Property Tax Allen C Goodman 2015 1

Property Tax © Allen C. Goodman, 2015 1

http: //www. taxpolicycenter. org/taxfacts/displayafact. cfm? Docid=517 Region and State 1977 United States. . . . . Great Lakes. . . . . Illinois. . . . . Indiana. . . . . Michigan. . . . . Ohio. . . . . Wisconsin. . . . . 1982 1987 1992 1997 2002 2004 2005 2006 2007 2008 2009 2010 2011 2012 35. 5% 30. 8% 29. 9% 32. 2% 30. 1% 30. 8% 31. 5% 30. 6% 30. 2% 30. 3% 30. 8% 33. 7% 34. 7% 33. 2% 32. 1% 36. 9 36. 8 33. 6 36. 0 32. 8 33. 8 34. 8 35. 1 34. 6 34. 5 34. 6 36. 6 37. 5 35. 6 34. 4 36. 7 35. 7 34. 2 38. 6 38. 1 39. 5 37. 6 37. 5 38. 5 41. 9 42. 8 40. 8 38. 4 36. 8 35. 6 32. 0 30. 7 34. 6 35. 2 32. 5 37. 7 33. 7 28. 5 29. 4 30. 4 32. 8 27. 5 26. 5 37. 5 42. 5 38. 2 42. 7 29. 0 32. 0 35. 8 36. 6 37. 6 39. 2 37. 6 40. 2 37. 5 36. 7 37. 7 33. 6 28. 2 29. 7 28. 8 29. 4 28. 7 28. 6 29. 2 29. 1 29. 6 30. 0 29. 4 29. 0 34. 5 35. 0 34. 6 34. 9 33. 4 34. 7 36. 3 36. 4 36. 0 36. 5 38. 4 39. 8 38. 9 37. 9 2

How do you assess? Schematic from Figure 13. 1 Rule Tax Variable Actual or True Mkt Value Agent 3

How do you assess? Schematic from Figure 13. 1 Rule Tax Variable Agent Ratio rule Exempt Property Actual or True Mkt Value Assessed or Taxable Value Assessor 4

How do you assess? Schematic from Figure 13. 1 Rule Tax Variable Agent Ratio rule Exempt Property Actual or True Mkt Value Rate and Tax Limits Assessed or Taxable Value Assessor Property Tax Levy Taxing Gov’t Referendum Required or Optional 5

How do you assess? Schematic from Figure 13. 1 Rule Tax Variable Agent Ratio rule Exempt Property Actual or True Mkt Value Rate and Tax Limits Assessed or Taxable Value Assessor Property Tax Levy Taxing Gov’t Referendum Required or Optional Property Tax Revenue Tax Collector 6

How Property is Assessed Most often for residences. • Comparative Sales – What has been the value of other recently sold properties? • Cost Approach – How much did the property cost to build? – How much have construction costs changed? Cost and income approaches are most often used for – How much has it depreciated? commercial property. • Income Approach – What is net present value of income to be generated by property? 7

Comparables • If you’re buying (appraising) a house, you do this. • Look at house you’re buying (appraising) – Find other comparable houses. – See how they differ. – Adjust values based on differences. • (Sometimes) float baseline values up according to neighborhood specific inflation factors. 8

Adjustments to make “comparable” similar to appraised house 9

On-Line Tools • There also on-line appraisal tools • Here’s one. – http: //www. zillow. com 10

Proposal A in Michigan 11

Housing – Why is it Different? • Why? – Housing is heterogeneous – Housing is immobile – Housing is durable – Housing is expensive – Moving costs are high – Neighborhood comes with housing … and it matters! 12

Heterogeneous? • Dwellings differ in: – house size (sq. feet) – lot size (sq. feet) – configuration – quality • People seem to value these qualities differently. 13

Immobile? • It is where it is. Where you buy it, you get: – Accessibility (to good and bad things) – Package of local public services – Environmental quality • Further – You can’t (really) “move” houses – You can’t rebundle them (use half of two different houses at the same time). 14

Price: The Hedonic Approach • Hedonic approach looks at house as a bundle of components. • Analogy: Suppose that when you went to the grocery store, all you could buy were “filled” shopping carts (food, soaps, etc. ), and each one had a price. • You know what’s in them, but you can’t take things out or put things in. 15

Price: The Hedonic Approach • How do you figure out what the individual components are worth? • A> If you had a large sample of carts, and each had different amounts of goods in them, then you could come up with the value of the individual components. 16

• Suppose that sq. feet of living space was ALL that mattered in the price of house. • You collect data on lots of houses. Price Example for Hedonic Prices Sq. feet 17

• What does this suggest? – A> Bigger houses have more value. Price Example for Hedonic Prices ? ? • Let’s draw a line. Sq. feet 18

Example for Hedonic Prices • What does a mean? • What does b mean? slope = b Price • Line has a form: Price = a + b*size a Sq. feet 19

Example for Hedonic Prices • Although it is hard to think of, we could draw this diagram in n dimensions! slope = b Price • Says that for each additional sq. ft. , house price is $b more. a b is the hedonic price of house size. Sq. feet 20

n dimensions? Let’s look at a house with 2000 sq. ft. , 5 rooms for $75, 000 Let’s look at a house with 3000 sq. ft. , 6 rooms for $100, 000 Price 100 s m oo 5 R 75 2000 3000 Sq. feet 6 21 Line has a form: Price = a + b*size + c*rooms

How do you do this? • This allows us to impute the valuations of all kinds of components of the bundle. The incremental valuation is called the “hedonic price. ” Was invented in Detroit! • Here’s a database with examples from Detroit for 1989. • American Housing Survey. 22

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Prediction is Important! • The prediction accuracy threshold employed by the automated valuation model (AVM) industry is that at least 50% of the predicted house prices must be within 10% of observed transaction prices. • Goodman and Thibodeau (2007) find: SM = submarket Standard Spatial SM PSF SM Hybrid Percent within 10% 35. 53% 66. 04% 62. 90% 65. 06% Percent within 15% 50. 86% 78. 73% 76. 69% 78. 32% Percent within 20% 63. 32% 86. 11% 85. 49% 86. 74% • Why is this important? – If you predict too low, you lose money – If you predict too high, you incite costly appeals. 24