Citation

## Material Information

Title:
Property taxation of public utilities in Virginia Assessment administration and practice
Creator:
Brown, James Earl, 1932-
Publication Date:
Language:
English
Physical Description:
xvii, 376 leaves. : illus. ; 28 cm.

## Subjects

Subjects / Keywords:
Assessed values ( jstor )
Corporations ( jstor )
Counties ( jstor )
Government human services ( jstor )
Personal property ( jstor )
Property taxes ( jstor )
Public property ( jstor )
Taxation ( jstor )
Taxes ( jstor )
Dissertations, Academic -- Economics -- UF
Economics thesis Ph. D
Public utilities -- Taxation ( lcsh )
Taxation -- Virginia ( lcsh )
Genre:
bibliography ( marcgt )
non-fiction ( marcgt )

## Notes

Thesis:
Thesis -- University of Florida.
Bibliography:
Bibliography: leaves 333-344.
General Note:
Manuscript copy.
General Note:
Vita.

## Record Information

Source Institution:
University of Florida
Holding Location:
University of Florida
Rights Management:
Resource Identifier:
022556172 ( ALEPH )
13825231 ( OCLC )

Full Text

PROPERTY TAXATION OF PUBLIC

UTILITIES

IN VIRGINIA:

ASSESSMENT

By
JAMES EARL BROWN

A DISSERTATION PRESENTED TO THE GRADUATE COUNCIL OF
THE UNIVERSITY OF FLORIDA
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE
DEGREE OF DOCTOR OF PHILOSOPHY

UNIVERSITY OF FLORIDA
August, 1962

ACKNOWLEDGMEINTS

The author wishes to express his sincere gratitude
to the Appalachian Power Company, and especially to Messrs. W. F. Keehne and C. L. Robison, for assistance in the collection of data and for making available research funds and facilities without which most primary data could not have been obtained.
Grateful acknowledgment is also due to Dr. Roland B.
Eutsler whose suggestions have proven most valuable and who devoted his time to this project far in excess of
any requirements as Committee Chairman. The writer is also indebted to Drs. R. L. Lassiter, R. H. Blodgett, W. E. Stone and E. R. Bartley for their advice and many worthy contributions.
Sincere appreciation is extended to Mrs. George B.
Page, who assisted immeasurably in the preparation of this manuscript, for her untiring diligence.

This work is dedicated to my wife, Maxine, without whose patience, encouragement and devotion this study would never have been completed.

ACKNOWLEDGlNTS . . ï¿½ LIST OF TABLE L-I.T OFFIGUR .ï¿½S

CHAPTR

1.

* * * * * * * * * * * 9 9

* * * * * * * * * * * * *9

***9 ******* *

INTRODUCTION . . . . The Problem . . . . . ï¿½ * * Limitations of Study . . . Economic Considerations . . Preliminary Investigation .

The Need for Equalization in Virginia . . . . . .

* * * * *9

* * * 9 *9 .* * * * . 9 .

. . e
. . .o .

Scope or Study . . . 9 . * 9 ï¿½ * *
2. HISTORiCAL DMELOPIM N1 AND BACKGROUND
OF PROPERTY TAXATION . . . . * 9 . ï¿½

Taxation of Interstate Commerce . .

Property Taxes . . . . . . . . .

Constitutional provisions-Virginia . . . . . . . . . .

Constitutional and statutory
development in Virginia . . . . .

Property tax revenues--general Property Tax Revenues in Virginia Summary . . . . . . . . . . . . *

* *

. .
* * . 9 . .

. . .

. 9 . . . .

iii

ii xi xvii

1 3 4 7 9 19

22

ABLE OF CONTENTS continuedd)

CHA PR Page

3. ASSSmN'as ADMINiSTRATION . . . . . . . 52
Making the Assessment . . . . . . . . . 5 Unequal Assessment . ï¿½ l ï¿½ . 60 Under-Assessment . . . . . . . . ï¿½ * * * 62

Failure to comply with te law . . . 63
Effects of under-assessment on
local government . . . . . . * . . 65

Full-value assessment versus fractional valuation . . . . * . . .. 67

The Assessment Practice . . . . . . . . 68

Assessment of Income-Producilng
Properties, City of R.chmond,
Virginia . . . . . . . . . . * * * * * 70

Use of gross income rather than
new income . . . . . . . . * * * * * 71

Use of rental value rather bhan
actual rental ....... . . . . . 72

The problem of estimating rental
value . . . . . # . . . . . . . . . . 72

Selection of the proper capitalization rate . . . . . . . . . . . 73

Appropriate use of the capitalization process . . . . . . . * . . * 74 Illustrations . . . . . . . . . . . . 74

Summary . . * . . . . . . . . . . , . 79

4. T ASSsSSENT PHACTiCz .~ V.RGI~L . . 81

General Practice . . . . . . . . . . 81

Comparison of Assessment Ratios
in V~rginia . . . . . . . . . . . . . . 81

jABjL OF CONTENTS (continued)

Significance of Local Assessment RatiOs . . . , * * * ï¿½

Geographical Dispersion of
Assessment Ratios . . . . ï¿½ * * ï¿½ The Trend of Assessment Ratios . .

The Experience in Giles County,
Virginia . . . . . . . . . . . .

Other Effects of Under-Assessment
in Giles Countyj Virginia . . .

Trend of Assessment Ratios and
Rates of Levy, Service Area
Illustration . . . . . . . . .

Average Levies Per $4100 of "Full Value" . . . . . . Average Levies on Assessed Valuations . . . . . . . . . . . Summary . . . * . . . . . . 5. VALUAT. , ASSESSiNT AND TAXATION OF PUBL SERVICE COPORATiON PROPERTY, . . . . . . . . . . . . . The Ad Valorem System of Taxing Utility Property . . . . . . . . Valuation of Utility Property . . Original cost less depreciation Advantages of original cost less depreciation . . . . . Disadvantages of original cost less depreciation . . . Reproduction cost less depreciation . . . . . . . . . Capitalized income . . . . . . Market prices of stock and debt 100 CHAPTER Pag * * 101 , 102 . 108 . 112 . 115 . 117 . 121 . 125 . 129 . 131 . 133 . 134 . 136 . 138 . 140 . 148 . 151 iALE OF CONTENTS (continued) C HiAPTR Eage Assessment of Properties of Public Utilities in Virginia . , . . . Summary . . . * * * * * * 6, CLASSIFICATION AND TAXATION OF TANG iBiLE PERSONAL PROPERTY . . The Relative Position of the Personal Property Tax . . . . . . . . . . . Real and Personal Property Defined . North Carolina . . . . . * . . . New York . . . . . * * * * * Effects in States Where Personalty is not Subjec- to Taxation , . . . . . Effects in States Where Persoralty is Taxed . . . . . . . . . . . . The Problem of Determining Value of Tangible Personal Property . . . . * States 4Where Realty and Personalty are Taxed Alike . . . . . . . . . . States Where Property is Classified . Thie Classification of Public Service Corporation Property in Virginia . . Classification by the Virginia State Corporation Commission , . . Basis for classification . . ... Tae problem of public service corporations in Virgin a . . . Practice in Virginia , . . . . . . The Personal Property Tax Solution as Proposed by Utilities . . . . . Practical Defects of the Personal Property Tax . . . . . . . . . . . . . 152 * 157 . 160 * 163 . 166 . 166 * 167 . 169 . 169 . 170 . 172 . 173 . 173 . 174 . 175 . 176 . 178 . 194 . 196 TABLX OF CONTAIN NS (continued) CIAPTiER Pa e Lack of uniformity. . . # * o * * 196 Lack of universality. . . . . . ï¿½ 198 incentive to dishonesty . . . . . 200 Regressivity . . . . . . * * * * * * 201 Double taxation . . . . . . . . . 202 Summary . . . . . . . . . * * * * * * 203 7. REPORMS IN THE TAXATION OF PUBLIC SERVICE CORP01hATIONS, PART I . . . . . 208 Elimination of the Present Ad Valorem Tax System on Public Utilities , . . . 210 Local taxation on the basis of productivity . . . . . . . . ï¿½ . . . 210 Taxation of public service corporations reserved for tie state . . , . 215 State responsibility for instructional salaries . . . . . 216 State sales tax.. . . .. . . 220 Keeping the Ad Valorem System of Taxation . . . . . . . . . . . . . . . 222 Greater equalization in the assessment practice . . . . . . Reducing the assessment ratio on public service corporation property . . . . . . . . . . Local ratios . . . . . . . . Operating area ratios . . . . Statewide assessment ratios . Raising the assessment ratio on nonutility property . . . . . * Deterioration of the average state assessment ratio . . . Inadequacies of local effort The proposal to raise local assessment ratios . . . . . Summary . . . . . . . . . . . . . . . 224 . . * . . . . . 224 228 228 228 . 231 . 234 . 238 . 242 249 vii TABLE OF COT2TS (continued) CHAPTER 8. R.ORMS IN riU TAXAT ION OF PUBLIC SERVICE CORPORATIONS, PART II . . . . * * ..... 251 The Central Tax Levy Rate . . . . . . . . 252 Need for uniformity . . . * * * * *g 252 The levy rate ... . * * * * * * * 253 Use of local rates of levy . . . . . . 253 Average operating system rates of levy. 254 Statewide average rate of levy . . * * 255 The Allocation of Central Levies . . . . . 256 Situs of investment basis . . . . . . . 259 Revenues generated basis . . . . . . 263 Population basis . . . . . 266 Watt-hour meters basis . . . . . . . 268 Pole-line miles basis . . . . . . . . 271 Combination of bases . . . . . . . . . 272 Plan A--no adjustment for local effort . . . . . . . g * g . * 278 Plan B--adjusted for local effort . 286 Centralized Assessment and Allocation for Local xation. ..... . . . . . 298 Summary . . . . . . . . . . . . . . . 300 9. SUMMARY ANID CONCLUSIONS . . . . . . . 303 Summary . . . . . . . . . . . . . . . . 304 Introduction . . . . . . . . . . . .. 304 Development of the property tax . . . . 304 Assessment administration . . . .. 305 viii TABLE OF COiiNTUTS (continued) C A Pra Page The assessment practice in Virginia . . 306 Valuation, assessment and taxation of public service corporation property. 310 Classification and taxation of tangible personal property y . ... . . . . 313 Reforms in the taxation of public service corporations . . . . . . . . . 314 Greater equalization in nthe assessment practice . . . . . . . . 315 Allocation of central levies . . . . 316 Allocation of centrally assessed values for local taxation . . . . . 320 Conclusions . . . . . . . . . . . . . . . 320 As to property taxation generally . . . 321 As to the assessment of real estate . . 323 As to the assessment of public service corporation property . . . . . . . . . 324 As to the taxation of tangible personal property .. . .. . * . . . . 327 As to the rate of tax levy . . . . . . 328 As to recommendations . . . . . . . . . 329 BIBLIOGRAPHY . . . . . . , . . . . . . . . . . . . 333 APPENDICES A. Counties in Virginia Served by Appalachian Power Company, 192 * . * 346 B. Percentage of Assessed Valuation to Market Value, Revenue from Local Sources and Revenue from Local Sources as a Per Cent of Total Revenue, Commonwealth of Virginia, Year Ended June 30, 1960 . . . . 347 AB OF CONTiNS (continued) APPEnaGcES Pa& C. The effect of Reassessment of All sieal Estate and Tangible Personal Property Other than Public Service Corporations, Using a 40 Per Cent Minimum Assessment Ratio, 1959 . . . . . . . . . ï¿½ * * 352 D. Town Levies . . . . . . . . . . . * * * 358 E. Assessed Value, Taxes Paid, Average Tax Rate, in Towns Only, One Electric Power Company, 1954-1958.. . . . . . . 362 F. Computation of Operating Revenues, Appalachian Power Company, 1959 . . . . 369 BIOGRAPHICAL SKITCH . . . . . . . . . . . . . . . 376 LST OF ABLEE TABLE R 1. Median Assessment Patios and Coefficients of Dispersion, Selected Localities, Commonwealth of Virginia . . . . . . . . . . 14 2. State and Local Tax Revenue, and Property Taxes as a Percentage of Total Tax Revenue, United States, Selected Years . . . . . . . 40 3. Sources of Revenue for Localities, United States, 1946 and 1957 . . . . . . . . . . . 42 4. Property Tax Revenue as a Percentage of Total State and Local Tax Revenue, Classified by States, Other Data, 1957 . . . 44 5. Sources of 1eve~ue for Virginia Counties, 1943 and 1958 . . . . * * . . . . . . 49 6. Gross Capitalization iMate . . . . . . . . . 75 7. Income Approach to Value of Apartment Building . . . . . . . . . . . . . . . . . 76 ,8. Warehouse Value Indicated by Income Approach 78 9. Ratios of Assessed Value to Sales Value of Real Estate, Commonwealth of Virginia, 1956. 82 10. Comparison of Actual Taxes Paid and Taxes Payable Using Average Statewide Assessment Ratios, Tax Year 1959 . . . . . . .. . . 88 11. Comparison of Actual Taxes Paid and Taxes Payable Using Average Systemwide Assessment Ratio, Tax Year 1959 . . . . . ... 12. Comparison of Actual Taxes Paid and Taxes Payable Using Separate Average Assessment Ratios for Cities and Counties, Tax Year 1959 * * * * * * * * * * * * . * * * * * * * 93 13. Ratios of Assessed Value to Sales Price, Real ;state, Selected Localities, 1956 . . . 98 LIST OF TAB]Ld (continued) 14. Trend of Ration of Acessed Value to Sales Value of Real Estate and Trend of Applicable Rates of Levy Thereon, Cities and Counties in Area Served by a Southwestern Virginia Power Company . . . ï¿½ ï¿½ * * * * * * ï¿½** 104 15. Computation of Tax Revenue, Area Served by Hypothetical Utility, 1936 . . . . . * * * * 104 16. Computation of Tax Revenue, Area Served by Hypothetical Utility, 1956 . . . . . . . .. 106 17. Investment and Assessment Data, Selected Counties, 1959 . . . ï¿½ * . * *. . * * . * . *114 18. Average Rate of Levy Per$100 of "Full"
Value, For the Years 1954 and 1958 . . . . . 118
19. Average Rate of Levy Per $100 of "Full" Value, For the Years 1954 and 1958 . . . . . 119 20. Assessed Values, Taxes Levied and the Average Rate of Taxation, Commonwealth of Virginia . . . . . . . . . . . * * * * * * 122 21. Assessed Values, Taxes Levied and the Average Aate of Taxation . . . . . . . . . 126 22. Comparison of Rates of Return to Bond and Stockholders . . . . . . . . . . . . . . . . 143 23. Assessed Value of Property Subject to Local General Property Taxation, 195b . . . . . . 164 24. Comparison of Actual Tax Levy with Levy Based on Reclassification, Electric Light and Power Companies in Virginia, 1949 . . . 181 25. Comparison of Actual Tax Levy with Levy Based on Reclassification, Electric Light and Power Companies in Virginia, 1959 . . . 182 26. Actual Classification of Assessed Va.Le of Electric Light and Power Companies in Virginia, Localities Employing Variable Rates on Realty and Personalty, 1949 . . . . 185 xit 0F A~sk~S(contin1 d 27. Suggested Classification of Assessed Values of Electric Light and Power Companies in Virginia, Localities Employing, Variable Rates on Realty and Personalty, 1949 28. Actual Classification of Assessed Value of Electric Light and Power Companies in Virginia and Rates of Taxation Per$100 of Assessed Value, Localities Lmploying Variable Rates on Realty and Personalty,
1959 . . . . . . . . . . . * * * * * ï¿½ * * * 187
29. Suggested Classification of Assessed Value
of Electric Light and Power Companies in
Virginia, Localities EmployinG Variable
Rates on Realty and Personalty, 1959 . . . 188

