Understanding Basics and Best Practices
By Patrick Santoso, Director of Implementation, Catalis Tax & CAMA
Centrally Assessed Property (CAP) plays a vital role in state economies, providing a fair and equitable approach to property valuation for taxation purposes. Let’s explore the fundamentals of CAP valuation, delve into common valuation methods, discuss the significance of fairness and defensibility, and highlight valuable resources for state users.
Why Do States Value Centrally Assessed Properties?
Centrally assessed properties encompass a range of assets that extend beyond municipal or county boundaries, such as utilities, railroads, pipelines, and other infrastructural components. These properties are assessed at the state level due to their widespread impact and the challenges posed by their unique characteristics. Centralized valuation ensures consistency, uniformity, and equitable taxation, preventing disparities among local jurisdictions. By valuing these properties at the state level, states can distribute tax revenue fairly while accounting for the use and impact of these properties on the entire state’s infrastructure. It is important to recognize that valuation methods should be defensible and predictable. Overly complex models can result in frequent appeals and complicated legal proceedings. The purpose of CAP is to develop a taxable value that is fair and equitable for the purposes of taxation.
Common Methods of Valuation for State-Assessed Properties
Several methods are commonly employed to value centrally assessed properties:
Cost Approach: This method estimates the value of the property based on the cost of replacing it with an equivalent one, accounting for depreciation and obsolescence. It is particularly useful for assets with high replacement costs, such as utility infrastructure, or for newer utility assets.
Income Approach: Often used for income-generating properties, this method assesses value by analyzing the property’s potential income stream. This approach is relevant for properties like pipelines or railways that generate revenue. Common methods are direct capitalization or discounted cash flow. It is important to recognize the difference between the capitalization rate development for each approach. In direct capitalization, it is desirable to utilize guideline companies that are publicly traded and comparable to the company you are valuing. In this manner, you can utilize their price-to-earnings ratio to develop your capitalization rate using the band of investments method. By doing this you are imbuing the market forces in your valuation without your own bias. For a discounted cash flow approach the valuer’s judgment is used to estimate future income and expenses to develop a cash flow that is discounted back to present value. For this method, capitalization rates are developed based on capitalization rate studies including treasury bond rates.
Market Approach: For publicly traded companies the stock and debt approach is a relatively simple and defensible approach to obtain a taxable value. While rarely used, the comparable sales approach can be used if relevant sales are available. This method involves comparing the subject property to similar properties in the market that have recently been sold. Adjustments are made for differences in size, location, and condition.
Apportionment Versus Allocation
Two key concepts in centrally assessed property valuation are apportionment and allocation.
Apportionment refers to the process of assigning a portion of a company’s appraised value to the subject state. Allocation refers to the distribution of the state-allocated appraised value to that state’s various tax-levying districts or jurisdictions. For both apportionment and allocation transparency and reliability are critical. Methods for apportionment or allocation for CAP vary based on industry and may include miles of track for the railroad, total in-state revenue versus total revenue, or original cost of assets plus construction work in progress and operating leases in individual taxing jurisdictions.
The Importance of Fairness, Equitability, and Defensibility
Fairness, equitability, and defensibility are the cornerstones of effective CAP valuation:
Fairness: Centrally assessed property valuation strives to eliminate disparities among taxpayers by ensuring that each pays its fair share. Fairness is key to maintaining public trust in the tax system.
Equitability: Valuations must accurately represent the property’s value, considering its unique characteristics. This prevents certain property owners from shouldering an undue tax burden due to inaccurate assessments. By centrally assessing properties, the inherent variations in valuations from local jurisdictions are eliminated and a total property value can be established by the state valuers and allocated to local jurisdictions.
Defensibility: Valuation methods and processes must be transparent and well-documented. This not only enhances the credibility of the valuation but also provides a solid foundation for defending the assessment in case of disputes.
Resources for State Valuers
For state users involved in centrally assessed property valuation, several valuable resources are available:
WSATA Handbook: The Western States Association of Tax Administrators (WSATA) offers a comprehensive handbook that outlines best practices, methodologies, and guidelines for centrally assessed property valuation. This handbook serves as an indispensable resource for state assessors and administrators.
Wichita Utility Valuation Conference: This annual conference brings together experts, practitioners, and policymakers in the field of utility valuation. Attendees can engage in discussions, attend workshops, and gain insights into the latest trends and developments.
Logan Utility Valuation Conference: Like the Wichita conference, the Logan Utility Valuation Conference provides a platform for professionals to exchange knowledge and explore advancements in the valuation of utility properties.
Conclusion
The valuation of centrally assessed properties is a complex but essential aspect of state taxation systems. By employing sound valuation methods, ensuring fair apportionment and allocation, and upholding principles of fairness and transparency, states can maintain a robust tax system that benefits all stakeholders. Utilizing resources like the WSATA Handbook, Wichita Utility Valuation Conference, and Logan Utility Valuation Conference, state users can enhance their expertise and contribute to the continued refinement of centrally assessed property valuation practices.
Catalis provides automated centrally assessed valuation solutions that produce defensible and accurate values for centrally assessed properties including Income, Cost, and Market approaches to value. Our solutions allow both allocation and apportionment of values to your state and local taxing jurisdictions.
Visit catalisgov.com/solutions for a comprehensive list of our government/public sector solutions.
