1 Property Tax © Allen C. Goodman, 2009

3 1. Have declined somewhat over last 30 years 2. Highest in New England, less in Great Lakes, even less in Mideast.

4 Schematic (Fisher text) Rule Tax Variable Agent Actual or True Mkt Value

5 Schematic (Fisher text) Rule Tax Variable Agent Actual or True Mkt Value Assessed or Taxable Value Ratio rule Exempt Property Assessor

6 Schematic (Fisher text) Rule Tax Variable Agent Actual or True Mkt Value Assessed or Taxable Value Property Tax Levy Ratio rule Exempt Property Assessor Rate and Tax Limits Taxing Gov’t Referendum Required or Optional

7 Schematic (Fisher text) Rule Tax Variable Agent Actual or True Mkt Value Assessed or Taxable Value Property Tax Levy Property Tax Revenue Ratio rule Exempt Property Assessor Rate and Tax Limits Taxing Gov’t Referendum Required or Optional Tax Collector

8 How Property is Assessed Comparative Sales, or “Comps” – What has been the value of other recently sold properties? Cost Approach –How much did the property cost to build? –How much have construction costs changed? –How much has it depreciated? Income Approach –What is net present value of income to be generated by property? Most often for residences. Cost and income approaches are most often used for commercial property. Valuations as golf courses, for example, are often based on how much they can earn.

9 Comparables If you’re buying (appraising) a house, you do this. Look at house you’re buying (appraising) –Find other comparable houses. –See how they differ. –Adjust values based on differences. (Sometimes) float baseline values up according to neighborhood specific inflation factors.

10 Adjustments to make “comparable” similar to appraised house Better than subject house, so you adjust this downward. Larger than subject house, so you adjust this downward.

11 On-Line Tools There are also on-line appraisal tools Here’s one. –

12 Proposal A Proposal A in Michigan

13 Housing -- Why is it Different? Why? –Housing is heterogeneous –Housing is immobile –Housing is durable –Housing is expensive –Moving costs are high –Neighborhood comes with housing … and it matters!

14 Heterogeneous? Dwellings differ in: –house size (sq. feet) –lot size (sq. feet) –configuration –quality People seem to value these qualities differently.

15 Immobile? It is where it is. Where you buy it, you get: –Accessibility (to good and bad things) –Package of local public services –Environmental quality Further –You can’t (really) “move” houses –You can’t rebundle them (use half of two different houses at the same time).

16 Price: The Hedonic Approach Hedonic approach looks at house as a bundle of components. Analogy: Suppose that when you went to the grocery store, all you could buy were “filled” shopping carts (food, soaps, etc.), and each one had a price. You know what’s in them, but you can’t take things out or put things in.

17 Price: The Hedonic Approach How do you figure out what the individual components are worth? A> If you had a large sample of carts, and each had different amounts of goods in them, then you could come up with the value of the individual components.

18 Hedonic Prices P (ln P) = P (House, Neighborhood, Location, Services) P (ln P) = P (h 1, …, h i, n 1, …, n k, l 1, … l j, s 1, …, s m ) Usually estimated as: P =  i a i h i +  k b k n k +  j c j l j, +  m d m s m These give you the coefficients: The “hedonic price” of housing component i, for example, is:  P/  h i = a i If P is in log form, then:  P/  h i = a i P We’ll spend a lecture on this stuff after the exam.

19 Example for Hedonic Prices Suppose that sq. feet of living space was ALL that mattered in the price of house. You collect data on lots of houses. Sq. feet Price

20 Example for Hedonic Prices What does this suggest? –A> Bigger houses have more value. Let’s draw a line. Sq. feet Price ? ?

21 Example for Hedonic Prices Line has a form: Price = a + b*size Sq. feet Price What does a mean? What does b mean? a slope = b

22 Example for Hedonic Prices Says that for each additional sq. ft., house price is $b more. Sq. feet Price Although it is hard to think of, we could draw this diagram in n dimensions! a slope = b b is the hedonic price of house size.

