{"id":4108,"date":"2025-02-22T13:36:41","date_gmt":"2025-02-22T18:36:41","guid":{"rendered":"https:\/\/journals.law.harvard.edu\/jol\/?p=4108"},"modified":"2025-10-13T11:05:48","modified_gmt":"2025-10-13T15:05:48","slug":"your-house-is-worth-more-than-they-think-the-strange-case-of-property-tax-regressivity","status":"publish","type":"post","link":"https:\/\/journals.law.harvard.edu\/jol\/2025\/02\/22\/your-house-is-worth-more-than-they-think-the-strange-case-of-property-tax-regressivity\/","title":{"rendered":"Your House Is Worth More Than They Think: The Strange Case of Property Tax Regressivity"},"content":{"rendered":"

David Schleicher [*]<\/a>\u00a0<\/span><\/strong><\/p>\n<\/p>\n

Abstract<\/span><\/p>\n

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\u2014and hence under-taxed\u2014while less expensive homes are over-valued and over-taxed. Put another way, one of the major methods of taxation in America is premised on repeated determinations 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. <\/em><\/p>\n

This Article explains the consequences of PTAR. It shows that PTAR, while still likely regressive, may be less regressive today than one might imagine. 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\u2019s property owners. PTAR also limits the \u201cinsurance\u201d 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 counterintuitively make jurisdictions less scared of allowing much-needed dense housing construction.<\/p>\n

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.<\/p>\n

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 \u201cwork,\u201d we have allowed local governments to engage in all sorts of bad policy\u2014taxing the less well-off at higher rates than those richer than them, and restricting housing growth in order to avoid redistribution.<\/p>\n

I. Introduction: The Strange Case of Property Tax Assessment Regressivity<\/span><\/p>\n

There are few ways in which governments raise money that are as public as the property tax. Both government determinations about most of the elements related to any individual\u2019s property tax liability and most of the underlying information that goes into determining any individual\u2019s property tax liability are generally publicly available and easily obtainable by anyone.<\/p>\n

The amount of property taxes an owner of real property has to pay is determined by multiplying a property tax or \u201cmillage\u201d rate\u2014sometimes set by one government, but more often by several overlapping local governments\u2014by a property tax assessment, a determination about the value of a given property.1<\/a><\/sup>The millage rate is the dollars owed per thousand dollars of property value. Millage<\/em>, Legal Info. Institute<\/span> (Jul. 2020), https:\/\/www.law.cornell.edu\/wex\/millage\/ [https:\/\/perma.cc\/8AB9-5M8T]. This paper will only discuss property taxes on real property. Historically, the property tax was a tax on all wealth: real property, personal property, and even intangible property (like investments). See<\/em> Sacha Dray, Camille Landais & Stefanie Stantcheva, Wealth and Property Taxation in the United States<\/em> 1 (Nat\u2019l Bureau of Econ. Rsch., Working Paper No. 31080, 2023). But during the early twentieth century, the property tax for individuals became largely a tax on real property, or land and improvements. For businesses, however, there are still often taxes on personal and business property, albeit with substantial variation by state and locality with regards to whether such taxes are imposed, what types of property are exempt, and what types of businesses must pay. See<\/em> Garrett Watson, States Should Continue to Reform Taxes on Tangible Personal Property<\/span>, Tax Found., <\/span>3\u20135 (2019); Joan Youngman, A Good Tax: Legal and Policy Issues for the Property Tax in the United States 6<\/span> (2016). <\/span> These determinations about the value of parcels of land and attached improvements are public. That is, under most circumstances, anyone can look up the property value assessment of any property.2<\/a><\/sup>See, e.g.<\/em>, Conn. Gen. Stat.<\/span> \u00a7 12-55 (2023) (mandating that \u201cthe grand list\u201d for each town containing \u201cthe assessed values of all property in the town\u201d be published each year); 53 Pa. Cons. Stat.<\/span> \u00a7 8841(d)(1) (2022) (requiring that the property tax assessment roll shall be \u201copen to public inspection at the county assessment office during ordinary business hours\u201d); Mich. Comp. Laws<\/span> \u00a7 211.10a (2023) (requiring that \u201call property assessment rolls and property appraisal cards shall be available for inspection and copying during the customary business hours\u201d). These databases are almost all searchable online now. For instance, the New Haven property assessor allows anyone to look up the assessed value, the amount of taxes due, and whether those taxes were paid for any property in the city. Tax Bills<\/em>, City of New Haven<\/span> (Last updated Oct. 1, 2024), https:\/\/www.mytaxbill.org\/inet\/bill\/home.do?town=newhaven\/ [https:\/\/perma.cc\/B6Z7-RKUT]. Travis County, Texas likewise makes it possible to look up property tax assessments online. Property Search<\/em>, Travis Cent. Appraisal Dist.<\/span> (2023), https:\/\/traviscad.org\/propertysearch\/ [https:\/\/perma.cc\/AJ3W-CV73]. Boston, Massachusetts provides spreadsheets of all assessments going back to 2004, complete with information about the styles of bathrooms and kitchens, the method of heating, the number of fireplaces, the quality of the view, and whether the property is a corner unit. Property Assessment<\/em>, Analyze Bos.<\/span>, https:\/\/data.boston.gov\/dataset\/property-assessment\/ [https:\/\/perma.cc\/L3JY-8LRT].<\/span> Further, property tax assessments generally are based on the expected market price for property, which, for houses, is usually determined by looking at sales prices of similar properties.3<\/a><\/sup>How assessed value is determined and how other considerations factor in vary a great deal by state and locality. See<\/em> discussion infra <\/em>Part II. <\/span> And actual sales prices for real property are publicly available in recorded deeds.4<\/a><\/sup>Reid K. Weisbord & Stewart E. Sterk, The Commodification of Public Land Records<\/em>, 97 Notre Dame L. Rev.<\/span> 507, 510 (2022) (discussing how easily accessed public land records are now that the information is available without going to county offices). In a few \u201cnon-disclosure\u201d states, this information is not made public, likely harming tax and property market efficiency. See<\/em> Robert P. Berrens & Michael McKee, What Price Nondisclosure? The Effects of Nondisclosure of Real Estate Sales Prices<\/em>, 85 Soc. Sci. Q.<\/span> 509, 518 (2004) (finding preliminary evidence that price disclosure leads to more accurate and less unequal property tax assessments); Candace Taylor, The States Where Home Prices are Secret<\/em>, Wall. St. J.<\/span> (June 19, 2019), https:\/\/www.wsj.com\/articles\/the-states-where-home-prices-are-secret-11560956939\/ [https:\/\/perma.cc\/CNZ2-BH6K] (discussing non-disclosure states).<\/span> This information is not hard to find either. If one looks up a property on popular online real estate websites, like Zillow or Redfin, annual tax assessments are listed alongside the history of sales prices.5<\/a><\/sup>See, e.g.<\/em>, 999 Andante Rd, Santa Barbara, CA 93105<\/em>, Zillow<\/span>, https:\/\/www.zillow.com\/homedetails\/999-Andante-Rd-Santa-Barbara-CA-93105\/15885544_zpid\/ [https:\/\/perma.cc\/6LJD-PNXG] (showing history of annual tax assessments and previous sales for \u201cone-of-a-kind, architecturally magical\u201d whale-shaped house in Santa Barbara, CA, that sold for $2,250,000 in January of 2024). <\/span> In contrast, one cannot go online and see the tax base for other methods of raising revenue; you cannot look on a government website and see how much people earned in income in a given year or what capital gains they received from selling investments.6<\/a><\/sup>This is not true everywhere. For instance, Finland, Sweden, and Norway publish everyone\u2019s tax returns. See<\/em> Patrick Collinson, Norway, the Country Where You Can See Everyone\u2019s Tax Returns<\/em>, The Guardian (<\/span>Apr. 11, 2016)<\/span>, https:\/\/www.theguardian.com\/money\/blog\/2016\/apr\/11\/when-it-comes-to-tax-transparency-norway-leads-the-field [https:\/\/perma.cc\/A6Y3-TGMT]; Katrine Mar\u00e7al, Sweden Shows That Pay Transparency Works<\/em>, Fin. Times (<\/span>July 27, 2017),<\/span> https:\/\/www.ft.com\/content\/2a9274be-72aa-11e7-93ff-99f383b09ff9 [https:\/\/perma.cc\/4NTM-UAXX].<\/span><\/p>\n

If finding a property\u2019s assessed value is easy, actually assessing a property is not.7<\/a><\/sup>See<\/em> Stewart E. Sterk & Mitchell L. Engler, Property Tax Reassessment: Who Needs It<\/em>, 81 Notre Dame L. Rev.<\/span> 1037, 1066\u201373 (2006). <\/span> Property tax assessors must figure out how much a property is \u201cworth\u201d without being able to see any real evidence of what anyone is willing to pay for it, never mind how much it is valued by its owner.8<\/a><\/sup>Most properties are not sold in any given year, nor are bids for properties that are not accepted made public.<\/span> But, in theory, any systematic<\/em> failure in property tax assessment should be easy to see, given how public property tax assessments and sales prices are.9<\/a><\/sup>And when individuals can, and regularly do, challenge their assessments, we might expect any widespread skew in property assessments not to remain for long. Chris Berry, Reassessing the Property Tax<\/em> 19\u201320 (U. Chi. Harris Sch. Pub. Pol\u2019y, Working Paper, 2021) (discussing frequency of property tax assessment challenges).<\/span> So while property assessment is as much art as science, there are powerful tools for checking the quality of assessment for systematic bias. If sunlight is the best disinfectant, there should be few germs in property tax assessment.10<\/a><\/sup>Cf. <\/em>Louis D. Brandeis, Other People’s Money and How the Bankers Use It<\/span> 92 (1914) (\u201cPublicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.\u201d).<\/span><\/p>\n

And yet, in the last few years, a substantial body of empirical research using nation-wide data by Natee Amornsiripanitch, Carlos F. Avenancio-Le\u00f3n and Troup Howard, and Christopher Berry, among others, have shown that property tax assessments for single-family homes and condos are indeed systematically biased.11<\/a><\/sup>Carlos F. Avenancio-Le\u00f3n & Troup Howard, The Assessment Gap: Racial Inequalities in Property Taxation,<\/em> 137 Q. J. Econ.<\/span> 1383, 1431 (2022) (finding systematic evidence of differences in assessment based on the connection between race and neighborhood); Natee Amornsiripanitch, Why Are Residential Property Tax Rates Regressive?<\/em> 2 (Fed. Rsrv. Bank Phila., Working Paper No. 22-02, 2022) (finding large amounts of regressivity in property tax assessment, only 60% of which can be explained with measurement error); Berry, supra<\/em> note 9, at 1 (finding large amounts of regressivity beyond the amount that can be explained with measurement error); Property Tax Fairness From the Center for Municipal Finance: Interactive Reports<\/em>, U. Chi., Harris Sch. Pub. Pol\u2019y<\/span>, https:\/\/propertytaxproject.uchicago.edu\/ [https:\/\/perma.cc\/Q8NK-C4M4] (allowing search of jurisdictions to see extent of assessment regressivity). This is particularly striking because houses should be the easiest type of property to assess. Houses are more similar to one another than, say, commercial or manufacturing property, and they are sold more often. This makes it possible to assess them using the \u201csales comparison\u201d method, where valuation is based on the price at which similar houses actually sold. Elli Pagourtzi, Vassilis Assimakopoulos, Thomas Hatzichristos & Nick French, Real Estate Appraisal: A Review of Valuation Methods<\/em>, 21 J. Prop. Inv. & Fin.<\/span> 383, 386\u201388 (2003) (explaining the sales comparison model and describing it as the most widely used in real estate valuation). <\/span> Their remarkable work builds on an existing body of studies on individual jurisdictions which largely finds the same thing.12<\/a><\/sup>See, e.g.<\/em>, Daniel McMillen & Ruchi Singh, Assessment Regressivity and Property Taxation<\/em>, 60 J. Real Est. Fin. Econ. <\/span>155, 168 (2020) (finding assessment regressivity in Baltimore, Cleveland, Denver, and Philadelphia); N.Y.C. Advisory Comm\u2019n On Prop. Tax Reform, Preliminary Report <\/span>46 (2020) (finding assessment regressivity in New York City); Daniel P. McMillen, The Effect of Appeals on Assessment Ratio Distributions: Some Nonparametric Approaches<\/em>, 41 Real Est. Econ.<\/span> 165, 185\u201388 (2013) (finding over-assessment among low-value properties in Chicago, but showing that this may be influenced by a few very large over-assessments); Justin M. Ross, Interjurisdictional Determinants of Property Assessment Regressivity<\/em>, 88 Land Econ.<\/span> 28, 40 (2012) (finding jurisdictional traits that correlate with assessment regressivity in Virginia); Olha Krupa, An Analysis of Indiana Property Tax Reform: Equity and Cost Considerations<\/em>, 104 Ann. Conf. Tax, Nat\u2019l Tax Ass\u2019n<\/span> 160, 166 (2011) (finding a reduction in assessment regressivity in Indiana following a policy change); Daniel P. McMillen & Rachel N. Weber, Thin Markets and Property Tax Inequities: A Multinomial Logit Approach<\/em>, 61 Nat\u2019l Tax J.<\/span> 653, 653 (2008) (finding property tax assessment regressivity in Chicago); Keith R. Ihlanfeldt, Property Tax Incidence on Owner-Occupied Housing: Evidence from the Annual Housing Survey<\/em>, 35 Nat\u2019l Tax J<\/span>. 89, 95\u201396 (1982) (finding property tax assessment regressivity in Atlanta and Philadelphia); Robert F. Engle, De Facto Discrimination in Residential Assessments: Boston<\/em>, 28 Nat\u2019l Tax J. <\/span>445, 445 (1975) (finding property tax assessment regressivity in Boston); Earl D. Benson & Arthur L. Schwartz, Jr., An Examination of Vertical Equity Over Two Reassessment Cycles<\/em>, 19 J. Real Est. Rsch. 255, 271<\/span> (2000) (finding property tax assessment regressivity across two assessment cycles in King County, Washington, although less in the second cycle); Morton Paglin & Michael Fogarty, Equity and the Property Tax: A New Conceptual Focus<\/em>, 35 Nat\u2019l Tax J. 557, 563<\/span> (1972) (finding regressivity in assessments in Multnomah County, Oregon). But see<\/em> Daniel P. McMillen & Ruchi Singh, Measures of Vertical Inequality in Assessments <\/em>17\u201324 (Lincoln Inst. of Land Pol\u2019y, Working Paper No. WP22DM1, 2022) (studying assessments in Indianapolis, Birmingham, St. Louis, and Tucson, but only finding consistent evidence of regressivity in Birmingham and St. Louis); Brent C. Smith, Mark A. Sunderman & John W. Birch, Sources of Variation in County Property Tax Inequities<\/em>, 15 J. Pub. Budgeting, Acct. & Fin. Mgmt.<\/span> 571, 572 (2003) (finding evidence of progressivity in assessments in Indiana); Levis A. Kochin & Richard W. Parks, Vertical Equity in Real Estate Assessment: A Fair Appraisal<\/em>, 20 Econ. Inquiry<\/span> 511, 531 (1982) (finding no assessment regressivity in King County, Washington after correcting for measurement error).<\/span> In almost all jurisdictions for which data is available, relatively expensive properties are under-assessed relative to the prices for which they are actually sold, and relatively inexpensive properties are over-assessed. Further, properties owned by racial minorities are systematically over-assessed.13<\/a><\/sup>See<\/em> Avenancio-Le\u00f3n & Howard, supra<\/em> note 11, at 1384\u201385; Michael Neal Sarah Strochak, Linna Zhu & Caitlin Young, Urb. Inst., How Automated Valuation Models Can Disproportionately Affect Majority-Black Neighborhoods 10<\/span> (2020) (finding that the percentage difference between actual sales values and what valuation models predict those sales values to be is greater in majority-Black neighborhoods compared to majority-white neighborhoods in Atlanta, Memphis, and Washington, D.C.); Keith Ihlanfeldt & Luke P. Rodgers, Explaining Racial Gaps in Property Assessment and Property Taxation<\/em> 3 (Working Paper, 2021) (documenting over-assessment of Black, Hispanic, and Asian homeowners relative to white homeowners in Florida).<\/span><\/p>\n

Some of these misvaluations result from intentional policy choices, like California\u2019s Proposition 13, which requires properties to be assessed at no more than their last sale price plus a small annual increase unless the property has been redeveloped, leading to under-assessment for properties that are held while they increase in value.14<\/a><\/sup>Marc Taylor, Cal. Legis. Analyst\u2019s Off., Common Claims About Proposition 13<\/span>, 1\u20133 (2016), https:\/\/lao.ca.gov\/publications\/report\/3497 [https:\/\/perma.cc\/7HLW-4KEW] (explaining how Proposition 13 and related property tax changes work, and describing the resulting undervaluation of valuable properties); see also<\/em> Andrew T. Hayashi, Property Taxes and Their Limits: Evidence from New York City<\/em>, 25 Stan. L. & Pol\u2019y Rev. 33, 48<\/span> (2014). Interestingly, some studies find that racial assessment gaps are lower in jurisdictions with assessment caps or acquisition price assessment, as doing so removes substantial amounts of discretion from the system. See, e.g.<\/em>, Avenancio-Le\u00f3n & Howard, supra<\/em> note 11, at 29.<\/span> But what\u2019s remarkable about the recent research is that the under-assessment of expensive properties, and the over-assessment of inexpensive ones, occurs almost everywhere, regardless of the jurisdiction\u2019s explicit policy choices.15<\/a><\/sup>Berry, supra<\/em> note 9, at 5. <\/span> The research is also clear that this is a real phenomenon, not merely a result of a measurement error.16<\/a><\/sup>That is not to say, however, that measurement error is not at all a factor. See<\/em> Amornsiripanitch, supra<\/em> note 11, at 1 (finding that sixty percent of total misvaluation is due to measurement error); Berry, supra<\/em> note 9, at 1 (finding that measurement error is possible but cannot explain the effect). <\/span> Let\u2019s give it a name: Property Tax Assessment Regressivity (PTAR).17<\/a><\/sup>By calling it \u201cregressive\u201d I do not mean to imply that all less expensive properties are over-assessed, or that all more expensive properties are under-assessed. Instead, PTAR means that on average<\/em> less expensive properties are over-assessed, or that all more expensive properties are under-assessed. <\/span><\/p>\n

The magnitudes are not small. Berry finds that, on average, homes in the bottom decile of prices\u2014i.e., the cheapest ten percent of houses\u2014face an effective tax rate that is more than double what homes in the top decile pay in the same jurisdiction.18<\/a><\/sup>Berry, supra<\/em> note 9, at 1; see also<\/em> Amornsiripanitch, supra<\/em> note 11, at 1 (finding that owners of inexpensive houses pay almost fifty percent higher effective tax rates than the owners of expensive houses).<\/span> In some jurisdictions, the effect is enormous; in Detroit in 2017, for example, the average home in the bottom decile was assessed at three times its actual market value.19<\/a><\/sup>Berry, supra<\/em> note 9, at 9.<\/span> Amornsiripanitch shows that simple improvements in assessment accuracy could increase the net wealth of poor homeowners by ten percent.20<\/a><\/sup>Amornsiripanitch, supra<\/em> note 11, at 1.<\/span> In some places, PTAR may even be unconstitutional under state constitutional \u201cuniformity\u201d clauses and other provisions.21<\/a><\/sup>See<\/em> Bernadette Atuahene & Christopher Berry, Taxed Out: Illegal Property Tax Assessments and the Epidemic of Tax Foreclosures in Detroit<\/em>, 9 U.C. Irvine L. Rev.<\/span> 847, 856\u201369 (2019); Bernadette Atuahene & Timothy R. Hodge, Stategraft<\/em>, 91 S. Cal. L. Rev.<\/span> 263, 266 (2018).<\/span><\/p>\n

These are a remarkable set of findings. It shows conclusively that the central method local governments have for raising tax revenue is, virtually everywhere in the country, premised on a consistent mistake: a finding that the rich are not as rich as they actually are and that poorer homeowners and racial minorities are far wealthier than they actually are.<\/p>\n

