U.S. property tax system overcharges owners of cheaper homes, study finds

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After examining property tax valuations of 26 million U.S. homes, Christopher Berry offers a stark assessment.

“The people who own low-priced properties are getting screwed,” says Berry, a professor at the University of Chicago Harris School of Public Policy.

Berry released a study Tuesday that concludes lower-priced homes are valued at a higher ratio of their value than are higher-priced homes.

He compared sales prices to assessments for millions of transactions from 2007 to 2017, reasoning that buyers had a more accurate handle on values than assessors. Berry found that on average, a property valued in the bottom 10 percent within a particular taxing jurisdiction pays an effective tax rate that is more than double that paid by a property in the top 10 percent.

In other words, Berry argues, less-affluent homeowners effectively subsidize the tax bills of more-affluent homeowners, a reality that exacerbates inequalities across racial and economic divides. For example, properties in neighborhoods that are 90 percent or more African-American experience assessment levels more than 1.5 times the average for their counties.

Berry sees the racial gap as an example of systemic flaws in property assessments, rather than a sign of overt racism.

“I have absolutely no evidence to suggest it’s intentional,” he says. “I’m not suggesting that any assessor is racially motivated.”

Why property assessments vary

Berry says tax assessors rely on limited data and flawed analysis, a reality that translates to inaccurate assessments. One large obstacle, he says, is that important features of homes often are invisible to tax assessors.

He offers the example of two similar houses on the same street. To the assessor, they appear identical — even if one homeowner has meticulously maintained the property and installed a brand-new kitchen, while the other house has a leaky roof and Formica counters.

“To the assessor, those look like the same home,” Berry says. “The guy with the leaky roof is over-assessed, and the guy with the chef’s kitchen is under-assessed.”

Even if the homeowner with the pristine property pulled permits for all of the work, the assessor still might not consider the improvements.

“There’s shockingly little cooperation between the jurisdiction that’s giving the permits and the assessor,” Berry says.

Half a trillion dollars in local tax revenue at stake

Americans pay about $500 billion a year in property taxes, representing the single largest revenue source for local governments.

Property tax systems are a hodgepodge nationally. Some states, including California and Florida, cap the amount of annual increases in taxable values, policies that ultimately benefit owners of higher-valued homes, Berry says. Other localities treat condominiums and single-family homes differently in the assessment process.

The skill and sophistication of local tax assessors also can vary widely, Berry says.

Property owners can appeal assessments that they believe to be unfair. But, Berry says, “For a whole lot of reasons, people who own the lowest-priced homes are least likely to appeal.”

Harris posted an interactive tool at the Property Tax Fairness site.

Learn more:

Written by
Jeff Ostrowski
Senior mortgage reporter
Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate in 2020, he wrote about real estate and the economy for the Palm Beach Post and the South Florida Business Journal.
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