Issue Summary (Updated June 2012)
Assessments and Tax Fairness
If all properties are assessed accurately at their true market value and there are no senior or income exemptions to muddy the waters and assuming everyone in a given community pays the same millage, the result would be fair taxation—in the sense that every parcel is paying taxes proportional to its market value in that taxing district. Of course, getting assessments in which 100 percent of properties are assessed at fair market value in any municipality or school district with a wide variety of ages of homes and rates of resale is very unlikely to ever happen. And since property values can change quickly for a number of reasons, a perfect assessment at a point in time could contain serious errors after a year or two.
What We Know:
Since there are three taxing bodies levying taxes on each property there are three different potential sets of properties in Allegheny County in which unfairness might arise—43 school districts, 130 municipalities and the county. Mt. Lebanon’s properties present a simpler situation since the municipality and school district are the same geographically, meaning there only two sets of properties two consider. And with the school and municipal taxes accounting for over 80 percent of the total tax burden in Mt Lebanon, errors in assessments within the township could create relatively more “unfairness” than the same degree and spread of errors across the County. But for most municipalities, that is not true. A taxpayer could face three different sets of properties against which fairness is to be judged. And it can happen that a property is fairly taxed in the municipality but unfairly taxed in the school district and vice versa. We showed that in a Policy Brief (Volume 12, Number 22).
Measuring unfairness: Take two Mt. Lebanon properties X and Y, each of which has a fair market value of $200,000. Say X and Y are erroneously assessed by 10 percent, with X too high and Y too low and the combined tax rate of 40 mills—or 4 percent. X will pay 0.04 times $220,000 ($8,800) and Y will pay 0.04 times $180,000 ($7,200) in taxes. The correct amount for each would be $8,000. From a fairness perspective is X over taxed by $800 or $1,600? Now look at property Z which has a fair market value of $200,000 and is assessed at $200,000 and is paying $8,000 in taxes. Is that property fairly taxed or over taxed? Relative to Y, Z is overpaying. Relative to X, Z is underpaying. In absolute terms the amount of unfairness, no matter which way one looks at it, can be reduced by lowering the millage rate. If combined millage was 30, X would pay $6,600, Y, $5,400 and Z, $6,000. In percentage terms the unfairness is the same. In absolute terms it is lower. Which is the better measure?
Note that if the combined tax rate was about 10 mills, as it is in many parts of the country, the taxes would be $2,200 for X, $1,800 for Y and $2,000 for Z. Obviously, the percentage differences are the same but the inequities in dollar terms are much more reasonable. Lesson: if you cannot assess very accurately, keep millage rates low. It seems Allegheny County and its taxing bodies cannot or will not do either.
Now look at property W which has a market value of $500,000 and is assessed at $450,000, 10 percent undervalued and property V with a market value of $500,000 and assessed at $550,000. Taxes on W would be $18,000 and on V, $22,000. The correct tax for each would be $20,000. Is V worse off relative to W than X was to Y? In percentage terms, no. In absolute terms, yes. And what about X relative to W? X is overpaying compared to actual value by $800 while W is underpaying by $2,000. Is X more unfairly taxed relative to Y or to W? Most would say W, which means absolute gaps are very important.
Now the question is, in order to raise current revenue from properties in the municipality (school district) if all properties were to be perfectly assessed would millage rates be lower, higher or the same as they are now? If more expensive properties are systematically underassessed is the underassessment enough to cause the aggregate underassessment to be significantly lower than it would be if those assessments were accurate, thereby causing millage rates to be higher than otherwise necessary and compounding the problem of unfairness caused by too high and too low assessments?
On the other hand if lower end properties are systematically overassessed sufficiently to cause aggregate assessment to be raised enough to allow lower millage rates than would otherwise obtain, then the underassessed high end properties are getting a double benefit. Which means high end underassessments and low end overassessments create a twofold inequity, one because the average high end property is on underassessed, leading to lower taxes for the properties than if they were accurately assessed, and two because the overassessment of low end properties is helping to hold down millage rates. That is to say, if all property assessments other than high end were correct, the underassessment of high end would cause millage rates to be higher by some amount, perhaps significantly, and lead to a double benefit for the high end.
The only way to know how far off the aggregate assessment is would be to have all assessments done accurately and then compare that aggregate to the current aggregate. The relevant question for the low end, high end discussion is whether the high end aggregate assessments if corrected to true values would raise overall assessments values by more than the reduction to correct values of low and middle priced properties would lower assessments. If aggregate assessment fell, the millage rate would have to be raised. Thus, high end taxes would rise while lower priced properties could rise or fall depending on the relative percentage changes in their assessments and the millage rate change. If aggregate assessment rose, then millage rates could fall reducing low end taxes. High end taxes would rise or fall depending on the relative size of the aggregate assessment change and the millage rate change.
In sum, the answer seems to be fairly straightforward if one only wants to know if taxes are being fairly levied (share of taxes compared to share of total assessment) across price groups. If one wants to know a numerical quantification of the unfairness, it requires a tedious process of collecting all the data for all the properties or at least a large enough sample to determine reliable estimates of the groups’ characteristics and those impacts on the aggregate of all properties.
At the county level, our research of the reassessment shows a bias toward substantial overassessment (even worse than before the reassessment) of low end properties and underassessment of high end, although the high end values are much closer on average to recent sales prices than the old values were. If that same pattern holds in Mt Lebanon, then the reassessment has worsened the unfairness even though the coefficient of dispersion might actually be lower.
Nonetheless, even if we know that houses worth $100,000 represent 25 percent of assessed value but pay 35 percent of taxes, that does not mean that every home owner in the group is over taxed. Fairness eventually comes down to the individual situation. The group numbers tell of a systematic problem that needs to be addressed and suggests that lot of property owners in that group are unfairly treated but many owners may not be. Just as there are undoubtedly high end owners who by virtue of being correctly or over assessed are paying more taxes than is fair because others are not paying their proportionate share.
Getting all assessments as close as possible to actual value is the only real answer and that means doing assessments on a regular basis of at least very three years. If we cannot do that we need to eliminate property taxes or at least reduce the reliance on them by at least three quarters to reduce the impact of the glaring unfairness substantially inaccurate assessments can create.