This research has unsurprisingly garnered substantial attention. Berry\u2019s findings were featured in a huge and eye-opening investigation in the New York Times<\/em>.22<\/a><\/sup>Editorial Board, How Lower-Income Americans Get Cheated on Property Taxes<\/em>, N.Y. Times<\/span> (Apr. 3, 2021), https:\/\/www.nytimes.com\/2021\/04\/03\/opinion\/sunday\/property-taxes-housing-assessment-inequality.html [https:\/\/perma.cc\/X2ET-VYSW] (\u201cAmericans expect to pay property taxes at the same rates as their neighbors. But across most of the United States, flat-rate property taxation is a sham.\u201d).<\/span> In Chicago, Berry produced an improved model for property tax assessment that the then-longtime Cook County Assessor opted not to use,23<\/a><\/sup>Susie Allen, Value Judgment<\/em>, U. Chi. Mag., <\/span>Summer 2018, at 14\u201315. <\/span> leading to a Pulitzer Prize-nominated series in The Chicago Tribune24<\/a><\/sup>See<\/em> Jason Grotto, The Tax Divide<\/em>, Chi. Trib. (<\/span>Jun. 10, 2017); Finalist: Jason Grotto, Sandhya Kambhampati and Ray Long of Chicago Tribune and ProPublica Illinois<\/em>, The Pulitzer Prizes<\/span> (2018), https:\/\/www.pulitzer.org\/finalists\/jason-grotto-sandhya-kambhampati-and-ray-long-chicago-tribune-and-propublica-illinois [https:\/\/perma.cc\/H6J2-MPEZ].<\/span><\/em> and the assessor ultimately losing reelection.25<\/a><\/sup>See <\/em>Jason Grotto, Cook County Assessor Joe Berrios\u2019 Defeat Opens the Door to Reform<\/em>, ProPublica<\/span> (Mar. 22, 2018), https:\/\/www.propublica.org\/article\/cook-county-assessor-reform-challenges-fritz-kaegi [http:\/\/perma.cc\/L9QK-6ZD9].<\/span><\/p>\n

The literature has not quite nailed down why we see these patterns in property valuation. Factors like slow reappraisal processes and variation in how frequently different types of homeowners challenge their assessments seem to matter but do not explain the full extent of PTAR.26<\/a><\/sup>See <\/em>Amornsiripanitch, supra<\/em> note 11, at 1 (suggesting slow reappraisal process has substantial explanatory force); Berry, supra<\/em> note 9, at 6 (finding differential rates of assessment challenges have some explanatory force). <\/span> Regressivity could stem from the fact that assessors often lack information about the true physical status of a property, such as how nice the finishings are or the regularity of maintenance.27<\/a><\/sup>See<\/em> Berry, supra<\/em> note 9, at 6.<\/span> Further, assessors often underrate differences in property value by block or small neighborhood, with geography taken into account using broad \u201czones\u201d that do not capture the important ways in which location drives property values.28<\/a><\/sup>Id.<\/em> <\/span> Some evidence points to the difficulty of assessing the effects of location as a particularly important factor.29<\/a><\/sup>See infra<\/em> note 45 and accompanying text.<\/span><\/p>\n

Just as exact causes of regressivity are yet to be fully explained, the full implications of PTAR have not yet been explored either. This Article will show that there are four major implications of PTAR. First<\/em>, it is not perfectly clear that regressivity in assessments leads to substantially worse outcomes for the less well-off, or at least for today\u2019s less well-off.30<\/a><\/sup>Specifically, these are owners of less valuable property. That is a distinct population from the \u201cless well-off\u201d if we mean the bottom of the wealth distribution. Owners of property are not generally the truly poor\u2014they own property\u2014although they can be heavily indebted. <\/span> PTAR very likely causes worse outcomes for the less well-off to some degree, but it is not clear how much.31<\/a><\/sup>For a brief discussion of this, see<\/em> Berry, supra<\/em> note 9, at 23.<\/span> The reason is that property taxes are substantially \u201ccapitalized\u201d into housing prices\u2014properties with lower taxes are worth more; properties with higher taxes are worth less.32<\/a><\/sup>See <\/em>G. Stacy Sirmans, Dean H. Gatzlaff & David A. Macpherson, The History of Property Tax Capitalization in Real Estate<\/em>, 16 J. Real Est. Literature<\/span> 327, 334\u201335 (2008) (literature review finding that the most typical empirical result has been partial capitalization); Keith Dowding, Peter John & Stephen Biggs, Tiebout: A Survey of the Empirical Literature<\/em>, 31 Urb. Stud.<\/span> 767, 775 (1994) (reviewing literature and finding that full capitalization is likely). See generally<\/em> George R. Zodrow, The Property Tax as a Capital Tax: A Room with Three Views<\/em>, 54 Nat\u2019l Tax J.<\/span> 139 (2001) (reviewing capitalization literature). <\/span> As a result, when property was first under-valued by assessors, it gave owners of the property at that time a one-time wealth increase\u2014they not only had to pay less than they should have in taxes, but they also became able to sell their property for more (and the same is true in reverse for inexpensive properties that were over-valued by assessors). But all subsequent buyers acquired their property based on the over (under) valuation and thus were not made better (worse) off by it, at least to the extent that the effect is fully capitalized into the sales price.<\/p>\n

Thus, the effect on today\u2019s homeowners will depend on when PTAR set in, when they bought their property, the extent of capitalization, and trends in relative property values inside jurisdictions.<\/p>\n

Second<\/em>, PTAR makes the property tax more like a flat head tax. Over the last fifty years, scholars have wrestled with whether property taxes can be understood as a \u201cbenefits tax.\u201d33<\/a><\/sup>See<\/em> infra<\/em> note 129 and accompanying text. <\/span> The \u201cbenefits tax\u201d argument is that property taxes are best understood as a charge for local public services.34<\/a><\/sup>See infra<\/em> notes 134\u2013142 and accompanying text. <\/span> Just as parents can pay for their kids to attend private schools and shopping malls can pay for private security, homeowners pay property taxes as part of the price of living in jurisdictions where their kids attend particular public schools and where they receive particular types of police protection. Under this view, the property tax is an extremely efficient tax, but not a progressive one.35<\/a><\/sup>Id. <\/em><\/span> Unlike other taxes, people are choosing to pay it by buying property in a particular town because they think they are getting good value in services for their tax dollars.<\/p>\n

Central to this argument, though, is the claim that local governments use zoning and other land use tools to keep housing prices (and thus the taxes paid per resident) relatively consistent across the jurisdiction.36<\/a><\/sup>See generally<\/em> Bruce W. Hamilton, Zoning and Property Taxation in a System of Local Governments<\/em>, 12 Urb. Stud.<\/span> 205 (1975). <\/span> If a local government allows lots of dense new housing to be built, the argument goes, it cannot keep the average property tax paid per resident from falling.37<\/a><\/sup>See, e.g.<\/em>, Bruce Hamilton, Capitalization of Intrajurisdictional Differences in Local Tax Prices<\/em>, 66 American Econ. Rev.<\/span> 743, 748 (1976). <\/span> If cheaper new housing gets built but services are provided to all residents on an equal basis, property taxes will end up redistributing wealth from long-term residents in expensive houses to newcomers in cheaper ones. Under this view, zoning to limit new housing turns the property tax into something like a per capita \u201chead tax.\u201d Everyone has similar property values and thus pays similar amounts in property tax to buy a package of local governmental services.38<\/a><\/sup>Id. <\/em>at 749.<\/span><\/p>\n

A problem for the benefits tax view is that, while zoning policies can be very strict, they are usually not so strict as to rule out any change in per capita housing prices in a jurisdiction.39<\/a><\/sup>See<\/em> infra <\/em>notes 151\u2013153 and accompanying text.<\/span> Critics have argued that this means property taxes are not best understood as benefits taxes.40<\/a><\/sup>See, e.g.<\/em>, George R. Zodrow & Peter M. Mieszkowski, The New View of the Property Tax: A Reformulation<\/em>, 16 Reg. Sci. & Urb. Econ.<\/span> 309, 310\u201311 (1986).<\/span> But PTAR helps \u201cfix\u201d this problem. If local governments can simply declare that inexpensive properties are worth more for tax purposes than they actually are and that expensive properties are worth less for tax purposes than they actually are, property taxes become more like a head tax even if cheaper new housing is built. That is, if property taxes do not really depend on property values (or rather depend on them less), the property tax moves in the direction of being a \u201cbenefits tax,\u201d a flat charge for services.<\/p>\n

Third<\/em>, PTAR could theoretically make the property tax more \u201cGeorgist,\u201d but it probably does the opposite in reality. An older understanding of the property tax than either the benefits tax or the capital tax view is that the property tax combines two separate taxes: a good, efficient, and progressive \u201cGeorgist\u201d tax on the value of land, with a bad, inefficient, and regressive tax on \u201cimprovements.\u201d41<\/a><\/sup>Joan Youngman, A Good Tax: Legal and Policy Issues for the Property Tax in the United States<\/span> 7\u20138 (2016); Dick<\/span> Netzer<\/span>, The<\/span> Economics<\/span> of the<\/span> Property<\/span> Tax<\/span> (1966). People call this Georgist after Henry George\u2019s proposal that a \u201csingle\u201d tax on land values should replace all taxes. See<\/em> Annika Neklason, The 140-Year-Old Dream of Government Without Taxation<\/em>, The Atlantic<\/span> (Apr. 15, 2019), https:\/\/www.theatlantic.com\/national\/archive\/2019\/04\/henry-georges-single-tax-could-combat-inequality\/587197\/ [https:\/\/perma.cc\/A69V-SUUN] (describing George\u2019s \u201csingle tax\u201d proposal and arguing that such a tax could be a beneficial reform today). <\/span> Taxes on the value of land are efficient; they get capitalized into the value of the land but do not discourage the creation of land as the amount of land is fixed. Taxes on the value of land are also progressive because richer people own most land. On the other hand, taxes on improvements, or things built on land like houses, are regressive, as the poor spend a greater percentage of their income on housing. Taxes on improvements are also inefficient, as they reduce the production of new housing. The property tax as it exists in the United States is both a tax on land and a tax on improvements and thus has good and bad elements.<\/p>\n

If PTAR was caused by a failure of assessors to consider the increased value generated by improvements, it would make the property tax more Georgist. But the empirical literature suggests that PTAR might be driven more by underrating how much the value of a property depends on its neighborhood and block. The tools assessors use to control for neighborhood are too crude to capture block-to-block differences in access to amenities and social meaning that have a huge effect on actual prices.42<\/a><\/sup>See <\/em>Avenancio-Le\u00f3n & Howard, supra<\/em> note 11, at 1384\u201385 (finding substantial evidence for neighborhood-level factors explaining racial assessment gaps and none for property-level factors); Amornsiripanitch, supra<\/em> note 11, at 1 (suggesting neighborhood effects play a large role in PTAR). <\/span> To the extent this is correct, PTAR as it exists likely makes the property tax less Georgist.<\/p>\n

Fourth<\/em>, PTAR removes part of what one might call the \u201cinsurance\u201d value of the property tax. It has long been a goal of policymakers to create a kind of property value or \u201chome equity\u201d insurance.43<\/a><\/sup>See infra<\/em> notes 194, 198\u2013201 and accompanying text.<\/span> Federal policy encourages home ownership in part to encourage savings. But owning and living in a home is a very strange kind of investment. For most homeowners, the majority of their wealth is tied up in the value of their home.44<\/a><\/sup>See<\/em> Matteo Iacoviello, Housing Wealth and Consumption<\/em> 1 (Fed. Rsrv. Bd., Int\u2019l Fin. Discussion Papers, No. 1027, Aug. 2011) (finding that housing wealth accounts for almost two thirds of the total wealth of the median household). <\/span> This is exactly the opposite of the type of diversification that protects investors against the risk that any one asset loses value. But, despite many efforts, markets have not been able to provide much in the way of this form of insurance.45<\/a><\/sup>See, e.g.<\/em>, Frank J. Fabozzi, Robert J. Shiller & Radu S. Tunaru, A 30-Year Perspective on Property Derivatives: What Can Be Done to Tame Property Price Risk?<\/em>, 34 J. Econ. Persp.<\/span> 121, 132\u201336 (2020). The absence of insurance has been linked to opposition to development and even to concerns about the identity of new neighbors, as changes in who resides nearby create variance in housing values and people do not want to see unnecessary variance in an asset that constitutes all of their wealth. See<\/em> William Fischel, The Homevoter Hypothesis 260\u201389<\/span> (2005) (linking a lack of insurance to NIMBYism). See generally<\/em> Robert J. Shiller & Allan N. Weiss, Home Equity Insurance<\/em>, 19 J. Real Est. Fin. & Econ.<\/span> 21, 32\u201333 (1999) (discussing how Oak Park, IL created a public form of home value insurance to reassure residents that their houses would not lose value during a period of increasing racial integration). <\/span><\/p>\n

Property taxes hypothetically provide something like property value insurance under some limited circumstances (something this Article is the first to identify, as far as I know). If property values and property assessments go down, tax liabilities go down too; if they go up, then taxes go up. This could be the case even despite limitations on the insurance value of taxes more broadly. As Evsey Domar and Richard Musgrave famously argued, for example, the insurance value of taxes is often defeated by investors who respond to taxes by deciding to make bigger bets (and thus cancel out the value of the insurance).46<\/a><\/sup>Evsey D. Domar & Richard A. Musgrave, Proportional Income Taxation and Risk-Taking<\/em>, 58 Q. J. Econ.<\/span> 388, 389\u201391 (1944). <\/span> But the housing market likely does not provide enough options to allow homeowners to take riskier bets to fully cancel out the insurance value of property taxes, nor are most homeowners likely to employ the options that are available.47<\/a><\/sup>See<\/em> Daniel Hemel, Taxing Wealth in an Uncertain World<\/em>, 72 Nat\u2019l Tax J.<\/span> 755, 763 (2019). <\/span><\/p>\n

That said, in places where the prices of all properties are heavily correlated (think a small suburb), property taxes would not provide insurance. The reason is that if all property prices in town fall, the local government will have to raise taxes to keep services up, nullifying the tax cut the owner of the property falling in value would otherwise receive.48<\/a><\/sup>See, e.g.<\/em>, Byron Lutz, Raven Molloy & Hui Shan, The Housing Crisis and State and Local Government Tax Revenue: Five Channels<\/em>, 41 Reg\u2019l Sci. & Urb. Econ. <\/span>306, 307 (2011). <\/span><\/p>\n

Thus, property taxes can provide some insurance against changes in property value among properties inside a single jurisdiction. But property taxes only provide insurance if property assessments track directional trends in property prices. PTAR means that this is not true or is at least less true than it would be if property tax assessments accurately tracked market property values. As a result, PTAR reduces the insurance benefits of the property tax.<\/p>\n

What follows from these points? Fixing PTAR would be costly\u2014it would require greater investigation into both individual properties and the economic value of location, more sophisticated modeling, a more well-resourced appeals process, and more frequent reassessments. But it seems possible, particularly as technology improves. Should governments devote the resources to do so?<\/p>\n

For a tax policy premised on a fiction that the rich are less rich than they actually are, and that the less well-off are richer than they actually are, the answer is surprisingly mixed. PTAR is unfair, sometimes unconstitutional, likely quite regressive, and a barrier to the achievement of property value insurance. But getting rid of it would come with some substantial policy risks. To ensure that fixing PTAR provides very substantial benefits, more accurate assessment practices should be paired with other policy changes. Namely, state governments should both locate more property tax collection in bigger taxing jurisdictions and pass very substantial limitations on local zoning authority.<\/p>\n

To start, because the change in taxes would be capitalized into home values, eliminating PTAR would constitute a substantial one-time wealth transfer from richer homeowners to less rich ones. But it would be a strange form of redistribution. It would only redistribute the responsibility for funding government among residents of the same local jurisdiction, meaning that in most cases it would not cause resources to transfer from the rich to the poor. It would only have any substantial effect in jurisdictions with diverse types of residential property, which is to say mostly big jurisdictions like cities and large school districts.49<\/a><\/sup>See <\/em>Tracy Hadden Loh, Joanne Kim & Jennifer S. Vey, Diverse Neighborhoods Are Made of Diverse Housing<\/em>, Brookings Inst.<\/span> (Feb. 8, 2022) (finding that \u201ccity neighborhoods tend to have more diverse housing inventory than suburban and rural areas\u201d), https:\/\/www.brookings.edu\/articles\/diverse-neighborhoods-are-made-of-diverse-housing\/ [https:\/\/perma.cc\/R4XR-D9A4]. <\/span> And it would not transfer resources to the truly poor, only to less well-off property owners.50<\/a><\/sup>Notably, the first order effect would not include the poor, who are less likely to own property. Rental buildings are generally assessed as commercial property. While there can be assessment problems with commercial property as well, papers in the literature generally do not include any analysis of rental buildings. <\/span><\/p>\n

Fixing PTAR would help make property taxes into a better form of property value insurance. Improving property value insurance would create real benefits for the huge number of people who have most of their wealth tied up in a single asset: their home. That said, this benefit would only happen inside very large jurisdictions where property prices are less correlated with one another.<\/p>\n

The major downside of ending PTAR concerns its interaction with land use policy. As noted above, PTAR makes the property tax into more of a benefits tax. Many people seem to want to avoid having their local taxes redistributed to others\u2014this is one of the major benefits of moving to an exclusive suburb. The most straightforward way for rich residents to ensure that their local government is not redistributing their tax dollars to poorer residents is simply to refuse to allow poorer people to move in at all. Using zoning to stop the construction of denser and cheaper housing can keep the average price of housing per resident consistent, thus avoiding redistribution. PTAR is a way around this. By basing taxes on a fiction that the values of property are more similar than they actually are, jurisdictions avoid engaging in redistribution from existing residents even if new construction of denser housing leads to a decline in per capita property values. Removing this fiction would create greater pressure among residents inclined to stop redistribution to do so the old-fashioned way\u2014by keeping poorer people out of the jurisdiction entirely. The costs of limiting housing construction on the broader economy are extremely large.51<\/a><\/sup>See<\/em> David Schleicher, Exclusionary Zoning\u2019s Confused Defenders<\/em>, 2021 Wis. L. Rev<\/span>. 1316, 1323\u201333 (2021) (summarizing a substantial academic literature describing these large costs). <\/span> So too are the costs of residential segregation by income.52<\/a><\/sup>See<\/em> Richard D. Kahlenberg, Excluded: How Snob Zoning, Nimbyism, and Class Bias Built the Walls We Don\u2019t See<\/span> 67\u2013121 (2023) (discussing the costs of economic segregation).<\/span> One may wish this were not the case\u2014I wish it were not the case!\u2014but if ending PTAR means more NIMBYism, less housing construction, and more segregation, it might be very harmful.<\/p>\n

To ensure that ending PTAR creates large benefits and does not generate too many unintended harms, states would need to pass laws concurrent with PTAR reform. States would need to reorganize their local governmental systems to give more taxing authority to bigger jurisdictions, like counties. Doing so would increase the insurance value of property taxes by reducing the correlation in price between the properties taxed. Further, state governments should also seek greater control over local land use policy, passing laws that limit the ability of jurisdictions to exclude using zoning and other tools.<\/p>\n

This leads to a larger and final point. The property tax is often seen as the ideal tax for local governments.53<\/a><\/sup>See, e.g.<\/em>, Youngman, <\/span>supra <\/em>note 1, at 1\u201315; Edward A. Zelinsky, The Once and Future Property Tax: A Dialogue with My Younger Self<\/em>, 23 Cardozo L. Rev.<\/span> 2199, 2217\u201319 (2002).<\/span> Having small local governments tax income or sales creates concerns that the tax base will flee. But that can\u2019t happen for land\u2014land stays put. Further, taxing land provides incentives for local governments to do a good job, as better services increase the value of property which increases revenue, in turn giving homeowners a reason to be involved in local politics.54<\/a><\/sup>See<\/em> William Fischel, The Homevoter Hypothesis<\/span> 5\u20136 (2005). <\/span><\/p>\n

There have long been critics of giving small local governments the power to tax property values. For instance, proponents of what is known as the \u201ccapital tax\u201d view argue that property tax rate differentials between jurisdictions inefficiently bias where investment is located.55<\/a><\/sup>See infra<\/em> notes 129\u2013133 and accompanying text.<\/span> But looking at the property tax through the lens of PTAR provides another line of critique. The things local governments do to make the property tax \u201cwork\u201d\u2014either barring new housing construction and\/or making the assessment system biased against people who own less valuable houses\u2014suggests that the property tax may not be as great a fit for local governments as is usually assumed. Understood through this lens, property taxes are not an exception to the problem of taxation by small local governments. Rather, property taxes are simply the flawed local tax we have grown used to, molded in ways that have harmed both our housing markets and basic concepts of fairness.<\/p>\n