30. "Rate of Class Discrimination" Trend,
Selected Years, 1949-1959 . . . . . . . . 193

31. Local Taxation Based on Revenue Generated,
One Electric Power Company, State of
Virginia, 1959 . . . . . . . . . . . . . . 212
32. Ratio of Assessment on Real Estate, Tax
Hate, and Tax Levy Under Assumed Condition
of $50 Nillion Investment, Castlewjood District, Russell County, Virginia, 1936-1956 . . . . . . . . . . . . . . . . . 219 33. Comparative Sales Taxes for States Surrounding Virginia, 1960 . . . . . . . . 221 34, Taxes Computed Using atio in iach Locality Served, 1959 . . . . . . . . . . . . . . ï¿½ . 226 35. Taxes Computed Using eighted Average Ratio in Service Area, 1959 . . . . . . * . . . . 229 36. Taxes Computed Using Statewjide Average Assessment Ratio, 1959. . . .. * . . . * 232 37. Average Ratios of Assessed Actual Sale Value of Real Estate, Counties and Cities, Selected Years, Commonwealth of Virginia, 1936 to 19560 . . . . . . . . . . . . . * 235 xiii LIC~~ OF ~A~3ILJ~ (cor~tinueci) 38. Grouping of Localities by Ratios of Assessed Value to sales Value, Commonwealth of Virginia, 1942, 1950 and 1956 . . . . . . . 236 39. Relationship of County Assessment Ratios to Percentage of Total Revenues Derived from Local Sources, Commonwealth of Virginia, Year Ended June 30, 1960 . . . . . . . . . . 239 40. Proposed Statewide minimum Assessment Ratio . 246 41. Limitations on Penalty Provisions . . . . . . 247 42. Levy Rates on Electric Utility Substation, Selected Taxing Districts in Virginia, 1959. , 254 43. Average Rate of .evy on Real Estate, Counties and Cities, Virginia, 1958 . . . * * * * * * * 256 44. Allocation of a Southwestern Virginia Power Company's 1959 Property Taxes, Computed on the Statewide Average iate to Localities on the Basis of Investment . . . . . . . . . . 260 45. Allocation of a Southwestern Virginia Power Company's 1959 Property Taxes, Computed on the Statewide Average iateto Localities on the Basis of Revenues Generated . . . . . . . 264 46. Allocation of a Southwestern Virginia Power Company's 1959 Property Taxes, Computed on the Statewide Average !ate to Localities on the Basis of Watt-Hour Meters . . . . . . . 269 47. Allocation of a Southwestern Virginia Power Company's 1959 Property Taxes, Computed on the Statewide Average Rate to Localities on the Basis of Pole-Line Miles . . . . . . . . . 273 48. Allocation Factors--Compositez for Interstate Allocation of Railroad Values . . . . * 277 49. Computation of Composite Allocation Factor, Not Adjusted for Local Effort . . , . . . , 279 xiv L12I OF ~Ai~K~S (cont~uucd) 50. Allocation of a outhoestern Virginia Power Company's 1959 Property Taxes, Computed on the Statewide Average Rate to Localities Using Composite Allocation Factor, Not Adjusted for Local Effort . . . . . . . 282 51. Allocation of a Southwestern Virginia Power Company's 1959 Property Taxes, Actual Taxes Paid Using Composite Allocation Factor, Not Adjusted for Local Effort . . . 284 52. Computation of Comiposite Allocation Faotor, Adjusted for Local Effort . . . . . . . . 288 53, Allocation of a Southwestern Virginia Power Company's 1959 Property Taxes, Computed on the Statewide Average Rate to Localities Using Composite Allocation Factors, Adjusted for Local Effort . . . . . . . . . 290 54. Allocation of a Southwestern Virginia Power Company's 1959 Property Taxes, Actual Taxes Paid Using Composite Allocation Factor, Adjusted for Local Effort . . . . . . . . . 292 55. Allocation of a Southwestern Virginia Power Company's 1959 Property Taxes, Actual Taxes Paid Using Composite Allocation Factor, Adjusted for Local Effort and Not Adjusted for Local Effort Compared . , . . . . . . , 296 56. Percentage of Assessed Valuation to Market Value, Revenue from Local Sources and Revenue from Local Sources as Per Cent of Total Revenue, Commonwealth of Virginia, Year Ended June 30, 1960..... , .. . 347 57. The Effect of Reassessment of all Real Estate and Tangible Personal Property Other Than Public Service CorporatiLons, Using a 40 Per Cent Minimum Assessment Ratio, 1959 . . . . . . * * * * * * * * * * 352 58. Average 'ax Levy of Towns in One utility's Operating Area, Relation to Statewide Average Tax Rate on Real Estate . . . . . . 359 W OF TAB l (ontinued) 59. Assessed Value, axeas Paid, Average Tax Rate, in Towns Only, One Electric Power Company, 1954-1905. . * * * * * 362 60. Computation of Revenues to be n1loca.ed on Basis of Watt-Hour Meters, Appalachian Po"er Company, ioanoke Division, 1959 * * 370 61. Computation of revenues to be Allocated on Basis of Watt-Hour Meters, Appalachian Power Company, 3luofeld Division, 1959 . . 371 62. Computation of City and County Revenues, Appalachian our Company, Roanoke Division, 1959. . . * * * * * * * * * * 372 63. Computation of City and County revenues, Appalachian Power Company, Blueflield Division, 1959 . . . . . . . . . * . . 374 xvi LIST OF FIGURES FIGURE ï¿½555 1. Assessment Ratios by Counties, Commonwealth of Virginia, 1956. . . . ï¿½ * . . * 86 2. Assessment iatios by Sales Nalues of Real Estate, Selected Areas, Commonwealth of Virgina, 1956. . . . . . . 99 3. Real satame AssesLment Ratios and Rates of Levy, Service Area of a Southwestern Virginia Power Company, Years of Assessment Studies, 1936-1956. . . . . . . . . 105 4. Real Estate Assesment Ratios and Rates of Levy, Giles County, Virginia Years of Assessment Studies, 1936-1956 . . . . 109 5. Comparison of Assessment Ratios and Rates of Levy o Utiit and NonutilityT, Property, service Area of a Southwestern Virginia Pow2er Company, Years of Assessment Studies, 1936-1956 . . . . . . . . . 116 6. Counties in Virginia erved by Appalachian Pouer Company, 62 . . . . . 346 xvii CHAPTER 1 INTRODUCTION The publication in 1776 of Adam Smith's Wealth of Nations marked the initial enumeration of "canons of taxation," criteria for the evaluation of the merits and weaknesses of indiv dual taxes and their effect upon whole systems of taxation. These criteria held that a good tax system must be characterized by equity, certainty, convenience to the taxpayer, and economy in collection, and they have provided the source for most of the modern principles for evaluation.1 The growth in population, expansion in territory, industrialization, urbanization and the changing concept of government's role and function have resulted in an assumption of increased fiscal responsibility by governments and a consequent search by federal, state and local governments for more and more tax revenue. In this search for 1 An examination of general taxation as it exists in the United States today leads one to the observation that the question of a tax or a tax system being "good" in keeping with these criteria is largely academic. See R. M. Haig, "Taxation," Encyclopedia of the Social Sciences, Vol. XIV, pp. 538-540; A. H. Hanson ana H. S. Perlo f, State and Local Finance in the National Economy (New York: W. W. Norton and Company, Inc., 194L4), pp. 250-456. additional revenue the federal government has led the way. The ratification of the Sixteenth Amendment to the United States Constitution, popularly known as tne "Income Tax Amendment," bestowed upon the federal government the power to so lead the way. The text of this sweeping amendment is both brief and to the point, leaving the intent clearly understood: "The Congress shall have the power to lay and collect taxes on income, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration." The increase in federal taxes which has stemmed from the exercise of this power of access has served to make the financing of state and local government more and more difficult. Though the purpose of this study is not to explore the multiplication and growth in federal taxation, the above comments do lead to three observations. First, federal taxation, in its efforts to extract from the taxpayers more and more dollars of revenue for federal purposes, has all but exhausted the readily available sources. Second, state and local governments, to match federal funds on the one hand and to compete with federal authority over their citizens on the other, have been forced to renew their demands on those sources of taxation not pre-empted by the federal government. Finally, the taxpayer, subjected to such crossfire, has developed a keener sense of awareness in the area of taxation, forcing all levels of government to strive for greater equity and fairness in taxation or, as an alternative, to engage in subterfuge. The Problem Illustrative of one problem of taxation is the ad valorem tax as imposed on the public utility industry. This study is specifically directed toward the electric light and power industry in Virginia with the assumption that the observations and conclusions presented herein are possessed of reasonable applicability to the public utility industry generally. 2 This study will encompass three broad areas, First, an examination of the assessment practice in Virginia will reveal whether the assessment of public service corporation property differs from the assessment of nonutility property. Second, since the question of equity in taxation can be considered only by reference to the total tax burden, the method of classification of property as well as of rates of taxation will be considered. If inequities are found it is insufficient merely to point them out; therefore, the third area of coverage in this work consists of proposals to rectify those inequities uncovered during the course of this investigation. 2Data and research facilities have been provided by the Appalachian Power Company, a subsidiary of the American Electric Power Company. See Appendix A for ma showing the section of Virginia served by the Appalachian Power Company. Specifically, this study is concerned with the possibility of inequitable ad valorem taxation of public utility property in Virginia which might arise from the allocation of centrally assessed values to the taxing localities or from the imposition of local rates of taxation. Where inequities are found to exist in these two specific areas some attempt will be made to develop corrective procedures. Limitations of Study This study of public utility ad valorem taxation is first limited geographically to a consideration of one state only, Virginia. Further, attention has been focused on the electric light and power industry in Virginia. Both of these limitations were necessitated by the physical difficulties of conducting a personal investigation in more than one industry or in more than one general geographical area; however, it is believed that neither the data nor the problems considered are peculiar to Virginia or to the electric light and power industry. On the other hand, the data and observations presented herein concerning the electric light and power industry in Virginia should not be considered as necessarily representative of all public utility industries in all states. However, a review of the literature indicates that these and related problems exist generally throughout the country and that the major difference between the problems of the various utility industries and between the various states is mainly one of 3 degree. As stated earlier, one of the purposes of this study is to investigate the possible inequities which might arise from the allocation of centrally assessed values to the localities for imposition of local tax rates. it should be noted that the allocation process is not the only way in which discriminatory or inequitable ad valorem taxation can be effected on public service corporation property. This study is mainly concerned with the allocation of centrally assessed values after such values have been determined. The determination of assessed values, although given some consideration, is not given detailed consideration for the following reasons. First, Just what constitutes value for public utility property where no active market for such property actually exists has been a problem plaguing economists and tax assessors for years. Much has been written and many theories have been advanced; however, 3An indication of the widespread interest in this and related problems can be found in the annual Proceedinges of the National Tax Association. there appears to be no generally accepted evidence of value 4 although certain "guides" are available to the interested. Second, the determination of value for ad valorem purposes is not, at the present time, of any real significance in Virginia.5 The Virginia practice of assessing public utility property at original cost, less an approximate depreciation allowance of 20 per cent, based on depreciation studies conducted by the Virginia Department of Taxation, apparently has been accepted by both the utilities and the State Corporation Commission. There is, of course, no excuse for continuing an assessment procedure which has obvious defects; however, there is little disagreement over this method in Virginia and it has been deemed beyond the scope of this study to consider as a problem an area in which no problem apparently exists. In its Appraisal of Railroad and Other Public Utility Property for Ad Valorem Tax Purposes, the Committee on Unit Valuation of the National Association of Tax Administrators reports that: "There are several tyges of evidence that are commonly used in making appraisals. This report suggests that among those to be considered are: "(1) capitalized earnings, (2) market prices of stock and debt, (3) original cost less depreciation, and (4) replacement cost less depreciation." The report goes on to advocate some combination of capitalized earnings and stock and debt evidences. (Page 3. See also "Guide for Assessment--Sales Ratio Studies, a report of the Committee on Sales Ratio Data of the National Association of Tax Administrators, dated June, 1954; "Guide for West Virginia Assessors," dated January 1, 1958. 58ee Chapter 5. Economic Considerations In the examination of the property tax structure in Virginia it is probable that certain inequities shall be discovered, as they must be in an examination of any tax system created by man; however, it it difficult to grasp the concept of inequity without personification. It is impossible for a corporation to be inequitably treated since equitable treatment is solely a human attribute. It is necessary, then, when investigating the state and local property tax structure as to its equity, to inquire Just who is it that is treated inequitably? Is it the stockholder of the public service corporation? Is it the consumer of utility services? Is it the owner of other property? For purposes of economic analysis the sole criterion for measuring equitable treatment of stockholders rests in the compensation necessary to call forth their capital in sufficient quantities to insure uninterrupted service by a growing industry. There is no evidence that such capital has not been forthcoming in the past, as confirmed by the fantastic growth in the electric power industry to meet the needs of the consuming public. Though it may be argued that "inequitable" tax treatment of utility property has so impaired the rate of return to investors as to make the raising of capital more difficult, actual facts indicate that this problem is not significant. In the first place, present rates of return apparently are adequate to call forth sufficient capital to meet current needs, indicating that if inequitable property taxation exists it is not presently inequitable to stockholders. Second, most regulatory commissions, following the "end result" doctrine, would probably allow, if demand were sufficient, a return to the investors of capital which would be adequate to call forth such capital, inequities in taxation notwithstanding. To the extent that regulatory commissions in the future fail to allow upward rate adjustments, necessitated for example by discriminatory taxation, then the stockholders might well have room for protest on the grounds of unwarranted confiscation of property. This has not yet taken place and the future is still speculative. For purposes of the present analysis, it is believed that any inequities which might exist in the taxation of public service corporations have not necessarily been imposed upon the investor. If they had, capital would not have been forthcoming to the utility industry due to an insufficiency in the rate of return, and this has not, fortunately, been the case. It follows, then, that the consumer of utility services is ultimately the one on whom the burden of taxation must fall, and where there are inequities in the taxing system it must be the consumer who is inequitably treated as long as the demand for utility Federal Power Commission v. Hope Natural Gas Co. (320 U.X. 591), 1944. 9 services remains relatively inelas,1c. Property taxes levied by one county, for example, must be paid by someone. When the burden of these taxes can be shifted to the citizens of another county, or a city, it is not the company which is being inequitably treated but rather the consumers of that company who must pay someone else's bill. Where there are defects in the assessment practice or in the administration of the tax system, it is again not the company which is being discriminated against but rather people, and these people are most likely the consumers. Thus, it should be kept in mind that "inequities" as discussed in this study refer to people, although for purposes of presentation this point is not often emphasized. Preliminary Investigatlon Before making the more detailed investigation of the property tax system in Virginia as it affects public service corporations, the results of which comprise the basis of this thesis, it was necessary to make a few preliminary inquiries in order to ascertain whether Virginia was indeed faced with any problems in this respect and, if so, to what extent ere they serious enough to warrant the more detailed investigation. It was observed that the Virginia Constitution, as is the case in most state constitutions, calls for uniformity in taxation. One aspect of uniformity in taxation is the assessment of property; therefore, it was undertaken in these preliminary investigations to measure the extent to which assessing in Virginia achieved a reasonable degree of uniformity. The measuring standard favored by assessing experts is the "coefficient of dispersion," or "coefficient of deviation," which is the percentage which the average of the deviations of the assessment ratios of properties from their median ratio bears to their median ratio. Dr. John H. Russell, the former director of research for the Virginia Department of Taxation, referred to this measure as an "index of assessment inequality."7 The method of computation for this measure is as follows. First, the median assessment ratio of the individual assessment ratios in the sample is determined. Second, the deviation in percentage points of each individual ratio from the median ratio is determined, and the sum of these deviations is divided by the number of ratios to ascertain the average deviation. The coefficient of dispersion is then derived by dividing the average deviation by the median ratio. Assume, for example, that eleven pieces of 7Cited by J. Edward Rountry, "Equalization at Market Value," Appraisal Journal, Vol. XXIV, No. 2, April, 1956, p. 222. property each have a market value of$30,000. The computation of the "index of assessment inequality" can be
illustrated as follows:
Deviations
Property Assessed Value Assessment Ratio from Median
1 $1,800 6.0 -19.0 23,000 10o.o -15.o 1,6o 12.o -13.0 s500 15.0 -10.0 5 6,000 20.0 - 5.0 6 7,500 25.0 0.0 7 10,500 35.0 10.0 8 14,4o00 48.0 23.0 9 17,700 59.0 3 .0 10 18,600 62.0 37.0 11 21,300 71.0 46.0 Total deviations . . . . . . . . . . . . . . . 212.0 Average deviation . . . . . . . . . . . . . . 19.3 Index of assessment inequality (coefficient of dispersion) equals 77.2 per cent (Average deviation, 19.3, divided by the median ratio, 25.) It is seen in the above illustration that the coefficient of dispersion is 77.2 per cent. This relatively high coefficient stems from the lack of uniformity in the assessment ratios. Assume, however, that the same properties are assessed at a more uniform rate. The following is observed: Deviations Property Assessed Value Assessment Ratio from Median 1$ 9,000 30.% -10.0 2 9,900 33.0 - 7.0
10,500 35.0 - .0
S0,80 36.0- .0
5 11,4o0 318.0 - 2.0 6 12,000 40.0 0.0 7 12,600 42.0 2.0 8 13,200 44.0 .0 9 14,100 47.0 .0 10 14,400 48.o .0 11 15,000 50.0 10.0 Total deviations . . . . . . . . . . . . . . 59.0
Average deviation . . . . . . . . . . . . . 5.4
Index of assessment inequality (coefficient of dispersion) equals 13.5 per cent
(Average deviation, 5.4, divided by median ratio, 40.0.)

