Year of Publication
Martin School of Public Policy and Administration
Master of Public Policy
Assessors are required, as mandated by the Kentucky State Constitution and KRS 132.690, to assess property at 100 percent of fair market value. Fair market value is defined as the price a seller would expect to receive in an open and competitive market. Evidence from data and analysis in this paper indicates that property is under-assessed by approximately 25 percent. Though urban areas assess at a slightly higher rate, this is offset by rural areas, which do a significantly poorer job. This has important implications for local communities in Kentucky that depend on property tax revenue in order to provide necessary goods and services to residents of those communities. Further, inaccurate property assessments distort the current school funding formula used in Kentucky that provides state funding to schools based on the value of properties in each school district.
Multiple econometric tests, including a rational expectation test and a hedonic price model, are conducted to analyze the quality of PVA assessments for 199 homes throughout Kentucky. These assessments are compared to certified appraisals for each home, which also contain market data for 3 comparable properties. The use of these appraisals as a proxy for fair market value is validated by econometric analyses that show the appraised value is an unbiased estimate of the market price of property and that appraised value is subject to only a small measurement error, about 3.5 percent of the variance across all property values. Further, evidence suggests that assessed values appear to be a scaled version of the unbiased appraised values.
Smith, Brian, "Do Property Assessors in Kentucky Value Residential Property at Fair Market Value?" (2007). MPA/MPP/MPFM Capstone Projects. 176.