Learning from Norfolk Town:
Local Government and Property Taxes

Dr. Sopon Pornchokchai
Managing Director, Agency for Real Estate Affairs

As Thailand's representative to the International Association of Assessing Officers (IAAO), I led a group of ten people, including senior government officers, bankers, and fee appraisers, to participate at the 2004 IAAO Annual Conference in Boston, held from August 30 to September 2, 2004. We had an opportunity to visit the Town of Norfolk, Massachusetts. Norfolk is a good case study of how town administration and property taxation work hand in hand.

Norfolk is located approximately 40 kilometres southwest of Boston, in the state of Massachusetts. Norfolk has only 2,895 housing units and about 4,000 parcels of land (for all types of real estate development). Growth in this town has been minimal in light of its age, 134 years (Norfolk was established in 1870). This minimal growth has resulted partly from careful planning, which allows no haphazard growth to occur.

Administrating the Town with Property Tax
Property tax is the major source of income for town administration. In the 2004 fiscal year, Norfolk expects to collect some 532 million baht in property taxes, of which 520 million baht will come from real estate developments. Property tax revenue will account for approximately 55% of the overall income of the town. This means that about 45% of the town's income comes from state government. Education is the town's major expense, expected to cost in the area of 480 million baht. This is an admirable public investment.

Since property tax is the major resource for local development, efficient systems of levy must be in place. According to Ms. Donna Putt, Chairman of the Board of Assessors and Ms. Deborah Robbins, Chief Assessor of Norfolk, people reporting falsified values for housing sales are subject to fine and possible jail terms. Neighbours are also allowed to report cases of miscalculation. This is something that is not likely to happen in Thailand today.

For the 2004 fiscal year, the property tax rate is 1.193%. This rate can be adjusted each year, depending on the town's budgeting needs. So if one owns a house worth one million baht, he would have to pay 11,930 baht in tax. In Thailand, the 2005 property tax rate will be 0.1% or 1,000 baht, around one-twelfth of Norfolk's tax rate. This will not be adequate for funding the programs of local administrations.

Assessed Value Equals Market Value
In the US, there is no difference between the government-assessed value and the market value of a house. This is the key difference between the US and Thailand, where we try to keep assessed values at a minimum to reduce the tax burden of the public. However, this may be poor logic. What we can do is lower the tax rate levied at the market value. Distorted assessments by tax authorities provide the potential for corruption to occur and give politicians an issue to manipulate during campaigning.

Assessments in Norfolk are very precise. Only 0.1% of homeowners object to their assessed values. This may be because both the authorities and residents understand the valuation methods and process. In the valuation profession worldwide, the market comparison approach (a logical model) is the most widely accepted method for assessing a property's value. In addition, the cost approach to value (an aggregation model) is also used to recheck assessments and consider depreciation. Lastly, the income approach to value (a simulation model) is used mainly for income-producing properties.

Considering valuation practices, an assessor may inspect a house only if the owner agrees. Otherwise, he must estimate value from outside the building. If a homeowner disagrees with the assessed value, he must then allow the assessor to inspect the house for value adjustment (if any). In addition, CAMA (computer-assisted mass appraisal) or AVM (Automated Valuation Method) are also applied to assist the valuation of properties in many town.

Changes in House Prices
According to the 2003 Norfolk Town Report, the total value of the 2,895 housing units was 43.980 billion baht, or 15.192 million baht per unit. This was higher than the overall US average of 8.8 million baht. House prices in Norfolk increased for 13% last year. In Bangkok, the increase in average assessed value was only 1% (source: Agency for Real Estate Affairs). It is amazing to learn that in 1995, an average house price in Norfolk was only 7.716 million baht. This implies property values have doubled (97%) from 1995 to 2003.

According to the town authorities, it is estimated that the growth rate in housing supply in Norfolk has been around 6% per year, but that demand has been around 9%. Consequently, housing prices have increased over time. Another reason for the increase is that there is a high school located in Norfolk that serves students from three towns.

In brief, it can be observed that property prices depend on the state of the economy. If the economy is good, prices tend to escalate and vise versa.

The Composition of House Value
The value of a house consists of land and improvements to the land, usually in the form of a building. The typical ratio of land to improvement is 1:2. For example, say a luxury house in Norfolk is worth 52 million baht. Land contributes 16.8 million baht (5,600 sq. metres at 3,000 baht per sq. metre), whereas improvements (before depreciation) contribute 35.2 million baht (878 sq. metres at Baht 40,000 per sq. metre).

The case is opposite in Thailand, where the ratio of land to improvement is 2:1. This is because Thailand less land and cheaper labour costs. For example, say a luxury house in the Lakeside Villa I development is worth 38 million baht. Approximately, 26 million of this value comes from the land (1,600 sq. metres at 16,250 baht per sq. metre) and the remaining 12 million baht comes from the improvement, or house in this case (500 sq. metres at 24,000 baht per sq. metre).

In July 2004, I went to New Delhi for the 2004 Congress of the Asian Real Estate Society. In New Delhi, the proportion is skewed even more towards land, standing at a ratio of 4:1. This implies that for a housing unit worth 5 million baht, 4 million baht comes from the land alone. This is because India is very populous.

Adjustments in Thailand
We can see the differences between Norfolk and Bangkok. Many of the practices in Norfolk should be applied in Bangkok or by other local authorities. However, we need to scrutinise and carefully analyze how to do things better in Thailand.

Norfolk's success in the area of property taxation is not technology. Things are more manageable in Norfolk because there is a database listing information on transactions with exact sales prices. This type of database should be considered a major part of any town's administrative infrastructure and should be developed further.

Several measures such as tax reductions and fines should be adopted to ensure people report exact transaction prices. More important for the success of a local jurisdiction's property tax collection system is the restructuring taxation rates, resource allocation, and an increase in the role of local authorities in the taxation process. In addition, personal judgement of authorities should be kept at a minimum to reduce possible loopholes for corruption.

Last but not least, the participation of the local residents in each jurisdiction must be exercised. In Norfolk, around 20 town boards are open to public volunteers to assist the town government in creating systems of good governance in local administration. Unlike Thailand, administrative power is placed in the hands of the public, rather than just in the hands of the mayor and his or her deputies. Norfolk is thus a good example of grassroots democracy and liberty entrenched in a liberal-minded American society.