II. The Property Tax and Property Tax Assessment Regressivity<\/span><\/p>\n

Paying property taxes is one of the most universal experiences in American life. Roughly 66% of people live in owner-occupied housing.56<\/a><\/sup>Richard Fry, Amid a Pandemic and a Recession, Americans Go on a Near-Record Homebuying Spree<\/em>, Pew Rsch. Ctr. <\/span>(Mar. 8, 2021), https:\/\/www.pewresearch.org\/short-reads\/2021\/03\/08\/amid-a-pandemic-and-a-recession-americans-go-on-a-near-record-homebuying-spree\/ [https:\/\/perma.cc\/W2ZQ-B8SP]. <\/span> All of those households, one way or another, pay property taxes directly.57<\/a><\/sup>Renters bear some of the incidence of property taxes. See, e.g.<\/em>, Leah J. Tsoodle & Tracy M. Turner, Property Taxes and Residential Rents<\/em>, 36 Real Est. Econ<\/span>. 63, 78 (2008) (finding that \u201ca one standard deviation increase in the property tax rates raises residential rents by between $402 and $450 annually\u201d).<\/span> Further, the services paid for by property taxes\u2014public schools, local roads, police, fire, sanitation, and so on\u2014are extremely tangible manifestations of the role of government in the lives of most people.58<\/a><\/sup>See<\/em> Youngman<\/span>, supra <\/em>note 1, at 27.<\/span><\/p>\n

That said, property taxes in America have changed a huge amount over time. For much of American history, property taxes were general wealth taxes assessed on all property\u2014real property, personal property, and even intangible assets like investments.59<\/a><\/sup>Dray, Landais & Stantcheva, <\/strong>supra<\/em> note 1, at 1. <\/span> For businesses, there can still be substantial property taxes on personal property depending on the state and locality.60<\/a><\/sup>See<\/em> Watson, <\/span>supra <\/em>note 1, at 3\u20135; Youngman, <\/span>supra <\/em>note 1, at 5\u00ac\u20136.<\/span> But, for individuals, the property tax today is largely a tax on the value of real property.61<\/a><\/sup>See <\/em>Dray, Landais & Stantcheva, supra <\/em>note 1, at 1.<\/span> Real property as a tax base covers two theoretically distinct assets\u2014land and improvements (or buildings).62<\/a><\/sup>See supra <\/em>note 41 and accompanying text.<\/span> And, importantly, this property tax is ad valorem<\/em>, or based on the value of property as an asset, and not, at least in the first instance, based on the income or cash on hand of a taxpayer.63<\/a><\/sup>Youngman<\/span>, supra <\/em>note 1, at 35. <\/span><\/p>\n

To see how PTAR works, it is useful to lay out a simple, and concededly somewhat stylized, model of property taxation. The first step of property taxation is \u201cassessment,\u201d which is an effort to determine the value of a given piece of property. States differ in which entities assess properties, with assessments being conducted by states, counties, cities, townships, or some combination of the four.64<\/a><\/sup>See <\/em>Steven V. Melnik & David S. Cenedella, Real Property Taxation and Assessment Processes: A Case for a Better Model<\/em>, 12 N.Y.U. J. Legis. & Pub. Pol\u2019y<\/span> 259, 270\u201372 (2009).<\/span> For example, there are nearly 1,800 different entities that assess property values in North Dakota and nearly 1,900 in Wisconsin, while property assessment is entirely in the hands of the state government in Maryland, the only state to do so.65<\/a><\/sup>Id.<\/em> at 262 n.10, 317. See also<\/em> Property Tax<\/em>, Comptroller of Md.<\/span>, https:\/\/www.marylandtaxes.gov\/individual\/property\/index.php [https:\/\/perma.cc\/6ZXQ-J67J]. Tax assessors are frequently elected officials. Shayak Sarkar & Josh Rosenthal, Exclusionary Taxation<\/em>, 53 Harv. C.R.-C.L. L. Rev. <\/span>619, 628 n.40 (2018) (noting that assessors are elected in 30 states, but there is sometimes variation in the method of appointment within states). <\/span> States also frequently oversee the assessment process, a process known as \u201cequalization,\u201d but the extent of this oversight varies substantially.66<\/a><\/sup>See <\/em>Melnik & Cenedella, supra<\/em> note 64, at 272\u201373. <\/span> Importantly, the frequency of reassessment varies very substantially. In some places, there is a reassessment every few years, while in others there has not been a reassessment since the 1960s.67<\/a><\/sup>See <\/em>Sterk & Engler, supra<\/em> note 7, at 1041\u201344. Compare<\/em> Tex. Tax Code<\/span> \u00a7 25.18 (2023) (requiring all appraisal offices to reassess all properties at least once every three years), with<\/em> Tax Assessment<\/em>, Franklin Cnty., Pa.<\/span>, https:\/\/www.franklincountypa.gov\/index.php?section=taxes_tax-assessment_frequently-asked-questions [https:\/\/perma.cc\/WZC5-PAES] (\u201cThe last County-wide reassessment went into effect [sic] for 1961.\u201d).<\/span><\/p>\n

Assessment is famously difficult.68<\/a><\/sup>See <\/em>Sterk & Engler, supra<\/em> note 7, at 1066\u201373. <\/span> Unlike stocks or bonds, properties are all different from one another. Moreover, most properties are not bought and sold in a given year (or even in several years),69<\/a><\/sup>See Quick Real Estate Statistics<\/em>, Nat\u2019l Ass\u2019n of Realtors<\/span> (Jul. 12, 2023), https:\/\/www.nar.realtor\/research-and-statistics\/quick-real-estate-statistics [https:\/\/perma.cc\/JJ23-VRJX] (noting that, in 2023, the typical home seller had been in their home for ten years).<\/span> and thus do not have a real market price.<\/p>\n

Assessors have different methods for nonetheless attempting to determine the value of different types of property.70<\/a><\/sup>See <\/em>Int\u2019l Ass\u2019n Assessing Officers, Standard on Mass Appraisal of Real Property <\/span>6\u20139 (July 2017). <\/span> For instance, assessors often look at the cost of construction for industrial properties and the income the property generates for commercial properties.71<\/a><\/sup>See id.<\/em> at 8\u20139.<\/span> But for existing residential properties, assessments are most frequently based on the \u201csales comparison approach.\u201d72<\/a><\/sup>Id.<\/em> at 7.<\/span> That is, assessors use the actual sale prices of similar houses to determine the likely price of a given house.73<\/a><\/sup>See id.<\/em><\/span> This used to be an extremely bespoke process, but now it is largely based on complicated regression analyses.74<\/a><\/sup>See<\/em> Neal et al<\/span>., supra <\/em>note 13, at 1\u20132. <\/span><\/p>\n

While state constitutions generally require \u201cuniform\u201d taxation within particular \u201cclasses\u201d of property, different assessment policies can apply to different classes of property.75<\/a><\/sup>Youngman<\/span>, supra <\/em>note 1, at 91\u2013103. New York City has four classes of property that it taxes at different rates and using different \u201cassessment ratios,\u201d or fractions of total property value that are subject to tax. N.Y.C. Dept. of Fin<\/span>., Calculating Your Property Taxes<\/em>, <\/span>https:\/www.nyc.gov\/site\/finance\/property\/calculating-your-property-taxes.page [https:\/\/perma.cc\/XC5N-N75M]. Cook County, Illinois, which includes Chicago, has fifteen different classes of property. See <\/em>Youngman<\/span>, supra <\/em>note 1, at 91. <\/span> For instance, properties used for agriculture are generally taxed according to their \u201cvalue in use\u201d rather than their highest value use.76<\/a><\/sup>See<\/em> Youngman<\/span>, supra <\/em>note 1, at 134\u201336.<\/span> For agricultural property, that generally means that properties are assessed based on their value as farms, rather than what someone would pay for the property in order to subdivide it and build housing on it.77<\/a><\/sup>See id.<\/em> at 134.<\/span> Jurisdictions will sometimes also apply different tax rates to different classes of property as well.<\/p>\n

Once a property is assessed, a property owner can appeal the assessment of their property. In most places, property owners have a right to discuss their assessment with the assessor\u2019s office, and if this is unsuccessful in changing their assessment, a right to file an appeal with an administrative agency.78<\/a><\/sup>See <\/em>William M. Doerner & Keith R. Ihlanfeldt, An Empirical Analysis of the Property Tax Appeals Process<\/em>, 11 J. Prop. Tax Assessment & Admin.<\/span> 5, 5\u20137 (2014).<\/span> And appeal they do. In Cook County, Illinois, for example, about twenty percent of all property owners challenged their assessments.79<\/a><\/sup>Robert Ross, U. Chi. Harris Pub. Pol\u2019y Ctr. Mun. Fin., The Impact of Property Tax Appeals on Vertical Equity in Cook County, IL<\/span> 1 (2017), https:\/\/harris.uchicago.edu\/files\/inline-files\/Ross%20-%20Vertical%20Equity%20in%20Cook%20County%20-%20CMF%20-%20Final.pdf [https:\/perma.cc\/8JR9-4QK8]. To be fair, Cook County is a bit of an outlier. See <\/em>Berry, supra<\/em> note 9, at 19. Property tax appeals have also increased substantially nationwide. See <\/em>Ross<\/span>, supra<\/em> note 79, at 1.<\/span> Appeals are widespread, but rich homeowners are particularly likely both to file appeals and to win a greater reduction in assessments.80<\/a><\/sup>See <\/em>Doerner & Ihlanfeldt, supra<\/em> note 78, at 15 (finding, in study of property assessments appeals in Florida, that \u201cappeals-related reductions in assessed values\u201d favor homeowners from high-income, majority white neighborhoods); Ross<\/span>, supra<\/em> note 79, at 1 (finding that appeals disproportionately reduce assessments for more valuable properties).<\/span><\/p>\n

After the value of a given piece of property is determined, individual taxpayers can apply for exemptions, caps, and other adjustments. For instance, many states and localities provide \u201chomestead\u201d exemptions that allow owners of primary residences to keep a certain amount of the value of a house off the tax rolls, although this is often limited to certain groups of taxpayers (like senior citizens).81<\/a><\/sup>See <\/em>Keith Ihlanfeldt, Property Tax Homestead Exemptions: An Analysis of the Variance in Take-Up Rates Across Neighborhoods<\/em>, 74 Nat\u2019l Tax J. 405,<\/span> 405 (2021) (noting that property tax homestead exemptions are available in more than forty states); Lexis<\/span>, Multi-State Charts With Analysis, Property Tax: Homestead Exemptions<\/span> (updated Mar. 1, 2022) [https:\/\/perma.cc\/39LE-P5R9].<\/span> Other exemptions or deductions apply to particular types of property owners or to properties used for particular purposes. In New York City, there are exemptions of varying sizes for anyone making less than $250,000 in income, veterans and their families, low-income seniors, disabled homeowners, disabled crime victims, Good Samaritans, and clergy.82<\/a><\/sup>See <\/em>N<\/span>.Y.C. Dept. of Fin<\/span>., NYC Residential Property Tax Exemptions<\/em>, <\/span>https:\/\/www.nyc.gov\/site\/finance\/property\/residential-properties-exemptions.page

\n[https:\/\/perma.cc\/LM6L-UDR5]. Property tax exemptions for clergy have a particularly long lineage. Part of the text of the Rosetta Stone is a thank you from priests to Ptolemy I for granting them a property tax exemption. See <\/em>Richard Henry Carlson, A Brief History of Property Tax<\/em>, Fair & Equitable, <\/span>Feb. 2005, at 3.<\/span> A number of jurisdictions have also adopted \u201cassessment caps,\u201d which are limits on how quickly the assessment of a particular property can increase in a given year.83<\/a><\/sup>See, e.g.<\/em>, Hayashi, supra <\/em>note 14, at 37; see also<\/em> Joan M. Youngman, The Variety of Property Tax Limits: Goals, Consequences, and Alternatives<\/em>, 46 State Tax Notes<\/span> 541, 556 (2007) (describing assessment caps as \u201c[t]he most common response to criticism that property taxes are too high,\u201d but acknowledging that this can have problematic effects). <\/span> \u201cCircuit breakers,\u201d or state tax policies, provide rebates to taxpayers who pay a substantial percentage of their income in property taxes.84<\/a><\/sup>See <\/em>Youngman<\/span>, supra <\/em>note 1, at 211. <\/span> Other jurisdictions allow some property owners to defer making tax payments until properties are transferred.85<\/a><\/sup>Id.<\/em> at 10\u201311. <\/span> These policies are often justified as ways to ensure that lower-income owners of property that increases in value are not forced to sell their home or borrow to pay taxes.86<\/a><\/sup>See <\/em>Sterk & Engler, supra<\/em> note 7, at 1038. <\/span><\/p>\n

Once the \u201croll\u201d of property value assessments in a jurisdiction is set, jurisdictions set their tax rates. Property is frequently taxed by multiple overlapping local governments\u2014cities and towns, school districts, counties, and special districts of a variety of types. For most local governments, property tax is the dominant form of \u201cown-source revenue,\u201d or money they receive from taxes and fees they levy themselves, rather than transfers from other levels of government. Nationwide, local governments raise more than $500 billion annually in property taxes, constituting nearly half of local governments\u2019 own-source revenue.87<\/a><\/sup>Berry, supra<\/em> note 9, at 1. Traditionally, local governments often would not even set their \u201cmill rate,\u201d or the amount of taxes they charge per thousand dollars of property value, as a first order matter. Rather, many would first set their budgets and then determine the mill rate by dividing the amount the government needed by the overall size of the property tax roll, backing out the necessary mill rate. See, e.g.<\/em>, Carolyn Chu, Why the Mid-1970s Play a Large Role in Property Taxes Today<\/em>, Cal. Legis. Analyst\u2019s Off.<\/span> (Jan. 27, 2016), https:\/\/lao.ca.gov\/LAOEconTax\/Article\/Detail\/166 [https:\/\/perma.cc\/GDK8-YAY7] (noting that, prior to the enactment of California\u2019s Proposition 13, local governments would set their property tax rate \u201cbased on the amount of revenue necessary to provide the level of services desired by their residents\u201d).<\/span><\/p>\n

States have regularly intervened in this process, limiting local tax-setting powers or otherwise shaping property tax collection.88<\/a><\/sup>See generally <\/em>Iris J. Lav & Michael Leachman, Ctr. on Budget and Pol\u2019y Priorities, State Limits on Property Taxes Hamstring Local Services and Should Be Relaxed or Repealed<\/span> (Jul. 18, 2018), https:\/\/www.cbpp.org\/research\/state-budget-and-tax\/state-limits-on-property-taxes-hamstring-local-services-and-should-be [https:\/\/perma.cc\/2JDF-NJMA]; Youngman<\/span>, supra <\/em>note 83.<\/span> State interventions have substantially increased since the 1970s, with many states sharply limiting both increases in assessments and tax rates.89<\/a><\/sup>See<\/em> Erika Rosebrook, Consequences of State Tax and Expenditure Limits on Local Services<\/em>, Nat\u2019l League of Cities<\/span> (Nov. 1, 2021), https:\/\/www.nlc.org\/wp-content\/uploads\/2021\/10\/Preemption-Brief-2-Consequences-of-State-Tax-and-Expenditure-Limits-Brief-1.pdf [https:\/\/perma.cc\/GY23-Z65A] (\u201cThen, the taxpayer revolt of the late 1970s and early 1980s provided the first large-scale enactment of multiple [tax and expenditure limits] components in a large number of states\u2026\u201d)<\/span><\/p>\n

The most famous tax limitation is California\u2019s Proposition 13, which moved the state to an \u201cacquisition assessment\u201d model, where the assessed value of a piece of property can only increase by two percent a year unless it is sold or built upon.90<\/a><\/sup>See<\/em> Mac Taylor, Cal. Legis. Analyst\u2019s Off., Common Claims About Proposition 13<\/span> 2 (Sept. 2016), https:\/\/lao.ca.gov\/reports\/2016\/3497\/common-claims-prop13-091916.pdf [https:\/\/perma.cc\/DGD8-VPUW] (analyzing effects of Proposition 13 on property valuations).<\/span> That is, the assessed value is just the amount the purchaser paid plus a small annual adjustment. For many owners of California property, the assessed value is far, far below the actual market value given the enormous increase in California property values since the 1970s.91<\/a><\/sup>Id.<\/em> at 4 (graphing difference between assessed and market property values in California). <\/span> Heirs can inherit primary residences in the state at the original tax basis if the value of the property is below $1 million (and keep a portion of their tax basis regardless of the value).92<\/a><\/sup>See <\/em>Cal. State Bd. of Equalization, Proposition 19 Fact Sheet 2 (<\/span>Apr. 1, 2022), https:\/\/www.boe.ca.gov\/pdf\/pub801.pdf [https:\/\/perma.cc\/5ZUK-A6KT] (providing flow chart overview of intergenerational property transfers in California). A 2022 initiative, which ultimately failed to receive the required number of signatures to appear on a state-wide ballot, would have increased the amount exempted from $1 million to $2.4 million and tied the figure to inflation. See<\/em> Letter from Jon Coupal, President, Howard Jarvis Taxpayers Ass\u2019n, to Anabel Renteria, Initiative Coord., Off. Att\u2019y Gen., at 4 (Aug. 26, 2021), https:\/\/web.archive.org\/web\/20210901081855\/https:\/\/oag.ca.gov\/system\/files\/initiatives\/pdfs\/21-0015%28DeathTax%29.pdf [https:\/\/perma.cc\/42B2-HZA4] (proposing property tax initiative to increase exemption amount); Initiatives and Referenda Cleared for Circulation<\/em>, Cal. Sec\u2019y of State<\/span>, https:\/\/www.sos.ca.gov\/elections\/ballot-measures\/initiative-and-referendum-status\/initiatives-referenda-cleared-circulation [https:\/\/perma.cc\/X7KW-KLJH] (listing referenda that received enough votes to appear on state-wide ballot, the property tax initiative not included). <\/span> Moreover, property owners over fifty-five years old can transfer the assessed value of their principal home to a replacement property up to three times without being forced to pay property taxes at actual market value if they sell and buy a new home.93<\/a><\/sup>Cal. State Bd. of Equalization, <\/span>supra <\/em>note 92, at 2.<\/span> Florida has also moved to something like an acquisition assessment model, and assessment caps that exist in many jurisdictions can similarly be understood as pushing traditional property tax systems in the direction of an acquisition assessment model.94<\/a><\/sup>See <\/em>Hayashi, supra <\/em>note 14 (describing Florida\u2019s Save Our Homes law); Youngman, supra <\/em>note 83, at 543\u201345 <\/span>(providing overview of impact of California and Florida laws).<\/span><\/p>\n

So, what is Property Tax Assessment Regressivity (PTAR)? PTAR is the empirical finding that expensive properties are under-assessed and less valuable properties are over-assessed.95<\/a><\/sup>See<\/em> supra<\/em> notes 11\u201313 and accompanying text (describing regressive property tax phenomenon). This is sometimes described as a lack of \u201cvertical equity.\u201d<\/span> This phenomenon can be diagnosed by comparing the actual sale price to the last assessed price. For more valuable properties in almost all jurisdictions, the actual sale price is substantially higher than the assessed price.96<\/a><\/sup>See <\/em>Berry, supra<\/em> note 9, at 3 (comparing sale prices and assessments of lower- and higher-priced homes). <\/span> For lower-priced properties, the assessed price is much higher than the actual sale price.97<\/a><\/sup>See, e.g.<\/em>, id.<\/em> It would still be the same phenomenon with regards to regressivity if all properties were under-assessed, but expensive properties were under-assessed by more and cheaper properties were under-assessed by less. <\/span> Notably, Amornsiripanitch shows that PTAR both exists, and is substantial, even when the observations are limited to the set of properties taxed by the same set of local governments.98<\/a><\/sup>See <\/em>Amornsiripanitch, supra<\/em> note 11, at 2\u20133 (using tax code areas to examine the regressive nature of property tax assessments). <\/span> That is, there is a substantial amount of PTAR among properties that share the same town, school district, county, and set of special districts.99<\/a><\/sup>Id.<\/em><\/span> Even for these properties, PTAR translates directly into higher taxes for lower-valued properties and lower taxes for higher-valued properties despite the fact that they all pay the exact same tax rate.<\/p>\n