With a higher degree of uniformity, then, the coefficient of dispersion is seen to be relatively low. There is some question as to just how low the coefficient of dispersion must be in order for a locality to qualify as a "good" locality, with respect to making reasonably uniform assessments; however, Dr. Russell is reported to have established, over twenty-five years ago, that " ' an index as low as 20 should be considered a goal desirable of achievement and reasonably attainable,' that anything below this is to be considered as an excellent degree of

equalization for uniformity," and that " 'an index as high as 45 should be judged cause for the gravest concern.' .8
It should be noted that, in the preceding illustration, where there was illustrated a low "index of assessment inequality," even lower than the 20 per cent suggested by Dr. Russell as desirable, the assessed values varied 25 per cent, plus and minus, from the median. Therefore, there is some room for argument that the coefficient of dispersion, to reflect really acceptable assessments, should be considerably less than 20 per cent. A Minnesota tax study committee, for example, asserts that "a coefficient of dispersion of 10 per cent or less suggests that the assessor is performing his Job well."9
With these rough standards in mind, the preliminary investigation of the situation in Virginia was conducted. An examination of the assessment ratios prevailing in two counties and one city revealed that there was "cause for grave concern" of the assessment practice in certain sec10
tions of Virginia. 0 The results of this preliminary investigation of the assessment ratios in those localities, and the coefficients of dispersion for each, are shown in Table 1.

81bid.

9Report of the Governor's Minnesota Tax Study Committee, State of Minnesota (St. Paul, 1956), p. 177.
10Assessment ratios are based on a 1956 study conducted by the Virginia Department of Taxation, the latest such study conducted.

TABLE 1

MEDIAN ASSESSMENT RATIOS AND COEFFICIENTS
OF DISPERSION, SELECTED LOCALITIES,
COMNWBEALTH OF VIRGINIA

Average
Median Deviation Coefficient Assessment from of
Ratio Median Dispersiona Dickengon
County 12.% 6.8 54.5 Giles Countyc 14.6 15.2 104.1 Roanoke City d 33.6 8.0 23.8

Source: Working papers of the Virginia Department of Taxatio for the 1956 real estate assessment ratio study.
aThe average deviation from the median assessment ratios divided by the median assessment ratio.
bBased on an examination of all real estate sales made in 1956.
CBased on an examination of 102 out of 333 real
estate sales made in 1956, using random sample technique.
dBased on an examination of 224 out of 772 real
estate sales made in 1956, using random sample technique.

In Roanoke City the "index of assessment inequality"
shows that property is being assessed relatively uniformly; however, in the two counties observed, the coefficients of dispersion are shown to be in excess of the 45 per cent which Dr. Russell considered cause for grave concern. In Giles County particularly the coefficient of dispersion shows an extremely wide variation in assessment ratios. Where such a situation exists, as expressed in one study,

" . . the consequences of such wide variations in assessed valuations for the amount of the property tax burden of the individual taxpayer are staggering. . ..
Further, in the initial examination of Virginia's
property tax system, it was noticed that, in addition to the wide variations in the assessment ratios, there was general assessment at less than the 40 per cent ratio which is applied to public service corporation property. The question then presented itself as to whether there is any correlation between low assessments and high coefficients of dispersion. That there is this relationship is shown by the following:12
Median Assessment Ratio Coefficient of
for Nonfarm Houses Dispersion
as of 1956 Median Area
Less than 20.0 37.3 20.0 to 29.9% 32.0 30.0 to 39.95 25.1 4o0.Q or more 22.2
As an illustration of Just how this relationship might affect individual taxpayers, consider the following. Assume there are three pieces of property in a certain locality, each

11
lEarnest E. Means and d. W. Martin, County Property Tax Assessment in Florida (Tallahassee: Florida State University, Bureau of Governmental Research and Service, 1957), p. 51.
12Taxable Property Values in the United States
(Washington: U.S. Department of Commerce, 1959), Table 17, p. 86.

with a fair market value of $1 million. If the coefficient of dispersion is low, say, 10 per cent, and the total tax desired is$48,000, and an attempt is made to keep the
assessment ratios relatively high, then the distribution of the tax burden is as follows:

Fair Market Assessment Assessed Share of Property Value Ratio Valuation Taxa
A $1,000,000 78.0$ 780,000 $14,976 B 1,000,000 80.0 800,000 15,360 C 1,000,000 92.0 2,000 17,66 24500,ooo$48,ooo
aAssessed valuation divided by total assessed valuation times total tax of $48,000. On the other hand, if the coefficient of dispersion is high, say, 50 per cent, and an attempt is made to keep the assessment ratios relatively low, then the distribution of a total tax burden of$48,000 is as follows:

Fair Market Assessment Property Value Ratio
A $1,000,000 28.0 B 1,000,000 40.0 C 1,000,000 52.0 aIndividual assessed valuati( valuation times total tax of$48,(

Assessed
Valuation
$280,000 pa oooo 1l,200,000 on divided by 00. Share of Tax$11,200
16,000 20,800
$48,000 total assessed In the first illustration, where assessment ratios are high and the coefficient of dispersion is 10 per cent, the owner of Property C will pay$2,688 more in taxes than the

