Property Tax Assessment Bias

In the last few years, researchers have revealed something shocking about the property tax, the mainstay of local governmental finance. In virtually all jurisdictions in the country, expensive homes are undervalued by property tax assessors—and hence under-taxed—while less expensive homes are over-valued and over-taxed. Put another way, one of the major methods of taxation in America is premised on repeated determinations that the rich are less rich than they actually are and that the less well-off are better off than they actually are. To give it name, there is almost universal Property Tax Assessment Regressivity, or PTAR.

This Article explains the consequences of PTAR. It shows that PTAR, while still likely regressive, may be less regressive today than one might imagine. A consistent, long-standing PTAR in jurisdictions would be capitalized into property values and thus have largely benefited property owners many years ago, rather than today’s property owners. PTAR also limits the “insurance” value of property taxes, the way in which property taxes limit the downsides of property value declines (and the upside of increases). However, PTAR may counterintuitively make jurisdictions less scared of allowing much-needed dense housing construction.

So, should PTAR be fixed? 

The answer is a qualified yes. Fixing PTAR would be an efficient form of wealth redistribution, if a somewhat oddly directed one, as it only shares revenue among homeowners in individual local governments. Capturing the insurance benefits of the property tax would have substantial benefits for the many homeowners with undiversified portfolios. However, fixing PTAR should be paired with policies to mitigate its downsides and enhance its upsides. More taxing authority should be given to bigger jurisdictions, as doing so would enhance the insurance and redistributive benefits of fixing PTAR. And states should pair fixes to PTAR with greater oversight of local zoning authority to ensure a better property tax system does not come at the cost of exacerbating the housing crisis.

What the strange case of PTAR reveals is that the property tax is not, as many have argued, the perfect tax for local governments to levy. Instead, the property tax turns out to be the bad local tax we have grown used to. To make it “work,” we have allowed local governments to engage in all sorts of bad policy—taxing the less well-off at higher rates than those richer than them, and restricting housing growth in order to avoid redistribution.

David Schleicher, "Your House Is Worth More than They Think: The Strange Case of Property Tax Assessment Regressivity", 62 Harv. J. on Legis. 1 (2024).

The Proposed Mega Sports Complex For Douglas County

Artist's rendering from Douglas County via the Denver Post

The Project

The controversial Zebulon Regional Sports Complex in Douglas County is set to break ground this fall. It is a $1.3 billion project planned for a site near Chatfield Reservoir in a brownfield development with "an old dynamite-making plant that operated for decades at the proposed Zebulon site" although it purportedly has been fully remediated. The state signed off on that conclusion in 2022.

The plans for the Zebulon Regional Sports Complex are huge.

On the drawing board are four baseball fields, three ice rinks and a pair of soccer fields. Eight to 10 basketball courts — which can be converted into 20 volleyball courts or 30 pickleball courts — are also in the mix. Add in a 400,000-square-foot, domed indoor sports facility that will house more fields for year-round play. . . .

And that’s just the first phase, which could break ground as soon as this fall on a 50-acre parcel just southeast of the master-planned Sterling Ranch community. Later phases could bring as many as eight additional sports fields, along with restaurants, shops and a hotel[.]

Does It Pencil?

I've worked with clients to help vet a similar proposals on a smaller scale, so I have so familiarity with the economics of these deals. For the life of me, I can't see how this could pencil as a "for profit" private sector venture at this scale in this location.

Sure, there is unmet demand in the area, which has had and continues to have large subdivisions rolled out over the last few decades (like 12,000 homes in Sterling Ranch which will house 35,000 people when completed that is only 20% built out), without sufficient government investment or HOA in community amenities. So, a much smaller private non-profit or public sector recreation center run by Sterling Ranch's metro district might work.

But, the demand just isn't there for something of this scale, and a similar but smaller complex in Centennial isn't thriving.

[A] citizen survey conducted last year by Douglas County ... revealed [that] a “mega-sports complex” was identified by 33% of respondents as the “least appealing option” of a list of potential amenities. The survey also showed that just 22% of respondents were dissatisfied with the number of youth sports facilities in the county.

Another smaller recreation center is already on the drawing board for Highland's Ranch which would be between the South Suburban Recreation Center twenty minutes to the east and the Zebulon complex.

The county investment is about $800K in engineering planning for infrastructure (realistically, a drop in the bucket) and a portion of the about $22 million a year in revenues for the the next 15 years from the county's 0.17% sales tax for its Parks, Trails, Historic Resources and Open Space Fund established in 1994.

