What Algorithms Get Wrong About Taxes (and What Humans Fail To Fix)
“Every time your local elected officials tell you they don’t have money for park maintenance, public school teachers, or basic public safety measures, remember this: They’re only telling part of the story,” wrote Joe Minicozzi on how his county of Buncombe, North Carolina, uses flawed formulas to generate valuations which result in thousands of dollars’ worth of tax breaks for owners of larger, more expensive homes. These “tax breaks,” caused by incorrect assessments, are not only the fault of a flawed computer software system, but also the humans who carry a responsibility in fixing it.
“You wouldn’t let a kid come home with a 50% report card,” Minicozzi said. But to Minicozzi, it seems like assessors (in North Carolina and nationwide) are allowing the property tax system to do just that. “It's a whole other thing when a human actually has the test score to look at and chooses to ignore it.”
Minicozzi has been advocating for transparent local accounting in North Carolina, along with the Just Accounting for Health Project (JAfH), for a little over a year. While Minicozzi has noted that assessors may just be married to a corrupt system—one they’ve received advance training in and may not realize is corrupt—he’s deeply questioning why local assessors haven’t made significant changes in closing the assessment gap, as more and more evidence of a broken property tax system surface. According to JAfH and national research by Dr. Christopher Berry of the University of Chicago, the assessment gap is present nationwide throughout the property tax system; in other words, the property tax burden has been shifted from owners of larger and more expensive properties to people who own smaller and less expensive homes.
In North Carolina, the assessment gap can be seen through a miscalculation in true value, where more expensive homes are underassessed. The state law directs that the “true value” of a home is equal to the market value, meaning a home must be assessed at the sale price so the owner receives the correctly charged property tax bill. According to the International Association of Assessing Officers, while assessors have access to computer software to assist with mass appraisal (Computer-Assisted Mass Appraisal), it is nonetheless the responsibility of assessors to ensure "the accuracy of values." Which, the association states, “depends first and foremost on the completeness and accuracy of property characteristics and market data.”
A lot of work goes into maintaining the computer-assisted mass appraisal software, and as seen on the graph below, it doesn’t always calculate the assessment correctly. For a real home in Buncombe County, it overassessed the home (pictured left) by 16%. Another home it underassessed by 3%.
(The light blue bar on the left is the software’s assessment, the green bar is the sale price, or true value.)
(Click to enlarge.)
Whenever a home sells, the assessor has the ability to adjust the software’s assessed value to the true value if it’s inaccurate. As seen below, Minicozzi points out the assessor was able to complete this task and match the “true value” to market value (see the dark blue bar on the right).
Home values were assessed in 2021, using sales data from the prior two years. (Click to enlarge.)
But sometimes, Minicozzi says, the assessor doesn’t properly correct the software’s inaccuracy.
“In defense of the assessors, they just learned this on the job from previous assessors,” said Minicozzi. “The issues are deeply rooted.”
As seen below, the higher-priced home is underassessed by the computer software, and Minicozzi points out that something is amiss when the assessor “fixes” the assessment of the higher-priced home. They don’t adjust the assessment to match the true value. Instead, the assessor only corrects the value by a small, and inaccurate, percentage.
(Click to enlarge.)
“The computer made a bet. It's like, ‘I think this is worth 1.2 million.’ That's an educated guess, but nothing's perfect. Humans invented the algorithm that's inside that computer. So, it's going to make a mistake,” explained Minicozzi. “But then the price comes in, and somebody should go, whoa, wait a minute, we're off by nearly 50% here. Let's go ahead and just fix that computer.”
By law, the assessor should have brought the assessment for house C up to $2.5 million in the above graph. The same assessor brought both houses A and B up to 100%—so, why not house C?
Minicozzi highlights two other higher-priced homes that follow the same underassessment pattern:
(Click to enlarge.)
Minicozzi says these underassessments are an issue because they’re causing the county to lose out on billions of taxable property that fund necessary public services. Additionally, those who are responsible for managing the property tax system are simultaneously responsible for a big part of people's lives. The weight of a property tax bill is felt throughout the year as homeowners create budgets for their families; plan for future retirement; and use property-tax-funded services such as public schools, hospitals, and parks.
“Why did they choose to assess 100% on lower-priced homes, and just do maybe 60% on higher-priced homes? That was a human choice,” said Minicozzi.
He notes that estimating a home’s market value for assessment is not an easy task, and assessors are bound to make some mistakes. The set of standards and rules that counties use to derive assessed values for homes is often hundreds of pages long. For example, Buncombe County’s Schedule of Rules and Values totals 655 pages. But this growing record of underassessments is turning out to be more than just a small mistake.
“It seems like the computer is set up to score the poor higher than the rich,” said Minicozzi “And when confronted with an actual transaction, the human also can't read the test score, and fails to follow state law.”
Buncombe County’s assessor did not respond for an interview on the data provided by Minicozzi, but the department stated, “We have not identified any error in the [computer-assisted mass appraisal] system methodology.”
This human choice to ignore the test score and underassess higher-priced homes has been a practice in the property tax system for decades. In the late 1970s, Arthur Lyons, an economics professor at the University of Illinois, conducted a review of assessments in Cook County, Illinois. In an interview with the Chicago Tribune, Lyons says that “the patterns are so devastatingly consistent, it's almost as if the [computer] program was written to discriminate against lower-value homes.” The assessor at the time, Thomas M. Tully, refused to permit access to examine the computer program and data, which was particularly distressing, as the county had just deployed a new assessment model.
(Click to enlarge.)
JAfH is actively working to reveal property tax inequities and challenge local governments to make significant corrections to the broken property tax system, stating that “the issue of a broken property tax assessment system is too important to ignore; the stakes are high for individual and local government success.” Minicozzi says we must take action to bring about change within the property tax assessment system for the betterment of all.
In the upcoming months, JAfH will publish a comprehensive final report on their years-long research of property tax inequities present in North Carolina. To be notified of its release, sign up for email alerts here.
On this episode of the Strong Towns Podcast, Chuck answers housing questions submitted by Ohio State University students, covering topics from the history of the housing market to financing housing development.