While researchers had found evidence of PTAR in specific jurisdictions for years, recent research has been able to build nationwide data sets and use better empirical tools to replicate these findings on a broader scale.100<\/a><\/sup>See supra<\/em> note 11 and accompanying text. <\/span> What the new research finds is that PTAR is a pretty universal phenomenon. It is easy to see how PTAR would occur in a jurisdiction like California, with its acquisition value method of assessment, or New York City, which has a strict assessment cap limiting annual increases.101<\/a><\/sup>See, e.g.<\/em>, Taylor, Common Claims,<\/span> supra <\/em>note 14, at 1-4; Hayashi, supra <\/em>note 14, at 34 (noting New York City\u2019s use of property tax caps); N.Y.C. Advisory Comm\u2019n Prop. Tax Reform, <\/span>supra <\/em>note 12, at 28\u201329 (explaining property tax caps in New York City).<\/span> In those jurisdictions, it is an intentional and inherently regressive policy choice to limit the growth of assessments when property values increase. But Berry finds that PTAR exists in jurisdictions whether or not they have assessment caps.102<\/a><\/sup>See <\/em>Berry, supra<\/em> note 9, at 18 (noting that there is \u201cno apparent difference in assessment regressivity\u201d between states with assessment limits and states without assessment limits). Other studies, however, find that assessment caps contribute substantially to PTAR. See generally <\/em>Hayashi, supra<\/em> note 14; N.Y.C. Advisory Comm\u2019n Prop. Tax Reform<\/span>, supra <\/em>note 12.<\/span> Moreover, this new research also shows racial bias in assessment: properties owned by Blacks and Hispanics are over-assessed, whereas those owned by whites are under-assessed.103<\/a><\/sup>See supra <\/em>note 13 and accompanying text. <\/span><\/p>\n

There are a number of explanations for PTAR other than policy choices. The first is random measurement error. If two homes assessed at the same level sell for different prices for effectively random reasons (e.g., timing or idiosyncratic tastes), the lower-priced home will be over-assessed relative to price based on its true value (and the higher-priced one under-assessed). No one has done anything wrong, but the outcome is regressive assessments. The recent empirical studies acknowledge this effect but find it only explains some of PTAR.104<\/a><\/sup>See, e.g.<\/em>, Berry, supra<\/em> note 9, at 12\u201317 (analyzing impact of measurement error on relationship between assessment ratios and housing prices); see also<\/em> Amornsiripanitch, supra<\/em> note 11, at 2 (describing literature which suggests that assessments regression estimates are inherently regressive because measurement error in sales prices introduces attenuation bias. Amornsiripanitch uses an instrumental variable approach to account for this measurement error, but nonetheless finds that assessments are regressive). <\/span><\/p>\n

Some studies point to the role of assessment challenges. If owners of expensive properties are more likely to challenge their assessments or appeals boards are more likely to reduce the assessments of expensive properties, PTAR should follow, at least at the high end. This seems to be the case, and provides some explanatory power, although not enough to explain the full extent of PTAR.105<\/a><\/sup>See, e.g.<\/em>, Berry, supra<\/em> note 9, at 20 (finding that \u201cappeals worsen but are not the primary cause of regressivity in Cook County\u201d); Avenancio-Le\u00f3n & Howard, supra<\/em> note 11, at 1385 (documenting racial differences in property tax assessment appeals, where minority homeowners are less likely to appeal their assessment, less likely to win an appealed assessment, and\u2014even if they do appeal and win\u2014more likely to receive a smaller reduction to their assessment than nonminority residents). <\/span><\/p>\n

Others focus on the frequency of reassessment to explain PTAR.106<\/a><\/sup>See, e.g.<\/em>, Amornsiripanitch, supra<\/em> note 11, at 23\u201326 (finding that empirical evidence strongly suggests that valuation errors and flawed valuation methods, such as infrequent reassessment, explain a \u201cnontrivial proportion of assessment regressivity\u201d); Avenancio-Le\u00f3n & Howard, supra<\/em> note 11, at 1423 (finding that inequality in reassessment is substantially higher in subsample regions with longer reassessment cycles, but much of the effect is driven by a single locality in each subsample).<\/span> If reassessments do not happen often, assessors will fail to capture recent changes in property values. If property values in a jurisdiction start off being relatively equal but then change relative to one another in the span of time between reassessments, PTAR will necessarily follow.107<\/a><\/sup>The same result follows if properties start off unequal but then expensive properties get more expensive relative to cheaper properties. <\/span> This factor seems to explain PTAR to some extent.<\/p>\n

Finally, methods of assessment can contribute to PTAR. Assessment is usually based on limited information about the physical status of a house.108<\/a><\/sup>See<\/em> Berry, supra<\/em> note 9, at 6 (discussing limited amount of information available to assessors).<\/span> Assessors may be required to do in-person inspections of properties in certain locations, but even then, in-person inspections are not necessarily mandated for all reassessments.109<\/a><\/sup>See, e.g.<\/em>, Sterk & Engler, supra<\/em> note 7, at 1041\u201345 (describing different approaches to assessment and inspection. In Connecticut, for example, \u201cstatute requires physical inspection every ten years,\u201d but some form of revaluation is required every five years). <\/span> As a result, assessors often lack information about the quality of interiors or about the state of repair of the building more broadly.110<\/a><\/sup>See<\/em> Berry, supra<\/em> note 9, at 6 (discussing limited information available to assessors). But see<\/em> Analyze Bos.<\/span>, supra<\/em> note 2 (providing spreadsheets of all property tax assessments in Boston, MA going back to 2004, complete with information about the styles of bathrooms and kitchens, the method of heating, the number of fireplaces, the quality of the view, and whether the property is a corner unit). <\/span> Moreover, increased use of Automatic Valuation Models has led to a decrease in investigation into the physical condition of property.111<\/a><\/sup>See<\/em> Neal et al<\/span>., supra <\/em>note 13, at 1\u20132 (describing growth of Automatic Valuation Models following the Great Recession). <\/span> To the extent that the value of property differs based on how well-maintained the property is, or whether the property has been renovated, assessors are increasingly likely to under-assess properties that have nice finishes, and over-assess those that have depreciated.<\/p>\n

While the physical status of a house could generate PTAR, researchers generally find more evidence that PTAR is caused by assessors underrating the importance of location.112<\/a><\/sup>See <\/em>Avenancio-Le\u00f3n & Howard, supra<\/em> note 11, at 1395 (finding that half of the racial assessment gap in property taxes arises from neighborhood-level misvaluation); Amornsiripanitch, supra<\/em> note 11, at 7 (describing an empirical relationship between assessment regressivity and valuation errors that comes from omission or mismeasurement of neighborhood characteristics). <\/span> To be sure, assessors take location into account, often dividing cities up into particular zones and determining how values in that area have increased or decreased.113<\/a><\/sup>See <\/em>Berry, supra<\/em> note 9, at 6 (noting that assessors often capture local variation in housing markets by controlling for neighborhood attributes); Avenancio-Le\u00f3n & Howard, supra<\/em> note 11, at 1389 (describing a standard general approach to property valuation, which often either incorporates a geographic fixed effect, or allows prices to vary by location, to try to account for the effect of relevant neighborhood characteristics on property values). <\/span> They also regularly take into account salient amenities, like whether a property has access to a body of water.114<\/a><\/sup>See, e.g.<\/em>, City & County of Honolulu v. Steiner, 834 P.2d 1302, 1307 (Haw. 1992) (describing City and County of Honolulu guidance for real property valuation, which directed assessors to consider, among other factors, \u201cthe amount, kind, and quality of shoreline, the quality and condition of the surf and water, the view, and the accessibility to the shore, and including the hazards or detriments because of the natural wave action\u201d). <\/span> But these zones or coarse accounts of access to amenities may not capture what it is about a location that makes a property valuable. If assessors miss what it is about location that contributes to prices and simply assume that properties in a neighborhood rise and fall together, PTAR will follow; they will under-assess properties that have access to these amenities and over-value those that do not.<\/p>\n

That PTAR\u2014and the related phenomenon of undervaluation of properties in largely white neighborhoods and overvaluation of properties in largely Black and Hispanic areas\u2014exists is now clearly established.115<\/a><\/sup>See supra<\/em> notes 11\u201313 and accompanying text. <\/span> What this means, though, is still unclear. The literature establishing that PTAR exists is extremely impressive, but it has not yet fully explained its implications. That is, it has not integrated PTAR into the broader economic and legal literature on the property tax. That is what this Article will attempt to do in the next section.<\/p>\n

III. Property Tax Assessment Regressivity and Property Tax Theory, Or Why Is Property Tax Assessment Regressivity Important?<\/span><\/p>\n

This section analyzes what PTAR means for the progressivity, efficiency, and \u201cinsurance\u201d value of property taxes.<\/p>\n

A. Property Tax Assessment Regressivity, Capitalization, and Redistribution<\/em><\/p>\n

If federal or state tax authorities assessing income taxes just pretended that people with high incomes had lower incomes than they actually do, and that people with low incomes had higher incomes than they actually do, it would be clear that choice was regressive. It would lead to higher-income people paying less in tax than the tax code suggests they should and lower-income people paying more.<\/p>\n

At first glance, it may seem that PTAR would be regressive equally, reducing the taxes of people with a great deal of wealth and increasing the taxes of people with less wealth. While this is likely true to some extent, the precise extent of the effect is not immediately apparent. This is in large part because property taxes directly influence property prices. If property tax rates are high, purchasers will pay less; if they are low, they will pay more. Economists call this \u201ccapitalization.\u201d116<\/a><\/sup>See <\/em>supra note 32 and accompanying text. <\/span> The extent of capitalization\u2014that is, whether a property tax increase leads to the exact decline in property prices one would expect from the expected additional tax burden over time or instead leads to a smaller decline\u2014is substantially debated.117<\/a><\/sup>Id.<\/em> <\/span><\/p>\n

What does this mean for PTAR? PTAR may not be regressive for today\u2019s taxpayers if three conditions are met: (1) PTAR started before today\u2019s taxpayers acquired their homes and has continued since; (2) capitalization is perfect or near perfect; and (3) relative property values (i.e., the differences among properties in a jurisdiction) are consistent.<\/p>\n

Under these assumptions, when an expensive property was first undervalued by a tax assessor, it had an immediate and proportional effect on the value of the property. Namely, the property would now fetch a higher price because the owner would pay less in taxes in future years. But, under these assumptions, the owners who bought the property after PTAR set in paid more for the property. Thus, they cannot be said to be made better off by PTAR, even if the original owner received a one-time benefit. New purchasers are just getting what they paid for. The same logic works in reverse for less expensive properties that are overvalued by tax assessors. If there was full capitalization, new owners purchased their homes at a discounted price and, therefore, cannot be said to have been made worse off by PTAR.<\/p>\n

Each of these assumptions may not be true. First, it may not be the case that PTAR started a long time ago and has been consistent since. We do not have longitudinal evidence about PTAR. So, while we know that expensive properties are undervalued, and less expensive ones overvalued, we do not know when the practice started or how consistent it has been.<\/p>\n

Second, capitalization may not be perfect. Economists\u2019 long-running debate as to the extent of capitalization suggests that this very well could be possible. If capitalization is not perfect, then PTAR provides an ongoing benefit to owners of more expensive properties, each year giving them some benefit that they did not pay for when they bought the property.118<\/a><\/sup>It is also possible that even if property taxes capitalize, PTAR does not capitalize. For instance, if PTAR builds up for long-held assets, but assessments update to the actual sale price when there is a transfer, then even if things like property tax rates capitalize, PTAR would all accrue to current holders (unless purchasers realize they will benefit over time, a pretty substantial assumption about the information processing capacity of new purchasers). However, in general, property tax assessments do not snap to the purchase price, as discussed in notes 126\u2013127 and accompanying text. However, to the extent that assessments are influenced by the actual sales price and PTAR accrues over time, then PTAR will benefit current holders. <\/span> The same is true in reverse for owners of less expensive properties. If capitalization is not perfect, then today\u2019s owners of less expensive properties bear a cost for which they received no discount when they bought the property.119<\/a><\/sup>That said, PTAR itself makes capitalization more likely. A basic finding in the literature is that the extent of capitalization is determined by how strict land use restrictions are and how many local governments there are. If land use restrictions bind so strictly that they bar all investment in property and home purchasers only have a limited universe of options, then the value of a property tax cut is perfectly capitalized. See generally <\/em>Wallace E. Oates, The Effects of Property Taxes and Local Public Spending on Property Values: An Empirical Study of Tax Capitalization and the Tiebout Hypothesis<\/em>, 77 J. Pol. Econ. 957<\/span> (1969); William A. Fischel, Homevoters, Municipal Corporate Governance, and the Benefit View of the Property Tax<\/em>, 54 Nat\u2019l Tax J. 157 (<\/span>2001). With PTAR, however, land use restrictions do not need to be as strict in order to lead to full capitalization. To see why, imagine that PTAR was far worse than it currently is, so that all homeowners in a jurisdiction paid an equal amount in taxes, no matter their property\u2019s underlying value. This is what is known as a head tax on property owners. In this context, construction of new housing would have no effect on the extent to which owning property was associated with paying taxes. The value of all property would be reduced by the net present value of having to pay a head tax every year. PTAR does not go all the way to turning the property tax into property-owner head tax, but it moves the property tax in that direction. As a result, it makes capitalization more likely. <\/span><\/p>\n

Finally, if the relative values of properties in a jurisdiction change, then PTAR could be producing regressivity right now.120<\/a><\/sup>If purchasers expect their properties to appreciate relative to other properties in the jurisdiction, they may be willing to pay more for properties in jurisdictions that have PTAR, capitalizing part of this effect into the sales price. But this requires assuming that purchasers are both good prognosticators and extremely far-sighted in their consideration of local tax policy. <\/span> If the prices of all properties in a jurisdiction go up or down at the same time, there is no reason to think that PTAR is having a present-day effect (assuming assessors started mis-assessing properties years ago). However, if properties in richer areas appreciate by more than properties in poorer areas, and PTAR leads tax authorities to understate that relative increase, then PTAR is providing owners of appreciating property with a present-day wealth increase.<\/p>\n

The extent to which PTAR creates genuine regressivity today depends on whether each of these assumptions holds.121<\/a><\/sup>One caveat is necessary. At some discrete point in the past when a more expensive property was first undervalued, PTAR increased the property owner\u2019s wealth. A substantial amount of that wealth was likely inherited by those who are well-off today.<\/span> However, it is important to note that whatever regressivity created is among homeowners in a single jurisdiction. Indeed, even if policymakers could snap their fingers and make property assessment completely accurate and predictive, it would not occasion any transfers between<\/em> local governments. To the extent that local governments are frequently stratified based on wealth, PTAR only creates redistribution among people of relatively similar economic conditions. This means that it is not likely to be causing direct transfers from the rich to the poor, or at least not in many places. However, in jurisdictions that are economically diverse\u2014particularly big cities, counties, and large school districts\u2014PTAR will be genuinely regressive if the above three conditions are not met.<\/p>\n

Further, PTAR only allows for transfers among homeowners. Homeowners are almost by definition not the very poor, although many of them may be quite indebted.122<\/a><\/sup>See<\/em> Chris Horymski, Total Mortgage Debt Increases to $11.2 Trillion in 2022<\/em>, Experian<\/span> (Mar. 27, 2023), https:\/\/www.experian.com\/blogs\/ask-experian\/how-much-americans-owe-on-their-mortgages-in-every-state [https:\/\/perma.cc\/R27W-99BK] (reporting that the average mortgage balance was $236,443 in 2022). <\/span> PTAR could theoretically also affect renters, as at least some amount of the property tax is passed through to renters.123<\/a><\/sup>See, e.g.<\/em>, Tsoodle & Turner, supra<\/em> note 57, at 65 (observing that a \u201csubstantial\u201d amount of property tax may be passed on to renters). <\/span> But PTAR, or at least the kind of PTAR specific to single family homes and condos that is found in these studies, will only matter to renters to the extent that the rental market is influenced indirectly by those other forms of housing. This is because the assessment of commercial properties, including multi-family rental buildings, is usually done with a different methodology. Instead of using the \u201ccomparative sales\u201d method that is used for single-family homes and condos, multi-family rental buildings are often assessed based on the income that property owners generate from their buildings.124<\/a><\/sup>See<\/em> Int\u2019l Ass\u2019n Assessing Officers<\/span>, Standard on Mass Appraisal of Real Property <\/span>9 (2017), https:\/\/www.iaao.org\/media\/standards\/StandardOnMassAppraisal.pdf [https:\/\/perma.cc\/QEQ3-WZZH] (describing multifamily valuation processes).<\/span> This process may have its own problems with accuracy and regressivity, but it is not part of the empirical findings on which PTAR is based.125<\/a><\/sup>See, e.g.<\/em>, Thomas Breen, Whose Boom Is It? City Cut Top Investors $166M Break<\/em>, New Haven Indep. <\/span>(Dec. 23, 2022), https:\/\/www.newhavenindependent.org\/article\/assessments [https:\/\/perma.cc\/7LCZ-9ZE9] (\u201cFor years, investors have paid far more money to buy large New Haven commercial real estate than the city assessor\u2019s office has considered those same properties to be worth.\u201d). <\/span><\/p>\n

Finally, the existence of PTAR can help explain some weird features of property tax assessment. For instance, assessors are told not to engage in \u201csale chasing,\u201d or reassessing properties that recently sold while leaving others alone.126<\/a><\/sup>See, e.g.<\/em>, Cnty. of Douglas v. Nebraska Tax Equalization & Rev. Comm\u2019n, 635 N.W.2d 413, 423 (Neb. 2001) (describing the \u201cunacceptable assessment practice of \u2018sales chasing\u2019\u201d); Boivin v. Town of Addison, 5 A.3d 897, 901 (Vt. 2010) (noting that Vermont Department of Taxes Listers\u2019 Handbook condemns sales chasing). Courts have also found sales chasing to be unconstitutional under state tax uniformity provisions. See, e.g.<\/em>, Twp. of W. Milford v. Van Decker, 576 A.2d 881, 885 (N.J. 1990). <\/span> At first glance, this is an extremely strange rule. When properties are actually sold, we go from being in the dark about their real value to knowing it. Why shouldn\u2019t assessors incorporate that information as soon as they get it?<\/p>\n

But if properties that are actually sold are reassessed in an accurate way, while others are systematically incorrectly assessed due to PTAR, the property tax system will either discourage (or inefficiently encourage) sales of property. For expensive properties, PTAR causes the tax basis of the seller to be lower than the tax basis of the buyer, meaning that even if a potential seller values the house less than a potential buyer, the house might not be sold if the difference is less than the difference in the tax basis.127<\/a><\/sup>The logic here is the same as why an \u201cacquisition assessment\u201d property tax system, like California\u2019s after Proposition 13, reduces sales and turnover. Current owners are paying less in tax than would new purchasers, increasing the value to the current owner relative to a purchaser. See <\/em>Taylor, supra<\/em> note 14, at 11\u201312. In California, this effect is understood as a feature, not a bug, of Prop. 13, as the policy was aimed at creating neighborhood stability. See <\/em>Nordlinger v. Hahn, 505 U.S. 1, 12 (1992) (observing state has \u201clegitimate interest\u201d in political stability). However, this benefit comes with very substantial costs: reduced transactions, diminished ability for neighborhoods to change, and economic harms from people not moving to opportunity. See, e.g.<\/em>, David Schleicher, Stuck! The Law and Economics of Residential Stagnation<\/em>, 127 Yale L. J.<\/span> 78, 131\u201332 (2017).<\/span> For less expensive properties, the opposite is true; selling property will be advantageous for tax purposes.<\/p>\n

In a system where property tax assessment is either accurate or randomly inaccurate, \u201csales chasing\u201d would make perfect sense. But having a different level of accuracy for sold and unsold properties would lead to owners of similar properties paying different amounts in taxes, therefore either encouraging or discouraging sales.<\/p>\n

B. Property Tax Assessment Regressivity and the Benefit Tax Versus Capital Tax Debate<\/em><\/p>\n

For a tax that is thousands of years old,128<\/a><\/sup>See<\/em> Carlson, supra <\/em>note 82, at 3. <\/span> it is somewhat surprising that economists cannot agree about basic facts about the property tax, such as whether it is an efficient means of raising revenue or whether it is progressive or regressive. Particularly over the last fifty years or so, there has been an intense debate between two camps of scholars over how to best understand the property tax and whom it helps and hurts.129<\/a><\/sup>See generally, e.g.<\/em>, Peter Mieszkowski & George R. Zodrow, Taxation and the Tiebout Model: The Differential Effects of Head Taxes, Taxes on Land Rents, and Property Taxes<\/em>, 27 J. Econ. Lit.<\/span> 1098 (1989) (discussing distributive effects of property taxes); Zodrow, supra <\/em>note 32 (reviewing capitalization literature); George R. Zodrow, Reflections on the New View and the Benefit View of the Property Tax<\/em>, in <\/em>Property Taxation and Local Government Finance: Essays in Honor of C. Lowell Harriss<\/span> 79 (Wallace E. Oates ed., 2001); Fischel, supra <\/em>note 119; Wallace E. Oates & William A. Fischel, Are Local Property Taxes Regressive, Progressive, or What?<\/em>, 69 Nat\u2019l Tax J<\/span>. 415 (2016).<\/span><\/p>\n

