(May-June 2009 GroundSwell)

 

 

 

 

  (The following session was presented at the Council of Georgist Organizations conference July 10, 2008 in Kansas City, Mo.  GroundSwell Editor Nadine Stoner has abbreviated the comments from her audio tapes and notes.)

 

BRETT MANDEL, director, Philadelphia Forward,
Protecting the Elderly from Large Increases.

 

      In Philadelphia we are a  case study of how real estate tax doesn?t work.  In Philadelphia real estate tax doesn?t mean so much to our budget so we tend to leave it alone.  In Philadelphia property taxes now are unfair.  Some people are paying too much.  Some people are not paying their fair share.  

 

    There is a tremendous disparity in what they are paying in taxes.  Taxation is unpredictable; you don?t know what is going to happen from year to year.  In Philadelphia like many places the value of houses has gone up and up in recent years and then backed off last year.  So our taxation authority, the Board of Revision of Taxes that value homes for tax purposes, didn?t change the value for five years and then last year nudged it up.  The  poster child for bad assessments in Philadelphia is a  State Senator who had a house valued on the market for about $6 million but it is valued for tax purposes at $250,000.

    We have a market value that is supposed to be what your house would sell for but we say we will take a fraction of that as your assessed value and apply a tax rate to that.  But market values doesn?t really mean what market value should mean, so it  is confusing.  Nobody really understands what is market value or assessed value.  In Pennsylvania that is also illegal.  So we are threatening to sue our assessing officials to get this right. We are currently in negotiations with them as we try to avoid a lawsuit.  We have to value every single year, we have to value accurately, we have to value uniformly, and we are currently not doing that. 

 

    The problem is getting worse and we studied this as part of the tax reform commission in 2003 and found that the average property in 2003 had a market value of about 70% of true market value.  When we revisited those numbers we found that the average property now is valued at 32% of what it could sell for.

    The northeast part of the city and some of the outlying areas have been paying too much.  The areas in and around the center city tend to pay too little.   It would be fairly straightforward  just get the values rights.  It is another thing to make a transition from where some paid too much and some too little.    If you do fix the problem  in revenue neutral way,   there  will be winners and losers.  You can buffer the change in and phase it in over a number of years - average the assessments  over 3 years, 5 years, 10 years.  Of course, we think of taxing land more and buildings less.   It makes a lot more sense not only in terms of encouraging  development and discouraging speculation but it creates a subtle tax shift with untaxed  residential properties mostly  and increased taxes on Walmart and center  city parking lot owners.  So it is desirable policy and helps protect vulnerable homeowners. 

 

    There are any number of other policies that politicians will debate.  Obviously one of the first things you can do in terms of  taxes is limit how much you can tax.  Some states have laws that say  jurisdictions can only raise tax rates X% or they can only raise collections by X%.  That has the attractiveness of protecting taxpayers and providing some stability and some predictability.  The downside is that if you are not going to get the revenue you want from the property tax base then you have to tax other bases that will provide more damage to the local economy.  Philadelphia is the poster child for that.  We have not taxed comparatively  but instead taxed business activity and wages of workers in Philadelphia and over the past 50 years Philadelphia has suffered an exodus of jobs and residents in part because we taxed the wrong stuff.  So if you limit how much you can get from the property tax base,  politicians tend to find other solutions that don?t make much more sense. 

    Another  alternative is you can shift the tax burden. There are assessment growth limits which would provide a limit on how fast the assessments can go up.  They may provide some predictability.  They are a very popular program with homeowners  and certainly homeowners understand that very well.  That creates an inequality in the market place.  With my house and the house next to mine we are going to have unequal assessments.  With split rate taxation we don?t have that.

    Homestead exemptions make some sense in terms of helping some people but you have to apply for the program or have someone apply for you.  But you also have a subtle shift because you are untaxing homeowners  and uptaxing the shift to commercial taxpayers.  
    

    Abatements and freezes in terms of direct relief.  It can be attractive to some people but on the other side it can be misused as a political favor. 

