Part of your job as a property tax manager is to forecast the expected property tax liability for the upcoming year’s budget. Anyone who’s been in this position before knows that it’s a balancing act: Management wants lower taxes, so they hope you’ll come in low. Accounting wants you to be accurate, not too low or too high. And you personally? You want to give yourself some breathing room in the event that something unexpected happens to throw your forecast off. (There are lots of moving parts that can change your tax liability at any time!)
Keeping key people within the organization well-informed about ongoing tax liability issues is an important part of forecasting, but accuracy is the prime concern. Taxes have a significant impact on corporate profits. So the more accurate your property tax forecasting, the better the tax planning—and the greater the organization’s profitability.
3 Property Tax Forecasting Methods
First of all, let’s clarify what “accurate” really means. It’s virtually impossible to generate a property tax estimate that hits the nail on the head, but it is possible to get within a 5% range of actual taxes due. So if the method you’re using routinely delivers those kind of results, stick with it—it’s working.
Here are three property tax forecasting methods commonly used by industry professionals. We recommend using all of them to produce a reliable estimate and minimize the margin of error.
1. Look at last year’s numbers.
Often, what you paid last year is a good predictor of the coming year; it also gives you a realistic baseline number to start with. Keep in mind that there may be different factors at play in the new year—like upcoming changes in tax legislation and anticipated business growth; if that’s the case, you’ll need to consider the impact those changes will have on your tax liability and factor them into your estimate. (To stay up to date with new legislation check out the Tax Foundation’s website.)
Then, move on to method two to make further adjustments to this number.
2. Analyze total tax trends in the value of your property.
Once you know what last year’s number is, do a little digging to spot past valuation trends, up or down. Analysis of historical data is a good way to factor the reality of change into your estimate, and it is a reliable method for making future projections. But there’s always the possibility of getting a new assessor who’s more aggressive in their valuations, or a new appraiser who’s doing things differently than the previous one—both of which could throw a wrench in your trend analysis.
If you’re using property tax software, you should be able to easily sort and view historical data into customizable reports that cover at least the last three years. (For reporting dates, keep in mind that your jurisdiction’s fiscal year may overlap your own company’s fiscal year.)
3. Analyze the effective tax rate and value trends.
Knowing the fluctuations in your historical effective tax rate will also help with forecasting. You can determine the effective rate with this calculation:
Last year’s property tax ➗ last year’s property value
Let’s say you had a $100,000 piece of property and your tax bill was $2,000; you have a 2% effective tax rate. You can either assume that rate is stable for the upcoming year, or you can look at the movement of your effective rates over the past two to three years. If they’ve been escalating, you can assume a growth rate. If year 1 the effective tax rate was 1.95%, and year 2 it was 2.0%, it may be reasonable to project a 2.05% effective rate this year unless you have other specific insight.
If you don’t have historical tax bills to examine, take a look at general trends within a particular state. Some people also make an assumption based on trends in the national tax rate. (Three percent is a commonly used, simple approximation that gives some hedge room in the event the rate does go up—but be careful not to overlap/double-count this assumption with your valuation assumptions.)
Once you have identified the effective tax rate trend, apply it to any changes expected in your property value. Property values change constantly due to inflationary or deflationary trends in asset costs, asset depreciation, and new additions or improvements (i.e. capital expenditures), specifically:
- Inflationary or deflationary trends occur when general costs change (i.e. price indexes), or supply and demand shifts.
- Depreciation occurs because assets deteriorate over time (except for land). The amount of depreciation can vary depending on changes in the condition of assets and types of assets. Some assets depreciate rapidly (like computers) and some depreciate slowly (like rail lines).
- Improvements or new investments can increase the value of assets, thus, quantifying the value of new expenditures adds a layer of complexity.
Taking all these factors into account can be time consuming, but the more precisely you analyze these changes, the more accurate your property tax forecast will be—and the more satisfied your stakeholders.
What if it looks like my forecast may be off?
If there are indications that things may change after you’ve made your forecast, you may need to make an accruals adjustment in your books. So if you forecasted a $2,000 tax liability for a property and, after receiving a notice in the mail, it looks like it’s going to be $3,000, you’ll need to begin accruing more per month over the remaining months to get where you need to be before it’s time to pay. Accrued adjustments true up your books to the actual expense and preserve the accuracy of your financial statements.
Interested in learning how software can improve the accuracy of your property tax forecasting?
Visit our website to learn more about TotalPropertyTax. It not only includes an integrated budgeting tool that captures historical tax information, and tax rates, but also assists with measuring changes in asset values to provide a more accurate forecast in your estimated taxes. And you can also easily create custom reports showing historical trends in property values and tax rates (and a lot of other data points, too!). If you have any questions about Total Property Tax, get in touch! We’re happy to help.