What's It Worth? Property Taxes and Assessment Practices

By Schiller, Timothy | Business Review (Federal Reserve Bank of Philadelphia), Fall 2011 | Go to article overview
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What's It Worth? Property Taxes and Assessment Practices


Schiller, Timothy, Business Review (Federal Reserve Bank of Philadelphia)


Residential property taxes are both a major source of local government financing and a significant cost of owning a home. Tax limitation measures and relatively moderate gains in house prices during most of the 1990s tended to keep property taxes from rising rapidly in those years. But from the late 1990s to the mid-2000s, house prices once again rose sharply. Property taxes followed a similar path, bringing them to greater public attention once again. Now that house prices appear to haw shifted to a level or downward trend in most parts of the country, there seems to be increasing concern that real estate valuations for property taxes are not promptly reflecting declining values. In this article, Tim Schiller focuses on how tax authorities measure value and calculate tax liabilities, the shortcomings of some of these processes, and the remedies that have been, or can be, implemented to make real estate assessment more accurate and equitable.

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Residential property taxes are both a major source of local government financing and a significant cost of owning a home. Homeowners view rising house prices favorably, but rising property taxes, which are based on house values, are not regarded in the same light. When house prices move up rapidly, public concern about the resulting upward pressure on property taxes increases. Periods of rapid increases in house prices occurred in the late 1970s and middle 1980s, and state and local property taxes increased in those same years. (See Figures 1 and 2.) The rising real estate property tax burdens during that time led many states to adopt measures limiting their growth. An early and widely copied measure was California's Proposition 13, enacted in 1978 and amended in 1986 to be even more favorable to homeowners. Proposition 13 limited annual increases in assessed value to the annual change in the consumer price index or 2 percent, whichever was lower. Proposition 13 also required houses to be reassessed at market value when they were sold.

Tax limitation measures and relatively moderate gains in house prices during most of the 1990s tended to keep property taxes from rising rapidly in those years. But from the late 1990s to the mid-2000s, house prices once again rose sharply. Property taxes followed a similar path, bringing them to greater public attention once again, and by 2007, limits on residential property tax assessments were in place in 20 states. (1) Now that house prices appear to have shifted to a level or downward trend in most parts of the country, there seems to be increasing concern that real estate valuations for property taxes are not promptly reflecting declining values. (2) And whether house prices are rising, falling, or flat, there are public complaints that property tax burdens have been inequitable across property owners, with similar houses subject to unequal taxes.

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Taxes on real property, such as houses, are ad valorem taxes; they are based on the monetary value of the property. Consequently, a fundamental issue in the subject of real estate taxation is the valuation, or appraisal, of properties, which is part of the overall real estate tax assessment procedure. The accuracy of valuations at the time they are made, changes in valuation over time, and the equity of valuations among properties are the major points of concern. With rapid fluctuations in residential property values over the past 10 years or so--first rising, then falling--valuation has come under increasing attention. This attention is especially justified during periods of rapid change in house prices and fluctuations in the pace of house sales, both of which make accurate appraisals more difficult.(3)

This article takes a look at real estate tax assessment practices that are common among local government jurisdictions in the U.S.--counties, municipalities, school districts, and special-purpose districts--which obtain most of their revenue from property taxes.

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What's It Worth? Property Taxes and Assessment Practices
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