Taxation Without Equalization

by Dan Richardson

The Cannon Hill neighborhood is a jewel of Spokane. Historic brick homes line avenues shaded by rows of majestic sycamores that provide summer shade and autumn color. The lanes are quiet and, often, narrow, with brick paving peeking out from beneath worn blacktop. People jog around the duck pond at Cannon Hill Park most of the year, walk their dogs and play softball.

The sugar on this plum, if you're a property owner here, is that these stately houses are greatly under-assessed, meaning property taxes are lower than sales prices would seem to dictate. It's as if you supped on wine and brie but paid only for generic beer and pretzels.

The neighborhood's most prominent resident, John Powers Jr., is the city's mayor. His classic brick house near Cannon Hill Park was recently listed for sale for $374,900 -- but the assessed value is just $128,100, according to records at the Spokane County Assessor's Office.

That's not Powers' fault, nor is he alone: The Inlander sampled the area by examining records of 10 other Cannon Hill houses that changed hands in the past few years. Their average purchase price, $218,000, was 52 percent higher than their average assessment. The city and the county are missing a million dollars' worth of taxable property in that sample alone.

"If the assessed values on homes, including mine, lag substantially behind current actual values, then the system needs to be fixed. Or, if it's a good system, it needs to be followed," says Powers. "If our home and the apparent discrepancy between the current value and the assessed value makes the case, so be it."

Cannon Hill's 52 percent difference is likely due to the fact that the upscale homes there increase in value fairly rapidly -- more so than, say, the middle-class homes of Hays Park in North Spokane, where a similar sample's assessment-to-sales average is just 14 percent.

Those, plus three other neighborhood samples and interviews with government and private real estate experts, indicate that the Spokane County Assessor and her staff have made notable improvements in the past couple of years. Yet assessment inconsistencies abound from neighborhood-to-neighborhood.

The sometimes dramatic sales-to-assessment differences suggest that millions of dollars of property are left off tax rolls. And with a budget crunch at Spokane City Hall -- where tax increases are being considered, including the road bond voters will decide on in March -- that could make a big difference. The records show, too, that wealthier homes are assessed less accurately than more mid-range ones. Since property taxes are paid according to a property's assessed value, the result of these two inconsistencies is that some Spokane County residents don't pay what they should in property taxes, and other residents make up the difference.

In other words, if you own an $80,000 home, you're probably paying your fair share of property taxes. But if you live in, say, a $240,000 home, especially an older one, you're probably not.

"If they're consistent, it doesn't matter if they're all low," reasons Scot Auble, a private appraiser and former member of the Board of Equalization, which rules on assessment appeals. "If neighborhood to neighborhood it's different, someone's getting screwed."

Neighborhoods have life cycles, ups and downs, periods of popularity, movement of residents in or out. That, say people in real estate, is why assessments won't ever keep up with market prices.

One result is that some neighborhoods get assessed less accurately, meaning lower tax bills for them -- but higher bills for everyone else.

"At the end of the day, those add up," says Kate McCaslin, a Spokane County commissioner. "It does have a dramatic impact on what everybody else pays."

Asked about consistency in Spokane County's assessment ratios -- that is, how closely assessments follow actual market prices -- officials at the Assessor's Office point to rosy-looking state Department of Revenue studies.

"Overall, statistically, we hit it pretty close, at 90 percent," says the assessor's Chief Deputy John Sweetman.

That's true -- but not the whole story. In 2000, state officials calculated Spokane's ratio at 90 percent, up from 85 in 1999. However, that ratio is an average of all parcels, new and old, commercial and residential, explains David Saavedra, program coordinator for the Department of Revenue's Property Tax Division in Olympia.

Hypothetically, one neighborhood could be assessed at 70 percent of actual market values, with another at 110. The two would average out to a 90 percent -- which appears accurate -- but it can bury a lack of consistency, says Saavedra.

Inlander research suggests that's exactly what's happening. Houses along swanky Rockwood Boulevard sold for an average of $376,250 -- or 27 percent above assessed value. Some properties were closer than others; some were way off, like the house that sold in September for $580,000, but is assessed at just $270,900, or less than half its market value.

That 27 percent ratio, in itself, isn't the problem. Neither is Cannon Hill's 52 percent ratio. Potentially missing out on tax revenues is a major issue -- one that we'll get into later in this story. Yet another major issue is one of fairness; it's that other neighborhoods, ones with more modest homes, pay assessments that are much closer to their sales prices. In three middle-class neighborhoods sampled, none showed a ratio greater than half of Rockwood's (or one-third of Cannon Hill's).

