MANCHESTER, NH – A homeowner walks into the tax assessor’s office with a complaint, “My taxes are too high.”
The assessor asks, “Too high in general, or too high compared to other homes?”
The homeowner replies, “Too high in general.”
The assessor says, “You’re in the wrong department.”
Understanding how taxes work requires understanding the city’s tax cap and the process of accounting for property taxes. This article sets out to do that.
In 2017, the city appropriated $336,086,817, and received the same amount in revenue. It collected $208,145,486 in property tax and $127,941,331 in fees and state education funds.
City Tax Assessor Robert Gagne explains how it works.
“Some people think that when they’re paying their taxes, they’re feeding the beast. But I look at it differently. The Board of Mayor and Aldermen and the city, when they go through this process to come up with the tax rate to collect monies, they are doing their job in providing the services that are legally required or demanded by the citizens,” Gagne says.
History of the Manchester tax cap
“On November 3, 2009, voters approved an amendment to the City Charter which provided for a cap on annual budget increases. The NH Supreme Court ruled the following year on November 11, 2010, that the cap was invalid. The NH Legislature passed legislation effective July 5, 2011, which retroactively authorized municipal tax and/or spending caps. The Board of Mayor later amended the cap language which was presented to voters as required by state law. Voters approved section 6.15 Limitation on Budget Increase of the City Charter on November 8, 2011, by more than 2,200 votes (7,203 – yes to 4,991 – no).” – City Charter
The tax cap: Property tax revenue
The Manchester tax cap limits property tax revenue and expenditures.
The cap limits property tax revenue to the previous year’s amount, increased by the average of the Consumer Price Index for All Urban Consumers (CPI-U) for the three previous calendar years. The rate for the 2019 budget is 1.63 percent.
When there is a citywide revaluation, property tax revenues raised in the prior fiscal year (excluding bond payments), may be increased by no more than the average of the CPI-U for the three previous years. The last revaluation was in 2016, and the next is expected in 2021.
When annual changes in real estate values occur as a result of state assessing requirements, property tax revenue may be increased by no more than the average of the CPI-U for the three previous years, plus real estate taxes calculated by applying the prior year real estate tax rate to the net increase in new construction.
The tax cap: City expenditures
Similarly, the cap limits expenditures (excluding bond obligations) to the amount of the previous year, increased by the average of the CPI-U for the three previous years (1.63 percent).
Total annual expenditures (excluding bond obligations) may not exceed property tax revenues, and other revenues generated by the city, such as fees for auto registration and licensing, and building permits.
The expenditures cap does not apply to Enterprise Funds (such as Aviation, Environmental Protection, Parking, or Water Works), or to municipal bond obligations.
With a 2/3 vote, the aldermen may make an exception for the budget under consideration, supplemental appropriations, and capital expenditures such as land, buildings, and vehicles.
Growth and the cap
Growth increases both the tax base and the demand on services which the city must provide, but the tax cap has no provision for growth.
In 2017, the tax base expanded, and the city exceeded the cap on expenditures, while keeping the cap on taxes steady.
When the aldermen are working on the biennial budget, they ask for a projection of growth. The tax assessor provides them an estimated range.
State and local laws governing property taxes
The state constitution requires “values anew” or reevaluation at least every five years.
Two cases affirmed that the property tax system is constitutional if it is properly administered and if properties are re-evaluated every five years: Sirrell vs. State of New Hampshire, May 3, 2001; and Claremont School District vs. Governor, Dec. 17, 1997.
The assessing process
“Property taxes are based upon the appraised value of property as of April 1 of each year. This means that the property tax bill, generally due in December, reflects the value of property on the previous April 1,” Barbara T. Reid explained in an article for the NHMA (New Hampshire Municipal Association).
Manchester performs a complete revaluation of all properties every five years to reflect current market values. The most recent revaluation occurred in 2016.
The equalization process
In New Hampshire, “The equalization process, a critical element of the property tax system, provides proportionality among municipalities dealing with shared tax burdens,” wrote Stephan Hamilton for the New Hampshire Municipal Association.
The state Department of Revenue (DRA) performs an equalization process annually. The goal is to ensure that taxes shared by municipalities, such as the state education tax and county taxes, are reasonably apportioned among municipalities.