owner of Property A, due entirely to a difference in the assessment ratios of 24 percentage points. However, in the second illustration, where assessment ratios are lower and the coefficient of dispersion is 50 per cent, the owner of Property C will pay $9,600 more in taxes than the owner of Property A, again due entirely to a difference in the assessment ratios of 24 percentage points. With high assessment ratios the owner of Property C is mildly discriminated against; however, with low assessment ratios the owner of Property C pays 85.7 per cent more taxes than the owner of Property A. It appears, then, that equality of assessment within a locality, though difficult to obtain under favorable conditions, is much more difficult to achieve when assessments are made at some fraction of a constitutional mandate of full value. Finally, in order to see to what extent Virginia had a problem worthy of further investigation, a comparison was made of this state with other states in the preliminary investigation. An examination of the U.S. Bureau of Census data revealed that of all the states (48 at the time of that particular study) only three had coefficients of dispersion in excess of 40 per cent, Virginia being one of these states. The grouping for the states was as follows:13 Coefficient of Number of Dispersion States Under lO. hone 10.0 to 19.9 21 20.0 to 29.9 19 30.0 to 39.9 5 Over 40.0% 3 The causes of relatively high coefficients of dispersion, with the inequalities resulting therefrom, are many; however, centralized control of the assessment function appears to have some direct relation to the problem. In Minnesota, for example, it was held that " . . . the principal handicap to more effective equalization and review at the state level appears to be issufficlent staff. Technical positions remain unfilled because the salary authorized does not attract men with the necessary qualifications."14 Another state's problem in this respect is illustrated by the following comment: Over the years property assessments in the great majority of Tennessee counties have got sadly out of line, one with another. There are many reasons for this, of which we need mention only a few. One of the main reasons, probably, is that we are still operating under an Assessment Act passed iu 1907. This act was an 1~3axable Property Values in the United States, a_. Cit., Table Id, P. by. 14Report of the Governor's Minnesota Tax Study Committee, State of Minnesota (St. paul, 1955), p. 163. excellent one--for 1907--but it was designed for a horse-and-buggy age and not for the conditions found in Tennessee today. Other contributing factors have been the low salaries paid to assessors and the inadequate help allowed them. In many counties the assessors' salaries are still thosel5 which were established by the 1907 act. Although the causes are not clear in Virgin.a, it might be that the segregation of the property tax function to the localities within the state has been a contributing factor. Further, although the causes may well merit attention, the effects of a "high index of assessment inequality" were deemed to be of ever., greater importance i. this study, particularly as tney affect the public service industry which has foui:d its assessment ratio frozen. The Need for Lqualization in Virginia At one time the major source of revenue to the state government in Virg.nia was tne general property tax, such levy being made upon the assessed values of property located and assessed in the various taxing districts. It was only natural for local assessors to seek to minimize 'their constituens' contributions so the centralized state governmeet in order to prevent an "undue burden" being placed upon them. Accordingly, assessment ratios were generally 15Cecil Morgan, "Eleven Counties Start Assessment Reform," Tennessee Planner, Vol. XVIII, No. 2, OctoberDecember, 1958, p 43. very low. Virginia then embarked upoi. a plaa of restricting taxalion on real estate and tangible personal property to the local authorities. This was supposed to alleviate inequities arisi..n from divergent assessment ratios and the discrim.nat-on resulting from having one taxiing district conr_bute a disproport-onate share to the state government. Although a particular injustice may have been corrected by segregation of tax sources between levels of government, such a procedure may have done little toward relieving individual taxpayers of any inequities which may nave faced them, for it is quite possible for discrimination of ths type merely to be transferred from a statewide level to a local level. In segregatin the taxation of real estate and tangible personal property to the localities, t should be noted that the state reserved the more dynamic and potentially greater sources of revenue for itself while giv ng to the localt es the more stable, if less yielding, sources of revenue, it is true, of course, that total property tax collections have increased; however, the proportion of total revenues derived by localit es from tne taxation of real estate has declined from 69.2 per cent in 1926, to 58.9 per cent in 1959.16 The cities and counties in 16Virginia Department of Taxat on, staff reports. Virginia have this bee- forced to expand the r revenues by ceans of add-tional tax-on devices to aucment the property tax. The reservatIOn of the propert, ax for tue sole use by the localities, except for the rolling stock of railroads, made necessary some method of equalization of the tax burden between taxpayers located in Virginia but within divergent taxing districts. Although segregation was intended to relieve inequities in the assessing procedure, the transfer of the responsib-lity to local assessors with no provisions to correct inequities would quite possibly have resulted in a sit-a-tion worse than tae one which was being corrected. Therefore, equalization boards were established by statute in the counties and cLties to act primarily upon the com plaint of an aggrieved taxpayer. Public service corporation property was also "equalized"; however, the device employed nere was State Corporation Commission assessment of utility property at a statewide average assessment ratio, computed at the t~me to be 40 per ce-t of "market value." Local equalization boards, as established n Virginia, act upon the instigation of aggrieved property owners; therefore, taxpayers must first know and be able to prove an injustice in tihe assessment of their property and then be wiling to take tneir case to the equalization board if they are to obtain relief. Tat the average taxpayer and property owner is possessed of sufficient knowledge to adequately present his case s subject to sone do'bt. it is for this mala reason trhat local equalizatio- boards have probably been somewhat ineffectual in aceieviug their proper goal. One of the .asks of this thess . to examine the effectiveness of the other equalization procedure, namely, the equalization of public service corporation property by assessing such property at 40 per cent uf its i.arket value. A few of the more important questions to be considered are: Has the average statewide assess ent ratio remained at 40 per cent since t.is ratio was originally determined? is it equitable to assess all publ-c service corporation property, both realty and persoialty, at an average statewide assessment ratLo determined largely by a study of real estate assessment ratios? Scope of Study T..e study of assessment ratios Ln Virginia is intended to yield some light as to tue equity of Virginia's property tax system, particularly ii relation to the utility industry generally. However, as has been noted, t..e assessment ratio is but half of the taxing process, the otlier equally important half being the rates of levy applied to assessed values to determine the final tax bill. Further, in this respect, the rates of levy frequently vary between those imposed on real estate and those imposed on personal property. Thus, the classificatio-n of utility property into categories of realty and personalty becomes an important prooleu to whici some attention will be directed. Ii addition, there will be a general review of the assessment practice as it applies to public service corporations. Finally comes the question of alternative courses of action to be taken ii case deficiencies are found to exist in the present system. It should not be expected that this study will disclose all of the weaknesses of property taxation and proceed to correct them therewitn; however, it is hoped tuat any deficiencies which tuis study does reveal will be noted for further investigation. Further, any alternatives proposed should not be taken as final answers, but as points of departure toward ultiate solut io-s. CHAPTER 2 HISTORICAL DEVELOPMENT AND BACKGROUND OF PhOPEhTY TAXATION The development of property tax schemes can be traced to tue Middle Ages and to the influences exerted on its development by the economic composition of the early feudal estates. The more significant refinements and characteristics of today's modern property tax systems have been, however, largely associated with the development of the American economy and especially with the clarifications of state limitations under the federal Constitution. The rapid rise in this country's population and tue increased demand for trade between the states precipitated many problems. States and local communities were in need of more and more funds to carry out their public functions. Further, it was only natural that the localities should attempt to protect their "home grown" businesses. As a result, interstate commerce was subjected to heavy taxation by localities. Taxation of Interstate Commerce This taxation of interstate commerce did not proceed without protest by t.iose so engaged in such commerce. Numerous cases arose in which it became evident that state taxation of interstate commerce involved considerations which were not present when the issue related merely to the police power. In view of these considerations tihe Cooley rule1 was not used to any great extent in the state tax cases. Uniformity, therefore, was considered to be of the utmost importance in this area.2 However, if granting protection to those engaged in interstate commerce solved the problem of local interference with national matters it created another equally difficult problem. To give interstate commerce full immunity meant that competing, local business would have to pay an undue share of the cost of local government whose benefits interstate commerce enjoyed. Out of many cases brought into the courts, the general rule evolved that states and localities, under their taxing power, may adopt any method of taxation which they desire as long as it is not in conflict with the federal Constitution. In order to steer the tax vessel to the harbor of constitutionality, safely past the "Scylla of the commerce clause and the Charybdis of due process," the states were forced to rely upon taxation of property, and not taxation of business income obtained through interstate commerce. 1Cooley v. Board of Port Wardens, 53 U.S. 298,299 (1851). In this case was developed the "doctrine of concurrent power" in which the states were permitted regulation of commerce concurrently with the federal government except when in conflict with federal regulation. 2The Passenger Cases, 7 Howard 286 (1849); State Freight Tax Case, 15 wallace 232 (1873 . Unfortunately, the United States Supreme Court has shown a remarkable lack of consistency in interpreting just what was a tax on property and what was a tax on income. It has been held, for example, that the property of companies engaged in interstate commerce may be taxed and, further, may be taxed at its value as it is, in its organic relations, and not merely as a series of unrelated items. It is therefore important to note that taxes on such property have been sustained tnat took account of the augmentation of value from the commerce in which it was engaged. On the other hand, the United States Supreme Court held a Texas tax, ostensibly one levied on property, to be a tax on income and, therefore, invalid.5 The difficulty in distinguishing between the two, of course, is apparent. Since the commercial value of property consists in the expectation of income from it, and since taxes ultimately come out of income, obviously taxes called taxes on property, and those called taxes on income, tend to run into each other in the long run. A brief examination of certain other important cases provides an insight into the rationale of the United States 3McAhren v. Bradshaw, 113 P. 2d 932, 57 Ariz. 342; Pullman alace Car Co. v. Pennsylvania, 141 U.S. 18 (1891). 4Adams Express Co. v. Ohio State Auditor, 165 U.S. 194 (1897); Adams Express Co. v. Kentucky, 6bb U.S. 171 (1896); Fargo v. Hart, 193 U.S. 490 (1904). 5Wisconsin & M. R. Co. v. Powers, 191 U.S. 379 (1903).. Supreme Court, although the theory evolved is dichotomous. In one such case, Justice Frankfurter, in the majority opinion, held that the commerce clause, even without implementing legislation by Congress, is a limitation upon the taxing power of the states.6 This "direct burden" rule would invalidate a tax not because it was discriminatory, or that other states might retaliate with a similar tax, or that it might increase the cost of production, but because there is interference by a state with the freedom of interstate commerce. On the other hand, when a regulatory measure has been called into judgment, the United States Supreme Court has generally followed the Cooley doctrine of "concurrent power." The "concurrent power" doctrine, however, has been limited by a decision which held that states can retard the flow of commerce under their police power to protect the health and safety of their people, but cannot make a similar retardation for economic purposes. Two more recent cases affirm the more modern view of the United States Supreme Court that "a tax on net income from interstate commerce, as distinguished from a tax on the privilege of engaging in interstate commerce, does not conflict with the commerce clause." Although taxes on net income Freeman v. Hewitt, 329 U.S. 249 (1947). 7H. P. Hood and Sons, Inc. v. DuMond, 336 U.S. 525, 69 S. Ct. 557 (1949). 8Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 79 S. Ct. 357 (1959); Williams v. Stockham Valves and Fittings, Inc., 358 U.S. 450, 79 3. Ct. 357 (1959). of local businesses have become increasingly popular, and although recent decisions of the United States Supreme Court have permitted an expansion of the states' power to tax interstate commerce, emphasis has continued to remain upon the property tax as a major source of local revenue. Property Taxes The earliest rule applicable to the taxation of property is said to have been expressed in the maxim mobilia seguuntur personam. This rule holds that property be taxed in the owner's domicile, regardless of the location of the property itself. It has been suggested that this rule found its applicability during those times when property consisted mainly of wealth in the form of gold, silver and Jewels, and could easily be carried around by the owner or hidden by the owner in locations known only to him.9 More recently, however, the rule of lex situs has, in many cases, replaced the old rule. The large increase in the amount and kinds of personal property divorced from direct control of the owners has given rise to this law of the place where the property is kept and used. Generally speaking, the rules which have evolved to the present hold that real property is taxable only where located under the 9p. J. Hartman, Taxation of Interstate Commerce (Buffalo, N.Y.: Dennis Co., Inc., 1953), pp. 79-o. lex situs rule. On the other hand, tangible personal property generally follows the owner under the mobilia sequuntur personam rule, with certain qualifications. First, where the tangible personal property tax is located permanently outside the domicile of the owner, such property may be taxed in the state of situs because the property obtains the benefits and protection of its laws.10 Second, the problem arises as to when tangible personal property, used in interstate commerce, acquires a situs in a nondomiciliary state in order to allow that state the power to impose a tax on it. It is generally agreed that a nondomiciliary state can tax the tangible personal property engaged in interstate commerce within it, disregarding the rule of mobilia sequuntur personam; however, such taxation must be based on a fair formula and possess some reasonable relation to the benefits conferred by the taxing state.11 A final consideration is the possibility of double taxation; that is, if the nondomiciliary state can tax tangible personal property, can the owner's state also impose a tax? The general conclusion apparently is that the domiciliary state cannot tax such property if 10Union Refrigerator Transit Co. v. Kentucky, 199 U.S. 194; 26, Ct. 3b6, 50 (1905). 11Pullman Palace Car Co. v. Pennsylvania, 141 U.S. 18 (1891); Ott v. Mississippi Valley Barge Line co., 336 u.s. 169; 69 S. Ct. 432 (1949); Braniff Airways V-. Nebraska State Board of Equalization and Assessment, 34d U.S. b52 ( 1954 ). there exists a permanent situs elsewhere; otherwise, the owner's state can tax under the rule of mobilia sequuntur personam.12 Constitutional provisions--Virginia Section 169 of the Virginia Constitution provides for assessment of real estate and tangible personal property at fair market value. Section 168 of this same Constitution provides that all taxes, regardless of who administers or levies them, "shall be uniform upon the same class of subjects within the territorial limits of the authority levying the tax. . . ." From these constitutional provisions there arise two important questions. First, can the property of public service corporations be classified separately from other types of property? Second, if property of public service corporations can be segregated, must the state assessing agency adhere strictly to the provisions of Section 169 or must it assess public service corporation property in the same manner as other property is assessed, whether or not the constitutional provisions are being followed? In considering these questions, some general and historical analysis is necessary, the uniformity provisions being afforded attention first. It is generally agreed 12Northwest Airlines v. Minnesota, 323 U.S. 809 (1944). that classification by legislative action of property into reasonable and natural classifications violates neither the Fourteenth Amendment to the federal Constitution nor the equality and uniformity clauses of many state constitutions. This power of a state apparently is without dispute, and allows such classifications to be made ". . . with respect to the subjects of taxation generally, the kinds of property to be taxed, the rates to be levied or the amounts to be raised, or the methods of assessment, valuation, and collection. Granting the power of a state to make classifications in tax matters, it has been said, we must then grant the right to select the differences upon which the classification shall be based."13 In addition to this power, it seems further that reasonable discriminations are permissible and, in fact, probably intended as a direct result of segregation. At least it is argued that classification does not prevent or bar unequal tax treatment between the various types of property so classified. Not only have state courts consistently held this position, but also the United States Supreme Court has maintained a position which affords little protection to property owners so discriminated 1351 Am. Jur., Section 173, pp. 230-231. 