HOW ASSESSMENTS AND TAX BILLS ARE DEVELOPED FOR FY 2010

This memo is intended to shed some light on the confusing relationship between a property’s assessment for a given fiscal year and its fair market value at the time when the property owner first sees his new assessment. Despite the Assessor’s annual warning that current assessed values represent a historic value, not the current value of a property, each year when the new assessments are released, taxpayers call to report that their house is not worth what it is now being assessed for. In some cases, particularly when the property was not inspected recently, a review of the property record card will reveal an error. More often, however, the property record card is correct and the difference between the current value and the assessed value is explained by the fact that assessed values are values as of a specific date, January 1 of the year prior to the Fiscal Year and are based on sales that took place as much as a full year even before that date. In other words, when a property owner first sees his FY 2010 assessment, sometime late in 2009 or early 2010, it is based on sales that could be two years old. In this age of volatility in the real estate market, there can be very dramatic value shifts within a two year period. There has been a tremendous change in property values since the lows of the housing market in the early 90’s. From that time until late in 2005 there was a long, steady increase in property values that consistently produced assessments well below their actual market values at the time the assessments were released. The tide turned in 2005 and some values (although not all) generally began to decrease. It is, therefore, to be expected that the new assessments for FY 2010 (which represent the property value as of January 1, 2009 and are based on sales from calendar year 2008) will, in some cases, come in higher than the current market value.

Recognizing that current market values can be lower than assessed values is the first step in understanding how the complex tax system works. Equally important is how what for so long was an “under-assessment” and now is an “over-assessment” can actually produce a tax bill that is fair to everyone. The answer to that question has two parts. The first is that everyone’s assessment for fiscal year 2010 is based on sales from 2008, not just one individual’s assessment or one section of town’s assessments. The field is level for everyone. The second part of the answer relates to how the tax bill is generated. Imagine that the City of Melrose is a large corporation and property owners all have shares in the corporation. The number of shares each person owns can be thought of as the total value of his/her real estate in the city. The Assessor’s job is to calculate that total each year and compute a tax rate that, multiplied by the shares everyone owns, will cover that part of the cost of running the corporation that is the responsibility of real estate owners. Real estate taxes comprise about 55% of the city’s budget while the other 45% of the budget comes from other sources such as state contributions, excise taxes, lottery shares, etc.

The amount that can be taken from real estate taxes (the tax levy) is set by the Department of Revenue at 2 ½% higher from one year to the next. Only new growth (new construction) and overrides or debt exclusions voted by the citizenry can be added to the 2 ½%. There are no exceptions to these rules. Any municipality trying to take even a single penny over the permitted amount will have their tax rate rejected by the Department of Revenue and a new, lower tax rate will need to be set before any tax bill can be sent out. The procedure, then, is that the Assessor calculates the number of shares each property owner has (the assessment), adds all the shares together to get the total number of shares outstanding, and divides that sum by the tax levy the Department of Revenue allows, with the result being the tax rate. Since the allowable tax levy is fixed and cannot change by law no matter how badly a municipality needs or wants more money, the two variables in the equation can only be the number of shares outstanding (the total of the assessments) and the tax rate. When values go up, the tax rate comes down and when values come down, the tax rate goes up. Either way everyone’s tax bill will be exactly the same in any given year. (See illustration below)

ILLUSTRATION:
As of January 1, 2009 (target date for FY 2010 values), the value of all taxable properties in Melrose was calculated at $3,518,831,885. The tax levy allowed by the Department of Revenue for FY 2009 is $43,780,661. In order to cover the tax levy from the 3,518,831,885 outstanding shares in the corporation, the formula is 43,780,661 divided by 3,518,831,885 or .012442. For every share owned in the corporation, the owners will pay .01244 cents in taxes. In Massachusetts we move the decimal three places to the right so the number is more easily understood, so we say the tax rate is $12.44 per thousand of assessed value. If we didn’t have a split tax rate where commercial properties pay more than residential properties, the tax rate for everyone for FY 2010 would be $12.44. At that rate, the average single family dwelling in Melrose, assessed for FY 2010 at $395,000, would be taxed for the year at $4,914, rounded.