    Circuit breakers usually done at the state level are policies that say if your income doesn?t go up as fast as the value of your house, the state  pays the difference.  That?s not a bad thing to help taxpayers but, of course, it is very costly to the government. 

    

    Finally there are deferrals.  Under that method the tax value will increase with the property but you won?t  have to pay that tax bill until the time you or your heirs sell the property.

    Philadelphia Forward in our advocacy work have come out against the idea of freezes,  as you start off with assessments unequal on homes.   One value grows faster and in five years you have created an inequality system.  You can find out more information on our web site, www. philadelphiaforward.org.

 

TED GWARTNEY, chief assessor, Greenwich, CT,
Public Relations of Revaluations.

 

     It is really critical that when a revaluation is being conducted the public is kept fully informed of what is being done, why it is being done, and how it is being done, and when it is going to get completed.  And you have to bring this to their attention time and time again.  Usually we have announcements before we get started and then we have press releases as we go along to tell the public about all the steps we are taking.  And when we complete the whole revaluation we want to give them as much information as possible.  We send out a notice that shows what their assessment was the prior year and what taxes they paid the prior year and then we show what their new assessment is going to be and what taxes they will be paying under the new assessment. This then reduces the amount of questions that come in and the use of court cases and all of the appeals that otherwise people would be taking.  Public relations is the job of keeping the public fully informed about everything that is happening. 

 

     The property tax is the primary source for local and public school revenue.  It is a tax on wealth, basically it is property wealth.  And over history it has been the primary source of revenue for financing public services and schools.    Before we had income and sales taxes we always had the property taxes going back throughout history.  It has become less important following the second world war than it was before the second world war, mainly because many jurisdictions now are using sales taxes and income taxes where they were not using them at the turn of the century. 

     The purpose of a revaluation is to raise funds needed for the local government and schools in an equitable manner.  A revaluation must eliminate any assessment inequalities that have developed since the previous revaluation.  Ideally the jurisdiction should  reappraise all property every year or every other year.  Not all property values raise at the same amount in the same time period. You are going to get into a very unfair situation the longer time that goes on before you have a new revaluation. 

 

    The revaluation balances out the property tax burden among all the property taxpayers in the community.  A reassessment should be a zero sum gain, and the City Council and the Schools should not look at it as though we are going to get any new revenue because we have a bigger tax base.  If the aldermen adjust the mill rate downward first then they may add additional taxes, only as needed but taxes are not going up because the property value is going up.  In Greenwich commercial properties went up twice as much as the residential.  On average the residential went up about 60% and the commercial went up about 120%. So it was a shift off the residential onto the commercial.  It just happened that we were in a very dynamic time with office buildings and retail demands. We of course pointed that out as part of our public relations.   

    Basically the whole idea behind a revaluation is to bring fairness in collecting the taxes. Properties that are paying too much should see some reductions.  Those that are paying too little should see some increases.  And if this is explained properly to the public they should understand that.
The property tax is an ad valorem tax.  If you have a $500,000 home you pay twice as much as someone who has a $250,000 home.  It is based on value, and the costs of government are spread according to all the total values of the community. 

 

    There are basically five steps in a revaluation.  The first one is to collect data on all the properties in town, and to correct any errors in the property description.   We do this in two steps.  We start with the land and review all the land purchases first.  We develop the land values before the total property values are done.   We treat the buildings as a residual value. We estimate the land value first, then we estimate the total value, and the difference between the total value and the land value is the building residual. 

    Second, you collect all the marketing information.  You check for all arms length sales since the last revaluation.  The market may be going up or it may be going down but your trending study moves the sales all to a common date, so when you are talking to people you are saying here is the actual selling price and here is the time adjusted selling price and we based all the assessments on this time adjusted market sale as at a set date. 

 

    Third, you then create a valid statistical relationship between all the data elements that you collected and the market values from the sales of those properties that sold and oftentimes this is done in terms of a multiple regression analysis, a statistical analysis, where you look at various characteristics of properties and you assign weights for different characteristics. 

 

    Then, fourth you apply that statistical relationship to your entire data base. 

