These measurement errors aren’t random, according to study author Christopher Berry of the Harris School of Public Policy. Across the country, in city after city, homes in low-income neighborhoods are systematically over-assessed relative to their actual market prices, while those in rich areas are under-assessed. The net result is a transfer of billions of dollars of tax burdens from rich households to poor ones.
Theory and practice
Berry gathered data on 26 million residential homes sold between 2006 and 2016 from CoreLogic, a real estate analytics firm. The data included addresses, sale prices, property taxes due the year of the sale, and tax values as assessed by local officials. He calculated effective property tax rates by dividing taxes due by the sale price.
In theory, property tax rates within a given city should be the same regardless of home value. Cities typically apply a flat property tax rate across the board. If you were to chart that tax rate against home value, you’d get a horizontal line. That’s what the first chart below shows, illustrating a hypothetical property tax rate of 3.2 percent.
But in practice, the numbers often don’t work out that way. The second chart, in the illustration above, shows the actual property tax curve for Chicago using real-world data covering nearly 10,000 home sales between 2015 and 2017.
Owners of the least expensive homes in the city, selling typically for less than $100,000, paid an effective property tax rate of nearly 4 percent. But effective rates on the most expensive properties — those with sale prices approaching $1.5 million — were less than 1.5 percent.
How that is possible, if the same tax rate is applied across the board, comes down to the difference between the market price of a home and its value as assessed by city tax officials.
“Property tax is not levied at the time of a transaction, but at regular intervals, usually annually,” Berry explains in the paper. “Because most properties sell infrequently, their value in any given tax cycle must be estimated, a job that falls to the office of the local assessor. The accuracy and fairness of the property tax depends fundamentally on the accuracy and fairness of the valuations estimated by assessors.”
The problem with assessments
Berry believes a fundamental flaw in the assessment process is the prime driver of property tax regressivity: When estimating home values, assessors don’t have access to the same information buyers and sellers do.
“Generally speaking, assessors are not allowed to enter homes to do inspections, nor do many have the labor power to do so,” Berry said via email. As a result, they’re unable to account for variables such as custom or upgraded fixtures or the condition of a home.
“Consider two neighboring homes that were identical at the time of construction (same square footage, number of bedrooms, etc.),” he said. “But over the years, one owner has not maintained the property and now has peeling paint and a leaky roof. The other owner has kept the property in pristine condition and even added a chef’s kitchen and spa bathroom.”
Buyers and sellers can see those differences — indeed, they may be some of the most readily apparent features of the homes. But assessors can’t. From the outside, the two houses may be virtually identical. The assessor assigns the homes an identical value, which turns out to be higher than the price the poorly maintained home could bring on the market, and lower than the true market value of the improved home.
Repeat this process across an entire city and you end up with a skewed property tax curve, as illustrated by the Chicago example above. A similar pattern is evident in counties and cities all across the country.
Mike Ardis, a spokesperson for the International Association of Assessing Officers, a trade group for property tax assessors, said in a statement that “homes at both ends of the value spectrum tend to present a valuation issue for assessors because there can be a lack of quality data, and the motivations of market participants tend to be different at those extremes.”
He added that the group is “focused on improving the accuracy and precision of the appraisal methodologies on which assessments are based, and helping assessors more accurately identify and locate regressive assessments.”
There probably are other factors driving property tax regressivity as well, although Berry believes they have a smaller effect than the assessment process. Many states, for instance, impose limits on how much a home’s assessed value can rise in a year to guard owners against huge tax increases. In booming markets, those caps may result in assessors undervaluing homes, particularly at the high end of the market, where prices often rise most rapidly.
Similarly, many cities allow property owners to appeal assessments, typically in hopes of lowering a valuation for tax purposes. Because these appeals “are disproportionately brought by owners of high-priced property,” Berry writes, their net effect is to lower property taxes for the rich relative to everyone else.
Finally, one major area of concern in analyses like Berry’s is the multitude of external, unpredictable factors that can influence any given home’s sale price. Some buyers and sellers may be better negotiators than others, for instance, able to nudge a sales price higher or lower than it would be otherwise.
Berry runs a number of complex statistical tests demonstrating that these unobserved factors are not likely driving his results. His findings are further strengthened by the simple fact that thousands of counties and cities across the United States show the same general pattern.
A driver of racial inequality
Because of the interplay between race and economic outcomes in this country, property tax regressivity results in stunning racial inequities, Berry said. He found, for instance, that in neighborhoods where 90 percent or more of the residents are Black, homes are taxed roughly 50 percent higher than they are in other neighborhoods in the same county.
“This is an example of structural racism,” Berry said. “African Americans and other minorities are more likely to own low-priced homes. This means that minorities are more likely to be overtaxed because they are more likely to own low-priced homes.”
However, Berry points out that even within communities that are overwhelmingly White, the same pattern of over-assessment and under-assessment remains. “The key fact is that low-priced homes are over-assessed,” he said. More accurate assessments would create more home equity for owners of low-priced homes regardless of their race.
Berry says transparency is one step that would help cities produce more equitable assessments. “Assessors are supposed to do their own studies and report on assessment quality, including regressivity, regularly,” he said. “But I am shocked at how many major jurisdictions either don’t do or don’t release these studies. Taxpayers have a right to know.”
There are also alternative ways to structure the assessment process. California, for instance, assesses home value at the time a property sells, pegging it precisely to the sale price. That solves much of the regressivity identified by Berry — so much so that he excluded the state from his analysis. But it creates separate issues: Homes that are nearly identical can theoretically be levied dramatically different tax rates based on when they were last sold.
Berry’s findings have potentially major implications, as homes are the primary driver of middle-class wealth. According to data from the federal Survey of Consumer Finances, home equity accounts for more than 60 percent of middle-class American families’ net worth.
Higher tax rates on lower-priced properties make it harder for the families living in those homes to build wealth and save for the future. And because those families are disproportionately non-White, regressive property taxes may also be contributing to the country’s staggering racial wealth gap.