Real Estate Report: Property tax impact in the U.S.

Chris Berry, University of Chicago, Center for Municipal Finance Professor joins the Yahoo Finance Live panel to discuss a recent study that says homeowners in richer neighborhoods are being taxed at roughly half the rate of homeowners in lower-income neighborhoods.

Video Transcript

ZACK GUZMAN: This week's Real Estate Report, we are focusing in on the worst part of homeownership for many, that would be property taxes, a thing that's universally hated by mostly any homeowner, but something that strangely isn't universally and equally applied, according to new data out of the University of Chicago that shows property taxes are disproportionately burdening owners of less-valuable homes, which tend to be minorities. To understand that and what the data shows, let's just do a simple thought experiment here.

In theory, a given city might set up its property tax rate at about 3%, applied to homes regardless of price. So a top-priced home gets taxed at that same 3% as a bargain sale home would get taxed at. But in reality, the data in this case from Chicago homes between 2015 and 2017 shows something very different.

The most expensive homes were getting taxed at a rate closer to 1.5%, while the least expensive homes were paying about a 4% tax rate, more than double what the richest homeowners were paying. So why is that? Well, joining us to break it down is University of Chicago professor and director at the Center for Municipal Finance. Chris Berry joins us now.

And Chris, very interesting data you had in this study here. So why is it that richer homeowners pay fewer in taxes here?

CHRIS BERRY: Well, it all goes back to the step of assessment. And what a lot of people don't spend a lot of time thinking about is that the value of your property is not always known with any certainty. So it's not quite like a sales tax. So where we levy the tax at the time that you buy a product, and we exactly what you paid for it.

The property tax has to be charged every year to everybody, when most people don't really sell their home very frequently. And so the assessor has the job of figuring out what your home is worth. And in general, they're going to take information about the homes that did sell and try to make estimates or guesses about those homes that haven't sold.

And it's really at that step that the inequities are being generated. And in particular, what we see is that they are systematically overestimating the value of low-priced properties and underestimating the value of high-priced properties. And because those assessed values are what ultimately determine the tax bill, that inequity in the assessments translates directly into inequities in tax payments.

ZACK GUZMAN: Yeah. And it was interesting to reach through your report. Obviously, that becomes very problematic when you think about minorities and the way that they are traditionally, as data would show, in those less-valuable home markets. But when you think about that, how do you fix the problem if you're thinking about assessment and how that just works. What are the solutions?

CHRIS BERRY: Well, first of all, it's not going to be easy. I want to be very clear that it's a hard job. The assessment is a hard job. And so I think it's not as if there's some switch that we can turn on, the switch of fairness that's going to just make this problem go away. I think there's several things that need to happen.

Assessors aren't always working with the best data. And one of the things that's really at the heart of this is there are many features of homes that buyers and sellers can see that the assessor can't see, for example, interior features of the home. Obviously for any shopper, if they find a home that has a beautiful renovated kitchen and a spa-like bathroom, that's a huge selling point, something you'd be willing to pay more for. But often, an assessor won't see that. And in fact, there's various sort of rules that prevent assessors from going into a home. So that's one example, one category of features the assessor doesn't get to see. But it counts for a lot of the price of a home.

And so getting better data is an important first start. It's also true that assessors aren't always using the most cutting edge models. And in particular, they are not great in general and modeling neighborhood to neighborhood variations. And so I think there's lots of room for improvement there.

But I think one of the starting points has got to be acknowledging the problem. The fact is, not many people have been paying attention to this. Assessors in general have tended to kind of sweep it under the rug. And until we're willing to acknowledge that we have this inequity, it's going to be impossible to fix it. So that would be step number one.

ZACK GUZMAN: Yeah, that's why your data really jumped out at me. But when you also look at maybe the other side too, the more expensive homes, interesting to see that a lot of states have limits on maybe how much that assessment and the value could rise in a year. I mean, is that another piece of it too, maybe getting rid of some of those to maybe make things more equitable too?

CHRIS BERRY: Yeah. I think what you mentioned is a great example of an unintended consequence of a policy. So a lot of states, as you say, have limits on how much assessments can increase year to year. And these limits were put in place with the intention of protecting people from skyrocketing property taxes if they live in a market where home values are appreciating quickly. So particularly, for example, people living on a fixed income, we wanted to protect them from having their property taxes increase rapidly. And so these caps were created.

But one of the things we find-- and it would be particularly true in a place like New York, that the caps end up benefiting most the people with the most expensive properties, which wasn't really the intent. But that's how it's played out. And certainly in some markets, particularly the rapidly appreciating markets, this contributes in no small part to the overall inequity.