Tom Sgouros: Reassessing Assessment - How property tax assessments become random

"Anyone who has ever challenged the assessor’s valuations knows that at some point, they shrug and say, “It’s market forces.” This is not very satisfying..."

In a previous column, I wrote that property taxes in Rhode Island are limited to a 4% increase each year. This is oversimplified in two ways: first, because the 4% limit applies to the total amount a town collects (which is weird and worth an article itself), and second, each city and town suffers a state-mandated “revaluation” every three years, where the assessment of each home is adjusted up or down according to recent sales prices.

Property in Rhode Island is taxed according to its market value, and has been for at least a couple of centuries. This is widely perceived as a fair way to do things, but what is a home’s value? You don’t ever know until it sells, and even then, you might not *really* know. Pao Lun Cheng, a longtime business professor at the University of Massachusetts, wrote in 1970 that the value of a house is an essentially unknowable abstraction because any particular sale price is confounded by complicating factors: the acumen of the buyer, the patience of the seller, the competence of the agent, the rectitude of the appraiser, and so on. He wrote that if you could sell a house many times over, the average sales price could be a good estimate of a property’s value, but a single sale price is hardly enough data.

This doesn’t mean throwing up one’s hands, but trying to be clear about what sales data tells you: a little, but not that much.

Before 1997, property in Rhode Island was assessed every ten years, when all properties were to be examined and revalued. But those revaluation years were marked by a tremendous number of complaints as people saw huge jumps in their property tax bills. I had a retired neighbor in Fox Point in the 1980s who saw his home’s value triple after a revaluation. His tax bill didn’t increase as much, but it jumped a lot. A real estate agent I mentioned it to told me my neighbor should be happy that his property’s value had gone up so much—small comfort to a guy who did not want to move. In the 1990s, among Mayor Cianci’s many transgressions was putting off the mandated revaluations by three years to help one of his reelection bids, because he knew how much people hated the inexplicable and unpredictable jumps in their tax bills.

In 1997, the General Assembly saw a threat to fairness in this unpredictability. It acted to reform the system, mandating that revaluations would happen every three years, with every third event being a full examination and the other two purely “statistical” revaluations, updating the assessments with the most recent sales data. According to the legislative findings, reducing the number of big jumps in tax bills was the primary goal, which you can read in RIGL 44-5-11.5. The legislation also aimed to “professionalize” the revaluation process by setting industry standards. All the cities and towns in the state now delegate the revaluation process to a handful of private assessment companies that follow assessment standards set by the International Association of Assessment Officials (IAAO)—no more arbitrary assessments set by unseen parties in the dark of the municipal assessor’s office. Now there would be real science behind the assessments, so people can have confidence that the changes in their valuations can be objectively explained.

Or something like that. Anyone who has ever challenged the assessor’s valuations knows that at some point, they shrug and say, “It’s market forces.” This is not very satisfying to someone asking why their taxes went up while their neighbor’s went down.

In 2023, I downloaded 21 years of tax rolls from the Providence Tax Assessor’s website, from 2003 until 2023, covering seven revaluation episodes. My goal was to see whether that 1997 reform actually worked. I found that over those 21 years, virtually all properties in the city saw a big jump (more than 15%, up or down) in their tax bill at least once, and around 60% of properties saw big jumps at least twice. Almost one house in five saw it happen four times or more. Under the old system, a homeowner would be at risk of a big jump in their property tax bill every ten years. Since the reform, 60% of properties have seen a big jump twice in 21 years. This hardly seems like convincing evidence that the reform worked as intended. (You can find the full analysis, with lots of pretty pictures, at SSRN.)

I analyzed next-door neighbors and identified 7,000 properties next door to each other whose property values were within 20% of each other in 2015. I calculated the correlation between the tax bills of these properties, and found the average correlation was not high. This means that the experience of next-door neighbors is only sort of similar, sometimes. The tax bill records were either totally uncorrelated or negatively correlated for around a sixth of these pairs. For those pairs of similar houses, right next door to one another, one neighbor’s tax bill went up while the other went down.

And you read that right: down. When revaluations happen, around half of all tax bills go down. You never hear complaints from those owners at town council meetings, but in truth, these are as much of a problem as the sudden jumps up, because one makes the other possible. They are both offenses against fairness in the tax system, but they are not surprising. The way the math works that these companies use in their fully professionalized “scientific” approach virtually guarantees big jumps up and down, no matter how frequently revaluations are scheduled. If they happened every year or every two weeks, the math would produce an overlay of randomness on top of its estimates. Does that sound fair to you? (The SSRN article has a lot about this problem, and you can find a few articles with less technical descriptions of the math here.)

During the study period, Providence property owners saw an unusually high number of large jumps in tax bills as a result of the 2009 revaluation. Well over half of properties saw swings of more than 15% and a fifth saw swings of more than 30%. The anomalous nature of that year is easily explained by the tumult of the real estate markets in the preceding three years, when the sales on which that revaluation was based occurred. The sales data for the 2009 revaluation used sales from 2007, before the market tanked, and 2009, after the collapse. Noisy data makes for even more random results. So, yes, “market forces” explain it. What is less easily explained is the justification for why we should put up with what seems like randomness in tax bills. What definition of fairness is that?

These effects are especially important to tenants. Property tax increases are readily passed along to tenants, but how many landlords pass along property tax decreases? This overlay of apparent randomness thus ratchets rents up. It also challenges attempts to finance new construction: How do you budget for expenses that can change unpredictably every three years?

The IAAO sets equity standards for assessments. They talk of “horizontal” equity, where two similar properties should have similar assessments, and “vertical” equity, where two disparate properties should have sales prices in a similar ratio to their assessments. The assessment companies can adjust the parameters of their estimates quite a bit to try to meet these equity standards.

But the standards have considerable blind spots. Two comparable properties can have comparable values and still see dramatically different changes in their tax bills, as with the neighbors mentioned above. What is needed is temporal equity: people should be able to expect a certain degree of continuity in their tax bills each year. The good news is that if math is the problem, math can also be the answer. There are ways to address these issues, but the first step is to understand how much the “market forces” are shaped by the assumptions we make about them.

The 1997 bill that rescheduled the revaluations also established a permanent commission on property taxes, but that commission does not appear on the General Assembly website, and I can’t find anything like it on the Secretary of State’s list of commission meetings and agendas. It’s time to convene that commission and consider the math behind property assessment and its impact on fairness and equity.