Many local governments are seeking increases in property tax for commercial via value-in-use taxation. But this isn’t such an advisable step considering the costly changes in the assessment process and the inequities that result. These issues have their greatest impact on commercial property owners.
Definition of Value-in-use Method
In the State of Georgia, as well as in most states in the United States, property taxes are a reflection of the property’s fair market value or assessed value. The property’s value-in-use isn’t a standard valuation method used by tax assessors for good reasons. Basically, value-in-use refers to the value of the property according to its productivity. The value-in-use for two identical neighboring property will most likely differ because of their different uses. These differences can come in many forms, such as the number of occupants, the duration and frequency of use, and the type of activities conducted therein, among others. The differences of the value-in-use can be dramatic for these reasons.
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For example, Rental Property A can have higher value-in-use because its tenants use it as a home office while Rental Property B is used only for residential purposes. A row of warehouses can also have greater value-in-use because it has more occupants than another row of warehouses in the same area.
Dangers of the Value-in-use Method
The people who advocatefor value-in-use taxation for property tax commercial argue that it’s an equitable form of taxation. The property owners, after all, who gain greater monetary benefits (i.e., income) should pay greater taxes.
This initially seems like a logical rationale, especially in a culture where the common belief is that the burden of taxation should be commensurate to the taxpayer’s ability to pay. But when you look closer at value-in-use taxation, you will quickly realize the following dangers.
- Value-in-use taxation isn’t an equitable system. Bear in mind that one of the hallmarks of an equitable system is uniformity in value, which can be best achieved by using market value-based taxation. In other words, commercial property can be uniformly and equitably valued based on sales prices instead on their different values while in use.
- Value-in-use taxation is inherently inequitable because of its highly subjective nature. Property owners, tax assessors, and other authorities in the appeal process, will have more variables if property valuation is based on each owner’s individual experiences with his/her asset. The property owner, for example, who is a poor manager can easily claim low value-in-use due to their shortcomings to escape high property taxes.
- Value-in-use assessments will likely result in duplication of taxes. For example, if real property is used in income-generating activities, value-in-use assessment will reflect its income. But there will be a duplication of taxes because other taxes, such as business income andbusiness personal propertyare also imposed on it.
Indeed, property owners and taxpayers should delve deeper into the risks of value-in-use assessment and taxation with their tax consultants before pushing for it.
Conclusion
Of course, market value assessment and taxation has its share of issues in property tax commercial. But in comparison with value-in-use, it’s a more equitable and uniform system, not to mention that it is more straightforward and you can make a successful appeal based on its valuation methods.