14City of Richmond v. Commonwealth of Virginia, Ex Rel., Record Number 339, Opinion of Justice Abram P. Staples, from the State Corporation Commission of Virginia. against. In one case before the United States Supreme Court, involving a tax which, through exemptions, discriminated against out-of-state competitors, it was held that . . . the equal protection clause of the Fourteenth Amendment does not prevent a state from classifying businesses for taxation or impose any iron rule of equality. Some occupations may be taxed though others are not. Some may be taxed at one rate, others at a different rate. Classification is not discrimination. It is enough that those in the same class arel treated with equality. That is true here. 5 The equal protection clause, in relation to taxation, requires that states treat parties among whom there is no substantial distinction in a reasonably uniform manner.l6 By the same token, inequalities that result incidentally in the application of a tax law which is not systematically arbitrary are not sufficient, it has been held, to make the tax unconstitutional.17 The United States Supreme Court has gone even further when it expressed the opinion that neither does the fact that a statute favors a certain class render it arbitrary if the differentiation is based upon a 15Caskey Baking Co. v. Commonwealth of Virginia, 313 U.S. 117 121 k1941). 16U.S. v. Burnison, 339 U.S. 87 (1950); Stewart Dry Goods Co. v. Lewis, 294 U.S. 550 (1935); Hopkins v. Southern California Telephone Co., 275 U.S. 393, 403 '(1925) . 17Maxwell v. Bugbee, 250 U.S. 525 (1919) (inheritance tax); Keeney v. New York, 222 U.S. 525 (1912), (transfer tax on property); Beers v. Glynn, 211 U.S. 477 (1909) (inheritance tax). 33 reasonable distinction or difference in state policy.18 Thus, in effect, the United States Supreme Court has held that a statute which has tne effect of encouraging needed and useful industries to locate within a state by exempting them, but not others, from its taxes is not arbitrary and does not violate the equal protection clause.19 On the other iand, arbitrary and unequal taxation is proscribed by both the federal and state constitutions.20 Where the state constitution contains a requirement that the general rule of taxation on property snall be uniformity, tile courts have so interpreted it as requiring all property to be taxed as one class.21 however, where 18Asbury Hospital v. Cass County, 326 U.S. 207 (1945) (discrimination between classes of farm owners presumed relevant to legislative purpose); Stebbins v. Hiley, 268 U.S. 137 (1925) (tax differentiation between testamentary disposition and inheritance permitted); American Sugar Refining Co. v. Louislanna, 179 U.S. 89 (1900) (discrimination between refining company and farmers who refined their own sugar allowed . 19Williams v. Mayor of Baltimore 289 U.S. 36 (1933); Ohio Oil Co. v. Conway, 261 U.S. 14b (1930); Bel's Gap R.R. v. Fennsylvania, 24 U.S. 232 (1890); Colgate v. Harvey, 29b U.S. 404, 439 (1935). 20Cumberland Coal Co. v. Board of Revision, 284 U.S. 236 (1931); Sioux Cty Bridge cdo. V. Dakota County, 260 U.S. 441 (1923). 210hicago & N.W. Ry. v. State, 128 W.s. 553, 108 N.W. 557 (1906); First National Bankc v. Holmes, 246 Ill. 362, 92 N.E. 893 (1910); Opinion of t~e Justices, 208 Mass. 616, 94 N.E. 1043 (1911); 1 Cooley, Taxation (4th Ed., 1924), pp. 292, 298. - constitutional provisions merely impose a requirement of uniformity upon the same class of subjects, as in the case in Virgin a under Section 168 of the Constitution, statutory classification of property is impliedly authorized and, apparently, reasonable differences in assessments between classes are allowable. A typical decision was handed down by a Minnesota court in 1938 when it stated that " . . , unless a discrimination is manifestly arbitrary and unreasonable it will be sustained. . . . Any classification is permissible which has a reasonable relation to some permitted end of government."22 in a decision of the United States Supreme Court, involving the classification of railroad property for taxation, cited and quoted at length by Justice Abram P. Staples in City of Richmond V. Commonwealtai of Virginia Ex Rel., supra, it was held that . . the states may classify property for taxation; may set up different modes of assessment, valuation, and collection; may tax some kinds of property at higher rates than others; and in making all these differentiations may treat railroads and other utilities with that separateness which their distinctive characteristics and functions in society make appropriate-these are among the common aces of taxation and of constitutional law. 22State ex rel. Equity Farms, Inc. v. Hubbard, 203 Minn. 111 (1933). 23Nashville C. & St. L. RIy. v. Browning, 310 U.S. 362, 60 S. Ct. 9b (1940). Constitutional and statutory development in Virginia An examination of the development of the constitutional and statutory provisions relating to the taxation of public service corporations should provide an insight to the development of property taxation in Virginia. The statutes relating to the assessment of all public service corporation properties follow the same general pattern as do those governing railroad property assessment, and since public service corporation assessment practice today was developed from the system used for railroad property assessment, attention is first turned to the development of railroad assessment practice.24 Originally, railroads assessed tneir own property for purposes of state taxation, applied the existing levy rate, and rendered payment directly to the state treasury. This procedure was provided for under Virginia law25 and was upheld by the courts, denying the localities any power to make assessments and, consequently, to levy taxes against 26 railroad property.26 24Based upon data in City of Richmond v. Commonwealth of Virginia, supra. 25Acts of 1870-71, Commonwealth of Virginia, p. 93. 26Virginia Tennessee R.R. Co. v, Washington County, 30 Gratt471 (i 7i). It was not long, however, until the legislature, under pressure from the taxing districts, enacted legislation which permitted a local levy on railroad property located therein.27 Local tax collectors were barred, however, from making tae assessment themselves, being required to use the same assessment as that made by the state and, further, being limited to the imposition of a rate of levy uniform with that imposed on other property. Even at this early date, classification was generally accepted; however, it appears that such separate classification of railroad property was made not for the purpose of discrimination, but to achieve equity between the taxation of railroad property and all other property. To attempt to place a value on railroad property located in one taxing district, without consideration of its operating whole, would be next to impossible. As a result, the General Assembly of Virginia specifically charged a central agency, the Board of Public Works, with the assessment responsibility, such assessments to be certified to the taxing districts for application of uniform local rates of levy.28 With the adoption of the Virginia Constitution of 1902, the system of taxation of both railroad and other public 27Acts of 1879-80, Chapter 106, Commonwealth of Virginia, p. 82. 28Acts of 1897-98, Chapter 76, Commonwealth of Virginia, p. 78. service corporation property was furt ier developed as a separate procedure, both as to ascertaining taxable values and as to taxation. The effect of this system has been to standardize the assessments of all public service corporation property; however, with each taxing district assessing all other property, it must have been obvious, even to the engineers of this device, that local assessment ratios would equate with utility assessments chiefly by accident. Justice Staples, on this subject, had the following to say in the opinion rendered in City of Richmond v. Commonwealth of Virginia, supra: In view of this necessary result with respect to the inequality of the tax burden on their respective properties which would fall upon railroads and other property owners, it cannot be doubted that the framers of the Constitution of 1902 intended to and did place the real and tangible personal property of railroads in an entirely separate tax classification. For many years prior to the adoption of the 1902 Constitution, it had been settled by the decisions of the Supreme Court of the United States that the equal protection clause of the Fourteenth Amendment required uniformity of the tax burden only upon persons and properties of the same class, and that it lay within the province of the state to classify its subjects of taxation, imposing on one kind of property one burden of taxation, and on another kind a lesser or greater burden.29 29City of Richmond v. Commonwealth of Virginia, supra. (Italics added.) Further on, this same opinion asserts that "since the uniformity provisions of Section 168 (of the Virginia Constitution) could not possibly be applied to such conditions, it follows that the framers of the Constitution considered railroad property as constituting a separate and distinct class and not within the uniformity provisions."30 There has been in the past, without resolution to date, considerable confusion as to the exact meaning of the uniformity provisions. Justice Staples, for example, from the passage quoted above, is of the opinion that separate classification is permissible and was intended by the framers of the Constitution, an opinion to which there is little disagreement; however, it is to be questioned whether classification for purposes of making assessments of property values is sufficient, per se, to assure uniformity in the burden of taxation. Since the burden of taxation is measured by application of rates of taxation to assessed valuations, uniformity of the tax burden upon persons and properties of the same class would seem to mean uniformity in both assessments and levy rates. As shall be observed, this complete "constitutional uniformity" does not exist in Virginia. On the one hand, the property of public service corporations and nonutility property owners, when located within the same taxing 30Ibid. district, is subject to uniform rates of taxation applied to divergent assessed valuations. On the other hand, two utilities serving a wide area, although assessed uniformly, are subject to divergent levy rates between counties and cities. This is similarly the case for one utility serving a number of taxing districts. Property tax revenues--general As a per cent of combined tax revenues of state and local governments, the property tax has been declining in importance over the years. This fact is illustrated in Table 2. The combined state and local property taxes rose from$4,730 million to $12,864 million in the thirty years between 1927 and 1957; however, expressed as a percentage of total tax revenue, the property tax declined from 78 per cent, in 1927, to 45 per cent, in 1957. This decline in the relative importance of the property tax is more significant in respect to state tax revenues, however, and reflects the gradual withdrawal by many states from the general property tax field in favor of other taxing devices such as the sales tax and the income tax. The property tax is still the major source of local tax revenue, however, 86.7 per cent of all local government tax revenue having been derived from this source, in 1957. Although Table 2 shows a decline from 97.3 per cent, in 1927, to 86.7 per cent, in 1957, in the percentage reliance of localities TABLE 2 STATE AND LOCAL TAX REVENUE, AND PROPERTY TAXES AS A PERCENTAGE OF TOTAL TAX REVENUE, UNITED STATES, SELECTED YEARS (In millions of dollars) Year 1927 1934 1940 1946 1950 1957 Combined state and local tax revenue a. Total$6,087 $5,912$7,810 $10,094$15,914 $28,817 b. Property taxes 4s730 4,076 4,430 4,986 7,349 12,864 State tax revenue a. Total 1,608 1,979 3,313 4.937 7,930 14,531 b. Property taxes 370 273 260 249 307 479 Local tax revenue a. Total 4,479 3,933 4,497 5,157 7,984 14,286 b. Property taxes 4,360 3,803 4,170 4,737 7,042 12,385 Property taxes as a percentage of total tax revenue a. State and local 77.7% 68.d 56.- 49.4% 46.2% 44.6% b. state 23.0 13.8 7.8 5.0 .9 3 c. Local 97.3 96.7 92.7 91.9 .2 .7 Source: U.S. Bureau of the Census, Historical Summary of Governmental Finances in the United States, 1959. (1957 Census of Governments, Vol. IV, No. 3), tables 4, 5 and b. nationally on the property tax for local revenues, the decline appears to be of minor significance. However, if one considers the tremendous increase in revenues from other sources, notably the individual income tax, the sales and use taxes, and federal supplements, it is seen that local governments are depending even less on the property tax than the foregoing figures would appear to indicate. As shown in Table 3, this fact has proved valid during the period of rapidly expanding revenue needs since World War II. While total local revenues were increasing 209 per cent, property taxes increased only 161 per cent. This lag in the increase in property tax revenues resulted in that source declining from 57.6 per cent of total revenues in 1946 to 48.7 per cent in 1957. Thus, although property taxes have declined in importance only moderately in relation to total local taxes, the decline is more pronounced when viewed in relation to total local revenues. As indicated in Table 3 property taxes are being supplemented by an increased reliance by local governments upon the other sources of revenue, in particular state and federal supplements. Although the preceding analyses are enlightening as to the role of the property tax nationally, they do not reveal either basic differences between states or, more important and relevant to this study, the actual situation which is confronted in Virginia by the taxpayers of that state, including in particular the public service corporations TABLS 3 SOURCES OF REVENUE FOR LOCALITIES, UNITED STATES, 1946 AND 1957 (In millions of dollars) 194t 107 Percent7age Per Gent Per ent Increase Amount of total Amount of total 1946 to 1957 Total local revenues$8,227 100.0% $25,406 100.0 209 Intergovernmental revenue: From federal government 53 0.6 34 1.4 547 From state governments 2,092 25.4 7,196 28.3 244 Local sources: Property taxes 4,737 57.6 12,385 48.7 161 Income taxes 33 0.4 191 0.8 479 Sales and gross receipts taxes 183 2.2 1,031 4.1 463 Other, including licenses 204 2.5 679 2.7 233 Charges and miscellaneous 925 11.2 3,580 14.1 287 Source: U.S. Bureau of the Census, Historical Summary of Governmental Finances in the United States, 1959. (1957 Census of Governments, Vol. IV, No. 3), Table 6. operating in and serving that state. Table 4 is more revealing in this respect. The various states, including the District of Columbia, have been broken down into three groups. Group 1 consists of those states which place heavy reliance (over 60 per cent) on the property tax as a source of local revenue. Group 2 includes those states which fall into the middle range of reliance, 40 to 60 per cent, and Group 3 includes the remaining states whose emphasis upon the property tax is less and whose revenue from this source is less than 40 per cent. It should be noted that only three states, Nebraska, New Hampshire and New Jersey, placed sufficient importance upon the property tax as a source of local revenue to obtain greater than 60 per cent of their local tax revenues from this source. As shown in Group 3 in Table 4 , there were eighteen states and the District of Columbia which had relegated the property tax to a role of only minor significance. It is noteworthy that this group includes most of the southern and southwestern states, a fact which reflects the predominant agrarian economy of these states. Explanations of this relatively unimportant position of the property tax in these states can only be conjectural; however, in each case there is at least one apparent explanation. In Florida, for example, the subsidizing of home owners by property tax exemptions has brought a material narrowing of the property tax base. West Virginia, among others, has set a legal limitation on property tax rates. Many counties in Virginia TAuE 4 PROPERTY TAX REVENUE AS A PERENTAGE OF TOTAL STATE AND LOCAL TAX HEVENUE, CLASSIFIED BY STATES, OTHER DATA, 1957 Property Tax Revenue - State an Percentage Per Per of all state$1,000 of $1.,000 of and local Per personal Per personal taxes capita income capital income Group 1 (over 6c) 1. Nebraska 70o$ 97.95 $53.31 9 5 2. New Jersey 64.0 112.92 5.02 2 15 3. New Hampshire 62.8 95.42 51.34 11 7 Group 2 (4C! to 6~) 4. Montana 58.3 109.49 58.17 5 3 5. South Dakota 58.2 94.66 61.02 13 2 6. Kansas 58.0 101.81 56.01 7 4 7. Massachusetts 58.0 122.28 51.95 1 6 . Indiana 54.9 77.82 38.50 24 23 9. North Dakota 52.8 88.25 61.60 16 1 10. Wisconsin 51.8 95.05 49.49 12 9 11. Minnesota 51.8 93.62 50.55 14 8 12. Illinois 51.7 92.35 37.99 15 25 13. Wyoming 51.4 98.33 48.40 8 10 14. Colorado 50.8 95.97 47.80 10 12 15. Rhode Island 50.4 76.50 38.23 25 24 16. Idaho 50.2 78.07 48.28 23 11 17. Connecticut 50.0 101.85 36.:18 6 26 18. Maine 50.0 74.91 44.86 26 16 19. Iowa 48.8 85.94 47.30 17 13 20. Ohio 48.0 73.20 32.48 27 29 TAIJ"B 4 (continued) Property Tax Revenue State Rank Percentage Per er of all state$1,000 of $L,000 of and local Per personal Per personal taxes capita income capita income New York California Arizona T sexa Michigan Vermont Missouri Utah Maryland Oregon Group 3 (under 40%) District of Coluab.a Kentucky Nevada Florida Penn sylvania ViRasadA Oklahoma Washington Georgia Tenesseeo Misa ssippi North Carolina 21. 22. 25. 26. 27. 28. 29. 30.$109.94 112.6
78.74
63. 3
78.85 57.98 71.33 67.73
85.08

