Fiscal Illusion from Property Reassessment? An Empirical Test of the Residual View

33 Pages Posted: 6 Dec 2011 Last revised: 27 Jul 2012

Justin M. Ross

Indiana University - School of Public & Environmental Affairs

Wenli Yan

University of Kentucky - James W. Martin School of Public Policy and Administration; Indiana University Bloomington - School of Public & Environmental Affairs (SPEA)

Date Written: July 26, 2012

Abstract

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.

Keywords: Property Assessment, Property tax rates, fiscal illusion, median voter theory

JEL Classification: H71, H73, H83

Suggested Citation

Ross, Justin M. and Yan, Wenli, Fiscal Illusion from Property Reassessment? An Empirical Test of the Residual View (July 26, 2012). National Tax Journal, Forthcoming; Indiana University, Bloomington: School of Public & Environmental Affairs Research Paper No. 2011-12-01. Available at SSRN: https://ssrn.com/abstract=1969015 or http://dx.doi.org/10.2139/ssrn.1969015

Justin M. Ross (Contact Author)

Indiana University - School of Public & Environmental Affairs ( email )

1315 East Tenth Street
Bloomington, IN 47405
United States

Wenli Yan

University of Kentucky - James W. Martin School of Public Policy and Administration ( email )

Lexington, KY 40506
United States

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA) ( email )

1315 East Tenth Street
Bloomington, IN 47405
United States

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