    Fifth, you review and verify the results.  You invite the people to first  come in for informal public hearings, to meet with your staff and your revaluation consultants. 

 

    And finally, if necessary, they may go on to the board of assessment appeals to argue their case.
 

 

LINDY DAVIES, Program Director, Henry George Institute,

The Need for Reform in New York City

 

    A project that we have been undertaking by an alumni group of the Henry George School in New York is a different way of looking at assessments.  We have developed a sort of a muckraking approach to looking at assessments in New York City and how bad they are and the obstacles they would put in the way of actually implementing Georgist reform.  Since we are coming from an academic point of view, we aren?t going to talk about 2-rate but  about what if we actually collected the rent.   Later on we can come back and talk about what is literally feasible, and we are working with Josh Vincent and with the office of the Borough president of Manhattan in implementing some steps toward LVT like a surcharge on vacant land.  
    

    The New York assessment system is exceedingly difficult to understand.  It is  a significant part of the city budget revenue, because the real estate tax is about one-third of the city budget.  Nevertheless, it is  difficult to explain to the taxpayers what the shifts are.  There are four different classes of real property in New York.  Each one has an assessed value which is a different percentage of market value;  each one is taxed at a different rate, each has gradual phase in of increased values at a different rate, so you have a system in which frequently properties are increasing in  value but decreasing in assessment or vice versa over time so that the inequities are legion.  We have started a muckraking approach to acquainting people with these facts.  And we put up a web site called the New York City Hall of Shame.  (www.commongroundnyc.org)

 

    New York City is the most dense productive place in the United States with  over a billion dollars of GDP per square mile.  Some people say look at the open space, if you are going to tax land and stimulate new construction, you are going to take our vacant lots, where will we breathe.  Actually 8% of the land in New York right now is vacant, 16,000 acres and an area half the size of Central Park is vacant in Manhattan itself. The more important story economically is the underuse of land. 

    An example is this parking lot  two blocks away from the Henry George School.  It is on a pricy corner at Park Ave. South and has been a surface parking lot for over 20 years right next to a subway stop.  There are a lot of vacant and underused lots next to subway stations.

 

    Here is another example.  This building sold in 1996 for $15 million.  But the city said the real estate was worth $1.3 million. 

    According to the New York city assessor?s office land is always worth less if there is no building on it.  This is a very consistent thing.  And the land under this 16 story building is worth $1500 per square foot.  The land sold for almost $4500 per square foot for a hotel that is planned to be built there.

 

    Here is the famous parking lot on Main Street. (420  Park Ave. S.)  The city says the land is worth $410 per square foot.  But in the surrounding buildings the land is worth approximately $1500 per square foot.  We hope this inspires outrage in our students and gets them to thinking about the way the system is actually done. 

    Some of the small residential real estate in New York is assessed on comparable sales.  But large residential and commercial  are assessed on income stream.  The large residential includes most apartments, coops, and condos.  So this means that assessments are naturally lower for most properties if the properties aren?t being used. 

 

    We see  buildings that were there in the 1900s and they haven?t been  remodeled since and  most of the upper floors are vacant.

    Either they leave the buildings sit in the unused state they are in or the rent from the ground floor retail space is enough to pay the minuscule property taxes and the property stagnates where  affordable housing is nonexistent or they build large hotels and condos for foreign investors.  There are a lot of elderly  residents buying condos in New York City.  And that is what the market incentives are.

 

    In our usual presentation we now go into a power point on the canons of taxation.  We talk about other forms of taxation and how the land tax is really the only one that satisfies the requirements.  And we talk a little bit about the theory of property tax.

    Property taxes provide one-fourth  of New York City  revenue and the annual rent is roughly 3 to 4 times what the annual tax bill is.   I think we can make a very good case for there being enough rent to satisfy the full needs of the city in terms of taxes.  Figures are publicly available.

