Infrequent Assessments Distort Property Taxes: Theory and Evidence

Abstract

Economists have long recognized that lags in property reassessment benefit infrequent movers because it reduces their property taxes. But in addition reassessment lags can influence the level of property taxes selected under majority rule. I show that short delays in community-wide reassessment increase property tax collections because it reduces the tax price for a majority of voters. However, longer delays reduce property tax collections because the aggregate assessed base (and thus the tax yield) declines so much. I formally characterize the cutoff between these regimes and show tax collections are generally above their socially optimal level. This theory can help explain why many people believe property taxes are excessive, and it also suggests that the American system of taxing capital gains at realization, rather than on accrual, might result in excessive rates. I test this theory on a sample of Pennsylvania municipalities in the Philadelphia suburbs. This is a suitable crucible for such an evaluation because community-wide reassessments are infrequently performed in Pennsylvania. It is not possible to reject the theory's basic predictions, and numerical estimates suggest that a five year delay in community-wide reassessment increases government revenues by six percent. However, reassessment delays do not impose statistically significant social losses because they benefit infrequent movers.

JEL Classification: D7, H7