Homes between Ray and Freya streets on the east side of the South Hill sell for about $90,000. Same goes for neighborhoods around Hays Park and Corbin Park on the North Side. The assessment-to-sales ratios for the three are 14, 14 and 12.

One state official familiar with assessment procedure chuckled when the disparities were described, saying, "That's crazy."

Crazy or no, that's the system. Property owners see assessments from the ground up, based on how their particular parcel gets assessed. Assessing officials look from the top down. They don't see one house or one business, but units consisting of hundreds or thousands of properties, tied together by sometime tenuous strands of data.

"We're taking sales and applying them to thousands of properties," says Byron Hodgson, appraisal manager at the Assessor's Office.

Independent entities like the Department of Revenue and the House of Representatives' Finance Committee collect data from assessors around Washington, plugging them into formulas of their own. The comparisons, averages and ratios these entities compile show that Spokane County is comparatively accurate and uniform in its assessments.

"What that tells us is we're doing a reasonable job," Hodgson says, adding, "we're looking at our overall statistics and they're very good."

But that macro data buries inconsistencies that writhe, barely hidden, below the surface. Neighborhood-level inconsistencies escape serious scrutiny because, taken together, they average out, officials say.

The Rockwood example of the expensive house selling for twice its assessed value represents a gross failure of assessment, looked at by itself. But the system's operators don't look at the single houses, even the ones that stand out, says Sweetman, the deputy assessor.

They can't be applied to larger units, they don't help create accurate averages, officials say, and assessors don't like to re-assess houses between inspections. It's just not, says Hodgson, how one makes assessments on a mass scale.

"For good statistical reasons, you don't chase sales, because sooner rather than later, the whole system is unbalanced," Sweetman says. Equity, especially in expensive neighborhoods, "is a double-edged sword."

Maybe tracking individual sales is the ideal, says Sweetman, "but it's an enormous amount of resources to go through that whole neighborhood and see how this one sale tumbles through this neighborhood. Which is a huge process and a huge amount of intensive work there."

Equity in assessments, in other words, is too expensive to work.

Assessing is a tough job, everyone in the industry says, and problems aren't unique to Spokane County. Indeed, Assessor Sadie Charlene Cooney's office appears to have made strides, cutting the number of tax appeals in half and boasting good state ratios.

Cooney's tenure, though, has been marked by some troubles. In December 2000, the Spokesman-Review published a blunt editorial: "Spokane County citizens deserve a better assessor."

"I really feel bad for the people in the office, because it's been a long period of years where they've not got a lot of good press," says Auble, the private appraiser. "Yet the truth it what the truth is."

The truth is that several assessing blunders have made headlines on Cooney's watch, which began in 1992, after she had worked more than 25 years in the Assessor's Office.

The troubles include work that was so far behind schedule in 1999 that the deadline for county property owners to pay their spring property taxes was pushed back three weeks. That failure cost the county about $500,000 in investment interest. An assessing error in 2000 cost Spokane $155,000. And last January, the state Attorney General's office began investigating alleged campaign violations by Cooney, including soliciting employees for campaign contributions and discriminating against those who failed to pony up some cash. That matter is scheduled for a civil court trial in Spokane County Superior Court next month.

Even with the smoothest of administrations, though, one inescapable truth is this: At a certain point, the assessment race to keep up with property values is probably unwinnable.

Property values will usually increase faster than assessments, which occur in fits and starts. Assessors in some Washington counties, including Spokane, attempt to rectify this with annual revaluations via computer models; but the real work is supposed to occur continuously: every one of the 190,000-odd parcels in Spokane County is supposed to be visited by an assessor every six years.

It probably doesn't help that Spokane County's 26 assessors have the second-highest workload of Washington's 39 counties, according to the state Department of Revenue -- 3,671 parcels per staff member.

Assessment inconsistencies are inescapable, say those in the business. Assessors agree that there are forces at play that push assessments downward, especially on more expensive properties. Auble, the appraiser, says, "It's easier to appraise moderate properties than high-end properties, because there's less variance between them."

Assessors -- unlike private appraisers -- don't get access to a home's interior, so they can't often see renovations.