But even this investment is controversial, in part, because the county leadership whose home rule county proposal epically crashed and burned in June, and which has a history of infighting and political posturing, isn't popular and doesn't have much public trust.

Moreover, as a "for profit" it probably isn't eligible for municipal bond financing with private activity bonds. This project would probably have, at best, a BBB credit rating implying roughly a 6.1% corporate bond interest rate, while a comparable municipal bond would have roughly a 3.6% interest rate, which is a $32.5 million a year difference for an investment of this size. Municipal bond eligibility, that it could receive as a non-profit, would be worth more than all of the sales tax revenue that could be diverted to the project.

There are a few other sports complexes with a similar (but slightly smaller than the proposed full build out) scale in the metro area, the South Suburban complex further east in Douglas County, one in Arvada, and one in Jefferson County (IIRC). But those are strictly government owned and funded, and the most similar South Suburban Parks and Recreation District facility further east, in Centennial, doesn't seem to be thriving.

Bottom Line Analysis

Philosophically, the fact that it is a brownfield development is a good thing, the fact that it provides amenities in a rapidly growing community with unmet needs is a good thing, and the fact that the risk that it will be an unprofitable money pit will fall mostly on wealthy, private sector, for profit, investors with only modest public subsidies is a good thing. It is also estimated to create 1,800 temporary jobs to build it, which is a good thing in what is mostly a bedroom community, where construction work for its huge sprawling suburban subdivisions is winding down due to factors like a limited supply of water for new taps.

But the fact that the proposal appears to be vastly bigger than the realistic demand for recreational facilities, the fact that the public is subsidizing a for profit company (even if it isn't a professional sports team), and the fact that it doesn't have much public support when the public will be providing significant sales tax funding support to the project, aren't good things.

An independent non-profit project, or metro district, or South Suburban Parks and Recreation District (with annexation of additional territory, if needed) sponsored project, that is less ambitious, with more phases to allow experience to determine if demand justifies something larger, would make more sense, in my opinion.

A Clean Slate For Property Rights, Entities, Federalism, And Related Matters

There are some economic and legal reforms which are hard to make now, but starting with a clean slate would have been better to have made differently, or which are just structural reforms.

Mineral Rights And Water Rights

* All mineral rights should be owned by the government and merely leased by firms exploiting them.

* The rights of surface owners of land over mineral rights leased by the government should follow the Colorado rule (which requires underground mining that preserves the rights to support of the surface owners) and not the Wyoming rule (which permits strip mining).

* All water rights should be owned by the government and leased annually to water users. All water users in the same watershed would pay the same lease rate based upon an auction. Market failures and transaction costs cause inefficient overallocation of water at very cheap prices to agricultural users to the detriment of fishing, recreational use, and municipal water use.

* Grazing land would be primarily publicly owned with the right to graze cattle on open ranges leased.

Wildlife Management

* To the extent possible, management of wildlife populations with natural predators, like bears, wolves, and mountain lions, would be preferred to hunting.

Real Property Rights

* Legal life estates and other present and future interests in real property should not be permitted. Someone wishing to create the equivalent to a life estate could establish a trust in which some beneficiaries had equitable life estates and others had equitable remainder interests. Existing legal life estates could be deemed to be trusts in which the present interest holder is the trustee for the benefit of themselves and all future interest holders.

* The race-notice statute should be modified so that a person with an interest in real property created by a written instrument could only benefit from the notice provisions for up to four months from the date of the instrument to gain priority over a recorded instrument creating rights in land. Written instruments creating an interest in real property that are more than four years old would be subordinate to the rights of the owners and encumbrances of record.

* Judgment liens would be possible to record against all real property in the state owned by a debtor in a single state filing.

* Ancillary probate of real estate would be replaced with a requirement to give full faith and credit to an executor, personal representative, or administrator appointed in the place of domicile, subject only to state homestead exemptions.

Property Taxes

* Education would be funded through state income, sales, and gifts and estate taxes, not through local property taxes.

* Non-profits, including churches and state government property, would not be exempt from property taxes, but state government property would be assessed at the state level rather than at the local level.

* Property tax assessors, and state and county treasurers, would be civil service appointments, not elected.

Limited Liability Entities and Judgment Liens

* Ownership interests in entities would have to be recorded with a state registrar, although this information would only be available to interested parties. 

* Trusts would be registered with the state registrar rather than with courts of probate jurisdiction.

* Trusts and estates would be treated as entities for state law purposes.

* Judgment liens should be possible to record against all interests in entities in a state with a single state filing.