47.7% 47.2
46.4 46.2 46.1
4u.0 4 .4 43.8 42. 42.4

36.8 36.3
36.1 35.4
334 31.1i
30.4
29.6 2940 28.9
2 .8

$4 .35 4 .51 42.70 35.51 38,56 46.60 29.76 415 31. 1 43. 81 25.26 28.28 33.61 31.40 25*42 24.23 28.54 26.27 25.20 24,38 30.78 22.76 64.35 38.77 83.oo 56.12 53.85 39.88 46.62 55.84 36.13 33.93 29.75 30.15 31. 32. 33. 34. 35. 36. 37. 38. 39. 0. 41. 42. TABLE 4 (continued) Property Tax Revenue Sate ank Percentage Per Per of all state$1,000 of $1,000 of and local Per persona Per personal taxes capital income capita income 43. Arkansas 26.5%$26.5 $23.22 47 42 44. West Virginia 25.4 28.46 18.19 46 47 45. Delaware 23.9 32.44 11.73 43 49 46.. ew , 4exico 23.4 36.84 21.41 39 45 47. Soutn Carolina 23.0 23.89 20.23 48 L 6 48. Louisiarna 21.8 35.39 22.59 41 44 49. Alabama 20.2 20.45 15.50 49 48 Source: U.S. Bureau of the Census, Compendium of Government Finances (Wasmgton: U.S. Government Printing Orrffice, 1959), 194 pp. (1957 census of Governments, Vol. ILL, No. 5.) have generally placed a low ceiling on the availability of property taxes through the practice of assessing property at small fractions of full value. Nevada, where gambling is legal, has an alternative source of revenue not readily available under existing laws to many other states. Washington State has taken over most of the responsibility for administering or financing the local administration of certain commonly local functions, such as schools and wjelfare, using for this purpose revenue fro. sources other than property taxation. It should also be noted that, on a per capita basis, with only minor exceptions, the rank of the state is similar to that obtained when comparing local property taxes with total taxes. The exceptions, taking iassachusetts as an example, show that where the per capita tax is exceptionally high, so also is per capita income. Per capita figures are not, however, a very good measure of the comparative property tax burden. For example, though New Jersey, California and New York rank high in per capita taxes, they rank 15th, 17th and 19th respectively in property taxes per$1,000 of personal inco e. On the other hand, these data show how a combination of moderate per capita income and relatively great reliance on the property tax creates an extremely high burden of taxation per $1,000 of personal income. North and South Dakota are cases in point. That the property tax accounted for 86.7 per cent of all local tax revenues in the United States in 1957 is an indication that other taxes have not become a material fac tor in local tax systems nationally. Though locally administered nonproperty taxes are a substantial source of revenue in some cities and of lesser importance in many others, they are not a satisfactory substitute for local governments generally. The more productive nonproperty taxes are not well adapted for local administration; how ever, it might well be possible to permit the localities to participate in state-administered tax schemes as a supplement to the property tax. Proerty Tax Revenues in Virginia Virginia is not distinctive in the relative decline of the importance of the property tax as the chief source of revenue to the localities. Table 5 illustrates this point. From it, it is observed that Virginia's counties continue to rely chiefly upon property taxes as their largest source of revenue; however, it is noted that, as a percentage of total local revenues, property taxes have declined in importance, dropping from 47.00 per cent in 1943 to 42.72 per cent some fifteen years later. It is also noteworthy that all sources of revenue have increased more rapidly in Virginia than the national averages; however, even in this case property taxes have increased to a lesser degree than have the remaining sources of revenue. This indicates that in Virginia as well as nationally property taxes are being supplemented by an increased reliance of local TABLE 5 SOURCES OF REVENUE FOR VIRGINIA COUNTIES, 1943 AND 1958 (In millions of dollars) 1943 195b Per Cent Type of Revenue Amount Per Cent Amount Per Uent Increase Property taxes$16,546 47.oo , 76,825 42.72 464. Service charges a 814 2.31 7,339 4.08 901.6 State supplements 14,196 40.36 69,75 38.79 491.4 Federal supplements 1,575 4.48 11,99 6.66 759.6 Other revenuesb 40 5.85 13,92 7.5 62.8
Total $35,171 1OO.0O%$179,816 iOO.0Q

Sources: Report of Auditor of Public Accounts on Comparative Cost of Local Government, Year Ended June 30, 1943, Commonwealth of Virglnia. Repot of Auditor of Public Accounts on Comparative Cost of Local Government, Year Ended June 30, 1958, Commonwealth of Virginia.
aState supplements include certain federal welfare payments.
bOther revenues include dog licenses and miscellaneous receipts.

governments upon the other sources of revenue, in particular state and federal supplements and increased service charges.

Summary
in this chapter some historical background of the
property tax was presented, including the taxation of interstate commerce and the development of rules applicable to the taxation of property. Also considered were the constitutional provisions for the taxation of property in Virginia. It was noted that the constitutional and statutory development of the ad valorem tax system in Virginia followed the same general pattern as the development of taxes on railroad property. These constitutional provisions, as they have developed, have never been precisely defined in all cases. In particular, the provision of the Virginia Constitution requiring uniformity in taxation does not spell out whether uniformity in assessment means uniformity between all property or between classes of property owners.
Background data relative to property tax revenues were also analyzed and it was found that nationally the property tax has declined in importance over the years, especially as a source of state revenues. Although it has declined somewhat as a source of local revenues, it was noted that the property tax continues to provide a substantial percentage of total local revenues. An analysis of property tax revenues in Virginia revealed that this tax scheme has similarly declined in relative importance as a source of

local revenues, being replaced in large part by state and federal supplements and non-tax revenues. However, Virginia's localities continue to rely on the property tax as their chief source of revenue.
Because the property tax does continue to play such an important role in local government revenues, the problems of equity in the administration of this tax system continue to have considerable significance. It is to one administrative aspect that this study now turns--the assessment function.

CHAPTER 3

The assessment of property on some equitable basis
has been the most difficult problem facing the tax assessor throughout the long history of this type of taxation. As long ago as 1692, a petition to the Governor of the Colonial Assembly of the Colony of New York urged
. . . that there may be a certain method
for the equal and proportionable assessing of subsidies, We doe pray his Excell. would
appoint Commissioners in each respective
County for the making of an Estimate of
their Estates, that for the fu ture there
may not be such uncertainties.

That the basis for such complaints exists even today is evidenced by recent findings and reports of state tax commissions throughout the country. For example, the final report of the State Tax Study Commission to the Governor of West Virginia states that "West Virginia's problem is not so much excessive taxes, as it is extreme unevenness of burdens."2 The 1956 Report of the Governor's

1Frederick D. Bidwell, Taxation in New York State Albany: J. B. Lyon Company, 1918), pp. 12-13.
2West Virginia State Tax Study Commission, West
Virginia Taxes, Charleston, West Virginia, Novem eE, 1960, p. 510

Minnesota Tax Study Committee states that in " . . . examining Minnesota's tax problems, the Research Staff and the Committee itself found the property tax to be the most deficient major element of the Minnesota tax system not only in terms of its inequity in structure and enforcement, but also in its discriminatory impact on industry and agriculture."
This same problem was also recognized in New Jersey, as indicated by the statement in a 1953 Report of the New Jersey Commission on State Tax Policy that the:
* . . study of the general property tax
touches upon the most sensitive issues of
state and local government. It was undertaken because of a long-held belief that property valuations and assessments were
marred by the grossest inequities. The
study demonst ates and confirms this
belief. . .
That uniformity in the assessment practice is essential to the health of the nation's economy is a fact which occasionally goes by unnoticed in the efforts of many tax assessors to obtain revenues. As stated by one authority, equity in the assessment practice
. . . is essential to the continued
success of our democratic system of government. Local government, the bulwark of
our democratic system, cannot be considered

3Report of the Governor's Minnesota Tax Study Committee, State ofr Minnesota (St. Paul, 195b), p. 568.
4New Jersey Commission on State Tax Policy, Sixth Report . * . The General Property Tax in New Jersey: A Century~ of Inequities (Trenton, 1953), p. ix.

on a sound financial basis unless the
cost is equitably distributed among its taxpayers. Uniformity and equality are also essential in an economic system of
free enterprise and fair competition.
The tax cost is a substantial item in
the overhead of commercial and industrial organizations. If the cost is not equitably distributed, it disturbs the economic
structure of our society. If a business
concern could count on its assessment and its competitors' assessments always being
on a sound and equal basis, It could better
plan a sound future program.

Making the Assessment

The first problem confronting the local assessor is one of locating taxable property and adding it to the tax rolls. Some pieces of property escape the tax rolls for some period of time due to questions of situs and jurisdiction, failure of the property owners to disclose the existence of the property, or the failure of the assessor to "find" such property through ignorance, incompetency or error.
Once property is located it is the assessors' Job to determine its value, according to a uniform standard, so that each taxpayer contributes to the cost of government in proportion to the value of his property, this being the essence of ad valorem taxation.

5Clifford Goes, "Appraisals," Proceedings of the Forty-First Annual Conference on Taxation (Sacramento, Calis National Tax Association, 1946), p. 149.

This is no easy task, however, since thele is little
agreement as to which standard of value should be applied by the assessor. The statutory and constitutional provisions of most states provide for the assessment of property at some percentage, most usually 100 per cent, of "full"
value, "fair" value, "fair market" value, "fair cash" value, "cash" value or some other varying term which is lacking in both uniformity and clarity between the states.
Section 169 of the Virginia Constitution provides for assessment of real estate and tangible personal property at its full fair market value. This leaves unsolved the problem of the determination of fair market value. For some types of property the determination of fair market value is relatively simple conceptually if one accepts the general definition that fair market value is
. . . the probable price at which it
would have been sold, had it been sold, on the taxing date at a sale between a
willing buyer able but not compelled to
buy, and a willing seller able but not
compelled to sell, if both buyer and
seller had been fully conversant with the
property and with current publ ic opinion
concerning prices in general,.
Even though sales prices of parcels of property can be objectively determined in many cases, there are limitations

6The determination of fair market value of public service corporation property is taken up in Chapter 5.
7philip H. Cornick, in A. E. Buck and Others,
Municipal Finance (New York: Macmillan Company, 1926), p. 313.

to its exclusive use in establishing taxable property values. First, it is necessary to eliminate from consideration sales of property which might not be "arms length" in nature, such as transfers between relations. Second, as is frequently the case, economic conditions might exist which affect the degree of willingness to sell or buy. A recessionary period such as the 1960-1961 downturn in economic activity, for example, may well encourage some owners of property, unable to meet mortgage payments, to sell on terms less favorable than they might normally sell. Further, not only is the number of sales of property in a given period of time a relatively small percentage of the total property available, but also it is questionable that the properties actually sold are truly representative of
all types, ages, and conditions of such other properties in the area. As a result, sales price data must be supplemented by other analyses in order to arrive at a "fair" market value which may or may not be the same as market price.
Though many assessors copy the preceding jear's assessme-t roll to satisfy ,heir respous-bility for the current year's assessment, maki . littlee real effort to acteve unifor'ity or equity, their excuses often are plausible. The assessment of property, whic exists In a multiplicity of k-,nds of land and i.-provemenas and for a leg-on of pur poses, is a form dable task even for the iiost exper enced and objective assessor. Although the job of assessor is

perhaps one of the most responsible i. government, most governmental units do not pay a salary sufficiently high to ,tract the more qualified .ndividuals to seek the office. In many cases, the local government's budget is such that sufficient funds are nt available because of the small size of the taxing district. In Virginia, the Department of Taxation has a team of expert assessors who will lend their

assistance to the assessors in. the localities; ho wever, there is .o evidence that the use of th-'s service is widespread.

In addition to the possible lack of competency on the part of the local assessor, other obstacles exist to impede assessment practice. O.e of the foremost of these obstacles is the scarcity of adequate funds to properly staff the assessment function. Closely related is the matter of time. Without adequate staff, regardless of the qualifications of the staff already on the Job, it is impossible to devote much time to the determination of a fair value on each and every parcel of property. The treasurer of oe city, for example, states that if the number of worki ig hours per year devoted to the assessing functio were divided by the

total number of parcels of property under the Jurisdiction of h.s office, the average time allowable for the assessmet of each piece of property would be approximately thirty
8
seconds.

8Personal interview with Johnny II. Johnson, treasurer, City of Roanoke, Virg.unia, July 14, 1960.

What, then, can tL.e assessor do? Whether the assessor meets his responsibility by guess.,, uy copy.g last year's assessment roll, or by applying objective appraisal methods depends largely oi4 his .raLn.g and the knd of organization and assessing aids he ..as at hs disposal. It is further depeodea on the part c lar problems with which he is faced. For example, . the case of certain , classes of real estate, such as dustr al property, sales may be both frequent and unreprese. tative of market value. Frequently, improvements have been made to proper y for which the market price depends on e..ther how well these improvements serve their tended purposes or how well they can be adapted to other uses for whtch there is some demand. illlustratons of tese problem s.tuatlo.s would be a moau aroud an eccentric's house, a bomb shelter of unknown adequacy, or a railroad station where service has been curtailed or abandoned, 1:. th s respect, o writer reveals tiiat older houses present a problem .n tat hey

. . . are frequently the materialzed
dreams of the.r wealthy owner-buJiders
(nightmares, however, for the assessor),
which ra..ge from mIniature repl cas of
Kng Arthur's castle at Camelot to
Brobd ingnaian mons bros -ties3 comb g features of Goth-ic, French Renaissa-ce, Tudor and Jyzantine architecture. . . .
Monumental residences are hardly more disposable tnam would be an elaborate tombstoae
.nscribed With the -ame and crowned wi-h
the family crest of tne ower-bucer.

