Measuring Vertical Property Tax Inequity in Multifamily Property Markets
Allen, Marcus T., The Journal of Real Estate Research
Abstract Vertical equity in property tax systems refers to the assessment of all properties in a taxing jurisdiction at the same proportion of their market values. This study considers alternative methods for measuring vertical inequity in multi-family property markets using sample data. The results indicate that vertical inequities do exist in this sample, with lower valued properties being assessed at a higher proportion of market value than higher valued properties. This study suggests that owners of properties in lower value ranges in this market should carefully monitor the assessment process to minimize their property tax expense.
Property taxes are a significant expense item in most multi-family property markets around the United States. Nationwide survey data from the Institute for Real Estate Management (IREM) indicate that real estate taxes range from 5% to 10% of gross rents for various types of apartments. Given the magnitude of this expense item, prudent management of property tax exposure can be an effective strategy toward the goal of profit maximization for real estate portfolio managers and investors.
The property tax system in most taxing jurisdictions is an ad valorem tax, meaning that the tax due on a particular property is determined by the value of the property and the tax levy rate. The value of the property typically is estimated by an assessment official based on market data and the tax levy rate is set by the taxing authority (city or county commissioners, school boards, etc.) based on the taxing authority's budget. The ad valorem system suggests that an owner who wishes to manage property tax exposure can do so by impacting either the political budgeting process that affects tax levy rates or the assessment process used to estimate value.
A property owner could endeavor to manage property tax expenses through involvement in local politics with activities such as supporting candidates/parties for elected office who share the owner's fiscal leanings, lobbying existing elected officials for decisions that coincide with the owner's preferences, or, at the extreme, personally pursuing elected positions that carry budget authority. More directly, however, property owners may attempt to affect property tax exposure by monitoring the assessment process used in the ad valorem system and challenging the assessment amount when an error is suspected.
Monitoring the accuracy of the assessment process is certainly not a new concept. In the words of Denne (1977), for as long as there have been taxes there has been concern that they be administered equitably, and the equity of the ad valorem property tax has long been a controversial subject. An obvious criticism of the property tax focuses on perceived or real inequities stemming from the failure of assessing officials to assess all properties in a taxing jurisdiction fairly according to their market value. Giving assessing officials the benefit of the doubt regarding any intentional manipulation of the assessment process, this failure may be due in part to the inherent difficulties of accurately estimating property value. To the extent that such difficulties vary across property value ranges, properties in different value ranges may face different probabilities of being inequitably assessed.
The purpose of this study is to demonstrate how to measure or detect systematic assessment inequities that may exist across value ranges in multi-family property markets. If the assessment process in a local market is biased in favor of higher or lower valued properties, property owners may be able to reduce their tax liability by challenging their assessments through established procedures and thus increase property profitability.
The first section of this paper discusses various methods that have been proposed to measure inequity in property tax systems. While these methods were originally developed to consider inequity in single-family houses and condominium units, they can be readily adapted to measure inequity in multi-family properties. …