An Alternative Measure of the Degree of Inequity in Assessed Values for Individual Properties: A Theoretical Perspective

Abstract

The Coefficient of Intra-Area Dispersion of assessed value/sale price ratios (COD) is frequently used as a measure of the degree of inequity in assessed values for individual properties. However, to the extent that property tax liabilities are capitalized in the sale prices of individual properties, the COD can be shown to be inconsistent as a measure of the degree of inequity with respect to (1) alternative but a priori reasonable choices for the definition of equity and (2) changes in the nominal property tax rate on assessed value. This second conclusion is valid under each choice for the definition of equity. The Measure of Intra-Area Dispersion of assessed value/market value ratios (MOD) is presented in this article as an alternative measure of the degree of inequity in assessed values. The MOD compares assessed values to hedonic market values based on attributes rather than sale prices. Depending on the choice for the definition of equity, the MOD is preferable. Unlike a distribution of assessed values consistent with the existence of equity with respect to sale price after assessment, the distribution of assessed values consistent with the existence of equity with respect to market value is unique. As such, unlike the COD, the MOD is shown to be insensitive to changes in the nominal property tax rate on assessed value. Therefore, the MOD is reliable.