Next, let’s see how the average tax bill would be exactly the same if we used current market values instead of market values as of January 1, 2009. For our example we will assume that the fair market value of all properties in Melrose dropped 2% between January 1, 2009 and January 1, 2010. We now will calculate the tax bill for FY 2010 based on the lower values of January 1, 2010. Property values which totaled 3,518,831,885 on January 1, 2009 are now worth only $3,448,455,247 on January 1, 2010. The tax levy does not change. The total amount of real estate taxes the city will take in remains at $43,780,661 as allowed by the Department of Revenue. Now when we divide that $43,780,661 by the lower number of total shares outstanding, (3,448,455,247) the tax rate will be .01269 per share or $12.69 per thousand of assessed value. The average single family home, now being worth 2% less than on January 1, 2008, would be assessed at $387,100. The tax bill, calculated by multiplying the tax rate by the assessment, would be $4,912 rounded, one dollar less (from rounding) than before despite the different levels of assessment. The only reason the more current sales are not used to calculate the assessments is that the sales toward the end of the year wouldn’t be received in the Assessors office until well after the tax rate needs to be set for the January bill. The important thing to remember, however, is that the tax bill will be the same, no matter which target year for sales is used.

I should mention one final confusing procedure. Assessments and tax rates for any given fiscal year are never set by July 1 when the fiscal year begins. Spring, summer and fall are used for processing building permit changes to the property record cards, analyzing sales, submitting data to the Department of Revenue for review and approval, and having a new tax rate set by the Aldermen. The first “actual” tax bill is the third quarter bill that arrives in your mailbox about the first of January. You have, however, already paid two tax bills for the fiscal year. Those bills are “estimated bills” and are calculated from the previous fiscal year’s assessment and the previous year’s tax rate. The new assessment, the new tax rate and the actual new fiscal year’s tax total are all on the third quarter (January) bill. The Tax Collector subtracts the amount you paid on the first two estimated bills, divides the balance by two and charges you equally on the third and fourth quarter bills. That is the reason the first and second quarter bills are different from the third and fourth quarter bills even though all four quarters are in the same fiscal year.

As always, if you feel your property assessment for FY 2010 is higher than the actual value of the property on January 1, 2009, you may come to the Assessor’s Office during the month of January (or until the date the third quarter bill is due, if later) to file an appeal. We will have a booklet with all the sales that took place in 2008 upon which the FY 2010 assessments are based. You may also submit as evidence an appraisal on your property done by an independent appraiser with an effective appraisal date at some point in 2008. If you appeal yourself, you will be asked to justify your claim that you are overvalued by looking through the book of 2008 sales and finding properties similar in style and size that support your contention. You will also be asked to complete a form describing your house so it can be compared to the data on your property record card which was actually used to compute your assessment. If you find good sales of similar homes during calendar year 2008 at lower prices or if there are data errors, the Board of Assessors will review your assessment and make whatever corrections are needed. Please remember that property assessments are data driven and the value of a property does not decrease because of an owner’s age, financial condition, number of years living in Melrose or anything that does not relate to the actual property value. Those living on fixed incomes as taxes rise can, of course, experience difficulty finding the money for taxes and if you fall into this category you should ask if you might qualify for any exemption programs. Senior exemptions, for example, are available to those with very limited assets and income. This does not reduce your assessment in any way but is a tax credit that can be applied to your tax bill. Tax deferrals are also available for needy seniors. Under this program, all or a portion of one’s taxes can be deferred until the time the property actually changes hands in the future. The taxes owed would then be paid from the proceeds of the property sale whenever that takes place.

You should also check to see if you qualify for the circuit breaker income tax credit. This is not done at the Assessor’s Office since it is a state program that must be done on your income tax form but it is a significant help to those who are paying a large percentage of their annual income for real estate taxes. You can get details of this program from the Council on Aging.

We hope that this memo is helpful in clarifying the very confusing tax system. If you have additional questions or need information on the tax exemption programs available, please call the Assessor’s Office at 781-979-4104.

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