Assessor incentives and property assessment.

• Author: Ross, Justin M.

1. Introduction

   The taxation of property is one of the most important sources of tax revenue in local public finance. According to the U.S. Census of Governments, local governments collected 45.2% of their tax revenue from the taxation of their residents' property in the 2005 fiscal year. This is a much larger share than any other form of taxation, and it is critical to the provision of local public goods such as education. Yet it is also widely accepted that the property tax is among the most disliked of taxes. (1) This is particularly true during periods of rising real estate prices when the level of taxation does not necessarily correspond with the income growth of the homeowners, leading them to express feelings of "being taxed out of their homes." Property tax assessors and their methodologies often become the target of this frustration, causing them to become the focus of taxpayer pressure to reduce the burden. (2) Furthermore, depending on the jurisdiction, property assessors may be elected directly by the local constituency or appointed to this office by another elected official. This suggests there is an incentive for incumbent officials facing reelection to underassess property values to lower the effective tax burden of their constituency in a vote-seeking effort.

   If assessors are not appraising property at their true market value and instead are appealing to a political constituency, there are a variety of implications. In terms of equity, assessors may discriminate between household or property types for underassessment and alter the incidence of the property tax burden along a dimension of political power. This would be particularly true if assessors compensate the underassessment of one household type with the overassessment of another, which they would have an incentive to do if they are required to comply with the International Association of Assessing Officer (IAAO) standards or other state rules of a similar nature. (3) For instance, Black (1977) has found that effective property taxes in 1960 Boston were more regressive than were previously thought after it was taken into account that assessors tended to understate the value of property at the higher end of the market.

   While property taxes were handled almost exclusively at the local levels of government historically, state involvement in property tax administration has become increasingly important over the past few decades. This has occurred in part as a result of the wave of school finance centralization reforms that took place throughout the 1980s and 1990s. These reforms came via a variety of state supreme court rulings and state legislative action on per pupil education spending inequalities among school districts (Fischel 200la). (4) In the 2005 fiscal year, the Census of Governments reported that state property tax revenues averaged about 1.7% of all own-source state tax revenues, with Vermont deriving the largest share at 35.3%. In 2007, all but 12 states collected a share of property tax revenue, either by levying their own tax rate or by collecting a portion of the local governments' property tax revenues. (5) In addition to serving as a revenue source, several states use the level of assessed property values as a measure of ability-to-pay in their school district aid formulas of state funding. For example, West Virginia's school-aid formula increases the level of state funding to the school district if they have a decrease in the value of their assessed property. So in West Virginia, which strictly uses elected assessors, if the assessor lowers the appraisals they not only cull favor from the constituency for reducing their individual property tax burden, but they also increase their share of state funding. Furthermore, underassessment creates distortions in the voters' choices when ordering preferences on statewide property tax legislation if they do not bear the full burden of the bill. Finally, the federal deductability of property taxes may potentially result in additional exporting of the property tax burden across states. What is clear is that the ability to measure property at market value accurately, not just uniformly, is becoming increasingly important.

   While the elected assessor is both bureaucrat and politician, even if the assessor is appointed it is possible that their elected appointer will apply pressure to underassess constituent property. In The Role of the States in Strengthening the Property Tax, the Advisory Commission on Intergovernmental Relations (ACIR 1963) dismissed the issue of appointed versus elected assessors on the point that they may be susceptible to political pressure. Though indirect, it could be true that the voters would just take their complaints to the elected official that appoints the assessor, who then could pressure the assessor to lower property assessments. Alternatively, one could see a situation where appointed assessors serve as a convenient scapegoat for elected officials to raise tax revenue with higher assessments rather than increasing the property tax rate.

   The purpose of this article is to test for sources of political pressure as well as differences in the levels of assessment between appointed and elected property tax assessors. This is tested using the median assessment-to-sale price ratio (sales ratio) for Virginia counties and independent cities, calculated by the Virginia Department of Taxation (VDT 2007), as the dependent variable. Virginia is one of the few states that allows its local governments to have either appointed or elected assessors, which permits a direct comparison of the types on the level of the sales ratio. The results indicate that elected assessors underassess more than appointed assessors by 1 to 2 standard deviations (SDs) of the sales ratio. This is after controlling for a variety of constituent socioeconomic and district characteristics that themselves influence the sales ratio in a manner consistent with what would be expected if assessors are responsive to factors that might promote their political support.

2. Previous Research

   Political economy issues for local governments have by no means received a lack of attention from economists, especially concerning the role of local property taxes. Fischel (2001b) supplied what he termed a "homevoter model," where zoning combined with local property taxes led to the more efficient provision of local public goods when compared with state level provision. Since present property values quickly capitalize the expected future value of amenities such as local public goods, Glaeser (1995) argues that even myopic politicians have the incentive to consider long-run implications of public goods that are funded by property taxes. (6) What is interesting in the role of the assessor here is the ability of political pressure to undermine these incentives. While a local voter may vote for community-level property taxes set to some ideal level that corresponds with their demand for local public goods, their individual incentive to minimize personal tax burden can be achieved by pressuring the local assessor's office.

   To illustrate these conflicting tensions, Johnson (1989) provides a behavioral model where the assessor maximizes wealth from office by gaining political support subject to those regulatory constraints. This is modeled differently for appointed and elected assessors because they are concerned with different constituent bases. In the case of the assessor appointed by someone in a different political office, they maximize political support by serving as scapegoats and assessing at higher values so that their appointers raise revenues without the political fallout of higher taxes. The elected assessors, on the other hand, maximize political support by providing as much tax relief as possible by lowering assessments among the parcels. In either case, the presence of commercial property allows for assessors to export the tax and allows them to further raise revenues and comply with regulatory constraints surrounding the level of assessment.

   Interestingly, the Johnson (1989) model makes this assumption regarding differential treatment of elected and appointed assessors in spite of a long standing disregard of the issue. The ACIR (1963), whose report seems to have driven much of the research over the decades that followed, had disregarded any differences due to political pressure on the grounds that constituents could just as easily pressure the assessor's appointer(s) for lower assessments. This view holds some empirical support in the previous literature. There has been considerable attention paid in the recent literature on the policy restraints on rising local property taxes during the rapid acceleration of housing prices around the United States at the turn of the 21st century (Bowman 2006; Cornia and Walters 2006). Since these policy changes are prescribed by lawmakers rather than assessors, there is likely some credence to the idea that appointers can request their assessors to lower the level of assessment. Since both conflicting propositions regarding the incentives of appointed assessors have intuitive appeal, their susceptibility to political pressure from the local constituency to underassess is primarily an empirical question.

   When differences in the assessor type have risen in the empirical literature they have almost entirely focused on the assessor type's influence on horizontal equity via uniformity measures such as the coefficient of dispersion (COD). Lowery (1984) found that uniformity erodes under fiscal stress and tax limitations when the assessor is elected but strengthens under appointed assessors. Strauss and Sullivan (1998) tested the influence of several indicators of assessor authority, state requirements, the level of government responsible for assessment, and assessor type on the level of uniformity. They found that elected assessors had higher levels of uniformity, but...