* All limited liability entities would be required to be bonded against the claims of trade creditors and insured to standards established by regulation, with the bonding agent and insurers made a matter of public record. The directors, officers, managers, and partners of the entity would have joint and several personal liability for any failure to do so, guaranteed by the owners if they, collectively, were unable to satisfy any debts of the company that should have been bonded or insured.

Local v. State Authority

* Occupational licensing in the construction trades, and building codes, should be regulated at the state level, rather than the local level.

* Local governments should not be permitted to have their own courts and instead would enforce their rights, including ordinance violations, in the appropriate state courts.

* Local governments should not be permitted to enact ordinances for which incarceration is a penalty, other than contempt of court punishments for violations of injunctions previously imposed against a particular defendant in a state court proceeding brought by the local government against that particular defendant.

* Zoning and use regulation by local governments would be limited at the state level.

Copyrights and Intellectual Property

* Copyrights should have a much shorter term, such as the pre-1976 rule of 26 years from publication and an additional 26 years if a copyright registration is renewed, which a separate regime protecting the exclusive right of the authors to publish and register unpublished works. Works not published within 26 years of the death of the author would be in the public domain. This might be accomplished with a one time buyout of existing copyrights more than 52 years old at fair market value or a nominal amount for unmarketed and unappraised copyrights.

* There would be mandatory licensing of copyrighted works, handled by one or more non-profits for performances of all musical works, all orphan works, translations of works for which had not been translated into a particular language pursuant to a license within some designated period of time after the publication of the work in its original language, and almost all other derivative works.

* The scope of the derivative work right for copyrights would be greatly narrowed.

* Statutory damages for copyright violations would be abolished. Economic damages for copyright violations would be limited to unjust enrichment relative to licensing the work, or lost profits relative to licensing the work, whichever was greater.

* Common law trademark rights in trademarks not registered in the principal register under the Lanham Act (including rights under state trademark filings) would be exclusively a matter of federal law.

* Rights of publicity would be exclusively a matter of federal law.

* Royalty income from intellectual property would be taxable where the sale giving rise to the transfer takes place, not where the owner of the intellectual property is domiciled.

Federal Court Jurisdiction

* Federal court diversity jurisdiction not involving international diversity would be abolished.

* Federal question jurisdiction in cases between private parties not involving other specific grants of federal court jurisdiction (e.g. in the cases of intellectual property, civil rights, certain class actions, and election law cases) would be abolished.

* Federal crimes for matters that can be prosecuted under state law, like bank robbery, intrastate controlled substances violations, and most murders, would be repealed.

* Felonies committed in Indian Country would be governed by new Indian Country District Courts and a U.S. Court of Appeals for Indian Country, and a related Indian Country law enforcement agency, rather than by the relevant U.S. attorney's office and the FBI.

* The lowest level immigration offense of illegal entry would be made a civil offense governed primarily by the immigration courts, and decriminalized (this makes up a significant share of the total criminal docket in many U.S. District Courts).

* The immigration courts would be reformed and made Article III courts. A right to an attorney at public expense would be established in the immigration courts.

U.S. Taxes And Trends In Wealth Inequality In The U.S.

Wealth Inequality In the U.S. Over Time

This chart, based on the same household net worth data from the Federal Reserve, shows the top 0.1% separately (but is harder to eyeball):

In the 34 years from 1990 to 2024:

*  the share U.S. national net worth owned by the top 1% (currently net worths of more than about $5.8 million, with the current net worth of the top 0.1% consisting of net worths more than $30 million) increased by about 33% (the top 0.1% increased from an 8.6% share to a 13.5% share which is a 57% increase, while the rest of the top 1% increased from a 14.2% to a 16.8% share which is an 18% increase), 

* the share of the next 9% (currently net worths of more than about $1.94 million up to $5.8 million) fell by about 3% from a 37.8% share to a 36.6% share, 

* the share of the next 40% (currently net worths of more than about $193,000 to about $1.94 million) fell by about 15% from a 36.0% share to a 30.5% share, and 

* the bottom 50% (currently net worths of about $193,000 or less including negative net worths since debts exceed assets) fell by about 29% from a 3.5% share to a 2.5% share.

The bottom 50% peaked around 1992 at 4% of total net worth and hit bottom around 2011 at 0.4%  of total net worth in the wake of the financial crisis, and has recovered about half of its losses since it peak since then.