9Albert E. Cnampney, "Obsolete Mans.o..s," Assessors' News Leter (National Assoclation of Assess-.g OffiCers, XX, Lo. 1, July, 1954), 50-51.

Few people question the mag&.tude of the assess_.g
function itself; however, few people seem to be aware of the complexity of the processes whereby property is assessed. in the assessing of personal property, for example, the assessment function ranges from being no problem at all in those states which have exempted personal property from ad valorem taxation, to being a problem of great futility in those states which stll attempt to tax kinds of personal property that do not readily lend themselves to assessment.

I1 the assess ng of real estate, which comprises the largest base in any ad valorem tax system, no few problems are encountered. Land itself is of different k.nds, improvements are of varying effectiveness and type, acd both land and improvements are devoted to a multitude of uses. it is the duty of the assessor to take cognizance of these elusive factors in determining market value.

Most assessing agencies are aware that "fair property 10
taxation is possible only with fair assessmets," and are making efforts to stay abreast of changing conditions. it is interesting to note that such efforts made by one state brought to light the following conditions:

1. Many property owners have continued to pay taxes on a vacant lot years after constructing a home or building on the lot.

1OGuide for West Virgin .a Assessors, Charleston, West Virgin a, January 1, 1950, p. 54.

2. Many properties, commercial and income,
are classified as residential anLd paying half tue tax rate that similar properties
are paying.

3. Many property owners paying taxes on a
value based on the property before the levy
limitations law was enacted. In other words, their property valuation has remained undisturbed for over twenty-five years.
4. Many properties built in the last ten
years carry high assessed values based on the inflated cost of labor and mater-al, therefore
have no relationship to t values placed on
properties prior to 1930.

The problem with which assessors are generally faced

center mainly in unequal assessments and under-assessments. Though complete equality of assessment is doubtful of achievement, even with the advanced scientific tools of the progressive assessor, reasonable approx .mations of equality are certainly feasible. Under-assessment, or assessing at some fraction of the legal requirement, presents certain difficulties of itself. Each of these problems of assessment administration will be given some consideration.

Unequal Assessment

All states require uniformity of assessment, irrespective of whether property is assessed at full value or

some fraction of full value. As long as all taxable property within a given taxing district is assessed at the

11lbid.

same ratio to market value, it may be stated, with certain qualifications, that there is equality of assessment. Within one taxing district, however, if one piece of property is assessed at 40 per cent of full value, as are public service corporations in Virginia, and another piece of property substantially the same is assessed at only

8.5 per cent, the bias in favor of the latter is immediately evident.

Though it is possible to correct the lack of equality of assessments within one taxing district -n a state there may remain inequality between taxing districts. This, too, creates certain problems, For example, and of paramount importance in th s thesis, many states assess the property of certain kinds of property, notably public service corporation property, and certify their assessments to the localities for application of local tax rates. Frequently, however, these state assessing bodies cannot or do not adjust these assessed values to the widely varying levels of local assessments. Often the local assessment ratios are used for purposes of allocation of state aid, as in the case in Virgini.a.12 Virginia, as many states do, limits the borrowing power of the localities to a fixed percentage of local assessed valuations. Thus, because of varying

12Virg3.la s still usig 1950 assessment ratios for this purpose.
130 ly the cities in Virginia are so limited.

assessment ratios, the various local governmets are limted unevenly ii the use of their fiscal resources. These considerat one help to explain w y "it is esseti al that the state law provide a uniform standard of assessment for all taxwug d stricts in the state, together with adequate administrative means for enforcing the use of the common standard.hl14

Under-Assessment

In some states fractional assessment is provided for

by law15 but the majority of the states seem to contemplate assessment at full value. However, investigation of the assessment practice of the various states reveals that no state actually meets the requirement of assessment at a full 100 per cent of full value. This situation of legal, or illegal, under-assessment raises three fundamental questions. First, why has assessment admin strat.on failed to comply witn the law? Second, n what ways is underassessment deleterious to local government? Third, what are the relative advantages of assessing at 100 per cent of full value, or of assessing at some fraction of full value?

14A. E. Buck, et al., Municipal Finance (New York: Macm..11an Co., 1926), p. 310.

15Alabama, 60 per cent; Arkansas, 18 to 20 per cent; Indiana, 33 1/3 per cent; Iowa, 60 per cent; ijebraska, 35 per cent; Oklahoma, 35 per cent; South Dakota, 60 per cent; Utah, 40 per cent; Washington, 50 per cent; Connecticut and Oregon, option of county assessor; Pennsylvana, county opt o. not to exceed 75 per cent.

Failure to comply with tiie law

Historically, one of the uajor reasons for te failure ,f certain counties and cit es to comply witu a law requiring assessment at 100 per cent of full value has been the policy of protec t g t.ae local c.t zeas from paying either an Anfair snare of state taxes or perhaps even a fair share of state taxes. With more and more states withdrawng from property taxat ou as a source of revenue, leaving this source to thie local tles, the impetus for lower assessments on local property for thLs reason no longer exists; however, the practice in mauy cases seems intre ced. Further, some states apport.ou school aid and other forms of ass stance to their poorer localities in greater proport~ous per capita tuan to t oe more well-to-do localit es, a d o e of the measures of "poorness" a frequently assessed valuati.on. This pract ce wold naturally encourage assessments at sometaingL less than the legal minimum. Also, maI.ay localities purposely retain low assessment rat -os in order to appear more attractive to potenttial industries who eight relocate or expand in that area. Unfortunately, manZ, localities fail to realize that firms generally tenJ to consider tIe fairuess and stability of the local tax structure as well as the suort-run aeuefits which might temporarily accrue to tem.

T.ere are a few other poss ble causes of assessment

at less than the legal min mum. First, it .s entirely possible that influenclal property owners, in some cases,

bring pressure to bear on local officials to concentrate their revenue-raising efforts in some direction other than the property tax. Just how this is accoiplisaed and to what extent it is successful is open to debate; however,

it s reasonable to expect that somne assessors can be so influe ced, particularly woen the assessing function is Cund acted by an elected official. Second, the assessment of property at less than tiie required ani a ma tend to make the property owner in general feel as tioU he were "getting a bargain" regardless of the rate of taxation applied to his assessed valuation. Tius, as lo..g as the taxpayer thinks he is "getting away witil soBo7etaing," th-s may tend to make the assessing and collection function considerably easier for the local officials. Finally, underassessment can either obscure unequal assessments or ..ake protests less likely. W..ere the state law requires assessment at 100 per cent of full value, and one taxpayer is assessed at only 50 per cent, he is not only less likely to know that he is unequally treated, even if otner taxpayers are assessed at only 10 per cent, because of his desire to keep ihis "bargain" a secret, but also ne is less likely to protest since he knows his assessment is less than tnat required by law. As expressed by one writer on the subject, "Historically, the full-value law has been

used by some escape-uinded assessors as a convenie~t met_..d of t rning aside complaints of inequiti.6 Effects of under-assessment on local government

One of the most serious effects of local assessment practice is tue exercise by the assessor of legislative powers not intended for ..im. in Florida, for example, the legislature has provided a homestead exemption of $5,000, presumably, according to the Florida Constitut on, an exemption of the first$5,000 of full value of real estate. if one local assessor decides to assess local property at 10 per cent of full value, ne is in effect, multiplying

the legislative intent by ten.

As mentioned earlier, state aid to localities is frequently measured by assessed valuations. Therefore, local manipulation of the assessment ratio res lts in erratic

deviations from the intent of state policy in the distribution of state funds. Further, local debt is often restricted to some percentage of assessed valuation, as is the case of the cities in Virginia, and local tax rates are often limited by state law, in consideration of what the state considers an acceptable assessment ratio, as is the

16Leslie E. Carbert, "Full-Value Assessment Versus Fractional-Value Assessment," Proceedings of the FortySixth Annual Conference on Taxation Zacramento, Calif: ihational Tax Association, 1953), p. 174.

case in West Virgini.a; therefore, low assessments may cause many local governments to suffer a material erosion of their general borrowing and property taxing powers. Curtailment of borrowing power has in many cases resulted in further complexities of local government plus added, unnecessary cost. In Washington State, for example, where the assessment ratio is "fixed" at 50 per cent, and where the tax rate is similarly restricted, the counties have established special districts as "separate governments"
although they are actually merely taxing arid borrowing districts set up to skirt the legislative restrictions.
The result has been, in many cases, the inJudic-ous and costly use of revenue bonds and the creation of "authorities" through which capital facilities are financed indirectly from property taxes.
Valuations of property at less than the legal minimum have not received consistent Judicial approval. In a fairly recent case tie Supreme Court of New Jersey upheld assessment at 100 per cent of full value, in spite of local practice to the contrary, and vowed to uphold this principle in any case brought by an "aggrieved" taxpayer.17

178witz V, Middletown Township, 23 N.J. 580 (1957).

67

The Connecticut Supreme Court, in a similar case, has held that the under-assessment practice is invalid and counterlegislative, saying:

Nor can we overlook a further matter in demonstrating the impropriety of pursuing a role of fractional valuation, Wnen assessors adopt suc rule, they indirectly
assume a role which rightfully is not
theirs to plan. For if such a rule is
applied, the assessment roll will obviously
be smaller in amount than it would be if the mandate was carried out. Under such circumstances the borrowing power of the
municipality is affected, since its indebtedness may not exceed specified percentages of the grand list. Assessors who use fractional valuations to determine their assessnents therefore interfere, perhaps unwittingly
but nevertheless effect'gely, with a power
that belongs to others.

Full-value assessment versus
fractional valuation

Fractional valuation is frequently supported on the

grounds that it makes little difference so long as there is equality of assessment. This point of view overlooks the fact that assessed value, in addition to providing a tax base, usually controls or influences certain basic fiscal powers and policies of local government. Objections to raising assessed value to full value are numerous, a popular one being that an abrupt departure from the various established conventions would result in disclosure

18ingraaim Co. v. City of Bristol, 144 Conn. 374 (1957).

of built-in inequalities between different classes of taxpayers, loss of local government revenues, a redistribution of the tax burden, and a loss of revenue from public service corporation properties whiich are frequently assessed at a percentage of full value soewat hither taa.. local property.
Arguments in favor of assessment at full value include the following: it gives taxpayers a better opportunity to spot inequities and obtain relief; it encourages a more professional and scientific approach to the assessment function itself; and to tie above ends, it makes iniequalities in the assessment practice more noticeable and, thus, more subject to protest. In the words of one proponent:

Does it really make any difference whether
assessments are at full or at a fraction of full value? From the point of view of
uniformity, it probably does not, although
it is often said that relative under- or over-assessment is more easily discerned
at full value. There is probably some truth in this, which would impel me to
believe that assessments would be better
made if their levels were up reasonably
near where they ought to be.

The Assessment Practice
The manner in which assessments are currently administered helps to account for the inequities which might

19Thomas A. Byrne, "Full Value Assessments in Practice: Reasons For Under-Assessment," Assessors' News Letter (International Assoc ation of Assessing officers), XXV, No. 1, January, 1959), 3-7.

