Fiscal Illusion from Property Reassessment? An Empirical Test of the Residual View
Justin M. Ross
Indiana University - School of Public & Environmental Affairs
University of Kentucky - James W. Martin School of Public Policy and Administration; Indiana University Bloomington - School of Public & Environmental Affairs (SPEA)
July 26, 2012
National Tax Journal, Forthcoming
Indiana University, Bloomington: School of Public & Environmental Affairs Research Paper No. 2011-12-01
The textbook view of the real property tax is that the tax rate is simply a residual, determined by dividing the revenue to be raised from the property tax by the taxable base of assessed values. As such, tax rate adjustment is automatic and changes in assessed values are neutral with respect to property tax revenue. Critics often claim that policymakers do not fully reduce the tax rate in response to increasing assessed values, allowing them to effectively raise revenue without raising tax rates. Using data from Virginia cities and counties between 2000 and 2008, this paper estimates the response of levy growth rates to property reassessment by taking advantage of a policy environment that offers a natural experiment in the execution of mass reappraisals. A timing lag in the implementation of updated property assessments to be used in setting the tax rate further allows the study to disentangle assessed value growth from other forms of economic growth, including the market values of property. Our findings provide partial support for the fiscal illusion critique, as mass reappraisals per se provide cover for politicians to raise levy growth rates; however, overall the growth in aggregate taxable assessed values is largely irrelevant.
Number of Pages in PDF File: 33
Keywords: Property Assessment, Property tax rates, fiscal illusion, median voter theory
JEL Classification: H71, H73, H83
Date posted: December 6, 2011 ; Last revised: July 27, 2012
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