Academic journal article Journal of Real Estate Literature

Review Articles: A MONTE CARLO EXPLORATION OF THE VERTICAL PROPERTY TAX INEQUITY MODELS: SEARCHING FOR A 'BEST' MODEL

Academic journal article Journal of Real Estate Literature

Review Articles: A MONTE CARLO EXPLORATION OF THE VERTICAL PROPERTY TAX INEQUITY MODELS: SEARCHING FOR A 'BEST' MODEL

Article excerpt

Abstract

We apply vertical inequity models to real estate data from Lubbock, Texas. We use Monte Carlo simulations to explore the performance of each inequity model. We generate eight different contrived inequity patterns from three different data-generating processes, which create 24 stylized data sets. The first data-generating process treats assessed values as a noisy function of sale prices, which reflect home values. The second process considers the sale price as a noisy function of assessed values. The final process considers both sale prices and assessed values to be a noisy measure of home values. Although our findings do not yield a ''best'' model, the results allow us to draw some conclusions and provide practitioners and academics with a road map to test for vertical tax inequity in future real estate data.

(ProQuest: ... denotes formulae omitted.)

In the United States, tax assessors typically calculate property taxes as a fixed percentage rate of a property's assessed value (net exemptions). The correctness and fairness of the assessment process is often a point of contention as it can lead to inequities in the property tax structure. A vertically equitable property tax system is one where the taxable values of all properties in the taxing district are assessed at the same percentage of market value. If higher (lower) valued properties are taxed at a lower rate, the taxation system is considered to be regressive (progressive). One possible source of inequity is subjective bias in the assessment process. This bias can arise from barriers to accurately determining values. For example, there may only be a very small number of properties that actually sell in a given year. Valuing assets that trade infrequently requires the application of a subjective process, often involving a mass appraisal technique whose application is more of an ''art than science.'' Another assessment barrier is the inherent asymmetric bias in the system. If a taxpayer is over assessed, they can contest the assessment and potentially have it reduced. If a taxpayer is under assessed, the likelihood is remote that they will bring this under assessment to the attention of the taxing authority.1

Regardless of the source of inequity, detecting vertical inequity has been the focus of many academic studies. Currently, the literature lacks a generally accepted method to test for vertical inequity. A primary reason for this deficiency comes from the conceptual differences in the true relationship between a home's sales price, its assessed value, and the true value of the property. For example, many researchers view sales price as a precise measure of true value, while others prefer to view assessed values as the more objective precise measure of the true value, and yet some studies consider both sales price and assessed value to be noisy measures of the true value. These differing points of view lead to alternative empirical estimation techniques for vertical inequity that often result in different conclusions. Furthermore, some models allow for the extent of inequity to differ at different home value ranges, while others do not.

The purpose of this paper is to determine the proficiency of the different vertical tax inequity models used in previous studies to identify inequity in tax structures. In conducting this investigation, we attempt to determine whether there is a 'best' model for verifying the existence of vertical property tax inequity. Our analysis begins by testing a sample of residential properties in Lubbock, Texas. Lubbock is a mid-sized city with a history of very stable and slightly increasing property values over the past 20-years. Particularly, the price stability has prevented property values from experiencing a 'boom' or 'bust,' which has plagued many cities and states around the nation. This fact makes Lubbock relatively immune to the ''housing price bubble.'' Our empirical tests show that the standard set of vertical inequity models produce conflicting results. …

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