The \u201ccapital tax\u201d argument\u2014sometimes called the \u201cnew view\u201d of property taxes\u2014is that property taxes are best thought of as an inefficient tax on all capital.130<\/a><\/sup>See <\/em>Peter Mieszkowski, The Property Tax: An Excise Tax or a Profits Tax<\/em>?, 1 J. Pub. Econ.<\/span> 73, 73\u201374 (1972); Zodrow & Mieszkowski, supra <\/em>note 40, at 309\u201310; George R. Zodrow, The Property Tax Incidence Debate and the Mix of State and Local Finance of Local Public Expenditures<\/em>, 53 CESifo Econ. Stud.<\/span> 495, 503 (2007); George R. Zodrow, Intrajurisdictional Capitalization and the Incidence of the Property Tax<\/em>, 45 Reg. Sci. & Urb. Econ<\/span>. 57, 57 (2014).<\/span> This view maintains that property taxes, which differ by jurisdiction, cause investment to flow into jurisdictions with lower property taxes and into assets that are not part of the property tax base. This increases the flow of capital chasing the same set of assets causing prices to rise, meaning that holders of all kinds of capital bear the burden of the property tax.131<\/a><\/sup>Notably, the tax on capital is based on the average property tax rate across jurisdictions. See <\/em>Mieszkowski, supra<\/em> note 130, at 94 (noting that \u201cthe system of property taxes imposed by local governments decreases the overall return to capital by the average rate of tax in the nation as a whole . . . .\u201d).<\/span> Because on some level what it means to be rich is to own capital, the property tax is a progressive tax.132<\/a><\/sup>Property taxation increases based on how much property wealth a person has, not how much income they earn. The progressivity of property tax under the capital tax view is a bit different from the progressivity of other taxes, given that progressivity in taxation is usually measured by how the tax varies with income, not wealth. Even under the capital tax view, however, there are regressive elements to the property tax in specific places. See, e.g.<\/em>, id<\/em>. at 94\u201395. In areas with high property taxes, for example, there is less housing construction and business investment, meaning that the price of housing and goods goes up while wages and land prices go down. This is bad for lower-income people in those jurisdictions. But viewed globally, this effect is offset by gains in the areas where investment flows instead, which see new construction and new jobs, therefore benefiting lower-income people. Id. <\/em><\/span> However, because the property tax encourages people to shift their investments around, both between local jurisdictions and between property and non-property assets, it is an inefficient tax\u2014it results in people making investments they otherwise would not have. Further, fear of discouraging investment may make local jurisdictions keep taxes inefficiently low, forgoing valuable investments in public services.133<\/a><\/sup>See <\/em>George R. Zodrow & Peter Mieszkowski, Pigou, Tiebout, Property Taxation, and the Underprovision of Local Public Good<\/em>s, 19 J. Urb. Econ.<\/span> 356, 357 (1986) (discussing literature about distorting impact of property tax on provision of public goods). <\/span><\/p>\n

This has been heavily contested by the proponents of the \u201cbenefits tax\u201d or Tieboutian view.134<\/a><\/sup>See generally <\/em>Fischel, supra <\/em>note 119.<\/span> Charles Tiebout famously argued that residents of a metropolitan area \u201csort\u201d themselves among local governments based on their preferences about local services, leading to an efficient allocation of those services.135<\/a><\/sup>See <\/em>Charles M. Tiebout, A Pure Theory of Local Expenditures<\/em>, 64 J. Pol. Econ<\/span>. 416, 418 (1958) (discussing consumer-voter phenomenon).<\/span> In Tiebout\u2019s model, local governments were funded with a head tax, a common charge paid by all residents.136<\/a><\/sup>Id.<\/em> <\/span> But, as Bruce Hamilton argued, if local services are funded with a property tax instead of a head tax, there is likely no equilibrium in the Tiebout model.137<\/a><\/sup>See <\/em>Hamilton, supra <\/em>note 36, at 205\u201306 (discussing weaknesses with Tiebout model).<\/span> If a given local jurisdiction begins providing high quality services to residents on an equal basis, owners of property in that jurisdiction have a big incentive to subdivide their lots and build denser housing. Each new resident in the newly subdivided property will have lower property values per capita (a smaller house on a smaller plot of land) than the original owner but will have the legal right to consume local governmental services in the same manner as all other residents. The result would be population inflows into any jurisdiction with good services, thus diminishing the per capita tax base that supports those services.<\/p>\n

Hamilton\u2019s answer to this was that jurisdictions use zoning and other legal land use tools to fix in place the average value of property, or at least to limit increases in the amount of housing with lower-than-average property values.138<\/a><\/sup>See id. <\/em><\/span> If a jurisdiction only allowed one kind of housing\u2014all identical houses equally far from transportation nodes\u2014then the value of each lot would be the same, or close. In that instance, property taxes would be a great deal like the head tax in Tiebout\u2019s model. However, real jurisdictions do not look like that. Even the most homogenous suburbs have houses and lots that are at least a little different from one another. In a later paper, Hamilton relaxed this assumption, arguing that his model still worked in the presence of diverse types of housing so long as zoning and land use rules limited the ability of people to change the use of their land to build less expensive housing.139<\/a><\/sup>See<\/em> Hamilton, supra <\/em>note 37, at 748. <\/span><\/p>\n

Thus, under the \u201cbenefits tax\u201d view, if zoning and other land use regulations are strict enough, the property tax is like a head tax.140<\/a><\/sup>William A. Fischel, Property Taxation and the Tiebout Model: Evidence for the Benefit View from Zoning and Voting<\/em>, 54 J. Econ. Lit.<\/span> 171, 171\u201372 (1992) (arguing that land use restrictions are, in fact, strict enough such that the property tax is like a head tax).<\/span> In this view, the property tax is just the price of services, as Bill Fischel and Wallace Oates have claimed.141<\/a><\/sup>See <\/em>Fischel & Oates, supra <\/em>note 129, at 415 (\u201c[L]ocal property taxes are seen as simply the payment that households make for the bundle of local public services that they have chosen to consume.\u201d). <\/span> It is efficient in much the same way that the existence of a busy store is efficient\u2014local governments funded by property taxes provide mobile residents with options they can buy or not buy.<\/p>\n

Further, even if there is a range of different types of property in a jurisdiction, there is no redistribution in the present day.142<\/a><\/sup>See <\/em>Hamilton, Intrajurisdictional<\/em>, supra <\/em>note 36, at 743 (discussing second-round price changes).<\/span> The reason is capitalization. If owners of smaller houses get more in services than they pay in taxes, that benefit gets capitalized into the value of these smaller houses. New buyers, therefore, do not receive a benefit.<\/p>\n

Proponents of these two views have battled back and forth in the pages of law reviews and economics journals for decades.143<\/a><\/sup>See supra <\/em>note 129 and accompanying text. <\/span> Proponents of the capital tax view argue that zoning is not as strict as proponents of the benefits tax view say it is.144<\/a><\/sup>Helen Ladd, Lincoln Inst., Land Pol\u2019y, Local Gov\u2019t Tax and Land Use Pol\u2019y\u2019s in the United States: Understanding the Links<\/span> 33\u201334 (1998) (recounting views of those who argue that benefits tax scholars\u2019 assumptions about perfect zoning are \u201cextreme\u201d and \u201cnot consistent with the evidence\u201d).<\/span> Further, they argue that the benefits tax view ignores the wider effects that property taxes have on capital.145<\/a><\/sup>See<\/em> Zodrow, supra<\/em> note 32, at 145\u2013<\/strong>52. <\/span> And, capital tax proponents note that capitalization happens in both models.146<\/a><\/sup>Id<\/em>. <\/span> In response, benefits tax scholars point to the extent of land use controls and the existence of capitalization as evidence that the local supply of housing is inelastic.147<\/a><\/sup>See <\/em>Fischel, supra<\/em> note 140; see generally<\/em> William A. Fischel, Regulatory Takings: Law, Economics and Politics<\/span> (1995).<\/span><\/p>\n

Scholars on each side of this debate do not even agree on what would constitute evidence for either view.148<\/a><\/sup>See <\/em>Zodrow, supra <\/em>note 32, at 139\u201340 (noting how hard it is to develop empirical evidence to separate the two models). <\/span> Nonetheless, some have tried to figure out who is right.149<\/a><\/sup>One fascinating paper by Byron Lutz, for example, arrived at mixed conclusions in examining an exogenous decrease in property taxes in jurisdictions across New Hampshire. See generally <\/em>Byron Lutz, Quasi-Experimental Evidence on the Connection between Property Taxes and Residential Capital Investment<\/em>, 7 Am. Econ. J. Econ. Pol\u2019y <\/span>300 (2015). Lutz found that this decrease in property taxes increased investment in rural and exurban areas (consistent with the capital tax view) but did not increase investment or housing supply in the areas of the state close to Boston that have more \u00acaggressive zoning and land use controls (but increased prices, consistent with the benefits tax view). See id. <\/em>at 320\u201324. See also<\/em> Enid Slack & Richard M. Bird, The Political Economy of Property Tax Reform<\/em> (O.E.C.D., Working Papers on Fiscal Federalism No. 18, 2014) (reviewing the empirical evidence on the capital tax view, benefits tax view, and traditional view that property taxes are regressive because they fall on housing, noting \u201cthat there may be something in all of these views\u201d); Harry Kitchen, Property Tax: A Situation Analysis and Overview<\/em>, in<\/em> A Primer on Property Tax: Administration and Policy<\/span> 1, 29 (William J. McCluskey, Gary C. Cornia & Lawrence C. Walters, eds., 2013) (\u201cThere is no clear cut answer to this question. Both views have their theoretical strengths and weaknesses and both have been tested empirically with varying results . . . . In all likelihood, [the property tax] is less regressive than it is said to be by the strongest proponents of the benefits tax view but not as progressive as it is said to be by many proponents of the capital tax view.\u201d); see generally <\/em>Robert W. Wassmer, Property Taxation, Property Base, and Property Value: An Empirical Test of the \u201cNew View<\/em>,\u201d<\/em> 46 Nat. Tax J. <\/span>135 (1993) (finding empirical evidence to support the capital tax view).<\/span> But this literature\u2014on both sides\u2014largely assumes that the property tax is based on the actual value of property.150<\/a><\/sup>One interesting barb in the debate makes this clear. Zodrow argues that the claim by benefits tax proponents that property taxes are efficient is only true from the perspective of new buyers in a community. But, otherwise, Zodrow contends, if property tax rates in a jurisdiction are increased and services are provided at the average level to all residents, there is a transfer from owners of more expensive properties to owners of less expensive properties. See<\/em> Zodrow, Intrajurisdictional Capitalization, supra <\/em>note 130, at 59 (arguing that the \u201cbenefit view is a long run result based on an analysis of the total prices for public goods\u2014property taxes plus fiscal capitalization effects\u2014faced by new purchasers of homes after home prices have adjusted to a property tax change. However, upon implementation of any change in property taxes, such capitalization effects significantly impact current landowners in a way that is not related to benefits received, with owners of large homes suffering capital losses and owners of small homes experiencing capital gains.\u201d). However, in jurisdictions with very aggressive PTAR, this is not the case or, rather, it is less true. A tax increase still burdens owners of expensive property more than owners of less expensive property, but the differential is far smaller than it would be if assessments were accurate. <\/span> PTAR challenges this assumption.<\/p>\n

Directionally, PTAR makes the property tax look more like a benefits tax. Without PTAR, the central challenge for the benefits tax view is that land use law does not entirely fix in place investment in property, even in restrictive jurisdictions. Indeed, nowhere does land use law stop people from renovating their houses.151<\/a><\/sup>Cf. <\/em>Ladd<\/span>, supra<\/em> note 144, at 34 (arguing that \u201cno one would disagree that the property tax would distort decisions about minor expansions and repair that are beyond the purview of the zoning authority but not the tax assessor\u201d). There is an exception. Beverly Hills was recently barred from giving permits for any new construction because of its failure to approve a housing plan that complies with state law. Liam Dillon, In Beverly Hills, No Kitchen Remodels or Pool Grottoes as Judge Orders Building Moratorium over Lack of Affordable Housing<\/em>, L.A. Times<\/span>, Jan. 17, 2024. <\/span> Similarly, zoning laws and other land use regulations do not require equal maintenance of property.152<\/a><\/sup>However, homeowner\u2019s associations (HOAs) can do just that. Roughly 60% of new housing is governed by an HOA. See <\/em>Leah Binkovitz, HOAs Are Spreading. But at What Cost to Cities?<\/em>, Rice Univ. Kinder Inst. for Urban Rsch. <\/span>(June 28, 2019), https:\/\/kinder.rice.edu\/urbanedge\/hoas-are-spreading-what-cost-cities [https:\/\/perma.cc\/V5C3-MUXH] (discussing growth of HOAs). And, jurisdictions increasingly require new subdivisions to create HOAs that provide some local public goods. See id.<\/em>; see generally<\/em> Evan McKenzie, Privatopia: Homeowner Associations and the Rise of Residential Private Government<\/span> (1994); Evan McKenzie, Beyond Privatopia: Rethinking Residential Private Government<\/span> (2011). These HOAs do frequently police disinvestment, as anyone who has forgotten to mow their lawn and gotten a notice from the HOA can tell you.<\/span> And, although there are extensive zoning restrictions in many jurisdictions and across whole metropolitan areas, jurisdictions do vary in how much they restrict housing growth.153<\/a><\/sup>That said, some jurisdictions really go up to, and beyond, the requirements of the benefits tax model. For instance, Bellerose, NY issued zero new housing permits between 2010 and 2018. Noah Kazis, N.Y.U. Furman Ctr., Ending Exclusionary Zoning in New York City\u2019s Suburbs<\/span> 16 (2020), https:\/\/furmancenter.org\/files\/Ending_Exclusionary_Zoning_in_New_York_Citys_Suburbs.pdf [https:\/\/perma.cc\/CMF8-267Y]. Notably, local governments such as Bellerose in the New York City suburbs, which are some of the slowest growing suburban areas because of extreme land use controls, rely very heavily on property taxes. See id.<\/em> at 18. <\/span><\/p>\n

But, with PTAR, the difference in tax assessments between expensive and less expensive properties is smaller than the difference in market values. That is, PTAR makes property values more similar for tax purposes than they really are. When homeowners make investments in their properties (and others allow depreciation), it creates an increase in the differences in home values among residents. PTAR causes this divergence in home valuations to be smaller for tax purposes than the real change in market value.<\/p>\n

Another way of saying this is that PTAR reduces the variation in tax assessments, making the actual tax payments required from property owners more similar. PTAR does not fully convert the property tax into a head tax among property owners\u2014the effect would have to be much more extreme than it is in reality for that to be the case. But it makes the property tax more like<\/em> a head tax among property owners than it would be if valuations were accurate.154<\/a><\/sup>Jurisdictions can go even further by linking amenities to services to some degree. For instance, if more resources are devoted to schools in richer areas, either formally or informally, then a jurisdiction is effectively creating PTAR through services. There are, of course, limits on the extent that local governments can specifically aim services to certain parts of town. See<\/em> Lynn Baker, Clayton Gillette & David Schleicher, Local Government Law, Cases and Materials<\/span>, 427\u201329 (6th ed. 2021) (surveying cases discussing requirements to provide services on an equal basis inside a given local government). To the extent that less well-off residents are paying more in taxes and receiving less in services than they would if assessment systems were accurate and resources equally distributed, local government becomes more and more like a paid-for service and less like a \u201cgovernment.\u201d <\/span> Thus, whatever one\u2019s previous position in the long \u201cbenefits tax\u201d versus \u201ccapital tax\u201d debate, the new evidence of PTAR should push one somewhat towards the benefits tax view.<\/p>\n

One should be clear-eyed about the stakes. If PTAR makes the benefits tax view more accurate, what that means is that it is easier for people to \u201cbuy,\u201d and remain confident they will receive, a particular package of government services when they buy a house in a particular jurisdiction. This has upsides in that it should, ceteris paribus<\/em>, lead to more competition between local governments and better \u201csorting,\u201d or fit, in terms of preferences for services. That is, it makes \u201cTiebout sorting\u201d more effective.155<\/a><\/sup>See<\/em> Fischel, Homevoters,<\/em> supra<\/em> note 119, at 159\u201361; Oates, supra <\/em>note 119, at 968; Oates & Fischel, supra <\/em>note 129, at 420\u201322. <\/span><\/p>\n

Also, PTAR could lead to better outcomes than what \u201cbenefits tax\u201d scholars would expect, as it might forestall some truly destructive policies that localities enact to prevent redistribution of property tax revenue. In the \u201cbenefits tax\u201d literature, the central assumption is that residents demand that local governments use land use regulations to bar new housing construction in an effort to prevent new residents from moving in and demanding services despite paying less per capita in property taxes.156<\/a><\/sup>See<\/em> supra <\/em>notes 137\u2013141.<\/span> PTAR limits how much owners of expensive properties have to redistribute without barring new construction. To the extent this calms the nerves of incumbent residents who do not want to redistribute, giving them reason to permit new housing construction, PTAR would provide real benefits, including allowing greater integration by class and alleviating housing shortages. (It may not, though, as there are many reasons jurisdictions do not allow new housing construction.)<\/p>\n

The corollary of this, however, is that PTAR also leads to less intra-local redistribution because taxes between people of different levels of wealth inside a given jurisdiction are more similar.157<\/a><\/sup>The extent to which intra-local redistribution correlates with redistribution more broadly depends a lot on the type of jurisdiction. Intra-local redistribution, by definition, only encourages transfers between people who share a local governmental boundary. In a rich suburb, PTAR therefore merely means fewer transfers from the super-wealthy to the only very-wealthy. But in a large jurisdiction with substantial economic diversity, like a big city or county, PTAR means owners of expensive houses are paying less and owners of cheap houses are paying more. For more on PTAR and redistribution, see supra <\/em>Section III(a). <\/span> And, better sorting can come at the cost of agglomerative efficiency, or the economic benefits of people choosing where to live.158<\/a><\/sup>See <\/em>David Schleicher, The City as a Law and Economic Subject<\/em>, 2010 U. Ill. L. Rev.<\/span> 1507 (providing economic framework for analyzing local government laws). <\/span> If people have to move to get their preferred package of government services, they almost necessarily move away from their preferred set of neighbors. Put another way, we all lose out on the potential economic and social benefits that would arise from letting people choose their neighbors without it impacting which government services they receive. However, these lost local agglomeration economies may be balanced by increased regional agglomeration economies if PTAR actually increases housing supply.<\/p>\n

C. Property Tax Assessment Regressivity and Georgism<\/em><\/p>\n

Before the benefits tax versus the capital tax debate, the best understanding of the property tax was that it included two taxes, one good and one bad. Property tax assessments are based on the value of land and the value of improvements, or investments that are attached to land. According to this view, the tax on land is very, very good, and the tax on improvements is very, very bad. In theory, PTAR could be associated with a property tax system that taxes land more than it does improvements. But the best read of the admittedly limited evidence is that, instead, PTAR makes the tax system rely less on land.<\/p>\n

That taxes on land are efficient is rooted in Henry George\u2019s famous \u201csingle tax\u201d argument.159<\/a><\/sup>See generally <\/em>Henry George, Progress and Poverty<\/span> (1879). <\/span> He argued that most taxes were taxes on productive activity, or things we would like people to do, like earning income or buying and selling goods. In contrast, owning land is not productive\u2014landlords do not have to do much to earn rents. And, the amount of land is fixed (or is close enough to fixed)160<\/a><\/sup>How much land there is in a city is obviously not entirely fixed. For example, cities can build new land through landfill, as the examples of Battery Park City in New York City and Back Bay in Boston reveal. See Battery Park City<\/em>, The Cultural Landscape Foundation,<\/span> https:\/\/www.tclf.org\/landscapes\/battery-park-city [https:\/\/perma.cc\/3EZU-WLMH]; William A. Newman & Wilfred E. Holton, Boston\u2019s Back Bay: The Story of America\u2019s Greatest Nineteenth-Century Landfill Project<\/span> (2006).<\/span> such that a tax on land will not reduce the amount of land. As a result, taxes on land will not have incentive effects by discouraging productive activity. Instead, they will simply be directly capitalized into the value of land. That is, a tax on land will make landowners poorer but will not otherwise make the economy less efficient. While there have been some criticisms of this view, economists today generally view land value taxes as a very efficient and progressive means of raising revenue.161<\/a><\/sup>See generally, e.g.<\/em>, Mason Gaffney, The Role of Ground Rent in Urban Decay and Revival: How to Revitalize a Failing City<\/em>, 60 Amer. J. Econ & Soc.<\/span> 57, (2001); Joseph Stiglitz, The Theory of Local Public Goods<\/em>, in<\/em> The Economics of Public Services<\/span> 274 (Robert P. Inman & Martin S. Feldstein eds., 1977); Warren J. Samuels, Why the Georgist Movement Has Not Succeeded: A Speculative Memorandum<\/em>, 62 Amer. J. Econ. & Soc.<\/span> 583, (2003); Dick Netzer, The Economics of the Property Tax<\/span> (1966). <\/span><\/p>\n

