Real estate tax system cumbersome | Robert McCoy

Reversing a common adage, every silver lining has a cloud. In this case, the silver lining consists of government services. The cloud is the taxes we pay to fund those services. The Montana State real estate tax cloud has two problems, one structural and one procedural.

The structural problem is likely to never be resolved due to how real estate taxes are calculated. Because real estate is usually held for multiple years, real estate taxes are based on appraised values, not on actual selling prices. Lacking sales data, the government uses appraisals to set the taxable value on real estate. While real estate values usually rise over time, the increases in real estate values are unrealized profits: no sale has been made, no money is in hand. That means there are no financial gains from which to pay additional taxes. Yet, taxes are based on that increased valuation.

Rising real estate tax increases may be affordable for the wealthy, those with abundant liquid assets or large incomes from which to pay more taxes on those increased appraisal values. They can be quite detrimental — or even disastrous — for farmers and ranchers who are only seemingly wealthy due to the substantial acreages they must own in order to ply their trades. Real estate taxes are also challenging for simple homeowners who pay mortgages out of modest incomes that often do not increase — if they rise at all — at the same pace as appraised values.

Instead, real estate taxes ought to be based on the price at which the property last sold. However, government savings from eliminating its appraisal process would not even come close to offsetting the reduction in property tax revenue. Thus, changing the real estate tax basis seems structurally impossible.

Even so, there are ways to improve the real estate tax system. One way is to simplify it. The simplest solutions to problems are often the best. When one looks at the complexity of the Montana State real estate tax system, the need for simplification becomes clear.

The State legislature has not been able to agree on how to set a real estate tax rate that would produce the proper amount of revenue without overburdening taxpayers. Instead of fine-tuning the tax rate over the last few years, it emulated Rube Goldberg, the long-ago cartoonist designer of convoluted gag systems.

The State has created a rebate process whereby taxpayers must file an annual form that verifies real estate ownership and also sums the real estate taxes they have paid for a calendar year. In return, they get a paltry rebate of up to $400 out of the perhaps thousands they paid in real estate taxes. This process required the State to design, develop, and maintain computer routines to manage taxpayer rebates. It requires the State to expend staff hours to verify the claims, to enter the data that calculates the amounts of rebates, and then to issue those rebates. All this means greater government expense.

Recently the State launched another process whereby homeowners can annually apply for “homestead” status on their primary residences to lessen their real estate taxes. That is one more computer process requiring additional staff hours to manage.

Improvement of the State real estate tax system is possible, starting with petitioning State legislators to:

1. Set the real estate tax rate properly and avoid the need for rebates and the “big government” system required to administer them.

2. Eliminate the tedious process for reducing real estate taxes on primary residences by adding a simple Primary Residence entry on the State income tax form.