 

    We are making a pitch for New Yorkers to consider shifting to LVT.  One of our points is that it has been done in New York.  The ads for rental   housing talk about pre-war buildings.  The reason there are so many pre-war buildings is because NYC did not tax buildings during a period in the 1920s.  Mason Gaffney wrote about New York City in a paper, New Life in Old Cities.
(editor?s note:  See Insights in Nov.-Dec. 2006 GroundSwell.)

 

MARION JOHNSON,  Chief appraiser for Douglas County, Kansas, 

 and last year?s president of the International Association of Assessing Officers (IAAO)

 

    In the state of Kansas  we do an annual revaluation cycle.  Every year on January 1 we revalue all the parcels in my county.   We mail out property valuation notices to everybody on March 1 and we go through the process of appeals of people that disagree with the values.  We have had an annual process in Kansas since 1989.  Prior to that it was a 20 year cycle when last revalued.  In 1989 when the property owners got their valuation notice for the first time there  was a lot of sticker shock  because values went up tremendously, 200%-300%.  Since that time we have gone to an annual revaluation cycle.

 

     When I did IAAO, and we always were for annual revaluation in our standards and in our writing and in our publications.  We support annual revaluation cycles.  We think that is the best method of handling the property tax valuation system in the United States, but that is not to say that all jurisdictions do.  I was just in North Carolina doing a class and in N.C. they have counties that revalue once every 4 years and some counties that revalue once every 8 years.

    In our state of Kansas our property owners, once they got through the sticker shock of that first time and we got through that first year, then in  the first three years they grew accustomed to seeing the annual amount on their property.  And it is more acceptable to them to see a 3% or 5% increase in value on that year.  Most property owners do tend to forget a property increase the 3 prior years and if they get a 25% to 30% increase in value the 4th year they get upset.

 

      So an annual revaluation has been pretty acceptable to our property owners in our state.  The other thing is using a base year.  In the jurisdiction now the values are going down and flat. Unless we do an annual revaluation, people are probably overpaying what the actual value is  as they have to stay in the base year until we do a revaluation cycle.   In my particular jurisdiction this year  60% of our parcels saw no value increase at all but the value declined.  So the ability to do valuing adjustments every year allows us to reduce the value every year for a large number of our properties in this particular appraisal cycle.

     One  of the other considerations is land values and building values.   CAMA,  computer assisted mass appraisal systems,  is how most jurisdictions in the mass appraisal world establish values.  Without computerization you wouldn?t be able to value the  large number of properties we have to value; we would have to do it be hand like we did 27 years ago when I started.   You couldn?t do that any more because you value every property every year. 

 

    In my state and in my  jurisdiction we establish a land value and that land value is applied to every parcel in the neighborhood whether it is vacant or improved.  If it is a residential parcel and the residential lots  sell for  $40,000 a lot in one neighborhood,   then every property parcel will have a
land value of $40,000 and what is left over will be the building value.

    For example, say my house is worth $200,000 and if the land value established in my neighborhood is worth $40,000 then the improvement value is $160,000.  We have to break it out so if the property owner comes in he can see how much we assigned for land and how much we assigned for parcels.  The land value doesn?t fluctuate just because it is a vacant lot, and that is the same with commercial also.  If we have commercial lots in the industrial park, for example, we see what the commercial lots in that industrial park sell for and then value all of them at the same price per square foot.  Whatever the total value is, we take the land value out and whatever is left we assign to the improvement value.  It works pretty well

 

     In my  state of Kansas,  the burden of proof is on me, the assessor.  When property value is appealed  it is a 3-4 step system.  When we mail out valuations notices,  if property owners disagree, they  have right to appeal within 30 days.  The first hearing is with a member of my staff.  If we can?t reach a settlement with property owner and can?t reduce the value,  then the property owner can appeal to the state of Kansas which is called a formal appeal.  The burden of proof was on the assessor, not the property owner.  That changed 4-5 years ago in our state. Prior to that the burden as on the property owner.

    I am proponent of annual figures.  I think it is the best way to get fair valuation of property.  For property value to be fair and equitable we have to start out with fair market value, what a willing buyer and willing seller would agree upon.  Our state constitution charges us to value property at fair market value.   <<