales data that was processed by the Statistical Package for Social Science (SPSS) computer routines; and,

3. Assessment/Sale Ratios that were calculated by the CAMA system dividing the assessed value by the price of recent sales data and then applying these ratios to properties which had not sold.

Unfortunately the statistical equations State administrators thought would yield market derived estimates of property values have proven to be ineffective for several reasons:

1. Wyoming is a diverse state, and the data necessary for estimating regression equations is not readily available;

2. The underlying statistical equations require very specific assumptions that are not generally met;

3. Assessors throughout the state have found the use of regression equations to be a mystery they have been unable to solve; and,

4. In those limited instances where assessors have attempted to use regression estimates to infer property values, they have incorrectly applied the technique.

In discussions with Department of Revenue representatives, they have acknowledged the shortcomings of the CAMA system’s statistical routines.  This glaring deficiency has resulted in local assessors continuing to rely on the traditional cost approach for improvements and subjective estimates of land values which are not built on valid market data.  These shortcomings in the CAMA system have led local assessors to use assessment/sales ratios derived from non-comparable sales data and then factor questionable replacement cost estimates upward. 

Established home owners in Wyoming do not sell their homes at a pace anywhere near the national average.  Working people save to buy a home and stretch as far as is financially feasible when they make their purchase.  Typically we have seen little growth in family income and parents are strapped to pay for the costs of raising their children, supplying food, paying for clothing and most recently trying to cover the cost of fuel and electricity.  They have not planned for double digit increase in the rate of property taxation.  Yet expenditures in most counties continue to rise at an alarming rate.  For example, the most recent audited statement for Lincoln County disclosed that revenues increased from $17,527,679 in 2006 to $21,764,304 in 2007: an increase of 24% in a single year.  This happened when family income remained stagnant at near $57,000 per year.

The argument is made that the value of homes is increasing; therefore, families are prosperous as property values increase, and they are more capable of paying higher property taxes.  There is little consideration for the fact that families have not experienced a corresponding increase in their income.  Elderly who have retired on pensions and social security also have not experienced increases in their income.  More often only those newcomers moving into the community and have higher incomes and are consequently able to pay the higher taxes required by the expensive home they are purchasing.

The current “Fair Market Value” property tax system does not allow property taxes to remain at the level calculated at the time a home is purchased.  There is no consideration of a family’s ability to pay property taxes from current income under the “Fair Market Value” system.  According to the CAMA generated assessment/sale ratios, if a few properties in the community sell at a price that is significantly higher the valuations of those homes which have not sold, the unsold homes must be factored upward, regardless of the owner’s income and ability to pay.  Property owners in some counties have seen their property taxes increase by 100%--500%.  The sale of newer or larger homes does not necessarily mean existing homes are worth more.

However, there are government officials who contend that the mere inference a property is worth more than was originally paid is justification for taxation at what they deem to be “Fair Market Value.”  For normal families and the average retired person the only recourse is to sell their home and move elsewhere.  They can only hope to find a job in a location where urban growth has not inflated property values and they can live their lives and raise their children without the fear of an ongoing financial crisis hanging over their heads.  They must do so even if they have to move away from family and long-standing friends.  There is no sense of fairness and equity in such a system.

Under Federal Income Tax Regulations, property owners who have an increase in property values are not required to pay taxes on this “unrecognized” increase in value until such time as they have sold their home and have realized the money necessary to pay the tax.  Even in these instances the Federal Government has recognized the importance of home ownership to the American way of life and has built in sizable exemptions for homeowners who sell their property.

The current property tax system in Wyoming does not allow for a gain to be recognized nor does it take into consideration a family’s ability to pay when levying property taxes.  Moreover, the State mandated CAMA system does not have the capacity to accurately appraise individual properties to insure the property owner that their home is being accurately and “fairly” valued. 

The only truly accurate estimate of the value a family’s home is the actual price that is realized at the time it is sold or purchased.  At this time 29 states have recognized the inequity and burden a “Fair Market Value” based property tax system places on the elderly and working families.  Those states have adopted what is termed the Acquisition Valuation approach to property taxation.

The Acquisition Valuation method is simple and does not require a complicated computer system, not does it necessitate spending several hundred thousand dollars a year on ill-trained property tax assessors.  The selling price of a home is confirmed by the buyer and the seller and that value is recorded as the basis for property tax assessment.  Families know at the time they purchase their home the property taxes they will be paying.  In most states allowances are made for inflationary adjustments in property taxes but these increases are generally limited to low single digit amounts or some recognized inflation index. 

If a family has purchased its property within the last two years, their valuation is fixed at their purchase price.  If a home was purchased prior to that time the assessment is fixed at the current assessed value and any increases are limited to the ceiling that has been set.  In many states there is a provision for the public, through an election process, to approve property tax overrides to enable the construction of certain capital improvements, such as schools or municipal buildings.  In these instances a plurality of two-thirds is often required.

It is important to note that there is no need for supplemental support from the State during a transition from the current system to one relying on Acquisition Valuation.  The new assessment roll would reflect the previous year’s assessments less any deductions that might have to be made for making sure properties sold in the last two years were listed at their sale price.  This would be offset by additions to the tax roll for properties that recently sold and were increased in value, again based on their sales price.

Given the defects in the current “Fair Market Value” system, and it associated inequities, Wyoming’s path to the future appears clear and the answer is adoption of Acquisition Valuation for its property tax administration.

Theodore R. Smith, Ph.D., a longtime resident of Wyoming, Dr. Smith has served on the staff of the International Tax Program at the Harvard Law School and has advised the IAAO and the Appraisal Institute on computerize valuation issues.  He has published extensively in the property tax and appraisal fields and has consulted with governments throughout the United States and abroad.
Rocky  Mountain Oil and Gas Association v. Bd. Of Equalization, 749 P. 2d 221 (Wyo.1987)
WYO STAT. § 39-2-102 (1994).