If property taxes motivate people to do anything it tends to be taking a trip to the local assessor’s office.  The Roman Empire found a way to create a more positive response to property taxes.  Augustus Caesar accomplished this through flat-rate land property taxes.  This meant that property taxes were assessed not on what a property did produce but on what it could produce.

Growing up in Wisconsin and now living in Illinois, I have become accustomed to cold winters (note that becoming “accustomed” should not imply that I necessarily am fond of them). As I sit here in July, it is almost impossible to fathom turning the furnace on, but in January you can’t live without it. What if property taxes were based on the number and sizes of your furnaces?

In 1662, England tried to make a correlation between hearths (a precursor to furnaces) and property taxes. In an attempt to establish a cohesive and fair system for valuing every property, they introduced a new property tax known as the “Hearth Tax”. It was simple in that its sole factor for establishing value was based on one aspect, the number of hearths (and the size of those hearths) in each home. A small home might have only one hearth in the main room, while a larger home would have several. They would be valued accordingly.

The hearth method of property taxation did bring some unity to how buildings were assessed, however it turned out to be widely hated by the public. Surprisingly, it had a seven year run before being phased out. Imagine how enjoyable it would be to live in the colder regions of England. I wonder if the purchase of heavy blankets would have been considered a tax planning strategy.

During the nineteenth century, most of the taxes collected were either from poll taxes (according to Wikipedia a poll tax is a head tax, a fixed amount per individual) or property taxes. In 1818, Illinois was the first state to adopt the uniformity law, which required that land be taxed based upon its value. By the end of the century, 33 other states had also adopted this law. As pioneers began to go west and create settlements, the need for property taxes became apparent.  Who better to handle this than the sheriff? So, the sheriff became the assessor and collector of property taxes.

Wyatt Earp moved to Tombstone, Arizona in 1870 after a successful law career. His plans were to make his fortune by operating a saloon and gambling concession but he decided to get involved in politics. Wyatt ran for sheriff against the corrupt incumbent, Johnny Beham. The corrupted law system of the Wild West ran its course and Earp lost the election (sounds like some of the politics in Illinois).

Wyatt, along with his brothers and Doc Holiday, ultimately gave American history one of its most infamous shoot-outs at the OK Corral.  I can’t help but wonder what may have happened if Wyatt Earp had won that election.  Would he have been busy collecting property taxes instead of fighting at the OK Corral?  I guess we’ll never know.

Determining the value of complex, special purpose facilities can present a formidable challenge to appraisers. Because special purpose facilities may be one-of-a-kind, there is often no option of comparison to other facilities for market value determination. For this reason, the cost approach has been the historic standard for the appraisal of complex properties. Unfortunately, because the cost approach does not always consider all forms of obsolescence, it often leads to inflated estimates of fair market value.

The first step in the cost approach is to determine the Replacement Cost New (RCN) for the facility. When performing a cost approach appraisal, you must keep changing technology in mind. The natural evolution of technological process and improvements in materials over time often renders yesterday’s technology obsolete in terms of capital costs. This concept figures how much it would cost to replace the current facility with one that duplicates the utility of the existing facility using current technology and materials at current prices.

Once RCN is calculated, the next step is to quantify depreciation. Depreciation is defined as the loss in value from all causes, and its estimation is one of the most subjective areas of the cost approach. All there forms of depreciation should be taken into account: physical deterioration, functional obsolescence, and external obsolescence. Under the appraisal principle of substitution, an informed and willing buyer would pay no more for a facility than the cost to build or acquire a facility with equal utility.

Many companies are ill-equipped to manage property taxes effectively. According to CFO magazine, “Property tax is one of the biggest tax expenses – and the hardest to manage”. The sheer volume of jurisdictions (estimated at over 12,000 townships, counties, and states) can be overwhelming. Companies may have property in hundreds or even thousands of jurisdictions, all with their own set up rules and filing requirements.

Several misconceptions regarding property taxes exist. Property taxes are often viewed as fixed costs.  Receive a bill; pay a bill; nothing more. Fair market value is equated with net book value or is based solely on a formula. Finally, there is a fear of the unknown, a fear of making waves in the community.

It is not a rosy picture on the jurisdiction side either. Jurisdictions do not have the manpower or expertise to evaluate each real estate or personal property parcel individually. Out of necessity they must employ mass appraisal processes to value all of the properties in their jurisdiction. In Los Angeles County alone over 1.5 million personal property returns are filed annually. You can probably double or triple that figure for the number of real estate parcels that must be managed every year.

Is property tax a pain in your company? What steps have you taken to improve the process and minimize the pain?