Of course, this is not a zero sum game (although the nominal dollar figures below exaggerate the extent to which everyone has improved their lot):

Adjusting for inflation (234%) and population growth (about 33%) from 1990 to 2024, the per capita net worth in each percentile group has changed in absolute terms as follows in that 34 year time period:

* Top 0.1% up 74%

* Next 0.9% up 67%

* Next 9% up 66%

* Next 40% up 38%

* Bottom 50% up 13%

Changing tax laws were a major driver of these trends

A significant factor in the increased share of wealth held by the top 1% over the last 30 years has been increasingly smaller tax burdens on them.

The strong preference for unearned income and gifts and inheritances over earned income in the tax code makes the effective tax rates of the wealthiest, especially the 1% lower in most cases, than the effective tax rates of the upper middle class and middle class.

The charts below break it down the tax rates on different kinds of incomes, and on gifts and inheritances, over time.

The chart above neglects several additional key tax preferences for certain kinds of income, mostly unearned: 

(1) the unlimited exclusion of income from municipal bonds, 

(2) the exclusion of income from increased cash value in whole life insurance policies, 

(3) the tax free status of accrued but not realized capital gains in assets owned at death, 

(4) tax deferral of capital gains from the sale of investment real estate that are rolled over into new investment real estate investments, 

(5) an exclusion of $250,000 of capital gain on the sale of a principal residence held for at least two years for a single person and $500,000 for married couple, 

(6) deferred or tax free income from various retirement and education investments (most Social Security benefits, defined benefit pensions, 401(k)s, IRAs, Roth IRAs, 529 plans, etc.), 

(7) preferential income tax treatment for stock options and certain other kinds of equity based compensation, and 

(8) the 20% of pass through entity income deduction (I.R.C. § 199A) in tax years 2018-2025.

Tax breaks from international taxation, too complex to review in this post, have also materially help people on the top 0.1% of net worth.

In addition to the federal income tax, wage and salary income is subject to a 7.65% employee and 7.65% employer FICA tax, for a combined 15.3% (and earned self-employment income is subject to a parallel self-employment tax) up to $168,600 in 2024 (the cap is indexed). Above this wage base, there is a Medicare tax of 1.45% employee and 1.45% employer for a combined 2.9% with a parallel self-employment tax.

There is also a federal 3.8% net investment income tax on investments, including the sale of stocks and bonds, for those who earn more than $200,000 if single or $250,000 for married couples (as of 2021), to finance the Affordable Care Act.

Income from marijuana dispensaries is taxed at a punitively high rate due to Internal Revenue Code Section 280E.

Gift and estate tax exclusions and rates over time:

1987-1996	$600,000	37%	55%	$10,000
1997	$600,000	37%	60%[1]	$10,000
1998	$625,000	37%	60%[1]	$10,000
1999	$650,000	37%	60%[1]	$10,000
2000-2001	$675,000	37%	60%[1]	$10,000
2002	$1,000,000	41%	50%	$11,000
2003	$1,000,000	41%	49%	$11,000
2004	$1,500,000	45%	48%	$11,000
2005	$1,500,000	45%	47%	$11,000
2006	$2,000,000	46%	46%	$12,000
2007-2008	$2,000,000	45%	45%	$12,000
2009	$3,500,000	45%	45%	$13,000
2010[2]-2011	$5,000,000	35%	35%	$13,000
2012	$5,120,000	35%	35%	$13,000
2013	$5,250,000	40%	40%	$14,000
2014	$5,340,000	40%	40%	$14,000
2015	$5,430,000	40%	40%	$14,000
2016	$5,450,000	40%	40%	$14,000
2017	$5,490,000	40%	40%	$14,000
2018	$11,180,000 [3]	40%	40%	$15,000
2019	$11,400,000	40%	40%	$15,000
2020	$11,580,000	40%	40%	$15,000
2021	$11,700,000	40%	40%	$15,000
2022	$12,060,000	40%	40%	$16,000
2023	$12,920,000 [4]	40%	40%	$17,000 [4]
2024	$13,610,000	40%	40%	$18,000

Notes to table:

[1] The 60% maximum tax rate actually represents an additional 5% that was added to estates of more than $10,000,000 from the years 1997 to 2001 in order to eliminate the benefit of the progressive tax table. The additional 5% ended at a taxable estate of $17,184,000, which is when the average tax rate reached 55%. So the top marginal tax rate during those years was 60%, but the top average tax rate was 55%.

[2] The federal estate tax in 2010 was actually optional, and estates could elect to pay no estate tax and instead accept a limit on the increase in the income tax basis on assets included in the estate.

