Pleased

As a British subject and member of Clan Munro, I must say I am grateful the Union stands.

This whole thing has been interesting to me as it really signals a major generational shift.  As I wrote in an e-mail to a friend upon hearing the news:

As a Briton of Scots and English heritage, I approve.  As an economist, I am relieved as I was worried about the future of an independent Scottish economy tied to the Pound.
Most interestingly to me is the generational shift this whole thing signaled.   

My grandfather was born in England to a Scot and was fiercely proud of his Scottish heritage and clan, but he served in the RAF in WWII and fought under the Union flag.  I think his generation identified strongly with the United Kingdom as a result.  But that memory has faded as new generations without such a unifying experience identify less and less with the UK.  

I guess this is also a part of the imperial history of the UK.  The union flag used to fly over all of the colonies as well.  I do believe that Scotland and the rest of the UK are better off together economically.  Socially, I actually think it is often better to be forced to get along in the same family then to separate and be angry neighbors.  I am in favor of more national autonomy for Scotland but happy they remain in the UK. 

Should We Reset Property Tax Assessments at Sale?

Editor's Note: I really can't give any prognosis for how soon this moribund blog will recover.  It has been a pretty stressful time in the Emerson household and this blog has had to take a back seat. Fortunately, we have the sagacity of Fred Thompson to warm our hearts and stimulate our brains in my absence. 

Take it away Fred:

Property taxes are fair and efficient only where there is a reasonable relationship between tax payments and property wealth. Severing that link renders their incidence both arbitrary and capricious. Oregon has a one-off property tax system, which emphasizes stable growth in tax assessments and payments and inter-jurisdictional uniformity in tax rates. On balance this system has probably been good for Oregonians.

However, it has one feature that is not entirely likeable: assessments are not readjusted to realign tax payments with property values. Consequently, those that are out of step with their neighbors tend to drift ever farther apart over time. Figure 1 shows the assessment ratios (assessed value/market value) of 14 houses along one side of a block in Portland’s Alberta Development District last year. This is clearly an extreme example, but when the current system of property tax assessment went into effect, assessment ratios within neighborhoods tended to be closely bunched together. This is increasingly not the case.

Figure 1: An Extreme Example of Neighborhood Dispersion

How serious is this problem? How misaligned are tax payments and property values, is the misalignment getting worse, and, if so, how much? To answer these questions for one jurisdiction, my colleague, Robert Walker, and I, regressed tax bills on market values for every residence in Portland for each of the years 2003-2012. In this analysis the coefficient of correlation (R²) shows the strength of the relationship between property wealth and tax payments: the higher the R² the stronger the relationship (according to professional assessment standards, an R² less than .80 is unsatisfactory). The regression coefficient shows how tax bills change as a result of changes in property value. If greater than 1, a 1% change in in property value is associated with an increase in the tax bill of more than 1%; less than 1, an increase of less than 1%. As a general rule, the greater the misalignment between property wealth and tax bills over time, the greater the likelihood that low-valued properties will be hit with relatively higher tax bills than high-valued properties.

Figure 2 shows what happened in Portland. The results for 2003 and 2004 are for the whole city; for 2005 through 2012, the city is divided at the Willamette, owing to the adoption of a higher statutory tax rate on the Westside of the river.

Figure 2: How Tax Bills Vary with House Prices, Portland

What Figure 2 shows is that, on the Westside of Portland, the relationship between property values and tax bills remains reasonably strong, although the trend appears to be downward. On the Eastside, more homes started off out of step with their neighbors and, over time, have drifted ever farther apart.

We don’t want to overstate the dimensions of the problem: it is real, but even on the Eastside, the misalignment is not huge, on average, and, while it is growing worse, it is doing so at a fairly slow rate. Nevertheless, the direction of change is unmistakable and the longer we go without fixing this problem, the more costly and unpleasant the fix will be.

Cognizant of this problem, the League of Oregon Cities has proposed that property tax assessments be “reset” whenever a home is sold, which would instantly stop the growth in misalignment and, over time, reduce it to a stable and acceptable level (see below).

This fairly straightforward proposal has triggered a surprising amount of opposition. The Oregonian’s editors claim that it would supercharge tax collections and create new inequities: “People who’d just bought homes would resent, with good reason, neighbors who’d owned their homes for a long time.” Bill Sizemore agrees, adding that, compared with the current system in which assessed value does not change when a home is sold, “adjusting assessed values to sales prices creates far worse inequities. This has been well documented. Our system may allow … inequities …, but adjusting values at the time of sale creates gross inequities between next door neighbors.” The Oregonian’s Erik Lukens concludes, “this is a classic ‘tax the other guy’ proposal that taxpayers likely will regret. There are problems with the property tax system … but this isn't a very good solution.”

Are the critics correct? As is usually the case, it helps to look at the numbers, not merely a few illustrative cases. Using our Portland data, we can estimate what would have happened to property taxes if assessments had been reset whenever a title transaction occurred and recalculate the R²s from the previous exercise. We have performed this analysis using two different reset standards: setting assessed value equal to real market value, as initially proposed by the League of Oregon Cities, and setting it equal to market value multiplied by the ‘changed property ratio’ (CPR), as proposed by several county assessors. (CPR is a county’s mean assessment ratio, i.e., the assessed value of all the properties in the county of a given property class divided by the real market value of those properties. This procedure is used throughout Oregon and is currently applied to all newly built properties and major improvements.)

What this analysis shows is that resetting assessed value to real market value each time a sale occurred would increase 2012 R²s on the Westside from .89 to .93, on the Eastside from .71 to .84, and total annual property tax collections 11.4%. In other words, contrary to Sizemore’s claims, the inequities would be substantially less on average, on both sides of town and overall, than under the current system. However, this proposal would also, as the Oregonian alleges, significantly boost property tax payments. In contrast, reassessment using the CPR increases the Westside R² to .95, the Eastside to .89, and total property tax revenues by less than 2%. This appears to be an altogether fairer, less objectionable way to go.