In this view, however, taxes on improvements are the exact opposite. Building houses is good. But property taxes go up when someone builds a house because it increases the value of the property on which the house sits. This discourages people from building houses. Further, it is well-established empirically that the less rich one is, the greater the share of income one devotes to shelter.162<\/a><\/sup>See, e.g.<\/em>, Netzer<\/span>, supra <\/em>note 161, at 57 (noting that \u201cexpenditures on housing exhibit a relatively low order of income elasticity in the sense that, at any one time, richer families spend less proportionately for housing than poorer families\u201d). <\/span> As a result, taxing improvements is both inefficient and regressive.<\/p>\n

In theory, Georgism could lead to PTAR. For example, if property tax assessors simply paid little or no attention to what was built on a given piece of land, PTAR would follow even though the tax system would effectively become a tax on land rather than a tax on land and improvements. Indeed, if someone invests in their property\u2014adding a garage or a tennis court or a new bathroom\u2014the property becomes more valuable. If tax assessors simply ignored this fact, and assessed the property as if nothing had happened, the result would be PTAR. The property is worth more but is taxed as if it is not. This form of PTAR would not create any disincentive to invest in improving property. There may be something to this view given evidence that expensive properties are harder to assess, due to the lack of comparable sales163<\/a><\/sup>See, e.g.<\/em>, McMillen & Weber, supra <\/em>note 12, at 668 (finding that accounting for the frequency of sales of property, including the thinner market for higher value homes, provides a partial explanation for regressivity of property tax assessments). Cf. <\/em>Amornsiripanitch, supra<\/em> note 11, at 23\u201326 (finding that empirical evidence strongly suggests that valuation errors, such as infrequent reassessment, play a non-trivial role in producing regressive assessments).<\/span> and the difficulty of capturing the extent of investment in a property.164<\/a><\/sup>See, e.g.<\/em>, Berry, supra<\/em> note 9, at 22 (finding that a \u201cgreat deal of variation in sales prices that is not reflected in assessments\u201d is \u201clikely due to property features that are observable to buyers and sellers but not to the assessor, and to imperfections in assessment models\u201d). <\/span><\/p>\n

The logic works in reverse as well. Letting a property depreciate by not maintaining it makes it less valuable. Tons of shows on HGTV are about whether a house has depreciated to the point that it needs a \u201cgut reno,\u201d or a complete overhaul of the interior of a house, to be marketable.165<\/a><\/sup>See <\/em>Amanda Mull, The HGTV-ification of America<\/em>, The Atlantic<\/span> (Aug. 19, 2022), https:\/\/www.theatlantic.com\/technology\/archive\/2022\/08\/hgtv-flipping-houses-cheap-redesign\/671187\/ [https:\/\/perma.cc\/J7EZ-RM3H] (discussing phenomenon of reality TV shows about home renovation). <\/span> If assessors pay no attention to the state of disrepair of a house, PTAR again follows. A property that is not maintained is worth less, but is taxed as if it is worth more. What PTAR means in this context is that the tax system refuses to give a tax cut to a property that is left to fall apart.<\/p>\n

Both of these surely happen to some extent. Assessors possess and collect information about the quality of houses: they generally know the size of a house, the number of bedrooms and bathrooms, its age, and sometimes more.166<\/a><\/sup>See <\/em>Berry, supra<\/em> note 9, at 6 (discussing limited information available to assessors); Analyze Bos.<\/span>, supra<\/em> note 2.<\/span> Assessors are also sometimes required to do physical inspections.167<\/a><\/sup>See, e.g.<\/em>, Sterk & Engler, supra<\/em> note 7, at 1044 (describing aspects of Connecticut\u2019s property tax assessment statute, which \u201crequires physical inspection every ten years\u201d). Courts have warned, however, that demanding entry to homes for tax assessment purposes can violate the Fourth Amendment. See<\/em> Widgren v. Maple Grove Twnshp., 429 F.3d 575, 577 (6th Cir. 2005) (finding that external inspection for tax purposes does not violate Fourth Amendment, but remarking that \u201c[t]ax appraisers would be well advised to obtain consent or a warrant as a matter of course before breaching the curtilage because, in many instances, such an intrusion may be a Fourth Amendment search\u201d); King v. Handorf, 821 F.3d 650, 652, 655 (5th Cir. 2016) (holding that assessors who were invited in by homeowner and declined, but then looked through a door the assessor may have opened surreptitiously, did not violate Fourth Amendment).<\/span> But it is unlikely that assessors capture all the benefits of investment or the costs of depreciation.168<\/a><\/sup>Property owners can challenge assessments using evidence about depreciation. See, e.g.<\/em>, Wash. State Dep\u2019t of Revenue<\/span>, Homeowner\u2019s Guide to Property Tax <\/span>2 (2023), https:\/\/dor.wa.gov\/sites\/default\/files\/2022-02\/HomeOwn.pdf [https:\/\/perma.cc\/6FHP-NGLC] (\u201cThe appeal form must include specific reasons why you believe the assessor\u2019s valuation is incorrect. Examples may include . . . excessive deterioration of your property . . . .\u201d).<\/span> And, this may be getting worse as assessors turn to Automated Valuation Methods, statistical models that are increasingly replacing in-person valuation methods.169<\/a><\/sup>See <\/em>Michael Neal, Sarah Strochak, Linna Zhu, and Caitlin Young, supra <\/em>note 13, at 1\u20132 (noting the raised profile of Automated Valuation Methods after the Great Recession, but warning that \u201c[h]istorically, AVMs have not been able to take a property\u2019s condition into account when determining a home\u2019s value\u201d); Where\u2019s the Real Value in Automated Valuation Models (AVMs)?<\/em>, Realtors Property Resources<\/span>, https:\/\/blog.narrpr.com\/tips\/wheres-real-value-automated-valuation-models-avms\/ [https:\/\/perma.cc\/N5C5-V89T] (last visited Nov. 25, 2023) (noting that \u201cwithout a physical inspection, AVMs do not factor in a property\u2019s condition and thereby, rely on \u2018average condition\u2019 scenarios when determining value\u201d). <\/span><\/p>\n

But the best evidence from the literature is that valuation bias stems from mistakes in assessing the value of land, not the value of improvements. Indeed, Avenancio-Le\u00f3n and Howard argue that racial bias in assessments is largely driven by the fact that \u201c[p]roperty assessments are less sensitive to neighborhood attributes than market prices are.\u201d170<\/a><\/sup>Avenancio-Le\u00f3n & Howard, supra<\/em> note 11, at 1383. Notably, the over-assessment of minority areas is greater than the over-assessment of poorer, but not minority, areas. See id.<\/em> at 1383\u201385. <\/span> By controlling for a battery of known facts about property attributes, they ultimately find that location matters more than assessors seem to think, both between neighborhoods and inside them.171<\/a><\/sup>Id. <\/em>at 1392\u201393.<\/span> Similarly, Amornsiripanitch argues that a failure to take stock of \u201cneighborhood characteristics\u201d accounts for a substantial amount of PTAR.172<\/a><\/sup>Amornsiripanitch, supra<\/em> note 11, at 4. To be sure, his methods do not allow him to differentiate between the improvement characteristics and land characteristics that drive PTAR. Amornsiripanitch instead broadly describes features that are \u201ceasily observable\u201d and \u201coften included in tax assessors\u2019 regression models\u201d as \u201chousing characteristics,\u201d and less easy to quantify features as \u201cneighborhood characteristics.\u201d Id.<\/em><\/span><\/p>\n

Why would this be the case? Assessors do, in fact, consider location. Traditionally, they have done so by creating neighborhood zones to facilitate comparative sales valuation.173<\/a><\/sup>Chris Berry, Reassessing the Property Tax<\/em> 6 (U. Chi. Harris Sch. Pub. Pol\u2019y, Working Paper, 2021) (\u201cOf particular note, assessors must appropriately capture local variation in housing markets, which is often done by controlling for neighborhood attributes or including a set neighborhood of indicator variables.\u201d). <\/span> And although more modern techniques often include out-of-zone sales as part of the statistical models used for assessment, they still generally use neighborhood as a factor in the assessment.174<\/a><\/sup>See <\/em>Avenancio-Le\u00f3n & Howard, supra<\/em> note 11, at 1389. Time trends, or efforts to figure out how to generate information from sales that happened in different quarters or years during a reassessment cycle, are usually adjusted on a jurisdiction-wide basis. See <\/em>Berry, supra<\/em> note 9, at 6.<\/span><\/p>\n

But the locational variables that assessors rely on can be too crude to capture distinctions in access to amenities and social meaning that determine a great deal about property values. Indeed, the areas assessors use to control for location are often just too big to capture relevant differences.175<\/a><\/sup>See <\/em>Avenancio-Le\u00f3n & Howard, supra<\/em> note 11, at 1416.<\/span> Neighborhood zones necessarily need to be broad in order to include enough comparable property sales. But while zones that are too small do not contain enough sales, zones that are too big fail to capture more fine-grained differences between neighborhoods and blocks.<\/p>\n

Measuring access to amenities can be difficult. Sometimes the value of land turns on formal boundaries which can be relatively easily accounted for, like catchment areas for different local public schools.176<\/a><\/sup>See<\/em> Bartley R. Danielsen, Joshua C. Fairbanks & Jing Zhao, School Choice Programs: The Impacts on Housing Values<\/em>, 23 J. Real Est. Lit. <\/span>207, 208 (2015) (arguing assignment to schools affects property values, but school choice programs attenuate this effect). <\/span> But other times, access to amenities is harder to see, like which properties are up on a ridge and thus have better views or block-by-block variations in crime rates.177<\/a><\/sup>See, e.g.<\/em>, Philip Bulman, In Brief: Block by Block: Zeroing in on Crime Trends<\/em>, Nat\u2019l Inst. of Just.<\/span> (Mar. 2, 2011), https:\/\/nij.ojp.gov\/topics\/articles\/brief-block-block-zeroing-crime-trends [https:\/\/perma.cc\/B2JK-J36C]. <\/span> Assessors try to take account of particularly important forms of amenities, like access to a shoreline in Hawaii.178<\/a><\/sup>City & Cnty. of Honolulu v. Steiner, 834 P.2d 1302, 1307 (Haw. 1992). <\/span> But lots of locational facts about access to amenities are likely either too small or too subtle for their models given the information they have.<\/p>\n

Even more difficult is trying to capture social meaning. Often what determines a property\u2019s value is who else lives nearby. Sometimes this is because certain neighbors are attractive, such as particularly good coffee shops or high-status residents. But sometimes this is because certain neighbors make a property less valuable. This is particularly relevant in contexts where there are racially-animated preferences (and expectations of those tastes in others).179<\/a><\/sup>Cf. <\/em>Thomas C. Schelling, Dynamic Models of Segregation<\/em>, 1 J. Mathematical Socio.<\/span> 143 (1971); Thomas C. Schelling, Micromotives and Macrobehavior (<\/span>1978).<\/span> Avenancio-Le\u00f3n and Howard argue that this drives a substantial amount of the over-assessment of homes owned by minorities, given that over-assessment is increasing in the minority population of a census tract.180<\/a><\/sup>Avenancio-Le\u00f3n & Howard, supra<\/em> note 11, at 1416.<\/span> Notably, these gradations can be extremely fine. Single blocks or half blocks can be the dividing line between groups, both racial and economic.181<\/a><\/sup>See, e.g.<\/em>, Nicholas Dawidoff, The Other Side of Prospect <\/span>(2022) (discussing the economic and social distinctions marked by the two sides of Prospect Street in New Haven, CT).<\/span> And these facts can be hard for assessors to see.<\/p>\n

To the extent that PTAR is driven by a failure to see distinctions in the value of location, it makes the property tax less Georgist. For example, the owner of a house next to a recently opened good coffee shop has not done anything but nonetheless sees a property value increase.182<\/a><\/sup>This may even be true for Starbucks, although separating cause and effect can be challenging. See<\/em> Edward L. Glaeser, Hyunjin Kim & Michael Luca, Nowcasting Gentrification: Using Yelp Data to Quantify Neighborhood Change<\/em>, 108 AEA Papers and Proceedings<\/span> 77, 80 (2018) (finding that the \u201centry of each additional Starbucks into an area is associated with a 0.5% increase in local housing prices\u201d). And, certain grocery stores seem to have a similar effect, although separating cause and effect is again difficult. See, e.g.<\/em>, Jamie Anderson, Whole Foods & Trader Joe\u2019s Provide a Healthy Boost to Nearby Homes<\/em>, Zillow Rsch.,<\/span> (June 16, 2017), https:\/\/www.zillow.com\/research\/whole-foods-trader-joes-home-value-11696\/\/ [https:\/\/perma.cc\/645Z-9434].<\/span> If assessors are not capturing these gains, the property tax is becoming both more regressive and less Georgist.<\/p>\n

D. Property Tax Assessment Regressivity, and the Property Tax as a Form of Home Value Insurance<\/em><\/p>\n

Most Americans with any amount of wealth have most of their assets tied up in a home.183<\/a><\/sup>Paul Ausick, How Much of Americans\u2019 Personal Wealth is Tied Up in Their Home?<\/em>, 24\/7 Wall St.<\/span> (Oct. 4, 2018), https:\/\/247wallst.com\/economy\/2018\/10\/04\/how-much-of-americans-personal-wealth-is-tied-up-in-their-home [https:\/\/perma.cc\/2U6G-AVA2] (reporting 2016 Federal Reserve survey which found that \u201c[t]he median U.S. household had 68% of its wealth stored snugly in its primary residence\u201d).<\/span> This investment is neither diversified nor insured against most risks. In theory, ad valorem<\/em> property taxes can provide a limited form of insurance. But PTAR makes that insurance less effective.184<\/a><\/sup>This Article does not address the interaction between property values and macroeconomics. From the perspective of local governments, the property tax is considered a good tax during recessions because property tax revenue does not usually fall as quickly as income or sales tax revenue. See, e.g.<\/em>, Matthew D. McCubbins & Ellen Moule, Making Mountains of Debt Out of Molehills: The Pro-Cyclical Implications of Tax and Expenditure Limitations<\/em>, 63 Nat\u2019l Tax J. <\/span>603, 615 (2010); Joan Youngman, Lincoln Inst. Land Pol\u2019y, A Good Tax: Legal and Policy Issues for the Property Tax in the United States <\/span>222 (2016). The reason is two-fold. First, property values are based on the future returns of holding property, something that will outlive the current economic cycle. Second, valuations themselves are backwards-looking, using earlier sales to inform values today. And, of course, local governments can, and often do, raise property tax rates to offset declines in home values. See, e.g.<\/em>, Byron Lutz, Raven Molloy & Hui Shan, The Housing Crisis and State and Local Government Tax Revenue: Five Channels<\/em>, 41 Reg\u2019l. Sci. & Urb. Econ.<\/span> 306, 306 (2011) (suggesting that local governments do raise taxes when property values decline). However, the downside of this stability is that when incomes fall during recessions, property taxes do not. See generally <\/em>Andrew Hayashi, Countercyclical Property Taxes<\/em>, 40 Va. Tax Rev.<\/span> 1, 1 (2020). This harms property owners, creating economic headwinds (relative to incomes, property taxes are going up, exactly what Keynesianism suggests governments should not do) and sometimes forcing foreclosures. Id. <\/em>But the form of \u201cinsurance\u201d discussed in this section does not cover this type of macroeconomic risk. <\/span><\/p>\n

Governments at all levels provide incentives for people to buy homes, through both the tax code and policies like mortgage insurance and creating a secondary market for mortgages.185<\/a><\/sup>Tax Pol\u2019y Ctr., What Are the Tax Benefits of Homeownership? (2020), https:\/\/taxpolicycenter.org\/briefing-book\/what-are-tax-benefits-homeownership [https:\/\/perma.cc\/NSR2-HFX9]; Mark P. Keightley<\/span>, Cong. Rsch. Serv., Why Subsidize Homeownership? A Review of the Rationales 1 <\/span>(2019), https:\/\/crsreports.congress.gov\/product\/pdf\/IF\/IF11305 [perma.cc\/CR6W-HBAE]. <\/span> This is justified on a number of grounds. For instance, it is regularly argued that homeowners invest more in their communities and properties, providing positive externalities for others that ought to be subsidized.186<\/a><\/sup>See, e.g.<\/em>, A. Mechele Dickerson, The Myth of Home Ownership and Why Home Ownership is Not Always a Good Thing<\/em>, 84 Ind. L. J. <\/span>189, 191 (2009).<\/span> Another key argument, however, is that encouraging homeownership is a good way to encourage savings.187<\/a><\/sup>Id. <\/em>at 190\u201391.<\/span> In this way, the home serves not only as shelter but also as a store of value.<\/p>\n

But homes are in many ways deeply inappropriate vehicles for savings.188<\/a><\/sup>See, e.g.<\/em>, id.<\/em> at 217\u201318 (describing the many ways in which home ownership failed to function as an effective forced-savings device in the lead up to the 2008 housing crisis); see generally<\/em> Robert J. Shiller, Macro Markets: Creating Institutions for Managing Society’s Largest Economic Risks <\/span>(1993).<\/span> Because they are so expensive, homeowners often have little diversification in assets they hold.189<\/a><\/sup>See <\/em>Fischel, supra <\/em>note 119, at 162 (noting that \u201chomeowners . . . cannot diversify their assets\u201d because \u201c[m]ost homeowners do not own other assets of any consequence\u201d) (citing Gary V. Engelhardt & Christopher J. Mayer, Intergenerational Transfers, Borrowing Constraints, and Saving Behavior: Evidence from the Housing Market<\/em>, 44 J. Urb. Econ. <\/span>135, 136 (1998)). See also <\/em>Fischel, supra <\/em>note 119, at 162 (arguing that homeowners \u201ccannot diversify location risk by placing their home in several different jurisdictions\u201d). <\/span> Most homeowners put a large portion of their money into a single asset, and thus face a huge amount of risk that their sole investment will lose value.190<\/a><\/sup>See<\/em> supra<\/em> note 183 and accompanying text.<\/span> Further, the value of that asset is correlated with the owner\u2019s income.191<\/a><\/sup>See, e.g.<\/em>, Karl E. Case & John M. Quigley, How Housing Booms Unwind: Income Effects, Wealth Effects, and Feedbacks Through Financial Markets<\/em>, 8 Eur. J. Hous. Pol\u2019y 161<\/span>, 162 (2008) (finding that housing market declines cause a \u201cdecline in aggregate expenditure and ultimately a reduction in income and employment\u201d).<\/span> Indeed, one major reason that property values in an area go down is because the local economy is weak.192<\/a><\/sup>See, e.g.<\/em>, Edward L. Glaeser & Giacomo A. M. Ponzetto, Did the Death of Distance Hurt Detroit and Help New York?<\/em>, in Agglomeration Economics<\/span> 303, 303-05 (2010) (\u201cWhen the costs of distance fall, manufacturing firms leave the city, which causes a decline in urban income and property values.\u201d). Cf.<\/em> Schleicher, supra <\/em>note 158, at 1513 (highlighting the low rents in Detroit caused by an excessively large housing stock, itself owed to negative economic shocks in the city since its peak in 1950). <\/span> If, say, a big local employer leaves town, property values will go down at the same time that the owners of those properties are likely to see reduced income, either because they were laid off or lost sales due to decreased economic activity in the area. And, worse still, these shortcomings are compounded because almost all buyers go deeply into debt to buy their homes.193<\/a><\/sup>See supra <\/em>note 122 and accompanying text. <\/span> Borrowing a lot of money and then putting all of it, plus the entirety of one\u2019s savings, into a single asset, the value of which correlates with one\u2019s income, is about as far from optimal portfolio construction as one can get.<\/p>\n

Given the risks entailed in storing so much of one\u2019s wealth in a single asset, homeowners buy insurance against certain physical risks\u2014fire, flood, and so on.194<\/a><\/sup>See <\/em>Robert J. Shiller, The New Financial Order: Risk in the 21st Century<\/span> 118-36 (2003).<\/span> But these types of insurance do not protect homeowners against risks like a big employer leaving town or someone putting a smelly factory nearby.195<\/a><\/sup>Cf. <\/em>Fischel, supra <\/em>note 119, at 162 (\u201c[Homeowners] can insure the physical capital of their homes, but not its location value.\u201d). <\/span> Nor do they protect homeowners against amenities being built elsewhere that shift demand, such as a new light rail line going to a different community or cool restaurants popping up on the other side of town. That is, this limited insurance does not protect homeowners against the possibility that the market for their home will go down.<\/p>\n