“This process involves a detailed study of property sales throughout the state, a comparison of those sales with the local property assessments, and an adjustment of the local assessed value up or down to achieve proportionality. The result is called the equalized assessed value,” wrote Reid.
City Tax Assessor Robert Gagne says he strives for fairness between property owners through a stable, relatively low equalization ratio. He performs a detailed analysis of every sale in the city, dividing the assessed value by the selling price. This yields a ratio of the assessed value to the selling price.
Sales are analyzed only for “arms-length” transactions.
“Arms-length transactions are typically sales that occur between a willing buyer and willing seller, when each is acting in a knowledgeable manner, involving properties that have market exposure. Sales involving foreclosures, fiduciary deeds, and bankruptcy are examples of non-arms-length transactions, and therefore are not included in the ratio study,” Stephen Hamilton explained in an article for the NHMA (New Hampshire Municipal Association).
When the real estate market is down (as it was between 2008 and 2012) the ratio goes up. When the market is up (2001-2005), the ratio goes down. But performing an accurate five-year revaluation ensures that the ratios do not drift too far from statistical goals.
Between full revaluations, the city Tax Assessor performs updates of new construction and changes to maintain proportionality between the properties in the city.
“Through revaluations and updates, assessors strive to ensure that property within the municipality is appraised proportionally as required by the New Hampshire Constitution, so that each property owner bears their proportionate share of the property tax based upon the value of their property — no more and no less,” wrote Reid.
“Rather than individually adjusting each local assessed property value to market value for billing purposes, under our property tax system the shared rates are adjusted to reflect each municipality’s percentage of market value. This is the best practical way to carry out the New Hampshire Constitutional requirement that tax rates be proportional, by ensuring that tax rates reflect the percentage of market value found in each community,” wrote Hamilton.
The tax assessor uses statistical measurements to gauge the performance of the city’s assessment model. These include the “coefficient of dispersion” (COD) and the “price related differential” (PRD), which are explained by Hamilton.
Setting the tax rate
The state Department of Revenue (DRA) certifies the property tax rate per $1,000 of property value using this formula:
((appropriations – all other revenue) / local assessed property value = tax rate) * 1,000
The Manchester property tax bill shows the assessed value of the property along with the tax rates for each component of the bill. In 2017, the total rate was $32.32 including:
- Municipal – $10.88
- Local school – $8.82
- State school – $2.32
- County – $1.30
Identifying the net tax base
The Tax Assessor tracks the city’s properties as follows (using 2017 figures):
- All properties are worth $10,463,089,974. However, some properties, worth approximately $1,458,724,567, are not taxable by Federal and state law (RSA 72:23), including those used for government, religious, educational, and charitable purposes. They are considered to be institutionally exempt. This leaves a gross tax base of $9,129,721,989.
- The gross tax base of $9,129,721,989 includes these property types: residential, commercial (commercial, industrial, and residential properties of 5 units or more), utilities, and “current use” (incentives for open-space such as woodlots).
- Properties worth $125,356,582 qualify for exemptions including dormitory, blind, elderly, and disabled.
- After subtracting exemptions, the resulting net tax base is $9,004,365,407, including $5,453,142,790 (60.56 percent) in taxable residential property, and $3,551,222,617 (39.44 percent) in commercial property.
Renters and condo owners
For renters, property taxes are paid by the landlord, and are calculated as part of the cost of doing business. The taxes are based on the market value of the property. Usually, the tax cost per unit is less than the average single-family home.
Some condo owners contend that they should pay less taxes if their condo fee covers typical city services, such as clearing snow or collecting trash. However, condo market values are typically lower, due in part to the condo fees.
When a property is assessed higher
While a higher assessment on a specific property affects the property owner’s wallet, it does not increase the total amount of taxes collected by the city. Similarly, the removal of an exemption does not increase the total taxes. The city can collect only enough taxes to cover its appropriations, minus fees and state education funding, and adjusted for the average of the past 3 years of CPI-U.
In challenging an assessment, the burden of proof is on the property owner, who must prove that the market value for that property is lower than the assessment. This must be based on recent sales of similar properties, not on their assessments.