Vertical Equity in the Taxation of Single-Family Homes

By Benson, Earl D; Arthur L Schwartz, Jr. | The Journal of Real Estate Research, January 1, 1997 | Go to article overview

Vertical Equity in the Taxation of Single-Family Homes


Benson, Earl D, Arthur L Schwartz, Jr., The Journal of Real Estate Research


Vertical Equity in the Taxation of SingleFamily Homest

Abstract. Vertical equity in ad valorem real property taxation is the concept that all properties within a taxing jurisdiction are assessed in equal proportion to their fair market value. This study examines the assessment of single-family homes in Bellingham, Washington, utilizing a database of 1,118 home sales in the southern half of Bellingham that sold during the time period January 1990 through June 1994. The results of several empirical tests suggest the presence of regressive vertical inequity. It appears that higher market value homes are assessed at a lower proportion of their value (sales price) than less expensive homes. These results suggest that property taxation at the local level magnifies the regressivity of Washington State's already highly regressive state tax system. Why does this apparent regressive vertical inequity exist? The authors offer several possibilities including the propensity of wealthy homeowners to challenge property tax assessments, the difficulty of valuing the amenities inside an upper-end home, the heterogeneity of the upperend home market coupled with a small number of transactions, and the lack of ample staff and other resources at the County Assessor's office.

Introduction

Ad valorem taxes on real property are an important revenue source for local governments throughout the United States. Additionally, they are often a significant expense for the property owner. Controversy rages fairly constantly both within the academic community and amongst the general public about property tax issues such as the level of property taxes, assessment and related valuation issues, progressivity or regressivity questions, and the topic of this study, vertical equity. Vertical equity is the concept that all properties are proportionately assessed according to their value. That is, the assessed value on a $500,000 property would be four times that of a $125,000 property if assessments fairly reflected the incremental value. The assessed value/market value ratio (AV/MV) is a common tool used in vertical equity studies. Vertical equity amongst all properties on a tax roll would be realized if all of the properties had similar AV/MV ratios. Vertical inequity will be the result if assessments are not a constant proportion of market value across all value categories. Regressive vertical inequity occurs if higher-priced properties are underassessed as compared to the lowerpriced properties. That is, a tendency for AV/MV ratios to be lower for higher-end properties would suggest regressive vertical inequity. Progressive vertical inequity occurs if higher-priced properties are overassessed in comparison to lower-valued properties. Evidence of this would be higher AV/MV ratios for more valuable properties. Vertical equity appears to be a topic more of interest to real estate scholars and practicing professionals than to the general public. Most political controversies dealing with property taxes relate to property tax rates and reassessment issues. In many states, voter concerns over property taxes have resulted in the passage of initiatives to limit or to lessen property taxes. In California, Proposition 13, passed in 1978, limits both the maximum property tax rate and the reassessment process. Florida's Save Our Homes initiative, passed in 1992, limits assessed value increases for owner-occupied homes.

Michigan's recently passed tax reform changed the primary source of public school finance from property taxes to a higher sales tax. While most voter initiatives deal with reassessment and/or taxation-level issues, evidence of persistent regressive vertical inequity could heighten the concerns of the public over assessment issues.

Most states mandate vertical equity by state law or constitution. In Washington State, for example, state law requires that county assessors must assess all properties for property tax purposes at one hundred percent of market value. …

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