With some confusion still floating around the classroom with regards to the relationship of property assessment, property taxes, and government budget, I found an extreme example which perfectly demonstrates how the three elements are interconnected. This story from Carver County, albeit 2+ years old, drives home the importance of accurate property assessments and the ramifications on local governments of wild shifts in property value. An unnoticed mistake in the assessor’s office led to a lake lot being assessed at 10,000x it’s actual value of $18,900 – that is 189 Million Dollars. While this may at first seem like a laughable mistake that is quickly changed with no real harm done, the discovery’s timing within the Property Tax Timeline was after the valuation notices were mailed to every property owner in the county informing them of their tax amount for the next year. Of course having to downward adjust the $189 million lake lot to $18,900, approximately $2.5 million of the county’s property tax levy was effectively lost. To make up for this lost revenue, the mill rates would need to be readjusted upwards to collect that same amount of money from smaller (but correct) tax base. Rather than doing this and sending out readjusted valuation notices and angering property owners, the county hoped to cut expenses elsewhere as described in the story. While this is an extreme example, it does do a nice job of pointing out how these three components of property tax are intertwined.
With that being said, what happens to property taxes if, in a small county with a limited tax base, a large industrial facility or other expensive building burns down (or is bankrupted or foreclosed on!!)? Well, in Minnesota, the January 2nd assessment date means that the next years taxes are based on whatever the value of the land and improvements were on that exact date. So, if the building burns down on January 1st, its good news (well, sort of...) for the property owner because they just saved themselves a pile of taxes the next year, but if it happens on the January 3rd, the property owner must pay an awful lot of money next year for their smoldering rubble (and if it happens on the 2nd, be glad you don’t work for that assessor’s office). But what happens to everyone else in the county? As we now know and was also described in the Star Tribune article, a major downward shift in assessed value does not affect the total money needed by the government, so mill levies or assessment ratios may have to be adjusted much to the chagrin of the public.