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The Algebra of Tax Burden Shifts from Assessment Limitations

Richard F. Dye and Daniel P. McMillen

July 2007, English

Although assessment limits appear to be an attractive policy option in areas with rapidly growing market values because they keep a homeowner’s property tax from rising rapidly without placing restrictions on expenditure growth, the policies often have unintended distributional effects. A stylized model demonstrates that taxes must rise for some groups in order to provide tax relief to others. The model confirms that an apparently surprising result is a logical necessity of assessment limits: taxes can increase for groups who appear to be enjoying tax relief. The extent of the tax increase is higher (1) the greater the appreciation rate for other favored properties and (2) the higher the percentage of favored properties with higher appreciation rates.