An exploratory approach for enhancing vertical and horizontal equity tests for ad valorem property tax valuations using geographically weighted regression

An exploratory approach for enhancing vertical and horizontal equity tests for ad valorem... PurposeThe purpose of this study is to enhance the estimation of vertical and horizontal inequity within property valuation. Property taxation is a crucial source of finance for local government around the world – based on a presumptive tax base underpinned by estimates of property value, inaccurate real estate valuations used for such ad valorem or value-based property tax calculations potentially lead to a variety of costs, both financial and other, for tax payers and governments alike. More common are increased costs in time, staff and, in some cases, legal fees. Some governments are even bound by acceptability thresholds to promote fairness, equitability and overall government accountability with respect to valuation.Design/methodology/approachThere exist a number of vertical inequity measurements that have undergone academic testing and scrutiny within the property tax industry since the 1970s. While these approaches have proved successful in detecting horizontal and vertical inequity, one recurring disadvantage pertains to measurement error/omitted variable bias, stemming largely from a failure to accurately account for location. A natural progression within property tax research is the application of a more spatially local weighted modelling approach to examine vertical and horizontal inequity. This research, therefore, specifies a geographically weighted regression (GWR) methodology to detect and measure vertical inequity in property valuations.FindingsThe findings show the efficacy of using more applied spatial approaches for vertical tax estimation and indeed the limitations of employing conditional mean estimates coupled with delineated boundaries for assessing property tax inequity. The GWR model findings highlight the more fluctuating nature of vertical inequity across the Belfast market for the apartment sector both in a progressive and regressive sense and at different magnitudes. Moreover, the results reveal spatial clustering in the effects and are indicative of systematic inequities related to location inferring that spatial (horizontal) tax inequities are not random. The findings further show increased GWR model predictability overall.Originality/valueThis research adds to the existing literature base for evaluating both vertical and horizontal inequity in value-based property taxation at the intra-neighbourhood level. This is accomplished by modifying the Birch–Sunderman approach by transforming the traditional OLS model architecture to a GWR model, thereby allowing coefficient estimates of inequity to vary not only across a jurisdiction, but also at a more local level, while incorporating property characteristic variables. This arguably allows assessors to identify specific geographical areas of concern, saving them money, time and resources on identifying, addressing and correcting for inequity. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Management of Property and Construction Emerald Publishing

An exploratory approach for enhancing vertical and horizontal equity tests for ad valorem property tax valuations using geographically weighted regression

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1366-4387
DOI
10.1108/JFMPC-04-2019-0033
Publisher site
See Article on Publisher Site

Abstract

PurposeThe purpose of this study is to enhance the estimation of vertical and horizontal inequity within property valuation. Property taxation is a crucial source of finance for local government around the world – based on a presumptive tax base underpinned by estimates of property value, inaccurate real estate valuations used for such ad valorem or value-based property tax calculations potentially lead to a variety of costs, both financial and other, for tax payers and governments alike. More common are increased costs in time, staff and, in some cases, legal fees. Some governments are even bound by acceptability thresholds to promote fairness, equitability and overall government accountability with respect to valuation.Design/methodology/approachThere exist a number of vertical inequity measurements that have undergone academic testing and scrutiny within the property tax industry since the 1970s. While these approaches have proved successful in detecting horizontal and vertical inequity, one recurring disadvantage pertains to measurement error/omitted variable bias, stemming largely from a failure to accurately account for location. A natural progression within property tax research is the application of a more spatially local weighted modelling approach to examine vertical and horizontal inequity. This research, therefore, specifies a geographically weighted regression (GWR) methodology to detect and measure vertical inequity in property valuations.FindingsThe findings show the efficacy of using more applied spatial approaches for vertical tax estimation and indeed the limitations of employing conditional mean estimates coupled with delineated boundaries for assessing property tax inequity. The GWR model findings highlight the more fluctuating nature of vertical inequity across the Belfast market for the apartment sector both in a progressive and regressive sense and at different magnitudes. Moreover, the results reveal spatial clustering in the effects and are indicative of systematic inequities related to location inferring that spatial (horizontal) tax inequities are not random. The findings further show increased GWR model predictability overall.Originality/valueThis research adds to the existing literature base for evaluating both vertical and horizontal inequity in value-based property taxation at the intra-neighbourhood level. This is accomplished by modifying the Birch–Sunderman approach by transforming the traditional OLS model architecture to a GWR model, thereby allowing coefficient estimates of inequity to vary not only across a jurisdiction, but also at a more local level, while incorporating property characteristic variables. This arguably allows assessors to identify specific geographical areas of concern, saving them money, time and resources on identifying, addressing and correcting for inequity.

Journal

Journal of Financial Management of Property and ConstructionEmerald Publishing

Published: Aug 5, 2019

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