Further, the absence of insurance has been linked to political behavior. William Fischel has argued that NIMBYism (Not In My Backyard), or opposition to housing construction near people\u2019s homes, is driven in part by concerns that nearby new development might increase the variance in home prices.196<\/a><\/sup>See <\/em>Fischel<\/span>, supra<\/em> note 54, at 16.<\/span> Undiversified homeowners use politics, Fischel argues, to reduce that variance. Further, communities have tried to create home value insurance to calm the nerves of homeowners during periods of racial change.197<\/a><\/sup>See <\/em>Shiller and Weiss, supra <\/em>note 45.<\/span> The idea is that homeowners might be concerned that racial change\u2014to avoid euphemism, the arrival of new black residents in majority white areas\u2014will reduce the value of their homes, causing residents to oppose integration.<\/p>\n

Scholars, investors, and policymakers have been trying to create a comprehensive form of home value insurance for years.198<\/a><\/sup>See, e.g.<\/em>, Fischel<\/span>, supra<\/em> note 54, at 16; Matityahu Marcus & Michael K. Taussig, A Proposal for Government Insurance of Home Values Against Locational Risks<\/em>, 46 Land Econ. <\/span>404 (1970).<\/span> The most famous of these scholars is Nobel-Prize-winning economist Robert Shiller, who discussed the benefits of home equity insurance extensively and influentially in his scholarly work with Karl Case and Allan Weiss.199<\/a><\/sup>See, e.g.<\/em>, Shiller and Weiss, supra <\/em>note 45; Shiller, <\/span>supra<\/em> note 195, at 118\u201336; Karl E. Case, Robert J. Shiller & Allan N. Weiss, Index-Based Futures and Options Markets in Real Estate<\/em>, J. 1993 Portfolio Mgmt.<\/span>, 83, 86\u201389; Shiller<\/span>, supra <\/em>note 188.<\/span> Case, Shiller, and Weiss went on to create the Case-Shiller Home Price Indices, national and regional measures of housing values, as well as a variety of financial products tied to these indices to provide insurance.200<\/a><\/sup>See <\/em>Lee Anne Fennell, Homeownership 2.0<\/em>, 102 Nw. U. L. Rev.<\/span> 1047, 1048 (2008).<\/span> While the Case-Shiller Index is frequently discussed, and derivatives attached to it and other property value indexes are available, it did not succeed in creating a popular mechanism for individual homeowners to hedge the risk associated with having most of their wealth tied up in a single investment.201<\/a><\/sup>See, e.g.<\/em>, Fabozzi, et al., supra<\/em> note 45, at 132.<\/span><\/p>\n

In theory, property taxes can serve as a limited form of property value insurance. If property values go down, property owners receive a minor form of compensation\u2014a lower assessment and thus lower payments. In contrast, the owner does not get the full set of gains when property values increase\u2014local governments get some of the benefit in increased revenues.<\/p>\n

However, any discussion of the insurance value of a tax on investments must contend with the well-known argument by Evsey Domar and Richard Musgrave that an income tax with loss offsets does not reduce risk because investors, understanding that the tax reduces risk, simply take riskier bets.202<\/a><\/sup>See<\/em> Domar & Musgrave, supra<\/em> note 46, at 389\u201391.<\/span> The same logic applies to wealth-based taxes, like the property tax.203<\/a><\/sup>See<\/em> Hemel, supra<\/em> note 47, at 763; Louis Kaplow, Taxation and Risk Taking: A General Equilibrium Perspective<\/em>, 47 Nat\u2019l Tax J.<\/span> 789, 790 (1994).<\/span> Maybe people, understanding that property taxes will reduce both upside and downside risk from their investment, buy bigger houses or put less money down, increasing their risk profile.<\/p>\n

This surely happens to some extent, but it is unlikely to nullify the insurance effect of property taxes. In the Domar and Musgrave model, investors rebalance their portfolios after every tax change to keep their preferred risk profile.204<\/a><\/sup>See<\/em> Domar & Musgrave, supra<\/em> note 46, at 418\u201321. <\/span> But, as Daniel Hemel notes:<\/p>\n

Portfolio adjustment is more likely in some contexts than others. Sophisticated high-net-worth individuals are, perhaps, likely to rebalance their holdings of lower-risk fixed-income assets and higher-risk equities in response to tax changes. It is less likely, though, that a middle-income household whose wealth lies primarily in owner-occupied real estate will scale up from, say, one home to 1.2658 homes in response to [a tax change].205<\/a><\/sup>Hemel, supra<\/em> note 47, at 763.<\/span><\/p>\n

The fact that houses are both investment and consumption goods make this type of rebalancing even less likely. A property tax cut would lead to less risk protection, and thus an incentive, in Domar-Musgrave terms, to reduce the risk profile of their investment. But owners cannot easily reduce the size of their investment (selling off a room?), nor is it clear that they would want to if they could. Homeowners also face cash constraints. Because investments in homes are such a large part of their individual portfolios, it is not certain that homeowners have the funds available to reduce the scope of their investment in other ways, such as by pre-paying part of their mortgage.206<\/a><\/sup>See<\/em> supra <\/em>note 189\u2013193 and accompanying text for a discussion of houses and portfolios. <\/span><\/p>\n

Further, the shape of investments in housing\u2014the amount down, the terms of a contract\u2014are often largely determined by other tax rules, like the mortgage interest deduction, and regulatory rules, like the extent of FHA insurance and the policies of Fannie Mae and Freddie Mac.207<\/a><\/sup>See, e.g.<\/em>, Dickerson, supra <\/em>note 186, at 193\u201396. <\/span> As a result, investors may not currently be at their preferred level of risk because doing so would mean losing out on numerous benefits provided by the government. Therefore, while the Domar-Musgrave effect must be taken into account, it is likely that the property tax still provides homeowners with some degree of home value insurance.208<\/a><\/sup>It should be noted that the literature is not certain that the existence of an insurance effect is normatively attractive for taxes in general. As Hemel writes, \u201cno clear normative implication follows from the fact that portfolio adjustments will be costly or unlikely for some taxpayers. In some cases, a higher tax rate on the risky return will prevent taxpayers from achieving their desired level of risk exposure. In other cases, a higher tax rate on the risky return may provide taxpayers with an insurance policy that they desire but otherwise would not be able to purchase.\u201d Hemel, supra<\/em> note 47, at 763. With regards to property taxes in particular, though, it is pretty clear that property value insurance is normatively attractive. The extent of investment in housing for most individuals is so far beyond what prudent diversification would suggest, and so clearly driven by federal and state policy encouraging homeownership and investment, that there is no reason to think that existing investments reflect optimal levels of risk exposure. Further, the existence of some degree of insurance may reduce harmful political opposition to development and socially harmful concerns about integration. <\/span><\/p>\n

However, the insurance benefit of property taxes only exists in large taxing jurisdictions. In a small town, most properties are likely to rise and fall in value together. If there\u2019s a shock\u2014better or worse economic conditions, improved or diminished amenities\u2014it will apply pretty similarly to all properties in the town. If all properties in a taxing jurisdiction lose value, then the owner of any given lot does not receive any tax benefit. Her property will be assessed at a lower value, but so will all other properties. The town will then lose tax revenue and face the choice of either raising tax rates or cutting spending (or both). If it raises taxes in order to keep spending on services constant, then property owners are not getting a tax cut\u2014they are just paying a higher rate on property with a lower assessment. Conversely, cutting services also harms homeowners, as the services were presumably set in a way to make them happy in the first place. And decreased services, just like higher taxes, are capitalized into property prices.209<\/a><\/sup>See<\/em> Fischel<\/span>, supra <\/em>note 54, at 56 (remarking that \u201ccapitalization is everywhere\u201d). <\/span><\/p>\n

As a result, property taxes, even in theory, only provide insurance against price changes among properties within a specific local government. That is, they provide a limited form of insurance against the risk that one\u2019s home will decline in value relative to properties in other neighborhoods in the same city or school district. Where prices in a jurisdiction diverge, the property tax transfers some of the surplus from the winners to the losers by shifting the tax burden each group pays (while continuing to provide services on an equal basis).<\/p>\n

To be sure, even this limited form of insurance is subject to other caveats depending on a specific jurisdiction\u2019s assessment regime. For example, if assessments do not happen frequently, the insurance benefit they provide is limited, perhaps only kicking in years after a property price decline.210<\/a><\/sup>One counterargument should be noted. If prices go up and assessments track prices, housing price increases result in less cash in homeowners\u2019 pockets. PTAR might mitigate the negative cash effect that affects owners of property that is increasing in value. That is, PTAR (and not property tax in PTAR\u2019s absence) might be thought of as a form of insurance against property tax increases. This style of argument is familiar in property tax. Arguments for Proposition 13-style acquisition value assessments, for less radical limits on annual increases in property tax assessments, for \u201ccircuit breakers\u201d that cap property tax liability for people with low incomes, and for exemptions for populations like the elderly all have a similar source. Andrew T. Hayashi, The Quiet Costs of Taxation: Cash Taxes and Noncash Bases<\/em>, 71 Tax L. Rev.<\/span> 781, 782 (2018) (discussing why property tax limitations are premised on \u201cconcerns about imposing hardship on illiquid taxpayers\u201d); John A. Miller, Rationalizing Injustice: The Supreme Court and the Property Tax<\/em>, 22 Hofstra L. Rev.<\/span> 79, 112\u201316 (1987) (arguing that worries about ability to pay, so commonly invoked in debates over Proposition 13 and caps on annual increases, cannot justify them); Micah Lemons, Note: Circuit Breakers: Implementing a Property Tax Credit to Help Low-Income Households<\/em>, 19 Geo. J. Poverty Law & Pol’y<\/span> 111, 112\u201313 (2006) (discussing circuit breakers, exemptions, and tax caps as being aimed in part at addressing the fact that property taxes are based on wealth, not ability to pay); Katie Babes, Property Tax Relief for the Elderly: A Survey of the Nation<\/em>, 6 Marq. Benefits & Soc. Welfare L. R.<\/span> 325, 328 (2005) (noting that justification for property tax relief for the elderly is that they are less likely to have cash on hand). These arguments, like the argument that PTAR is a form of insurance against tax increases, are premised on the idea that taxing wealth, rather than income, is unfair because holders of assets that increase in value do not necessarily have cash in their pockets and may have to borrow against the value of their assets or sell them to pay their taxes. Zachary Liscow and Edward Fox, The Psychology of Taxing Capital Income: Evidence from a Survey Experiment on the Realization Rule<\/em>, 213 J. Pub. Econ.<\/span> 1, 6 (2022) (survey data finds general distaste for taxation paper gains, including for property tax purposes). Property markets have a plethora of financial tools that allow people to borrow against increasing values, such as reverse mortgages and home equity loans. Hayashi, supra<\/em> note 210, at 792 (arguing that the existence of such tools mitigates but does not remove the cost of wealth taxation on liquidity-strapped holders of appreciating property). In practice, there is substantial variation in how much homeowners consume out-of-home value increases. See generally <\/em>Aditya Aladangady, Housing Wealth and Consumption: Evidence from Geographically Linked Microdata<\/em>, 107 Amer. Econ. Rev.<\/span> 3415 (2017) (summarizing literature and then finding slightly less marginal propensity to consume than in previous literature); Atif Mian, Kamalesh Rao & Amir Sufi, Household Balance Sheets, Consumption, and the Economic Slump<\/em>, 128 Q. J. Econ.<\/span> 1687 (2013) (discussing variation in and effect of debt on marginal propensity of homeowners to consume based on increases and decreases in housing wealth); Iacoviello, supra <\/em>note 44 (summarizing literature). PTAR makes the property tax into more of a head tax and less of property tax (at least directionally). As a result, it has the effect of reducing the effects of the property tax, which, as a wealth tax, is not sensitive to income or cash on hand. How much one is concerned about this turns very substantially on one\u2019s broader view of the property tax (and wealth taxes generally). Further, one of the central concerns that has animated the quest for home equity insurance\u2014that the absence of insurance leads homeowners to use politics or social persuasion to block new development or racial integration\u2014is clearly responsive to the story about PTAR and insurance told in the main text. Thanks to Ryan Bubb for pushing me to include this. <\/span> Similarly, if policies stand in the way of assessment changes, then the insurance value is defeated. Many states and cities limit how quickly property assessments can increase, reducing the ability of local jurisdictions to capture the benefits of price appreciation.211<\/a><\/sup>See<\/em> supra<\/em> notes 14\u201315 and accompanying text.<\/span> Where that is the case, property taxes do not provide insurance, as there is no surplus to be transferred from property owners whose relative home value has increased to those whose relative home value has declined.<\/p>\n

In any event, PTAR reduces the insurance value of the property tax further. To see why, imagine that properties in a jurisdiction start off as being roughly equal in value to one another, but then diverge. Under an accurate property tax assessment system, those that gain on a relative basis would pay more in property tax and those that decline on a relative basis would pay less. But if the assessment system undervalues higher-value properties, and overvalues lower-value properties, then this does not happen. The relative losers do not get a tax cut, and the relative winners do not get a tax increase.<\/p>\n

The same logic holds if prices were originally different from one another and then converge. In that case, the high-value property that falls in price does not get a tax cut, as it was already assessed at a lower rate. And the lower-value property that increases in price does not get a tax increase, as it was already assessed at a higher rate.<\/p>\n

Thus, PTAR stands in the way of the property tax playing a role in providing something that the market has failed to\u2014a form of property value insurance.<\/p>\n

IV. The Conditional Case for Fixing Property Tax Assessment Regressivity<\/span><\/p>\n

Can PTAR be fixed? Some sources of PTAR are simply choices governments make. Of the potential sources of PTAR, the easiest to fix\u2014in a technical, not political sense\u2014would therefore be the government policies that contribute to it, like Proposition 13 and assessment caps.<\/p>\n

Other contributors to PTAR are also potentially fixable, but doing so would be expensive. For example, PTAR is worse where assessments are infrequent; jurisdictions that wanted to fix PTAR could simply hire more assessors and schedule more frequent reassessments.212<\/a><\/sup>See<\/em> supra <\/em>note 106 and accompanying text; Melnik & Cenedella, supra<\/em> note 64, at 299 (calling for state governments to take over assessment and reassess properties every year). <\/span> Similarly, the process of appealing assessments, another contributor to PTAR,213<\/a><\/sup>See<\/em> supra <\/em>notes 78\u201380 and accompanying text. <\/span> could be reformed with additional investment, such as by providing the government with more resources to contest appeals or providing resources that make it easier for poorer homeowners to appeal.<\/p>\n

PTAR is also a result of methods of assessment, driven in large part by the limited information that assessors have. Hiring more assessors and encouraging them to learn more about individual properties could make assessments more accurately reflect investments in property or depreciation. Hiring people who have, or can obtain, information about access to amenities and localized social meaning would be even more difficult but, in theory, is possible as well. It also appears that jurisdictions with elected, rather than appointed, tax assessors have more PTAR, as low-information elections are particularly responsive to the interests of rich property owners.214<\/a><\/sup>See<\/em> Michael W. Sances, The Distributional Impact of Greater Responsiveness: Evidence from New York Towns<\/em>, 78 J. Pol<\/span>. 105 (2016) (finding this effect in New York State).<\/span><\/p>\n

Given these varied contributors to regressivity, fixing PTAR would be expensive. It would also be politically difficult, as it would involve raising taxes on the most politically active part of the local electorate. But would it provide benefits?<\/p>\n

The answer is \u201cyes, but.\u201d That is, there would be gains from fixing PTAR, but some risks as well. Achieving both the full extent of the gains and mitigating the accompanying risks would require adopting other policies, like locating a greater extent of taxing authority in larger local governments\u2014such as county governments\u2014and adopting statewide reforms that limit local land use authority.<\/p>\n

That there are any downsides to fixing PTAR may seem odd, as the basis for PTAR is a systematic and regressive mistake. PTAR occurs because assessors underrate how much expensive properties will eventually sell for and, conversely, overrate how much cheaper properties will sell for. This is an error, and a deeply unfair one. The effect is to treat property owners as if they are more similar in how much wealth they have than they are in reality.<\/p>\n

In a way, you can think of PTAR as reducing the extent to which property taxes depend on property wealth. This makes them more closely resemble head taxes on property owners, where everyone pays the same amount no matter what their property costs. To be sure, PTAR doesn\u2019t turn the property tax into a head tax\u2014it would have to be much more dramatic to do so\u2014but it pushes the property tax in that direction. As a result, some of the upsides and downsides of fixing PTAR are just the upsides and downsides of relying on property taxes to fund local governments. But there are other benefits and drawbacks of doing so that may be less readily apparent.<\/p>\n

To start, fixing PTAR would redistribute wealth quickly. Reassessing property accurately would not only reduce taxes on owners of cheaper property and increase them on owners of expensive property, but it would also have a direct wealth effect. Indeed, because property taxes are capitalized into property values, fixing PTAR would immediately transfer wealth from richer to less rich property owners. Further, this would be a form of redistribution that would be hard to argue against, as all it would involve is interpreting state and local law more accurately.<\/p>\n

While the redistributive effect would be instantaneous, ending PTAR could also have a more gradual effect on behavior over time, at least to the extent to which PTAR is driven by house-specific variables. For example, fixing PTAR would reduce the incentive for people to invest in expensive properties by taxing a greater amount of the increase in value caused by those investments. It would also reduce the incentive to invest in cheaper properties. When PTAR is in effect, investing in cheaper properties can have a double benefit, in that doing so both increases the property\u2019s value and removes it from the class of cheaper properties that receive a de facto tax penalty under PTAR. But, by making the property tax back into more of a tax on the value of property, a PTAR fix actually would create some inefficiencies because an accurately-assessed property value tax falls partially on improvements.<\/p>\n

However, the literature suggests that PTAR is driven more by failures to assess the value of land accurately. To the extent that this is true, ending PTAR would redistribute resources from owners of more valuable land to owners of less valuable land. Because the portion of the property tax that follows Georgist principles and is levied on land values is efficient, making the property tax more of a property tax along this dimension would increase efficiency as well as equity.215<\/a><\/sup>One possibility would therefore be for governments to try to fix the part of PTAR driven by misvaluation of land values, but not the part created by misvaluations of investments. This would make the property tax more Georgist. See<\/em> supra<\/em> notes 174\u2013184. See<\/em> supra<\/em> note 172 and accompanying text.<\/span><\/p>\n

Fixing PTAR might also improve the efficiency of investment in property. Under the \u201ccapital tax\u201d view, the property tax is inefficient because it influences where investment flows, discouraging investment in high-tax jurisdictions. PTAR effectively increases the number of different rates faced by investors by increasing the number of rates in a given jurisdiction. Thus, a world with PTAR operates like a world with a greater number of property tax rates, and thus creates greater bias in where investment goes. However, it does not increase or reduce the average tax burden, which is what determines the harm to capital owners.216<\/a><\/sup>See<\/em> supra<\/em> note 131.<\/span><\/p>\n

Further, fixing PTAR would also allow property taxes to operate more like a form of property value insurance. With PTAR, the property tax does not reflect the full extent of increases or losses in property value, removing a substantial amount of the insurance effect. Insurance for property values would be an extremely valuable product, so allowing the property tax to achieve this, even partially, would be very attractive.217<\/a><\/sup>Further, William Fischel argues that homeowners\u2019 NIMBY sentiments are largely driven by fear about the effects of new development on property values. See<\/em> Fischel, <\/span>supra <\/em>note 54, at 3\u201318. More specifically, Fischel argues that owners are afraid of the large potential variation in the effect of new development on property values given the extent of investment in their own property. Fischel argues that the answer to NIMBYism is property value insurance. To the extent that property taxes can provide even a little of the benefit of reducing risk, it might give at least some owners less of a reason to oppose new development.<\/span><\/p>\n

However, property tax insurance is only possible in large local governments. In small local governments, a decrease in values is likely felt by all, or most, properties in the jurisdiction. In such a situation, a decrease in values will not cause a tax cut, as the taxing local government will lose a lot of revenue and therefore need to respond by either raising tax rates or cutting spending on local services. Thus, to get the benefit of fixing PTAR, states would also have to either create larger local governments (e.g., through easier annexation rules) or give more power to bigger governments like counties to both tax property and provide services.<\/p>\n

