FISCAL ILLUSION FROM PROPERTY REASSESSMENT? AN EMPIRICAL TEST OF THE RESIDUAL VIEW

Abstract

The textbook view of the real property tax is that the millage rate is simply a residual, determined by dividing the revenue to be raised from property by the taxable base of assessed values. In such a case, changes in assessed values are neutral with respect to property tax revenue as it can be offset or adjusted by changing the millage rate, and reappraisals of property assessments simply serve the purpose of maintaining horizontal equity across individual households. Critics of this view claim that policy makers do not fully revise the millage rate in response to changing assessed values, allowing them to effectively raise revenue without raising tax rates. Using data from Virginia cities and counties between 2000 and 2008, this paper estimates the response of levy growth rates to assessed value growth. Unlike the previous literature testing these competing claims, this paper is able to disentangle assessed value growth from other forms of economic growth, including the market values of property. Our findings suggest that mass reappraisals per se provide some cover for politicians to raise levy growth rates, but the growth in aggregate taxable assessed values is largely irrelevant.