New Article: David Schleicher, Your House is Worth More Than They Think: The Strange Case of Property Tax Assessment Regressivity, Harvard Journal on Legislation, Forthcoming. (SSRN May 2024). Abstract below:
In the last few years, researchers have revealed something shocking about the property tax, the mainstay of local governmental finance. In virtually all jurisdictions in the country, expensive homes are undervalued by property tax assessors – and hence under-taxed – while less expensive homes are over-valued and over-taxed. Put another way, one of the major methods of taxation in America is premised on a consistently-told lie that the rich are less rich than they actually are, and that the less-well off are better off than they actually are. To give it name, there is almost universal Property Tax Assessment Regressivity, or PTAR.
This Article explains the consequences of PTAR. It shows that PTAR, while still likely regressive, may be less regressive today than one might imagine, as a consistent, long-standing PTAR in jurisdictions would be capitalized into property values and thus have largely benefited property owners many years ago, rather than today’s property owners. PTAR also limits the “insurance” value of property taxes, the way in which property taxes limit the downsides of property value declines (and the upside of increases). However, PTAR may counter-intuitively make jurisdictions less scared of allowing much-needed dense housing construction.
So should PTAR be fixed? The answer is a qualified yes. Fixing PTAR would be an efficient form of wealth redistribution, if a somewhat oddly directed one, as it only shares revenue among homeowners in individual local governments. Capturing the insurance benefits of the property tax would have substantial benefits for the many homeowners with undiversified portfolios. However, fixing PTAR should be paired with policies to mitigate its downsides and enhance its upsides. More taxing authority should be given to bigger jurisdictions, as doing so would enhance the insurance and redistributive benefits of fixing PTAR. And states should pair fixes to PTAR with greater oversight of local zoning authority to ensure a better property tax system does not come at the cost of exacerbating the housing crisis.
What the strange case of PTAR reveals is that the property tax is not, as many have argued, the perfect tax for local governments to levy. Instead, the property tax turns out to be the bad local tax we have grown used to. To make it “work,” we have allowed local governments to engage in all sorts of bad policy – taxing the less well-off at higher rates than those richer than them, and restricting housing growth in order to avoid redistribution.
Poverty Law 