Finally, fixing PTAR could lead to greater opposition to new development. Recall that in the \u201cbenefits tax\u201d model of the property tax, local residents try to stop new, denser development in order to fix in place per capita property values. The motivation in doing so is to turn the property tax into something like a head tax. But, at least in theory, PTAR allows them to make the property tax into something more like a head tax without actually stopping new development. By pretending that property values are more similar than they actually are, PTAR allows local governments to approve denser new development without reducing per capita property values. That is, PTAR pushes the property tax in the direction of being a head tax, and therefore reduces the need to use land use policy to minimize diversity in actual property values.<\/p>\n

As a result, if PTAR plays a role in allowing for more housing development, it may perversely be both efficient and progressive. It is extremely counterintuitive that a tool that makes property taxes into something more like a head tax could be in any way progressive. After all, property taxes are taxes on wealth, and wealth is definitionally something that the rich have more of than the poor. Moreover, head taxes are necessarily regressive; charging poor people and rich people the same dollar amount for something takes up a larger portion of a poor person\u2019s wealth.<\/p>\n

But if local governmental reliance on property taxes creates political incentives to pass land use polices that reduce the production of dense or otherwise cheaper housing, then the losses to poor people might be larger than the benefits they receive from having a more progressive tax structure by eliminating PTAR.<\/p>\n

Bruce Hamilton identified this possibility in 1976. He wrote:<\/p>\n

Increasing the nominal progressivity of the property tax, while generating competitive economic forces for expansion of LIH<\/em> [low-income housing], also generates political forces for curbing the growth of LIH<\/em> . . . . It should be emphasized that the fiscal incentive to restrict the supply of LIH<\/em> extends beyond restriction to efficient levels. Any<\/em> increment of LIH<\/em>, regardless of whether it is justified on Pareto criteria, confers capital losses on current owners of developed property. This . . . raises the ironic possibility that the distribution of income might be more favorable to the poor if local governments were to replace local property taxes with simple head taxes, thus eliminating the fiscal incentive to restrict the supply of low income housing.218<\/a><\/sup>Hamilton, Capitalization<\/em>, supra<\/em> note 37, at 751\u201352. <\/span><\/p>\n

Further, allowing more dense development in rich suburbs means greater integration by social class.219<\/a><\/sup>Alex Baca, Patrick McAnaney & Jenny Schuetz, \u201cGentle\u201d Density Can Save Our Neighborhoods<\/em>, Brookings Inst.<\/span> (Dec. 4, 2019), https:\/\/www.brookings.edu\/articles\/gentle-density-can-save-our-neighborhoods\/ [https:\/\/perma.cc\/8BYR-CLR4] (\u201c[D]iversifying the housing stock in exclusive neighborhoods creates better access to economic opportunity\u2026\u201d)<\/span> This could have all sorts of benefits for social mobility.220<\/a><\/sup>See, e.g.<\/em>, Kahlenberg<\/span>, supra<\/em> note 52, at 37\u201350 (discussing benefits of economic desegregation).<\/span><\/p>\n

Beyond the distributive effects, however, land use restrictions pushed by residents seeking to avoid redistribution can also have a huge impact on overall economic output. When Hamilton was writing, the idea that all jurisdictions would raise very substantial zoning barriers seemed fanciful. Big downtowns would always allow growth, the conventional wisdom held, and the exurban fringe seemed to be ever-growing.221<\/a><\/sup>See, e.g.<\/em>, David Schleicher, City Unplanning<\/em>, 122 Yale L.J. 1670, 1693 (2013) (<\/span>discussing the growth of Sunbelt cities). <\/span><\/span> The result was that no one worried about housing shortages at the region-wide level.222<\/a><\/sup>Id.<\/em><\/span><\/p>\n

But, by the 1990s and 2000s, this became a very real phenomenon. Housing prices in the highest-wage regions exploded, as housing restrictions limited the supply response to demand shocks.223<\/a><\/sup>Id.<\/em><\/span> Regions like New York City, Boston, Washington, San Francisco, Silicon Valley, Los Angeles, and San Diego all developed region-wide housing shortages, a problem that later extended to many other regions as well.224<\/a><\/sup>Id.<\/em><\/span> The lack of housing supply due to excessive local regulations has become a national crisis, which almost all economists and leading political figures in both political parties recognize as harming economic growth and equity.225<\/a><\/sup>Schleicher, supra<\/em> note 51, at 1323\u201333 (summarizing literature and broad political support). It should be noted that one of the leading papers on the economic costs of zoning regulation, Chang Tai-Hsieh & Enrico Moretti, Housing Constraints and Spatial Misallocation<\/em>, 11 Am. Econ. J. 1 (2019),<\/span> has been challenged for using a non-replicable and for having made statistical errors. Brian Greaney, Housing Constraints and Spatial Misallocation: Comment<\/em>,

\nhttps:\/\/drive.google.com\/file\/d\/1iNdQ2YBfUCbc2uH4p9wdnuoVGhJZLSqe\/view [https:\/\/perma.cc\/M3RQ-NLFZ]. One of the authors of the original paper has responded, and the debate is ongoing. See<\/em> Bryan Caplan, Hsieh Replies to Greaney<\/em>, Bet On It<\/span> (Nov. 16, 2023), https:\/\/betonit.substack.com\/p\/hsieh-replies-to-greaney [https:\/\/perma.cc\/GCV5-ZA3G]. However, the broader idea of the paper\u2014that land use regulations create substantial economic costs\u2014is supported by many papers using many methodologies. See,<\/em> e.g.<\/em>, Gilles Duranton & Diego Puga, Urban Growth and Its Aggregate Implications<\/em>, 91 Econometrica<\/span> 2219, 2255 (2023) (asserting that relaxing land use rules in seven large U.S. cities would lead to an \u201cincrease in aggregate output of 7.95% and an increase in aggregate consumption of 2.16%\u201d); Kyle F. Herkenhoff, Lee E. Ohanian & Edward C. Prescott, Tarnishing the Golden and Empire States: Land-Use Restrictions and the U.S. Economic Slowdown<\/em>, 93 J. Monetary Econ<\/span>. 89, 90 (2018) (\u201cU.S. labor productivity would be 12.4% higher and consumption would be 11.9% higher if all U.S. states moved halfway from their current land-use regulation levels to the current Texas level.\u201d); David Albouy & Gabriel Ehrlich, Housing Productivity and the Social Cost of Land-Use Restrictions<\/em>, 107 J. Urb. Econ.<\/span> 101, 101 (2018) (\u201cObserved land-use restrictions raise housing costs by 15 percentage points on average, reducing average welfare by 2.3% of income on net.\u201d); Devin Bunten, Is the Rent Too High? Aggregate Implications of Local Land-Use Regulation<\/em> 1 (Fed. Rsrv. Bd., Working Paper No. 2017-064, 2017), https:\/\/www.federalreserve.gov\/econres\/feds\/files\/2017064pap.pdf [https:\/\/perma.cc\/2RL2-RVRW]<\/strong> (finding that \u201c[w]elfare and output would be 1.4% and 2.1% higher, respectively\u201d under optimal planning as opposed to the current, restrictive land use regime). The size of the economic losses due to zoning is fairly debatable. If the Moretti and Hsieh paper does not withstand the critical scrutiny it is under, one of the larger estimates will no longer be credible. But, the effects on national output and welfare are very large in all of these papers, and the literature is quite large and robust.<\/span><\/p>\n

Fear of property tax redistribution certainly is not the only factor driving land use restrictions. Many forces have conspired to slow housing growth in our richest metropolitan areas\u2014NIMBY preferences have many sources.226<\/a><\/sup>For a discussion of the many sources of anti-development opinions, see, e.g.<\/em>, Jessica Trounstine, Segregation By Design <\/span>(2018) (pointing to desires to keep taxes and public services away from minority populations); Richard Rothstein, The Color of Law<\/span> (2017) (discussing the history of racism in housing development and lending); Robert C. Ellickson, Suburban Growth Controls: An Economic and Legal Analysis<\/em>, 86 Yale L.J.<\/span> 385, 400 (1977) (identifying efforts by homeowner cartels to protect housing values from competition); William A. Fischel, The Rise of the Homevoters: How the Growth Machine Was Subverted by OPEC and Earth Day<\/em>, in<\/em> Evidence and Innovation in Housing Law and Policy<\/span> (Lee Anne Fennell & Benjamin J. Keys eds., 2017) (arguing that the new language of environmentalism and the desire to maintain housing value gains caused by inflation provided incentives and tools for NIMBYs to limit growth); Schleicher, supra <\/em>note 221, at 1672\u201380 (discussing land use procedure); Roderick M. Hills, Jr. & David Schleicher, Planning an Affordable City<\/em>, 101 Iowa L. Rev.<\/span> 91, 111\u201312 (2015) (citing the decline of local political parties); Matthew Yglesias, Answering Bill Maher\u2019s Concerns on Traffic and One Billion Americans<\/em>, Slow Boring<\/span> (Aug. 3, 2022), https:\/\/www.slowboring.com\/p\/answering-bill-mahers-concerns-on [https:\/\/perma.cc\/E43T-47P6] (approaching growth and traffic through a supply and demand lens).<\/span><\/p>\n

But a desire not to redistribute property tax might be a<\/em> factor. If removing PTAR makes local zoning worse, even on the margin, the cure could be worse than the disease, both in terms of distribution and in terms of economic output. One cannot make policy based on an assumption that local voters will simply behave in an enlightened way and become comfortable with local property tax redistribution when the history of the twentieth and twenty-first centuries suggests that this is not the case, even, and maybe particularly, in communities that are liberal with regards to national politics.227<\/a><\/sup>See, e.g.<\/em>, Jason Sorens, The Effects of Housing Supply Restrictions on Partisan Geography<\/em>, 66 Pol. Geography<\/span> 44, 44 (2018) (finding that \u201c[j]urisdictions with greater housing supply restriction gradually and subsequently become more Democratic\u201d); Richard D. Kahlenberg, Excluded: How Snob Zoning, Nimbyism, and Class Bias Built the Walls We Don\u2019t See <\/span>101\u201307 (2023). <\/span><\/p>\n

How might this downside be addressed? One option would be to reduce local authority over zoning before addressing PTAR. All around America, state legislatures have either passed, or are considering passing, laws that would reduce local discretion over zoning.228<\/a><\/sup>See, e.g.<\/em>, Christopher S. Elmendorf, Beyond the Double Veto: Housing Plans as Preemptive Intergovernmental Compacts<\/em>, 71 Hastings L.J.<\/span> 79, 113\u201328 (2019) (describing recent preemptive reforms in California and elsewhere); John Infranca, The New State Zoning: Land Use Preemption Amid a Housing Crisis<\/em>, 60 B.C. L. Rev. 824, 824 (2019) (<\/span>highlighting a \u201cnew wave of state interventions in local zoning\u201d).<\/span> This Article is not the place to summarize all of these efforts, which range from requiring jurisdictions to allow accessory dwelling units to caps on minimum lot size regulations to state-imposed housing targets. State laws to restrict local discretion over land use would be a wise policy in most states, as local governments\u2014even with PTAR\u2014continue to excessively restrict housing development. But if states and localities make substantial investments in order to fix PTAR, these preemptive state laws would become even more important.<\/p>\n

V. Conclusion: What Does PTAR Tell Us About Local Property Taxes and Local Governments More Broadly?<\/span><\/p>\n

The central fact about property taxes in America is that they are local<\/em>. States occasionally tax property in a variety of different ways, but the power to tax property largely falls to local governments. And, while there is variation in how local governments work\u2014for example, how much they rely on state and federal funds, whether they have other powers to tax, and the extent to which they rely on fees and special assessments\u2014the property tax is far and away the most important tool that local governments have for raising revenue themselves.229<\/a><\/sup>See<\/em> supra <\/em>note 87 and accompanying text.<\/span><\/p>\n

The local nature of property taxes is often justified by the fact that land does not move.230<\/a><\/sup>See, e.g.<\/em>, Zelinsky, supra <\/em>note 53, at 2217\u201319.<\/span> Because local governments are often quite small, there is a substantial worry that taxing income or sales at the local level will lead to tax avoidance, with people merely moving a short distance to the next jurisdiction to avoid income taxes or driving to the next town to avoid sales taxes.231<\/a><\/sup>There is some debate about how real this risk is, as agglomeration economies\u2014the economic benefits of co-location\u2014can keep people geographically fixed, at least in downtowns. See, e.g.<\/em>, Schleicher, The City<\/em>, supra<\/em> note 158, at 1535\u201340 (describing evidence that agglomeration economies \u201ccreat[e] a stickiness in individual location decisions\u201d). Cf.<\/em> Clayton P. Gillette, Local Redistribution, Living Wage Ordinances, and Judicial Intervention<\/em>, 101 Nw. U.L. Rev. <\/span>1057, 1077\u201380 (2007) (proposing reasons why wealthier residents would tolerate, or even support, local redistribution in exchange for the benefits of agglomeration economies). Notably, New York City and San Francisco both have very substantial income taxes but also many rich residents. There is also some debate about whether increased rates of working from home will change this. See, e.g.<\/em>, Schleicher, supra <\/em>note 51, at 1370\u201371.<\/span> In contrast, both land and improvements stay put, thus making them useful targets for taxation by local governments. Further, when local governments are effective and provide high-quality services for less in taxes, property values increase. As a result, homeowners become involved in local politics in an effort to increase the value of their properties (or at least reduce potential variance in their value).232<\/a><\/sup>See generally <\/em>Fischel, <\/span>supra <\/em>note 54.<\/span> In this way, property taxes provide a justification for local governance.<\/p>\n

But the idea that property taxes are a great fit for local governments has been challenged by proponents of the \u201ccapital tax\u201d view of property taxes. Capital tax proponents instead view place-to-place differentials in property tax as the source of its inefficiency.233<\/a><\/sup>See, e.g.<\/em>, Mieszkowski & Zodrow, supra<\/em> note 129, at 1120 (\u201cTo the extent that the property tax is not applied uniformly across all sectors in all jurisdictions, tax differentials will distort the allocation of capital.\u201d). There is also the question of whether capital taxation is inefficient tout court<\/em>, a subject of substantial debate in the literature. See id.<\/em> at 1119.<\/span> Investors may want to build in Connecticut towns like Bridgeport or New Haven for example, but their higher property tax rates encourage them to look to Westport or Stamford instead.234<\/a><\/sup>Conn. Off. of Pol\u2019y & Management, FY 2022\u20132023 Mill Rates (2022), <\/span>https:\/\/portal.ct.gov\/-\/media\/OPM\/IGPP-Data-Grants-Mgmt\/FY-22-23-ADM_MillRates-882022.pdf [https:\/\/perma.cc\/2B7Z-ZHNB] (listing tax rates for different local governments in Connecticut, including Bridgeport, New Haven, Westport, and Stamford).<\/span> In this view, the fact that so many local governments tax property is bad because it creates more variance in property tax rates and moves investment away from its optimal locations. Further, the more local governments there are, and the more they rely on property taxes, the greater the likely range in property tax rates. Systems with many small local governments likely have very different levels of per capita property values. To raise even a modestly decent amount of revenue from a low per capita amount of property values requires very high rates. Conversely, governments blessed with lots of property wealth can raise gobs of revenue even with very low rates.235<\/a><\/sup>See, e.g.<\/em>, Zachary D. Liscow, The Efficiency of Equity in Local Government Finance<\/em>, 92 N.Y.U. L. Rev.<\/span> 1828, 1886\u201387 (2017) (plotting property tax rate against town median household income in Connecticut and illustrating that wealthier towns impose much lower property tax rates than poorer towns but still have better schools and less crime).<\/span><\/p>\n

Thus, in this model, the harm of the property tax comes in substantial part because it is a local tax. Further, George Zodrow and Peter Mieszkowski argue that the fear of capital flight causes local governments to forgo useful investments in public services.236<\/a><\/sup>See <\/em>Zodrow & Mieszkowski, supra<\/em> note 133.<\/span> In this sense, a reliance on property taxes does not eliminate concerns about races to the bottom and tax avoidance, but instead creates them.<\/p>\n

Conversely, in the \u201cbenefits tax\u201d view, the property tax is a good thing because it is a tool that allows for effective Tiebout sorting. Through the use of land use tools that can stop property from being subdivided or more densely built upon, jurisdictions can ensure that residents pay a roughly equal (or at least steady) amount in property taxes per capita. This allows them to match taxes to services without fear of tax base deterioration, making the property tax into a tool for efficiently providing public services for those who choose to buy into the jurisdiction. And, because taxes and services are capitalized into real estate prices, benefits tax proponents argue that house buyers essentially shop for their preferred package of taxes and services when they buy a house.<\/p>\n

But looking at the property tax from the perspective of PTAR changes this story. As noted above, PTAR makes the \u201cbenefits tax\u201d version of the property tax more plausible. To be sure, PTAR neither conclusively ends the longstanding argument between the capital tax and benefits tax view, nor does it make the benefits tax model make sense in all circumstances. Yet, directionally, it does push in favor of the benefits tax view. What this suggests normatively, however, is somewhat different from traditional arguments made by proponents of the \u201cbenefits tax\u201d view.<\/p>\n

Indeed, this discussion of PTAR reveals that there are very real costs to making the benefits tax view \u201cwork.\u201d In order to turn the property tax into a quasi-head tax, jurisdictions either have to wildly distort the housing market through severe land use restrictions or they have to remove many of the qualities that make the property tax an attractive tool for raising revenue.<\/p>\n

The costs of excessive local land use regulation are hard to overstate. That such regulations are unjustified on economic grounds is now beyond dispute.237<\/a><\/sup>See supra <\/em>note 225 and accompanying text.<\/span> Local land use policies reduce economic output by keeping workers out of top job markets and reduce growth by restricting localized information spillovers. Similarly, it is beyond dispute that the consequences of excessive land use restrictions are extremely regressive, specifically in keeping lower-income workers out of the top markets while providing huge capital gains for owners of increasingly scarce housing units. Many of these effects happen at the regional level\u2014where the harm comes from a lack of affordable housing in whole commuting zones\u2014but are caused by excessive local regulation in metropolitan areas across the country.<\/p>\n

When the \u201cbenefits tax\u201d literature was developed, the idea that land use restrictions would influence regional housing supply seemed impossible. But today, it is clear that this is no longer the case: land use restrictions are excessive across whole metropolitan areas, in downtowns as well as suburbs. Further, this is increasingly true not only in coastal metropolitan areas, but in metropolitan areas around the country.238<\/a><\/sup>See, e.g.<\/em>, Emily Badger & Eve Washington, The Housing Crisis Isn\u2019t Just a Coastal Crisis Anymore<\/em>, N.Y. Times <\/span>(July 14, 2022), https:\/\/www.nytimes.com\/2022\/07\/14\/upshot\/housing-shortage-us.html [https:\/\/perma.cc\/9GA3-XK8D].<\/span><\/p>\n

While excessive land use restrictions have many possible sources, the desire among residents to keep the local governmental tax base from falling is likely among them. That is to say, the property tax may \u201cwork\u201d as a local tax, but it does so at the cost of America\u2019s housing markets and its broader economic success.<\/p>\n

If PTAR is not all bad, it is because it is a way for locals who do not want to redistribute wealth to avoid doing so without completely stopping all investment in property. In other words, by taxing more expensive properties less and less expensive ones more, PTAR makes per capita property tax revenue less dependent on actual facts about the property market and the houses which comprise it.<\/p>\n

But in so doing, PTAR removes many of the things that are theoretically desirable about property taxes in the first instance. Indeed, PTAR reduces the connection between property wealth and taxes. And, worse still, PTAR may even redistribute wealth upwards to the extent it continues in the current period. Further, it reduces the insurance features of the property tax.<\/p>\n

The image that is left is not that the property tax is a \u201cgood tax,\u201d as Joan Youngman described it,239<\/a><\/sup>See generally <\/em>Youngman<\/span>, supra <\/em>note 1.<\/span> or a good tax for local governments in particular. Instead, it is the local tax that we have learned to live with. Across the country, we have allowed jurisdictions funded by property taxes to make things \u201cwork\u201d by giving them freedom to engage in broadly economically costly land use regulations and to under-assess properties owned by the richest members of our communities.<\/p>\n

\n

[*]<\/a>Professor of Law, Yale Law School. Thanks are due to Ryan Bubb, Kevin Davis, William Fischel, Brian Galle, Andrew Hayashi, Daniel Hemel, Rick Hills, Darien Shanske, and participants in workshops at Duke University School of Law, New York University School of Law, the State and Local Government Law Works in Progress workshop at Northwestern University School of Law, and the University of Texas Law School for their comments. I would also like to thank Sumaya Bouadi, and Taylor Wurts for their excellent research assistance.<\/p>\n\n\n

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View the PDF Version<\/a><\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

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