Housing costs have climbed rapidly in the past few years, with the average US home sale price up 47.5% from the fourth quarter of 2020 to the fourth quarter of 2022. The crunch in housing supply is felt acutely by prospective buyers of mid-range and working-class housing.
The market wants to meet this demand with more construction. The average new-construction house in 2022 was just a shade over 2,500 square feet, which places the cost of the average newly constructed home in more than half of the 50 states above $500,000 and affordability at a 40-year low.
Inequitable property tax assessments majorly contribute to this issue. As is so often the case in matters of taxation, inequity cuts in favor of higher earners; more expensive properties are frequently undervalued, while less expensive properties are overvalued.
We should use artificial intelligence and other technology—in addition to shifting policy—to make annual and accurate assessments by municipalities the norm. We also need additional safety nets to prevent overvaluation of properties whose owners can least afford to shoulder the bill or appeal the assessment.
Solutions Through Technology
Accurate assessments require substantial amounts of data in the absence of intrusive in-person appraisals. This is where technology can step in—AI and sales data can be used to make annual adjustments to property assessments.
Furthermore, technology doesn’t come pre-programmed with biases beyond those of the programmer—and those can be better corrected for than unconscious biases in an army of tax assessors spread out across the country. Correlations between property demographics can be detected and prioritized for reassessment.
In general, AI and machine learning can be used to compare existing property assessment data—from regional home sales to individual lender appraisals and transaction data from comparable regions. Further, they can use historic data to model future trends through predictive analytics, leveraging known correlations between other economic indicators and home prices to key in appraisals to real-world approximations of actual market values.
Additional indicators such as permit applications and satellite imagery can be ingested by the model, allowing states to include improvements and additions in annual valuations. Property images can be examined by image recognition models to factor in property condition without an assessor stepping foot on the premises.
Accurate Valuation and Tax Policy
At its core, a tax is a rate applied to a base: a sales tax rate applied to the taxable sales in your grocery cart, income tax rates applied to your income, and property tax rates applied to the assessed value of your property. The tax bill in each of these examples can be substantially reduced by a reduction in the rate or the base.
Without an accurate assessment or valuation of a piece of property, the base can be skewed and can undercut any attempts at progressivity in the rate. Uniformity in rate loses progressivity with property valuation when that valuation is inaccurate—a 5% property tax rate across the board is far from equitable when $100,000 properties are assessed at $120,000, and million-dollar properties are assessed at $500,000.
In most instances of valuation, a transaction is used to find a real-world example of the market-set value. In the case of real estate, this is of diminished utility owing to a tendency toward long-term ownership—the average US homeowner tenure is 12 years, and values can shift significantly in that time span.
Notwithstanding this shortcoming, on-the-ground appraisals are generally seen as intrusive and politically unpopular—few would support a local candidate who promised to put a tax assessor in your living room with a tape measure every year. They’re also administratively burdensome, and there’s an issue of diminished returns when every municipality needs to employ a roving assessor.
Inequities of the Current System
Undervaluing expensive properties shifts the burden of that property tax incidence to lower-value property owners; it also exacerbates a dynamic where higher-value owners are more able to remain in their homes following a change in income than lower-value owners.
This also stokes demand for higher-valued properties, new construction and otherwise, and undercuts attempts to alleviate the housing cost crunch through building. Prospective buyers of high-value properties know they won’t have to pay property taxes on an accurate valuation of their property.
And even if they are, appreciation or reevaluation will give them distance between their valuation and the property’s actual market value, and thus the equity they stand to hold. They also can borrow against the equity in their home—often the very difference between their tax assessed value and their actual appraised value by their lender—to pay their property tax bill.
Owners of lower-value properties are then left holding the bag—nationwide. According to a 2021 study, 69% of the lowest-value properties in Atlanta are over-assessed, and 32% of the highest-value homes are under-assessed. In Philadelphia, those numbers are 78% and 17%, respectively.
We Need Fundamental Changes
The current housing cost crisis isn’t one that we can build ourselves out of—at least not while persisting in the current trend of ever-larger new homes. There’s likely an ample supply of large homes that would reach the market should the existing owners be made to pay their fair share in property taxes. By shaking loose supply at the upper tier of the market, the effect will be to increase demand at the mid and lower end of home values.
States must take up a comprehensive overhaul, fostering accuracy and fairness. It isn’t just about rectifying a flawed system; it’s crucial to build a foundation for a society where opportunities and burdens are shared equitably.
Something must be done that balances individual privacy, administrative overhead, and tax equity. Thankfully, it appears technology is ready to step in—and with proper policies in place, we can provide accurate and unbiased valuations across the board.
Look for Leahey’s column on Bloomberg Tax, and follow him on Mastodon at @andrew@esq.social.
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