As U.S. Supreme Court Chief Justice John Marshall observed two centuries ago, “the power to tax involves the power to destroy.” That statement applies today in the Delaware Valley, where taxing jurisdictions are delegating the tax assessment function to outside consultants.
Incredibly, these consultants are compensated on a contingent fee basis for the additional tax revenue they can accumulate for the jurisdiction. In a typical contract, the fee has been 25 percent of the additional revenue received over a three-year period.
In practice, these consultants can pick and choose which properties to recommend for reassessment. It’s not surprising that the most valuable commercial assets, which offer the largest potential for gain in a reassessment, attract the most attention from these bounty-hunting consultants.
Here’s how the process typically works. Once consultants have determined which properties are under-assessed, the school districts file affirmative appeals to raise the assessments on the affected properties. Property owners who choose to defend their existing assessments must hire attorneys and independent appraisers at considerable cost.
This system of taxation grows less uniform with each reappraisal. And while it may seem absurd to hand over the reins of tax policy to an outside consultant, the practice is becoming routine under current Pennsylvania law.
Experience has shown that at any given time there will always be disparities in tax assessments within a given jurisdiction. However, most taxpayers assume that the assessment function is being performed by tax assessors in an ethical and uniform manner, and that those assessors are not paid based on the increased revenue they find.
The increasingly prevalent use of tax assessment consultants raises serious issues that communities must address.
First, the Pennsylvania legislature has prohibited contingent fee agreements where it has deemed them to be contrary to public interest. Specifically, Pennsylvania law prohibits real estate appraisers from accepting an appraisal assignment where the fee is contingent on the valuation reached.
While consultants to taxing entities might argue that they are not appraisers, the fact that they are concluding to a value or value range arguably makes their work product an appraisal.
Second, Pennsylvania has adopted the Uniform Standards of Professional Appraisal Practice (USPAP), which can help to level the playing field for the property owner in appealing an assessment. Those rules include minimum standards for the retention of records, referred to as the “record-keeping rule.” An appraiser or consultant must prepare a work file for each appraisal, appraisal review or appraisal consulting assignment.
A work file must exist prior to the issuance of any conclusion, and a written summary of any oral report must be added to the work file within a reasonable time after the issuance of the oral report. Any appraiser or consultant who willfully or knowingly fails to comply with the obligations of this record keeping rule is in violation of the state’s ethics rule.
While the taxing jurisdictions’ consultants maintain that they are not doing appraisal work or appraisal consulting work, a review of USPAP definitions suggests differently. The Uniform Standards define appraisal consulting as “the act or process of developing an analysis, recommendation, or opinion to solve a problem, where an opinion of value is a component of the analysis leading to the assignment results.”
The Uniform Standards also indicate that an appraisal may be numerically expressed as a “range of numbers or as a relationship (e.g. not more than, nor less than) to a previous value opinion or numerical benchmark (e.g. assessed value, collateral value).” Clearly, concluding that certain properties are under-assessed requires a conclusion of value and a comparison to an existing assessment benchmark. The point is, if it looks like a duck, walks like a duck, and quacks like a duck, it is a duck--or in this case, an appraisal.
Allowing consultants to wander the tax lists on the basis of bounty hunting for under-assessed properties is essentially a free trip for the taxing authorities, which bear no burden of cost. When the targets are identified and appeals are filed to increase the assessments, the consultants are rewarded for their efforts by being paid a fee contingent on whatever additional revenue is raised.
If taxing authorities had to fund these efforts on an ongoing basis, rather than on a contingent fee basis, much of this bounty hunting would end. Moreover, if state licensing authorities would examine this conduct under existing appraisal law and the Uniform Standards, the inevitable conclusion would be that appraisal consulting services are taking place. Again, this would serve to restrain the current, unbridled practice of targeting large taxpayers.
John Garippa is senior partner and Brian Fowler is an associate in the law firm of Garippa, Lotz & Giannuario with offices in Montclair, N.J., the New Jersey member of the American Property Tax Counsel, the national affiliation of property tax attorneys.