exist, as well as to account for the general underassessments which are prevalent. Without coordination of the assessment practice within a state where there are a number of independent assessors, there may be a number of divergent opinions. With a separate assessor employed in each of the state's localities, large or small, the rate of compensation generally has been quite low. Revealing that, in 1956, nearly 60 per cent of the assessors in New York State earned less than $500 per year, the New York director of the equalization board commented: "Is it any wonder tLat the assessing Job in many towns and some cities is confined primarily to copying last year's roll?"20 An economist at the University of Washington similarly observed that , . it should be said that the compensation paid these officials is grossly malproportioned to the importance and technical character of the assessment function. If technical qualifications were required of those standing for election as county assessor, based on specialized training and accepted professional standards, it is questionable whether there would be any candidates for this office.21 The conclusion to be drawn from these statements is that the assessment function has been divided into too 20Frederick L. Bird, "Equalization in New York," Proceedings of the Forty-Ninth Annual Conference on Taxation Sacramento, Calif: National Tax Association, 19577, 21james K. Hall, "Equalization of Property Assessments in Washington," in Ibid., p. 213. many segments, few of which are capable of supporting a qualified assessing office. As early as 1941 the National Association of Assessing Officers reported that: The political subdivision serving as an assessment district should have sufficient resources to afford adequate assessment machinery, and should provide an assessment task large enough to realize the economies of large-scale operations and to warrant t.e employment of one full-time asses r and at least one fulltime assistant. Though it is true that the assessment function has not been given adequate consideration in many localities it is equally true that certain other localities have made considerable effort to improve their assessment practice and to achieve a greater degree of uniformity and equity. A brief examination of the procedure developed in the City of Richmond, Virginia, for the assessment of incomeproducing properties illustrates some of the efforts made in this direction. Assessment of Income-Producing Properties, City of Richmond, Vir.Inia. The City of Richmond has used capitalized income to determine assessed values for over twenty years; 22 Report of the Committee of Assessment OrManization and Personnel (Chicago Ill.: National Association of Assessing Officers, 1941), p. 51. 23The data following result from a personal interview with Mr. Richard A. Chandler, Assessor of Real Estate, City of Richmond, Virginia. With Mr. Chandler's permission, considerable use of data provided by Mr. Chandler is made. Date of interview: July 21, 1960. consequently, its method of using this technique, as evolved over the years, is relatively well-developed. The advocates of this procedure point to six key reasons for its use: 1. To demonstrate that assessments are not arbitrarily made and to inst-ll confidence n assessments by conforming with the practices of the market. On income producing properties particularly, lack of use of this approach creates public skepticism in the value estimate. 2. To provide an essential check on the other approaches to value. 3. To provide a measure of all forms of depreciation. 4. To avoid the elimination of basic concepts of value. Each of the three approaches attempts to measure a different motive and each is based upon different theories, laws and principles of economics and value. To ignore this approach is to ignore established concepts of value. 5. To comply with tue rulings of the courts and thus avoid having an assessment declared erroneous. Since 1861, Supreme Courts of various states and the United States have insisted that the rental or income of a property must be considered and evaluated in determining assessed values. 6. To produce equitable assessments based upon fair market value, which is required by law in most assessing Juriscictions. Use of groes income rather than net income In utilizing the capitalization method, one of the first decisions confronting an assessor is whether to use gross income or net income. The City of Richmond uses gross income for three reasons. First, the use of gross income in mass appraisals makes it unnecessary to study large volumes of income and expense statements, some of which are distorted. Second, the use of gross income assures the prudent manager of real estate that he will not be penalized in favor of the inefficient or imprudent manager. Last, the use of gross income leads to uniformity and equality and, thus, equitable assessments. Use of rental value rather than actual rental In determining value based on income the question arises whether to use the actual rent a property produces or whether to use its rental value. Once again, the City of Richmond prefers to use economic income, or rental value, following the recognized practice in the appraisal profession at large. The use of this value avoids erroneous values created by using unusually high or low leases. Actual rental income would develop different values and would result in inequitable assessments. The problem of estimating rental value There are numerous sources of obtaining this data. An analysis of what the majority of similar space is renting for frequently helps ascertain the rental value of a particular piece of property. Also used in the City of Richmond is the device in which gross sales of the property are determined, and using a percentage lease table, estimating the perce.a e of ross sales at ti.e part cuaar t pe of bus less can aff rd to pay for rent. Selecturo of toe proper capital nation rate In the City of Richaond three 'eo s or so rces are utiliZed for select n .ross rates. First, whenever there is a transfer of .ncone producing property, the assessor's offLce obtains the gross .ncoe, tie sales price and the operating statement when ava la le. The rate is then deteruied by d hiding t.ie sales price into thie inco .e. The resultant rate is te catalog ed as to the type pr pert, and location, front which a pat oer is developed. Second, infor.ced opI .on of realtors and appraisers 1as, over a period of time, helped to develop cross rates for each t pe of reuta- property accord. n to condition, use and location. Finally, the "built- p" nethiod is used to de ermine the proper gross rate either for a teneral class of property or for an individual p ece of property. Tile gross rate is composed of the inrmerest rate, tie depreciat .on rate and normal expenses expressed as a rate. To develop the gross rate by the ouliit- p methoo, onlo the typical operating rat.o of the type propert u..der study, the tpica. .a~.d and uIlding ratio, and either the interest rate and est. mated remainmig economic life or the over-al rate need be known. The typ:cal operat:.ng ratio can be ascertained from national studies or from analyses of operating expense staueueuts of similar properties. Tne use of typical or average operat ng ratios -n lieu of actual expenses or otner methods is preferred for the same reasons gross come ls used rather than neet income. Tie typical land and b ilding ratio on any general class of property Is normally generallyy known or can be readily obtained. Interest rates and depreciation rates or over all rates are obta..nable from tae market. The process na of these item s into a gross capitalization rate is illustrated in Table 6. Appropriate use of the capitalization process This process is most generali- used in nose cases where the real estate market itself livess pr ie considerat.on to value factors such as anticipated eari-..gs or income prodccling potential. These cases would include cu.L.mercial stores, apartment houses, factories, theatres, shopping centers, motels and sim.-lar properties. illustrations In Table 6 the gross capitalization rate for apartment property, with gross .income of$19,500, is determined. It will be not ced that if ,he gross capitalization rate, determined therein to be 18 per cent, is divided into tne gross income of $19,500, tue capitalized value of 4108,333 is determined. To see how reliable this method is, Table 7 is presented, using the income approach to value; TAB13E 6 GROSS CAPiTALIZATION RATE Capitalized Value of An Apartment Building Typical operating ratio Typical ratio of land to total Typical ratio of buildin_ to total interest rate Remainikg economic life, 40 years Gross rental per year 55% 20 80 6$19,500

Rates:
Land, 20 x 6 1.2% Building, 8W x (6% / 2) 6.8
Over-all rate 8.0

If expenses represent 55 of gross -ncoue then the over-all rate (8.0%) represents 45%.

Gross capitalization rate equals 100.o.
Therefore, 45% of X = 8.0%
X = 18.0% (gross capitalization rate) Capitalized value = $19,500 div ded '8.C =$108,333

TABLE 7

INCOME APPROACH To10 VALUE OF AN APARiSiET BUILD:ILNG
Based on Actual Operating Statement

Gross income (100% occupancy) Less: vacancy and collection loss of 5%
Effective gross income
Less:
Operating expenses
Depreciation (excluding building)
0tner fixed charges
Total expenses
het income to land and buildings before depreciation on building
Return on land value $25,000 at 6% Net income imputable to building before depreciation on building, Coputation of value: Estimated reua ining economic life of building 1a 40 years, interest and depreciation thIerefore is 8.5%. Net income before depreciation$7,479 capitalized at 8.5%
Indicated value of tae property by capitalization

419,500
,975
418,525

$6,026 930 2490$ 8,979
S1,500 LJ 7412

$87,988 22, 000$112,9 88

that is, val ing the real estate cased on reconstruction of an actual operating statement aud using ouildin, residual straight line depreciation technique of capitalizat Union.

As can oe seen in an examination of the two preceding tables, the application of tue gross capitalization rate yields an estimated value whic varies less than 5 per cent from tie $112,988 developed from the full processing. Another example to be considered is a warehouse, one story, w th 7,000 square feet of rental space. The ware-ouse was built in 1948 and has an estimated remaining useful life of fifty years. From the trend tables of the City of Richmond it was ascertained tiat typical rental for similar properties is 60 per square foot and that the average gross rate of capitalization for such property is an estimated 12 per cent. Seven thousand square feet at 604 per square foot would yield$4,200 of gross income wiich, when capitalized at 12 per cent, gives a value of $35,000. Table 8 shows a value indicated by the time-consuming income approach of$38,344. This compares with thie value, 435,000, obtained throuLi the use of a gross capitalization rate. Ti.us, it is seei tnat appraisal and assessment tools are available to the harrassed assessor and wLll provide within a tolerable range equitable and uniform
assessments with a winiuum staff. Though these tools exist and can facilitate tue informed assessor in his task,

WAREHOUSi VALUE I fCATED BY CC0 APP210ACH241

Gross income: 7,000 0qdare feet C 60
Less: vacancy and collection losa, 3
Effective gross income
Less:
Management fee,
Taxes
Insurances
Repairs and maintenance
Reserve for depreciation:
Roof
Heaters
Total
Net income before depreciation on building
Return of land value, 6 of $10,000 het income imputable to building Interest rate 6; remaining economic life of building is 50 years, or 2,. Capitalization rate for interest and depreciation B%.$2,267.56 capitalized at B equal Add value of land
Value indicated by income approach

04,200.00
126.00
$4,074.00$244.44 600.00
122.00 100,00
100. 00 40.00

1,206.44

42,867.56
600.00
Goo.oO

$2,267.56$28,344 10,000

$38,344 there is still a wide range in which he must use his Judgment. For example, property substantially identical in every respect may vary in market value because of tImproving or deteriorating neighborhoods, location in respect to bus service, shopping or schools, scenic views, noise, 24Exoerpt from independent appraisal of this warehouse. and a multitude of ouher factors. Where staff is inadequate or incompetent, it is impossible to stay abreast of all the changing factors. As a result, frequent unequal assessment or under-assessment becomes a naJor deficiency in the assessment practice. Summary This general review of assessment administration commenced with a discussion of the basic problems facing the assessing officer. First, property subject to taxation must be located and placed on the tax rolls. Second, a reasonable valuation of such property must be made. It was noted that both of these problems are frequently complicated by the fact that not only are valuations difficult to make for all types of property but also the assessing office is frequently limited as to staff and operating funds. As a result both of these internal limitations of the assessing function and of the fact that not all property within a given locality is assessed by the same office, unequal assessments within taxing districts and between taxing districts may give rise to discrimination in ad valorem taxation. If assessments which are not equal result in inequities, then the alternative of uniform assessments must be followed to insure a greater degree of equity. In making uniform assessments, however, it was noted that certain problems remain. Should all assessments be made at "full value" or uniformIl at some fraction of full value? Ihe Leneral conclusion was reached that from the point of view of uiformity it probably makes no difference; however, from the point of view of the fiscal powers and policies of local government as well as of the best interests of property owners, assessments closer to full value seem more desirable. Finally, the procedure as has developed in the City of Richmond, in respect to the asseising function, was examined in order to show what one city has done toward achieving reasonable uniformity in the assessment of its nonutility properties in spite of fiscal limitations. The significance of this general review of assessment administration for purposes of this study lies in the extreme importance attached by the utility industxtry to the assessment of nonutility properties. Utility property is currently assessed centrally and where assessment administration within the localities differs from the administration of central assessment, inequalities and possibly inequities, the object of inquiry in this study, are likely to exist. Turning from a general review of assessment administration to the assessment practice in Virginia, it is felt that an analysis of the specific facts as they exist in Virginia will reveal whether there is in fact cause for concern at the variance between central and local assessment administration, CiHAPTER 4 THE ASSESSIEN PRACTICE IN VIRGINIA General Practice Constitutional and statutory provisions to the contrary, the practice of assessing property at some percentaLe of full value has been approved by the courts. In Virginia, the courts have permitted the separate classification of utility property and its assessment at a percentage of market value, even where nonutility property is assessed at different ratios between and within taxing 1 districts. I Decisions in other states offer similar conclusions, a more recent court in Kentucky holding that assessments at some ratio of market value was acceptable in the interest of uniformity and equity, in spite of a constitutional requirement to assess at full value.2 Comparison of Assessment Ratios in Virginia An examination of Table 9 of assessment ratios in Virginia reveals some characteristics of the assessment 1City of Richmond v. Commission, 188 Va. 100, 59 S.E. 2d 6T4 T(194). 2Luckett v. Tennessee Gas Transmission Company, Ky. 331 S.W. 2d oy9 (190). TABLE 9 RATIOS OF ASSESSED VALUE TO SALES VALUE OF REAL ESTATE, COMMONWEALTH OF VliCINA, 1956 Cities Richmond Danville South Norfolk Lynchburg Falls Church Winchester Fredericksburg Colonial Heights Clifton Forge Norfolk i-Martinsville 81.(% 66.0 53.0 46.8 45.1 44.8 44.2 43.2 41.2 40.9 4o.7 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. Hopewell Petersourg Newport News Portsmouth Virginia b3eachi Harrisonburg Alexandria Bristol Roanoke taimpton ladford 40.1% 40.0 4o.o 39.7 383.4 36.1 35.9 34.7 34.4 33.4 32.5 32.0 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. Suffolk Buena Vista 4aynesboro Covington Ciiarlottesville .arutJick Staunton Norton Williamsburg Galax Counties henrico Arlington Norfolk Fairfax Lancaster Chesterfield Prince George Richmond 39.7 31.9 31.3 31.2 29.7 29.32 28.14 28.2 U S. 10. 11. 12. 13. 14. 15. 16. Buckingham Surrey Bath Roanoke Spottaylvania h ighla nd Westmore land Nelson 27.42 26.9 26,6 26.4 26.4 25.5 25.2 2 .6 17. 18. 19. 20. 21. 22. 23. 4 Madison Stafford Halifax Nor thu~miberland Appomattox Culpepper Charles City 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 30. Q 27.4 27.3 27.2 27.0 23.3 22.9 21.6 19.7 14.2 24.7. 24.2 23.9 23.5 23.2 23.0 22.4 TABLE 9 (continued) Counties 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 38 39. 40. 41. 42. 46* 4 . 45* 46. 4 . 4* Powhatan Floyd Niottouway Goochland Brunsuick Ma theus Craig Auelia Gloucester Rockingham Campbell Pittsylvania Alleghan Middlesex Clark Mecklenburg Rockbridge Accoack kLng George James City Lunenburg Greenville Suex Northampton Charlotte 22.1 , 21.9 21.8 21. 21.8 21.4 21.3 21.2 21.1 20.9 20.6 20.5 20.5 20.1 20.0 19.9 19.8 19.5 19.4 19.3 19.2 19.1 19.1 19.0 18.4 49. 50. 51. 52. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. GD. 69. 70. 71. 72. 73. iappahannock Dinwiddie Loudoun Augusta Greene Fauquier Cumberiand Fluvaa a King William Prince Edward Ja nsemond Caroline deu Kent King a. d Queen Frederick York Warren Essex isle of dight Louloa Price .illiam Bedford Ora.,go Shenadoah Dythe 18.49 18.2 18.2 18.1 18.1 18.0 18.0 17.9 17.9 17.7 17.6 17.5 17.2 17 .* 17.2 17.2 17.0 16.9 16.9 16. u 16.8 16.3 16.1 16.0o 15.9 74. 75. 76. 77. 78. 79. 80. 81. 82. 8$. 84. 81.
86.

89.

90. 92. 93. 94. 95.
96. 97. 98.

Estate Assonsuont Ratio

Patrick Southlampton Wise Botetourt
Amherst Fulacki Giles
13laad Mouwgomery Frakli 1anover Page Albunarle Buchanau Tazaxcell

Priceos Amnoe D-ICIckeson Lee
Gra o Ruso 1
Scott Carroll Smytl ua sh into

15.\$ 15.8 15.5 14.9
14.1 13.8 13.4 13.3
13.3
13.1 12.1 12.4 12.1 11.3
11.2 11.0
10.2 10.0 9.1
8.5 8.5 8.5
8.4 8.3 6.5

Source: Virginia Department of Taxation, 1956 eal Study.

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