Crunching the Numbers on Assessments: Part 1

Disclaimer: The charts and graphs are for illustrative purposes only and do not represent the actual or projected assessment rates, tax rates or distributions for the City of Amsterdam.
I posted a while ago about the state of assessments in the City of Amsterdam.
I tried to make a few key points based upon my analysis:

1) The existing assessments from 10 years ago are no longer aligned with assessments as of 2008

2) Therefore, the distribution of tax levies is not fairly distributed , ie, some taxpayers are paying more than they should while others are paying less

3) The justification of withholding the revised assessments based upon their unpleasantness or based upon the notion that they were performed during a ‘peak’ market are not tenable

In a comment from Rug City, I decided to sharpen up my analysis a bit so I’ve been working on a way to illustrate my points. I hope this proves instructive.
Before we start, I have two important caveats:

1) My analysis is for illustrative purposes only; the analysis will not withstand any statistical rigor (I’ll explain later)

2) As I’m trying to illustrate dynamics of assessments, I’ve intentionally withheld the addresses of specific properties used in the examples (I’ll explain later too)

Let’s get started.
First, we’ll use the list price of homes for sale as the market value and assume that the level of assessment will be 100%. For example, if your house is listed for $95,000 , we will establish a 2008 assessment value of $95,000 (100% * $95,000). This assumption seems reasonable as real estate list price represents an informed estimate of the market price (ultimately the sales price) and as I posted previously, the purpose of an assessment is to arrive at a market value. Second, we can find the existing assessment of the property as a matter of public record. So given the public availability of listing prices and current assessed value, we can easily calculate what the change in taxes will be. It’s sooo… simple!
Not really.
According to the Office of Real Property Services, the city of Amsterdam has 5034 residential parcels. Given that, how many units would I need to assess to calculate a statistically sound analysis? I’d need to assess 2278 units so I could be 99% sure that my estimates of the new assessments would be within +-2% of their market value. Unfortunately for me , I can only find 110 houses listed for sale in the city via the MLS so I can in no way reach a statistically defensible analysis as my sample size falls far too short. This shortfall accounts for my caveats and disclaimers at the beginning of the post as I especially did not want to isolate specific properties currently on the market and give any indication of a future assessment value knowing that the underlying analysis does not support the calculation.
Let’s proceed anyway with the currently listed houses and let’s make a simplifying assumption for the sake of argument (and likely a heated one) that the universe of listed houses represent the city as a whole. Remember: I’m trying to illustrate the dynamics at work in assessments versus trying to calculate the ‘true’ assessments (which we’ve seen is statistically impossible with only 110 houses and also ignores non-residential parcels which also must be part of the assessment ).
Before I crunch any numbers, I can see three scenarios play out related to assessments. The first scenario is a “perfect world” scenario whereby the new higher assessments create no change in taxes paid by homeowners. The second scenario is an “acceptable” scenario whereby the new assessments create changes in taxes paid by homeowners but the changes are within plus or minus three percentage points– in other words, most people would see no change in taxes paid while some people would pay a bit less and some people would pay a bit more. The third scenario is a “nightmare” scenario whereby the taxes paid would shift radically with a significant portion of the tax payers paying more and a significant portion paying less.
To crunch the numbers on taxes paid, I’m going to use the current City of Amsterdam tax rate multiplied by the assessed value. As the City tax rate is $13.89 per thousand (excluding fees and water/sewer charges), we can calculate the taxes paid with the current assessments and with the estimated assessments after reassessments.
For the first scenario (“perfect world”), the distribution of changes in taxes paid looks like the chart below.

Distribution of Changes in Taxes Paid

This is truly a perfect scenario as no one would see any change in their taxes; the chart shows everyone with a zero percent change.
The distribution of changes in taxes for the second scenario (the “acceptable” scenario) is shown below:

Distribution of Tax Changes

In the second scenario, the “acceptability” of the scenario depends upon which side of the curve you fall. For those on the left side, they will no doubt find it acceptable as they will see a decrease in taxes. On the right side, those taxpayers will see an increase and likely find the change “less acceptable”. The key takeaway from the second scenario is that the change in taxes for most tax payers will be zero with a lower number of tax payers either benefiting or losing under the new assessment scheme. It’s here that I want to point out that the assessment “game” is a zero sum game; if I get a decrease in my tax bill, it is at the expense of someone else who now has to pay more taxes. I think this point is sometimes lost as the perception tends to be that reassessment will force everyone to pay higher taxes; that is mathematically impossible.
Let’s now get to the nightmare scenario illustrated in the chart below:

