Opinion ID: 853967
Heading Depth: 1
Heading Rank: 3

Heading: Constitutionality of Cost Schedules

Text: The State Board contends that the Tax Court's conclusion that the Board's cost schedules [6] are unconstitutional is clearly erroneous. The Tax Court concluded that the schedules violate the Property Tax Clause of the Indiana Constitution because they do not result in a uniform and equal rate of property assessment and taxation and do not accurately measure property wealth. St. John III, 690 N.E.2d at 382. In St. John II, this Court approved of the Tax Court's determination that `the framers of Article 10, § 1 intended that each taxpayer's property wealth bear its proportion of the overall property tax burden.' St. John II, 675 N.E.2d at 324 (quoting St. John I, 665 N.E.2d at 970). However, we recognized that varying methods of valuation could be used and that uniformity of assessment method is not required, provided that the resulting valuations are just and the burdens are distributed with uniformity. St. John II, 675 N.E.2d at 327. We found: [T]he Indiana Constitution requires that our property tax system achieve substantially uniform and equal rates of property assessment and taxation and authorizes the legislature to allow a variety of methods to secure such just valuation. Id. The uniform and equal rate of property assessment and taxation, we held, must be based on property wealth. Id. at 328. However, we also emphasized that our state constitution does not require the property taxation system to be based solely on a fair market value. Id. at 327. Collectively, these principles require that the system provide rates of assessment that are substantially uniform and equal based on property wealth. While expressly foregoing any appeal of the Tax Court's invalidation of the subjective elements of the present rule (e.g., neighborhood, condition, grade, obsolescence), [7] the State Board argues that no evidence in the record supports the Tax Court's ruling that the basic design of the cost schedules is unconstitutional. The State Board's real property assessment rules are required by statute to include instructions for determining various factors, one of which is the cost of reproducing improvements. IND.CODE § 6-1.1-31-6(b)(5). Pursuant to rules adopted by the State Board, this cost is determined by application of its cost schedules. IND. ADMIN. CODE tit. 50, r. 2.2-2-2(b) (assessing officials must follow the State Board's rules in assessing real property). The cost of reproduction to be applied in assessments is not the actual cost of reproducing an item, but rather the reproduction cost as specified in the State Board's cost schedules. St. John III, 690 N.E.2d at 373. As the Tax Court noted, the cost schedules are the heart of the True Tax Value system. Id. at 377. In reviewing a decision of the Tax Court, we shall not set aside the findings or judgment of the Tax Court unless clearly erroneous. Ind. Tax Court Rule 10. This is the same standard of review as that provided in Indiana Trial Rule 52(A). We consider the evidence most favorable to the judgment on appeal and refrain from reweighing the evidence. Chidester v. City of Hobart, 631 N.E.2d 908, 910 (Ind.1994). Findings are clearly erroneous only when the record contains no facts to support them either directly or inferentially. Gibson County Farm Bureau Coop. Ass'n, Inc. v. Greer, 643 N.E.2d 313, 315 (Ind.1994); Indianapolis Convention & Visitors Ass'n, Inc. v. Indianapolis Newspapers, Inc., 577 N.E.2d 208, 211-12 (Ind.1991). In conducting our review, we recognize that the Indiana Tax Court was established to develop and apply specialized expertise in the prompt, fair, and uniform resolution of state tax cases. Indiana Dep't of State Revenue v. Caylor-Nickel Clinic, P.C., 587 N.E.2d 1311, 1313 (Ind.1992). Therefore, with regard to issues which are within the particular purview of the Tax Court, we exercise cautious deference. Id. The foundation for the Tax Court's decision is its conclusion that the assessment system must be based on objectively verifiable data to enable a review of the assessment system to ensure uniformity and equality, and to ensure that individual taxpayers have a means to assert a personal right of uniformity and equality as to individual assessments. St. John III, 690 N.E.2d at 376 & n. 12. Upon this latter point, the Tax Court emphasized its view that, because the existing system precludes evidence of any value which is not found in the cost schedules or otherwise approved by the State Board, assessors are prevented from considering other relevant evidence of property wealth, thus undermining the system's ability to achieve uniformity and equality as applied to individual assessments. Id. at 376-77. By instructing the General Assembly to provide, by law, for a uniform and equal rate of property assessment and taxation and to prescribe regulations to secure a just valuation for taxation of all property, the Property Taxation Clause requires the creation of a uniform, equal, and just system. However, the constitutional text does not expressly provide a personal right of absolute uniformity and equality in assessment rate. We also note that this provision is not located in Article 1 of our state constitution, which generally protects individual liberty rights and limits government action. As we noted in St. John II, when Article X was under consideration at the Constitutional Convention of 1850-51, the delegate who proposed it, Daniel Read, acknowledged the aspirational nature of the provision's language and implied that he did not expect the full achievement of absolute and precise exactitude. St. John II, 675 N.E.2d at 323. Delegate Read emphasized, `The rule will be a part of the organic law, and the people and the Legislature will endeavor to work up to a rule