Equitable Property Tax Assesment, Zoning and Eminent Domain

by Jeffry R. Fisher

Whenever property taxes become irritating enough for people to complain about them, somebody proposes freezing assessments, as California did with its now famous "Prop 13". I don't like assessment freezes because they have the unintended consequence of granting a big cash advantage to longtime property owners at the expense of new owners. This has the corollary effect of dampening housing turnover, which hurts the economy and society in general.

Awareness of these unintended consequences has been gnawing at me since I first noticed them emerging in California a few years ago. A recent proposal to enact an assessment freeze here in Washington State triggered a radical idea that could restrict property value assessments *without* inhibiting movement. Even better, my idea could be extended to reform eminent domain and zoning, which like taxes, sometimes arbitrarily and capriciously evaluate private property.

First, the basic idea on assessment:

If you want to cap property taxes, then cap the percent at which value may be taxed, but let each county assess property at any value it wants to... Then treat each assessment as an offer to buy, so that the owner may choose to sell out at the assessed value rather than paying the tax.

If the county had previously authorized the purchase, then title changes and the owner has some reasonable time to move out (with a pile of cash).

However, if the county hadn't planned to acquire that property, then it must auction immediately (pick a reasonable duration, say 90 days). Since the county holds virtual title in limbo, it may change any zoning or other codicils before the auction.

If the current owner 'wins' the auction, then the title doesn't even move, just the price difference in cash. If an outside bidder wins, then the original owner gets the accepted assessment, and the county pockets or makes up the difference. Regardless of who wins, the top auction bid becomes the assessment price on which tax is calculated.

This formula would hold assessments down (a county would take it in the shorts if its assessor bought too many properties high and auctioned them low) without giving an artificial benefit (and incentive) to stay-put owners. What's more, if a housing market goes down, then recent buyers have a very simple way to push assessments down with it.

As an added bonus, all property owners would have an escape hatch by which they could cash out in a known period of time. Savvy assessors would generate a steady income stream from such brokering activity.

Note: Just as an assessor must now be watched against soft assessments of family and close personal friends, assessors under my plan would need to be checked for overly generous "offers". However, since none could pass without a very public auction (or at least a legislated authorization to buy), oversight would have triggers. Finally, as a variation to protect against too many accidental purchases, give assessors one chance to re-evaluate any property whose owner registers an intent to sell out.

Second, an extension to eminent domain:

[Note: Justifying eminent domain is a whole separate issue, perhaps a topic for another essay someday. For now, I merely recognize that it exists and needs reform]

With an auction process in place, when some developers wanted somebody's property, then before any motion to condemn would be in order, the developers could be required to register (and guarantee) a firm offer through the county, the county then re-assessing the target property at the new guaranteed value. If, in light of the new tax level, the owner "accepted" in lieu of paying, then the property would go up for auction as described above, and the developer's firm offer would become the opening bid.

However, if the owner held out, and if the county did eventually vote to force the sale of the property, then instead of a legislated sale at an arbitrary price, an auction would still take place. If the original owner won, then no title or cash would move, and the effort to condemn the property would fail. Otherwise, the original owner would pocket the full proceeds from the auction. [Either way, a new taxable value would be set according to the auction result.]

Third, a further extension to transact zoning changes:

Furthermore, all zoning decisions and other changes in property restrictions (both increases and decreases) could be funneled through the same process. Whenever any government wanted to change the use of some property, then they would need to put the property through auction and bid high enough to acquire at least temporary (virtual) title.

If the government failed to win initially, then the result would be as in the eminent domain case. However, if the government gained virtual title (no real transfer), it could add or delete restrictions, and then auction the property out again with the new codes. Ultimately, the government would pay for winning first auction and collect the amount of the second, possibly a partial wash with the actual owner not changing. In any case, the new assessed value would be the last auction price.

With this scheme, property owners would collect from the community a fair market value for transferring rights from private to collective. Similarly, owners would fairly compensate the community to transfer collective rights into private hands. The first effect would protect the vulnerable, while the second would curb the influential.

In all three of my ideas, private property rights for both tax disputes and material changes would be truly measured instead of being set capriciously by bureaucrats, lawyers and judges.

Copyright 2003-2008 by Jeffry R. Fisher: Permission is granted to reproduce this article in whole, but only in combination with attribution, the original title, the original URL, and this copyright notice.
Jeffry R. Fisher is the founder and president of Propagate Ltd, which is liberating digital content as LiberateIP.com.