Academic journal article The Journal of Real Estate Research

Applying Models for Vertical Inequity in the Property Tax to a Non-Market Value State

Academic journal article The Journal of Real Estate Research

Applying Models for Vertical Inequity in the Property Tax to a Non-Market Value State

Article excerpt


The objective is to contribute to the discussion on property tax inequity by employing the methodologies developed to test for vertical inequity in a tax system that currently does not rely on some form of market value in the assessment process. There is strong evidence that the property tax and the "True Tax Value" assessment procedure employed in Indiana contains progressive vertical inequities rather than regressive inequities as is typically perceived. This is unique, as previous findings tend to support the notion that the property tax is regressive. It provides potentially pertinent information in light of the ongoing discussion surrounding the restructuring of Indiana's property tax assessment and property tax debates elsewhere.


Ad-valorem taxes on real property are a continuing source of controversy and debate among the general public and the academic community. Public attitude surveys consistently reveal that the property tax is considered one of the "worst" forms of taxation in terms of equity (Aaron, 1975). The distaste for the property tax has contributed to a relative decline in its reliance over the last ninety-five years. The percentage of local general revenue produced by the property tax has declined from more than 70% in 1902 to less than 30% by 1986 (Fisher, 1996). The concern over the property tax is illustrated by a number of legal battles and legislative motions recently carried out across the country that challenge components of the property tax system. In Florida, a lawsuit was filed in 1990 challenging the fairness of the property tax system resulted in an amendment to the constitution that caps the annual growth of real property assessed values (Metz, 1995). In Oregon, legislation was adopted in 1995 to simplify the property tax appeals process in favor of property owners. In Michigan, local school reliance on the property tax was eliminated and reallocated to the state level. And in 1996, the Indiana Tax Court, under Judge Thomas Fisher, found in favor of a group of community activists charging the State's property tax assessment system based on "true tax value" was unconstitutional. The Fisher ruling has initiated a spate of discourse and subsequent rulings that call for restructuring the property tax assessment system in Indiana from a system based on true tax value to a system that relies on market value.

Academic debate has focused on such issues as the level of the property tax, administration and assessment procedures, the regressive or progressive nature of the tax and the equity of the tax both vertically and horizontally (Benson and Schwartz, 1997). This article focuses on the role of assessment in addressing vertical equity in the property tax. While there have been numerous empirical tests of assessment practice, all have involved states that rely on some definition of market value in the assessment process. This study seeks to extend the literature on property tax inequity by testing for inequality in the Indiana tax system. Indiana is one of only thirteen states that restricts real property assessment to replacement cost thereby excluding transaction information as a basis for value (DeBoer, 1996).1 A series of models developed over the last twenty years to test for vertical inequity are employed on assessed value data and on listed residential sales transactions in the city of Bloomington, Indiana from 1993 through 1998. The analysis involves comparisons of the assessed value to market value ratio (AV/ MV) across market value ranges in a test of vertical inequity. Inequities are a basis for arguments in favor of restructuring the property tax system in Indiana due to the constitutional violation of omitting fair market value from the assessment process.

An analysis that indicates a direct or inverse relationship between the ratio of assessed value and market value suggests that there is merit to the discussion in favor of restructuring the Indiana assessment system on the basis of perceived inequities in the assessment process. …

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