23 n dimensions? Let’s look at a house with 2000 sq.ft., 5 rooms for $75,000 Price Sq. feet Let’s look at a house with 3000 sq.ft., 6 rooms for $100, Rooms Line has a form: Price = a + b*size + c*rooms

24 How do you do this? Let’s look at the examples from the Brasington Database. Parameter Estimates Parameter Standard Variable Estimate Error t Value Pr > |t| Intercept <.0001 bedrooms <.0001 agehouse <.0001 buildingsqft <.0001 R 2 = SER = 65629

25 Parameter Standard Variable Estimate Error t Value Pr > |t| Intercept <.0001 bedrooms <.0001 brick <.0001 fullbath <.0001 agehouse <.0001 buildingsqft <.0001 R 2 = SER = Or

26 Prediction is Important! The prediction accuracy threshold employed by the automated valuation model (AVM) industry is that at least 50% of the predicted house prices must be within 10% of observed transaction prices. Goodman and Thibodeau (2007) find: StandardSpatial SMPSF SMHybrid Percent within 10%35.53%66.04%62.90%65.06% Percent within 15%50.86%78.73%76.69%78.32% Percent within 20%63.32%86.11%85.49%86.74% Why is this important? –If you predict too low, you lose money –If you predict too high, you incite costly appeals. SM = submarket

27 Analyzing the property tax If we look at land, labor, and capital, the property tax is a tax on plant, land, and equipment, but not on labor. As a result property tax will be borne by –Owners of the property and/or –Consumers of the goods that are made by the taxed. Much of the analysis comes from an (almost entirely unreadable) article by Peter Mieszkowski, “The Property Tax: An Excise Tax or a Profits Tax,” Journal of Public Economics, 1972 Also McLure, Charles E., Jr., "The 'New View' of the Property Tax: A Caveat,". National Tax Journal, Vol. 30 (March 1977), pp

28 How Mobile is Capital? From town to town, ultimately pretty mobile. For the country as a whole, possibly not very mobile. What does this mean? Suppose the supply elasticity of capital is 0! S $ Amount of Capital D = MP capital Income from Capital r0r0

29 If we impose a national property tax? Effective demand shifts down. S $ Amount of Capital D = MP capital Income from Capital r0r0 (1-t)r 0 Who pays the tax? TAX Why?

30 We don’t have a national property tax … but Suppose we have 1000 municipalities and none of them impose a property tax. Now, suppose that one of them (Southfield) imposes a 2% property tax. We want to look at Southfield … and at the rest of the world. What happens to capital in Southfield … and what happens elsewhere?

31 Southfield … and elsewhere Southfield LR Supply, why? Demand $ Amount of Capital Elsewhere LR Supply, why? Demand $ Amount of Capitalb0b0 B0B0 After-Tax Demand

32 Where does the capital go? Southfield LR Supply Demand $ Amount of Capital Elsewhere LR Supply Demand $ Amount of Capitalb0b0 B0B0 After-Tax Demand Everywhere Else! B1B1 b1b1

33 What has happened? Southfield LR Supply Demand $ Amount of Capital Elsewhere Demand $ Amount of Capitalb0b0 B0B0 After-Tax Demand B1B1 b1b1 Price of capital went up a LOT in Southfield This is an excise tax effect! Return to capital went down by 0.02/1000 Elsewhere. LR Supply Prices of items made with capital in Southfield  a lot. Prices of items made with capital elsewhere  a little.

34 Remember This was only 1 city in 1,000. Suppose a second city passes a 2% property tax.  Big excise tax there; little capital tax elsewhere. Suppose eventually that every one of them passes a 2% property tax. What do you have? A national property tax!

35 What has happened? Southfield LR Supply Demand $ Amount of Capital Elsewhere Demand $ Amount of Capitalb0b0 B0B0 After-Tax Demand B1B1 b1b1 r 0 (1 – 0.02) Allocation of capital is the same as at the beginning. Return is 2% lower! LR Supply r 0 (1 – 0.02)

36 So … what do we have? The tax differentials between jurisdictions function as excise taxes (if there is a “national” property tax of 2%, then a jurisdiction w/ taxes of 3% will incur excise tax effects). The overall weighted property tax functions as a national tax on capital and land.

37 Incidence Incidence depends on: –Excise tax effects (probably somewhat regressive) –Capital ownership effects (probably somewhat progressive).

38 Who pays? Carroll and Yinger (1994) look at $1.00 increase in city property taxes used to produce $1.00 of services for renters. They find that landlords bear between 70 and 91% of the increase because tenants are relatively more mobile than landlords.