Market value-based assessment system in property taxation: Equity, institutional determinants and cost considerations

The study examines the administrative performance of a newly-implemented market value-based assessment system for the purposes of property taxation in Indiana over a period of twelve years. Uniform and equitable assessments result in the uniform application of the property tax rate to all properties in a jurisdiction. If the equity principle of the property tax assessments is violated, then the taxpayers of the same jurisdiction bear different property tax burdens. An assessment of the vertical and horizontal equity of the market value-based system in Indiana over time indicates mild tax regressivity. The assessors' performance under a market value-based system improves and demonstrates vertical and horizontal equity of assessments on a steadily growing market of residential property prices. The housing market crash in Indiana, coupled with the trending requirement of property assessments based upon historic market price movements, results in significant tax equity distortions of the market value based system. These results are statistically significant and robust over time and across specifications. The institutional characteristics of counties are examined in relation to quality of property assessments. The level of assessments, noted by the assessment ratio has the strongest impacts on the quality of property assessments. Significant cost savings are noted as a result of government consolidation of the property tax function to the county level. Post-government consolidation cost function notes that the economies of scales in property tax administration have been reached. Assessment quality does not drive property tax administration costs, which is an interesting and important finding that contrasts with previous literature. Results are significant and robust across specifications. In the conclusion, policy recommendations are made to eliminate trending requirement as a poor substitute for mass reassessments and to shorten the time interval between mass reassessments.