"There's nothing they can do about that," Auble says. "Think of what it does to your analysis technique when you're trying to go through a neighborhood and [you] have 50 houses in this subdivision, and five have sold that [can be used for assessment calculations]. And it turns out the data you have on those five sales is totally inaccurate because you've been denied access. Trying to apply that data creates an incredible error rate throughout the neighborhood, so what you tend to do is you start hedging to the low side."

Given that property owners can argue their bills are too high if they have to pay more money than comparable properties nearby, the tendency, assessment-savvy people say, is to avoid controversy by low-balling the assessments. No one's going to complain about a low tax assessment.

Commercial properties have some of the same complexities, officials say. One prominent piece of commercial real estate is the River Park Square downtown shopping center and its parking garage. The city agreed to pay more than $26 million for the garage in 1997, but it's assessed at only about $18 million today.

Says Auble, "Think of all the properties in town, how many improvements are being made. How many of those improvements the assessor never finds out about, and what a tough job. What a tough job. But that's the job."

It is, say Cooney and her officials, a problem that all assessors in every county have. Cooney says she and her staff have talked about the inequalities, but they are a fact of life. Assessing, after all, "really isn't an exact science."

It's not just missing the value of existing properties -- residential or commercial -- that can cause inconsistencies. When Cooney took office as assessor in 1992, there was some $400 million worth of newly developed property around the county that the previous assessor hadn't yet assessed at all. Called "segregations," these unassessed properties galled Spokane officials because of the lost tax money they represented.

"The city agreed to pay for a person to work in the assessor's office to help them, because they were so far behind," says Pete Fortin, former Spokane city manager.

Reducing segregations is one measurable victory for Cooney's staff, which has slashed the number from about 3,000 to 841. The turnaround time for segregations has shrunk from about two years to just three months.

When Spokane City Manager Jack Lynch came on board one year ago, he heard about some city concerns about getting the property tax money it was owed.

"Our budget director has assured me she is becoming more comfortable with the manner in which things are being done now," says Lynch.

County commissioners like Kate McCaslin deal with the Assessor's Office all the time. Because the assessor is elected, county commissioners can do little to correct mistakes or change policy -- only voters can do that.

"I personally don't think they've improved," McCaslin says, citing the previous foul-ups in the office.

Commissioner John Roskelley, though, believes just the opposite. Yes, there were problems, he says, like the county's changing of computer systems that tangled assessment records a couple years ago. (Assessors blamed computer systems for some problems then. Sweetman says those problems sparked greater county interdepartmental cooperation; "it gave us a sort of epiphany.") But now, according to Roskelley, with the computers figured out and a first-rate staff, the Assessor's Office is coming along swimmingly.

"In fact, I'd say it's working better than it has in years," says Roskelley. He adds, "I know that Sadie [Cooney] has had some detractors in the past, but I look for results, and I see the results coming in."

Most tantalizing to local officials, from the city of Spokane to the humblest fire district in the county, is that in lagging behind so far, there is a lot of unclaimed cash out there. Who needs to raise taxes, or ask for a bond issue for streets, when all we need to do is charge people for the real value of their property? If Cooney could flip a switch or find the right computer software to track actual market values with absolute accuracy, the result would be a flood of cash for local governments.

Or, it would have been that easy until November.

That's when voters approved Initiative 747. The initiative limits property tax levy increases to 1 percent a year, excluding new construction. The initiative's purpose is to shield people from bearing large increases year after year. Public officials respond that it's a strait-jacket that will become increasingly tight as the 1 percent limit fails to keep up with everything from fuel costs to health insurance premiums. Keeping up with market prices, as local government's could benefit from, will be impossible now that I-747 has passed. But 747 doesn't prevent officials from reshuffling the deck in order to make assessments more fair.

City Manager Lynch says that 747 will hurt the city's poorer residents first, as local governments slice first into human services, buses and other nonessential services.

But accurate assessments are worth more than just a larger pot of dollars. They're more about splitting up the pot fairly, about getting the right money from the right people. Keeping assessments up with Spokane County market prices might not help governments much, but it would treat the taxpayers more fairly.

"If every property in the county was properly assessed or valued, everybody's taxes would go down, except for the people who weren't properly assessed before," says McCaslin. "Overall, folks would see a reduction."

"We've talked about it," Cooney says when asked about inequities in the system. "I've never been afraid to take a stand."

Cooney notes that wealthier property owners would likely make all kinds of appeals if assessors began ironing out the inconsistencies. People getting a break now have something to lose; it could be a touchy issue. But maybe, she says at the end of the interview, just maybe, it's time to take a stand on this.

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