so manifestly just and equitable.' Id. at 323 (quoting 1 REPORT OF THE DEBATES AND PROCEEDINGS 946 (Dec. 4, 1850) (comments of Delegate Read)). This express delegation of function to the legislature under the Property Taxation Clause is not unlike several others provided in our constitution. See, e.g., IND. CONST. art. VIII, § 1 (duty of the General Assembly to provide, by law, for a general and uniform system of Common Schools); IND. CONST. art. IX, §§ 1, 2 (duty of General Assembly to provide, by law, for the support of institutions for the education of the deaf, the mute, and the blind; and for the treatment of the insane, and to provide institutions for the correction and reformation of juvenile offenders). These constitutional provisions affirmatively require the legislature to enact laws for specified public purposes, subject to certain qualifications, but such provisions do not create entitlement rights for individuals seeking to benefit from the particular purposes or specified qualifications. See, e.g., Ratliff v. Cohn, 693 N.E.2d 530, 540 (Ind. 1998) (although Article IX, section 2 requires the legislature to provide institutions for juvenile offenders, it does not create an individual right for all such offenders to be housed only in such institutions); Y.A. by Fleener v. Bayh, 657 N.E.2d 410, 417 (Ind.Ct.App.1995) (legislative duty imposed by Article IX, section 1 to provide institutions for treatment of the insane does not impose absolute duty of care for individuals suffering from mental illness). We conclude that the Property Taxation Clause requires the General Assembly to provide for a system of assessment and taxation characterized by uniformity, equality, and just valuation based on property wealth, but the Clause does not require absolute and precise exactitude as to the uniformity and equality of each individual assessment. The system must also assure that individual taxpayers have a reasonable opportunity to challenge whether the system prescribed by statute and regulations was properly applied to individual assessments, but the Clause does not create a personal, substantive right of uniformity and equality. It does not establish an entitlement to individual assessments for abstract evaluation of property wealth, nor does it mandate the consideration of independent property wealth evidence in individual assessments or tax appeals. [8] As we noted in St. John II, legislative discretion to provide regulations to secure just valuation is limited by the constitutional requirements of uniform and equal rate of property assessment and taxation, and compliance with such limitations is subject to judicial review. St. John II, 675 N.E.2d at 328. Such judicial relief is available when the assessment system fails adequately to provide for uniformity and equality in general. For this reason, the Tax Court is correct to require that the State Board's assessment regulations be based on objectively verifiable data to enable review of the system to assure that it generally provides uniformity and equality based on property wealth. The State Board argues that the requirement of objectively verifiable data euphemistically mandates adoption of market value. Brief of Appellant at 16. The State Board contends that the Tax Court is incorrect if its decision, announced in St. John III and St. John IV, means that the assessment system must incorporate all three standard market-value measures of value noted by the Tax Court (comparable sales, reproduction cost minus depreciation, and income capitalization). See St. John III, 690 N.E.2d at 382 n. 27. The Board represents that its planned revisions of the assessment system would not satisfy such a standard. [9] The Tax Court declared: The State Board must measure property wealth in order to meet the dictates of the Indiana Constitution. This can only be done through the application of objective data and an application of real world factors affecting property values. Id. at 382. Observing the three recognized valuation methods, the Tax Court acknowledges that some valuation methods are inappropriate for some types of property. Id. at 382 n. 27. It authorizes the State Board to assess certain property by certain methods to the exclusion of others. Id. The State Board's regulations are not required to use all three standard market-value measures of value in its assessment system. However, as noted above, the system must provide rates of assessment that are substantially uniform and equal based on property wealth, and this requires that the regulations be grounded on objectively verifiable data, although a system based solely upon strict fair market value is not expressly required. St. John II, 675 N.E.2d at 327. The State Board argued to the Tax Court that the system adequately determines property wealth by the use of separate cost schedules for various classes of property and by measuring the value in use of assessed property. The Tax Court found that the present system's separate cost schedules for different types of property prevented uniformity and equality. St. John III, 690 N.E.2d at 377. To the extent the Tax Court's determination may be understood to assert that different procedures or cost schedules can never be used, we disagree. The General Assembly may adopt different methods of assessment for different classifications of property in order to achieve uniformity and equality. Indiana State Bd. of Tax Comm'rs v. Lyon & Greenleaf Co., 172 Ind. App. 272, 277, 359 N.E.2d 931, 934 (1977) (citing Clark v. Vandalia R.R. Co., 172 Ind. 409, 86 N.E. 851 (1909) (method of assessing railroad property permitted in order to secure a fair valuation of the whole property and an equitable distribution among the counties affected); Board of Comm'rs of Johnson County v. Johnson, 173 Ind. 76, 89 N.E. 590 (1909) (classification of banks permitted where practical effect is to place the classes on the same footing in taxing result); State ex rel. Lewis v. Smith, 158 Ind. 543, 64 N.E. 18 (1902) (statute permitting mortgage deduction on real estate)). The use of different methods does not alone make the system unconstitutional. However, although different methods may be used, the classification of the differing properties cannot be arbitrary but rather must be based upon differences naturally inhering in the property. Lyon & Greenleaf, 172 Ind.App. at 277, 359 N.E.2d at 934 (citing State ex rel. Lewis, 158 Ind. at 580, 64 N.E. at 20). As to the value in use claim, the Tax Court found that, under the applicable cost schedules, it is the physical characteristics of an improvement, not its use, which governs reproduction costs and that, therefore, the system does not measure use. St. John III, 690 N.E.2d at 382. The Tax Court did not prohibit the evaluation of property wealth based upon value in use but rather found that the present system was defective in its methodology. Id. As the Tax Court noted, the constitution does not require an assessment to be based upon the highest and best use of the property. Id. at 379. Focusing upon the taxpayer's actual use of land and improvements, rather than the possible uses which potential purchasers may choose, is an altogether appropriate way to evaluate property wealth for the purpose of assessment and taxation under the Property Taxation Clause. We find that property valuation for assessment based upon value in use is a reasonable measure of property wealth. A uniform and equal assessment of land or improvements accurately based upon value in use would not offend constitutional requirements. However, while it is constitutionally permissible for the assessment system to apply different valuation methods for differing property classifications, including the assessment of some classifications based upon value in use rather than upon highest and best use, the Property Taxation Clause requires that the property wealth assessment methodologies result in general uniformity and equality across all the classifications. Independent from its statements regarding the issues of value in use, separate cost schedules, mandatory use of standard market-value measurement methods, and entitlement to individual assessments based on property worth, the Tax Court further concluded that the true tax value system in general violated the uniformity and equality requirements of the Property Taxation Clause of the Indiana Constitution. The Tax Court found that the current assessment system as a whole fails to use any method to determine property wealth, id. at 381 (emphasis in original), and that the cost schedules are arbitrary figures and formulas, determined by the State Board and applied to property by local assessors with little or no reference to actual value or worth, id. at 382. The Tax Court explains that, because the system eschews real world, objective data, no verification of either equality or uniformity of taxation based on property wealth is possible. Id. at 376 n. 11. The State Board contends that the Tax Court's determination is clearly erroneous. It argues that the cost schedules were based upon a commercially available valuation manual modified to account for actual costs in Indiana. Citing the Report of the Indiana Fair Market Value Study (DeBoer Report), conducted at the direction of the State Board and admitted as State Board Exhibit 64C, the Tax Court found that the State Board assesses different types of property unequally, noting that residential property was assessed at 62%, commercial property at 81%, industrial property at 72%, and agricultural property at 54%, of market value. Id. at 378 n. 17. Citing supporting evidence, the Tax Court found that the State Board has not identified any way to measure equality of taxation under the present system except by using market information. Id. at 379. As discussed supra, although each individual assessment need not consist of a separate valuation of fair market value, the State Board's assessment regulations must be based on objectively verifiable data to enable review of the system and to ensure that it generally provides for uniformity and equality based on property wealth. As previously noted, supra, we cannot set aside the findings and judgment of the Tax Court unless clearly erroneous, a standard which requires that the record contain no facts supporting the judgment. We extend cautious deference to the Tax Court's special expertise, and we do not reweigh the evidence but consider that which is most favorable to the judgment. There exists evidence in the record to support the Tax Court's findings that the cost schedules lack sufficient relation to objectively verifiable data to ensure uniformity and equality based on property wealth, and to support its findings of significant lack of uniformity and equality across property classifications. The State Board has not demonstrated that these findings are clearly erroneous. We affirm the Tax Court's determination that the existing cost schedules, lacking meaningful reference to property wealth and resulting in significant deviations from substantial uniformity and equality, violate the Property Taxation Clause of the Indiana Constitution. However, the Clause does not require the consideration of all property wealth evidence in individual assessments or appeals therefrom. It does not mandate the use of strict market value or the use of its three measurement standards. It does not prohibit the use of different assessment methodologies for differing property classifications, or assessment based on value in use, provided that the result is substantial uniformity and equality based on property wealth across all property classifications.