[3] The basic exclusion amount was doubled in 2018, but that doubling ends after 2025.

[4] Official figure published in Rev. Proc. Rev. Proc. 2022-38.

Unused gift and estate tax exclusion became inheritable by a surviving spouse starting with decedents dying in the year 2010.

Working Class and Middle Class Taxpayers

The working class and the middle class pay no meaningful federal income tax (and sometimes even receives a net credit) and no gift and estate tax. The poor and the working class pay little federal income tax mostly due to the standard deduction (and previously a per person exclusion from income), the per child tax credit, the earned income tax credit, the exclusion of health insurance from income, the Affordable Care Act subsidy for certain non-employer health insurance policies, higher education tax benefits, graduated tax rates that tax low incomes more lightly, and the lifetime exclusion from gift and estate taxes. Deductions for student loan interest, self-employment health insurance, mortgage interest and state and local taxes also reduce the tax burden for many middle class families.

They do pay FICA or self-employment taxes, however, which greatly offsets the benefit of paying little or no federal income taxes (although they do receive Social Security benefits based in part on the FICA taxes they paid, and received Medicare health care benefits at age sixty-five, in exchange). 

They also pay the "poor man's estate tax", in the form of the estate recovery system for Medicaid nursing home benefits which requires means tested Medicaid nursing home benefits to be repaid with a beneficiary's probate estate.

Federal Excise Taxes And Revenue Sources

In addition to the federal taxes shown above, there are a variety of federal excise and duties taxes on gasoline and other vehicle fuels, on commercial air travel, on alcohol, on tobacco products, on firearms and ammunition, on phone service, and on good imported from less favored nations. Collectively, these taxes have a mostly regressive impact, meaning that the take a larger share of low income people's money than they do higher income people.

The federal government also earns modest amounts of money from miscellaneous sources such as making coins and currency, entering into grazing leases on federal lands, leasing federal mineral rights, and imposing fines and penalties.

International Comparisons

In many developed countries, value added taxes (VAT) and wealth taxes are important, and are largely absent in the U.S. (apart from real property and car taxes) and in many small countries especially islands, customs duties are a major source of government revenue, while they are largely insignificant in the big picture in the U.S. 

The U.S. also does not follow the "no taxation and no representation" model of oil rich monarchies where government services are financed with oil wealth owned personally by the monarch or the royal family, and likewise, has not nationalized oil and gas extraction to the extent of many, mostly developing, countries.

Overall, total tax collections in the U.S. as a share of GDP are low compared to other developed countries, which is one of several important reasons that the U.S. has more wealth inequality than many other developed countries.

Winners and Losers In Federal Taxes And Spending

Generally speaking, "blue states" (i.e. those that vote for Democrats in Presidential elections) pay more in taxes than they receive in federal spending, while "red states" (i.e. those that vote for Republicans in Presidential elections) are subsidized by blue states and pay less in taxes than they receive in federal spending, although this isn't a strict relationship.

This is mostly because "red states" tend to have lower incomes and GDPs than "blue states". 

At the county level, Biden voting counties had 71% of the national GDP while Trump voting counties had 29% of the national GDP, despite having roughly similar populations. It isn't clear how much of this relationship is because income drives political preferences, and how much of this relationship is because partisan differences in policy drive income differences.

State and Local Taxes

In addition to the federal government, various taxes are collected by state and local governments. The most significant are income taxes (often, but not always based on federal income taxes), business income taxes, taxes on retail sales of certain goods and some select services, property taxes on the assessed values of real property, gas taxes, alcohol taxes, tobacco taxes, and motor vehicle registration fees. Some state and local governments tax the value of real estate transfers. There are also a variety of user's fees. Taxes on mineral extraction and gambling and marijuana are significant revenue sources for some state and local governments.

Alaska pays a fixed some of money to every resident annually, currently $1,580 per resident, from its "permanent fund" of oil and gas tax revenues.

The relative importance of different kinds of state and local taxes varies greatly from state to state.

On balance, most state and local tax systems are regressive, meaning that lower income people are taxed at a higher percentage of their incomes than higher income people. 

Generally speaking, "blue states" have higher overall tax rates and more progressive tax systems, while "red states" have lower overall tax rates and more regressive tax systems, although the correlation isn't perfect.

The combined average state and local tax burden from all state and local taxes combined (from here) is shown below (the U.S. average combined state and local tax burden is 10.56%):

State Level Income Inequality

This only partially drives income inequalities between states, however (states with strong economic contributions very high income industries like technology, finance, and insurance also tend to have great income inequality):