1 Introduction

The property tax is the single largest source of revenue for American local governments. Cities, counties, school districts, and special districts raise roughly $500 billion per year in property taxes, accounting for 72% of local taxes and 47% of locally raised revenue (U.S. Census Bureau 2016). Whether residents rent or own, property taxes directly or indirectly impact almost everyone.

In many cities, however, property taxes are inequitable; low-value properties face higher tax assessments, relative to their actual sale price, than do high-value properties, resulting in regressive taxation that burdens low-income residents disproportionately.

The standard approach for evaluating the quality and fairness of assessments is through a sales ratio study (International Association of Assessing Officers 2013). A property’s sales ratio is defined as the assessed value divided by the sale price. A sales ratio study evaluates the extent of regressivity in a jurisdiction, along with other aspects of assessment performance, by studying sales ratios for properties that sold within a specific time period. A system in which less expensive homes are systematically assessed at higher sales ratios than more expensive homes is regressive.

This report presents a basic sales ratio study for Cook County, Illinois Diagnostic, based on user supplied data. Data was used for residential properties that sold between 2015 and 2019 and are classified as arm’s-length transactions utilizing the IAAO Standard. For more details, see the Appendix.

2 Sales Ratio Analysis

The relationship between assessments and sale prices is regressive if less valuable homes are assessed at higher rates (relative to the value of the home) than more valuable homes. To evaluate regressivity in assessments, Figure 2.1 presents a binned scatter plot of sales ratios against sale prices.

For this graph, property sales have been sorted into deciles (10 bins of equal size based on sale price), each representing 10% of all properties sold. Each dot represents the average sale price and average sales ratio for each respective decile of properties. This graph compares the most recent values for 2019 (solid line) with the average across all years of observation from 2015 to 2019 (dashed line). All values were adjusted for inflation to 2019 dollars to facilitate comparisons.

If sale prices are a fair indication of market value and if assessments were fair and accurate, Figure 2.1 would be a flat line indicating that sales ratios do not vary systematically according to sale price. A downward sloping line indicates that less expensive homes are over-assessed compared to more expensive homes and is evidence of regressivity.

In 2019, the most expensive homes (the top decile) were assessed at 87.1% of their value and the least expensive homes (the bottom decile) were assessed at 102.0%. In other words, the least expensive homes were assessed at 1.17 times the rate applied to the most expensive homes. Across our sample from 2015 to 2019, the most expensive homes were assessed at 83.4% of their value and the least expensive homes were assessed at 109.4%, which is 1.31 times the rate applied to the most expensive homes.

Figure 2.1

Figure 2.2 shows the share of properties in each decile that were overassessed or underassessed. relative to the median rate of assessment. That is, a property is classified as overassessed if its sales ratio is above the median sales ratio for the jurisdiction, and classified as underassessed if its sales ratio is below the median. If errors were made randomly, each decile would have 50% of properties overassessed and 50% underassessed. When lower value homes are more likely to be overassessed than higher value homes, it is evidence of regressivity.

In Cook County, Illinois Diagnostic, 68% of the lowest value homes are overassessed and 39% of the highest value homes are overassessed.

Figure 2.2

3 Industry Standards

Section 2 provides graphical evidence of regressivity in property assessments, but it does not provide a statistical evaluation. In this section, we report several standard statistics used in the evaluation of assessment quality.

The International Association of Assessing Officers (IAAO) defines standards for assessments including standards for uniformity and regressivity (International Association of Assessing Officers 2013). A detailed overview and definition of each measure can be found in the Appendix.

3.1 Coefficient of Dispersion (COD)

The COD is a measure of assessment uniformity, or horizontal equity. It is the average absolute percentage difference from the median sales ratio. For instance, a COD of 10 means that properties have ratios that on average deviate by 10 percent from the median ratio. The IAAO specifies that the acceptable range for COD is below 15, which is shaded in Figure 3.1.

For 2019, the COD in Cook County, Illinois Diagnostic was 17.97 which did not meet the IAAO standard for uniformity.

Figure 3.1