Fred Thompson: Property Tax Assessment in Oregon

Another Dispatch from the desk of Fred Thompson:

Reliance on an ad valorem property tax is, perhaps, the most distinctive feature of the American tax system. Most students of public finance appreciate property taxes. Indeed, our foreign counterparts frequently view the US property-tax system with envy (although not our system of land registration). This is because property taxes are both fairer and more efficient than other taxes and also because high property taxes tend to promote high levels of civic engagement.

Unfortunately the comparative advantages of the property tax depend upon the strength of the relationship between tax payments and real property values. Where the linkage is strong, the tax does a really nice job of matching local tax burdens to the benefits that result from local public spending. Where this relationship is severed, the tax is neither fair nor efficient. Once upon a time, or so the City Club of Portland claims, Oregon had a property tax system that was the envy of the world, but as the result of a series of initiatives and referenda (Measures 5, 47, and 50), it is now a mere shadow of its former self. Is this claim correct? As will be seen, not entirely.

What Measure 5 did was cap property tax bills at 1.5 percent of market value (RMV) and reform the assessment process so that assessments accurately reflected market value. (The measure also shifted responsibility for school funding from local government to the state, but that is another story.) Measure 5 was enacted in 1990 and was scheduled to be fully operational in the 1995-96 tax year. Measure 50 was enacted in 1997,. It rolled residential tax assessments back to whichever was less: the last pre-Measure 5 assessment, that of 1994–95, or 90% of the 1995–96 assessment and limited future increases in tax assessments, except for new construction or additions, to 3 percent per year. We call this quantity ‘Measure 50 assessed value’ (M50AV); it is currently ≤175 percent of 1995 market value, which is on average about 60 percent of current market value. The actual assessment used for tax purposes (TAV) is the lessor of M50 and RMV. Currently the average statutory property tax rate in the state is about 2.2 percent. Consequently, Measure 5 limits are binding only where the ratio of M50AV/RMV is greater than 65 percent.

This is a pretty complicated arrangement and it has obviously attenuated the linkage between local property values and tax burdens (under Measure 5), but like most things the relevant questions are how much and compared to what? Fortunately, every exit is an entrance somewhere else. Oregon’s idiosyncratic property-tax arrangements have left us an extremely accurate system of measuring property values (RMV), a system of assessment that has held relative values constant for 17 years (M50AV), and a cap on property tax bills. These data allow us to answer several important questions: how good are current assessments, why aren’t they better, how fast do assessments degrade in the absence of reassessment and what drives this process?

Moreover, when measure 50 was enacted, it is unlikely that anyone thought about how it would operate in a recessionary environment. Although Oregon’s economy went through a deep slump from 2002-2004, housing inflation continued, steadily widening the gap between M50AV and RMV. But, as in much of the rest of the United States, home prices fell sharply after 2007. This had two effects. It narrowed the gap between M50AV and RMV, but, more importantly, it made Measure 5 limits binding on an increasing portion of homes. At present, Measure 5 limits go into effect when M50AV > 65 percent of TMV. The same data that allow us to understand the dispersion of MAV with respect to TMV over time and the direction and bias associated those measures, also allows us to assess the relationship between market valuation and tax payments over time and from the peak to the trough of the business cycle under Oregon’s property tax system.

Finally, these data would allow us to simulate the effects on dispersion and tax fairness of various policy modifications, including most importantly reassessment to RMV at title transfer, but of other policies as well, although we haven’t done that.

Looking at these data the first thing we learn is that most of the discrepancies between M50AV and RMV were present at the creation. Rolling assessments back to 1994-5 wiped out the gains in assessment uniformity from the more accurate methods mandated by Measure 5, as well as the capitalized increases in market values that Measure 5 triggered. As a result, the discrepancies we see now in TAR/RMV ratios from residence to residence largely reflect discrepancies that existed prior to the implementation of Measure 5. The figure to the right shows average assessment ratios by zip code from 2003 to 2012 (the shallow U shape reflects the fact that the numerator was growing at a more or less constant rate of 3 percent per year, while the denominator grew faster than nominator prior to 2008 and slower after or in many cases actually fell). Clearly the difference between zip codes is greater than the difference within codes, although how clear may not be apparent until you see the next figure). Consequently, it follows that most of the departures from assessment quality wrought by Measure 50 resulted from the rollback and not from post-enactment price movements.

This conclusion is reinforced when we look directly at the variance in the ratio of all TAVs to RMV and the coefficient of dispersion (CD) over time.  Again, the bottom line is that assessment quality didn’t degrade very much between 2003 and 2012 (the period for which we have data in individual residences). The standardized variance was 20 percent in 2003 and 22.5 percent in 2008; it deteriorated only a little faster after 2008, to >27 percent in 2012, Price depreciation has evidently been slightly more uneven than the earlier appreciation, when a rising tide did apparently lift all boats. Using the CD, assessment quality declined overall from 14 percent in 2003, to 18 percent in 2008 and 22.5 percent in 2012. Even so, overall assessment quality in Oregon is not measurably worse by this standard than it was prior to Measure 5 and is much better than in many earlier periods.

Moreover, looking at Multnomah County, the within zip code CDs are remarkably consistent over time and reflect good assessment quality. Across all zip codes, 1997 CDs explain 2/3 of the variation in 2012 CDs. The actual CDs ranged across zip codes from four percent to 26.3 percent in 1997 and from 5.7 percent to 25.7 in 2012. In 1997, CDs in two of 31 zip codes exceeded 15 percent, the standard established by the National Association of Real Estate Appraisers; by 2012 that standard was topped by only five.

The box and whiskers chart (above) shows the mean (the solid bar), the standard deviation (the box), and the range (the whiskers) of residential assessment ratios for each year from 2003 to 2012. Clearly, there was a fair amount of dispersion in assessments and, apparently, after 2008, the dispersion increased. One of the questions raised by this observation is whether or not assessments favor one class of residences or another. The Multnomah zip-code data tell us that there are substantial neighborhood effects. Does this imply, for example, that deviations from mean assessment ratios were or are biased in favor of high or perhaps low-value residences? Property appraisers use an instrument called the price-related differential (PRD) to measure this bias. A PRD equal to 1 indicates no bias; a PRD greater than 1 indicates a bias in favor of higher valued properties. From 2003 to 2010, the PRD was slightly less than 1 (.98 to .99); in 2011 and 2012, slightly greater than 1 (1.006, 1.014). This shift can be seen in the following figure; the assessment ratios of residences in the lowest quartile of value started lower or faster than did those in the higher value quartiles; more recently they have evidently lost value faster.

Note this does not necessarily mean that the owners of low-valued residences face significantly higher effective tax rates (where property taxes are concerned, the effective tax rate is found by dividing the tax bill by RMV) than the owners of higher valued properties. This is because more than half of the owners of low-value residences (the first quartile) are now subject to Measure 5 tax limits. In absolute terms, some have even seen a decrease in their tax bills as the result of Measure 5 tax compression.