MW This hated tax on property owners can be fixed if government takes these steps

By Anna Scherbina

How to create a more equal, transparent and efficient property-tax system

The property-tax appeals process is stacked in favor of financially sophisticated property owners.

During every tax season, U.S. homeowners are confronted with the daunting total expenditure of property taxes. For example, in Massachusetts, a median property tax of $5,600 amounts to roughly 10% of the median per-capita income in the state.

Despite recent calls to abolish it, property taxes, more than others, align with taxpayer interests. Property taxes fund essential local services such as schools, police, libraries and road maintenance, which then help enhance real-estate values. Moreover, communities have a say on these local amenities, and everyone in the same tax jurisdiction gets access to the same services.

Despite these obvious advantages, property tax remains the most hated tax. The opacity with which tax assessments are calculated and the unfairness of the final tax bill are what antagonize homeowners - not always the concept of property tax itself. Reforming the tax assessment and appeals process is an easy first step to improving homeowners' experience and creating a more equal, transparent and efficient property-tax system.

Property tax is calculated as a percentage of assessed value. Although assessed values go up as real-estate prices increase, they rarely go down, in part because the frequency of reassessments is often arbitrary. Assessed values are determined using statistical models that use prices of recently sold properties to value other homes, while making adjustments for property characteristics - such as a home's square footage and the number of bedrooms and bathrooms.

The assessment algorithms are often quite simplistic, making adjustments for only a few relevant property characteristics, and the quality of assessment algorithms, as well as the level of assessor expertise, varies by location. Adding to the evidence of opaqueness in the assessment process is the finding that assessors who live in the counties they serve assess their own homes by, on average, $4,270 less than similar neighboring properties.

Assessment models also can be biased and systematically overvalue lower-quality properties. Moreover, the models do not use sufficiently specific neighborhood indicators to capture existing quality differences between neighborhoods. Often the models overassess homes in less desirable areas and underassess homes in fancier locations. Additionally, these assessment models often use wrong inputs for individual properties, which leads to additional valuation errors.

There are straightforward steps to improve homeowners' experience with the tax-assessment process. First, assessment models need to be improved by including all relevant property characteristics that affect market values and by having more granular neighborhood adjustments that accurately reflect differences in neighborhood quality.

Also, the assessment models and the relevant inputs need to be shared with homeowners, much like the algorithm for calculating income taxes. Homeowners deserve to know exactly how tax assessors arrive at the assessed value and which recent sales are considered relevant to their property value.

Lastly, a process needs to be put in place to correct obvious valuation errors instead of having to launch a formal tax appeal. Greater transparency would, in turn, lead to greater effort and accountability in assessors' offices.

Reforms will help property owners and also raise local tax revenues.

These easily implementable reforms will help property owners and also raise local tax revenues. Successful appeals reduce the taxes collected. But just as some properties get overvalued because of the shortcomings of assessment models, others get undervalued. If the models are improved, the reduced tax revenues can be easily offset by collecting higher taxes on better-quality homes.

Assessed values can be disputed by property owners, and some estimates show that property tax appeals have a 40% to 60% success rate and result in a 10%-15% reduction in taxes. But the dispute process is complex because the burden of proof rests with the property owner, and it is even somewhat risky because the assessed value can actually go up as a result of the review.

The way it is designed, the appeals process is stacked in favor of financially sophisticated property owners. Consider the case of institutional investors in single-family homes. Since the Great Recession, institutional investors have been buying single-family houses in the United States, and currently own about 2% of all rental properties.

The scale and sophistication of institutional investors as compared to traditional households allows them to systematically reduce their ownership costs by disputing tax assessments. Institutional owners of single-family homes successfully challenge assessed values far more than households, and as a result save on average $747 in property taxes per house per year.

Lower-quality properties, as well as minority-owned homes, tend to have higher tax assessments relative to the market value of their properties.

Given the embedded flaws in the assessment process it is not surprising that lower-quality properties, as well as minority-owned homes, tend to have higher tax assessments relative to the market value of their properties. In addition to their homes being systematically over-assessed, poorer households tend to be less financially sophisticated and therefore less likely to successfully challenge their tax assessments.

Minority homeowners have it worse still: minority-owned properties are assessed 5% to 6% above the non-minority-owned neighboring homes, largely because minority owners are less likely to appeal their valuations.

Read: Deferring property taxes is the best way to help older homeowners

More money for local governments

More precise tax assessments can bring in more revenue for local governments. While nationwide statistics on appeal frequency are not available, some municipalities provide such information. For example, in Belmont Mass., a Boston suburb, roughly 4% of households appeal their assessments in a given year, while in Cook County, Ill., which includes Chicago, the appeals rate is as high as 20%.

Applying the midpoint of the estimates described above on the appeal success rate (50%) and the resulting tax reduction (12.5%), the lost tax revenue amounts to between 0.25% and 1.25%. These are not trivial amounts. Even taking the lower-bound estimate, for Belmont the 0.25% savings would increase total tax revenue by almost $310,000. For larger tax jurisdictions, the savings would be considerably greater.

Improving the quality and transparency of tax assessment is long overdue. Such a reform will enhance the reputation of a dreaded tax, protect the affordability of homeownership, and increase local tax revenues.

Anna Scherbina is a nonresident senior fellow at the American Enterprise Institute $(AEI)$ and a professor of finance at Brandeis University's International Business School. At AEI, her research focuses on behavioral finance, cybersecurity, investment management, asset pricing and real estate as an asset class.

Also read: A 'property-tax revolt' is underway across the country. These numbers explain what's driving it.

More: Want to challenge your property-tax bill? Here's the smart way to do it - and how much you could save.

-Anna Scherbina

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May 07, 2025 14:55 ET (18:55 GMT)

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