This scenario is truly a nightmare as it shows radical shifts in taxes paid with some property owners seeing 25% tax increases across the board. On the other hand, a significant group of property owners would see tax reductions of 25% or more. What’s interesting in the nightmare chart above is that it is generated from the approach I outlined at the beginning: I took a sample of 43 properties from the 110 properties listed on the MLS and calculated the taxes owed under the current assessment along with the taxes owed under the ‘new’ assessment using the listing price as the new assessed value. Here’s a short section of the table to show you what I mean:

I then applied the distribution of the change in tax levy to the universe of 5034 parcels to generate the “nightmare” chart above. Again, this is for illustrative purposes versus statistical yadda yadda.
Let’s return to Mr. Chiara’s statement on the assessments from last week: I still didn’t come up with the numbers that wouldn’t put the city in jeopardy and that’s something I don’t have the right to do,” Chiara said. Chiara claims he did the work, but he says even after multiple revisions, the new numbers would put some residents in danger of not being able to afford their homes.
So now given what Mr. Chiara said and given the three scenarios above, what scenario do you believe comes closest to what Mr. Chiara saw. Wait for it, wait for it… It has to be the “nightmare”. The other scenarios would represent palatable outcomes to the taxpayers but the nightmare scenario specifically shows what the distribution would like such that “some residents in danger of not being able to afford their homes.”
The shape of the nightmare distribution supports the points I’ve been making: 1) Taxes are not fairly allcoated as some people are currently underpaying while others are currently overpaying. Under the new scenario of assessments, the current losers will become the winners and the current winners will become the losers 2) The amount paid in taxes is a zero-sum game; in other words, if I get to pay more in taxes, then that means you get to pay less in taxes. 3) The political palatability will be quite sour as a portion of the tax payers will see significant increases.
I’m a bit freaked out by the whole process as I currently feel I am overtaxed and as a result tend to be in favor of reassessments. On the other hand, if you feel you are undertaxed you will rightly and quite rationally take the position against a reassessment. But who knows for sure? Am I advocating against my own interests? Quite possibly so. The financial problem is that we now have a great deal of uncertainty in what the outcomes of assessments will be and uncertainty tends to not help your financial returns on real estate. But if we step back as a matter of policy and governance of our city, we need to establish fairness and uniformity on assessments as it now appears we have anything but.
If in fact, the distributions are so horribly skewed, the city taxpayers have suffered a great disservice on many levels:
1) Overpayment and underpayment of taxes– some tax payers are unfairly footing the tax bills for the others
2) Uncertainty of future property taxes– it’s no secret that financial markets and real estate markets typically do not reward uncertainty. As uncertainty rises, the market value drops as it’s deemed to be more risky especially in real estate.
I’ll be posting some follow ups in response to the notion that we cannot use the reassessed figures because they were performed at the peak of the market. Hint: my analysis will show otherwise.
Disclaimer: The charts and graphs are for illustrative purposes only and do not represent the actual or projected assessment rates, tax rates or distributions for the City of Amsterdam.

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1 Response

  1. rug city says:

    Excellent analysis- very informative.
    First, you are correct that, on paper, the revaluation should be a zero sum game, but I have my doubts whether that would end up being the case. If they can somehow find a way of justifying that the tax coffers were being cheated due to low valuations I can see them playing with the mil rate a bit. Is there a law that prohibits this? I’m not sure.
    Second, assuming it does play out as a zero sum game, the odds are stacked significantly against the responsible homeowner since the bottom third of housing in Amsterdam continues to bottom out. That is, these houses are being boarded up, sold to tax-lien companies, falling into arrears, etc. This automatically begins to shift the burden to the middle and upper third before they even think about the market valuations. Then the true market valuation process begins and it becomes even more disparate, as certain pockets of the city have far outpaced others since they have kept their areas nice and desirable, while the others have slipped further behind. Again, this is not a simple matter of some homeowners unduly sitting on a lowball assessment in need of a boost, it is coming to the realization that the folks who live in the dwindling good part of town or good, solid homes are all we have left to keep us afloat. I ask again, how much more can some of these “rich” homeowners pay? Is $8, 10, 12, 15 K not keeping up their end of the bargain already?
    I’ll tell you what will happen. When these folks get ready to retire and move on it will become increasingly more difficult to find someone who can justify paying close to or beyond 10K in taxes for a home in a crappy school district. Who will we turn to then to keep us afloat?
    I agree that there is no alternative to keeping assessments up to date in order to avoid future calamity, but if these numbers are going to hammer the very people who are keeping this town viable, it is worth reassessing the assessment process and scrapping it entirely if necessary to come up with the right and fair numbers; numbers that are reflective of our world today.

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