Why are Residential Property Tax Rates Regressive?
65 Pages Posted: 23 Nov 2020 Last revised: 9 Nov 2021
Date Written: November 12, 2020
Among single-family homes that enjoy the same set of property tax-funded amenities and pay the same statutory property tax rate, owners of cheap houses pay almost 50% higher effective tax rates than owners of expensive houses. This pattern appears throughout the United States and is caused by systematic assessment regressivity -- cheap houses are over-assessed relative to expensive houses. I use an instrumental variable approach to show that a large portion of this pattern can be attributed to measurement error in sale prices. Sixty percent of the remaining regressivity can be explained by tax assessors' flawed valuation methods that ignore variation in priced house and neighborhood characteristics and 40% by infrequent reappraisal. A simple valuation method can alleviate assessment regressivity and increase poor homeowners' net worth by more than 10%.
Keywords: Property Tax, Assessment Regressivity, Wealth Inequality
JEL Classification: H2, R00, G00
Suggested Citation: Suggested Citation