Assembly Testimony on Equity in Assessment Practices
H. William Batt
[Testimony presented by H. William Batt, Ph.D. to the New York State
Assembly on February 6, 2007. Reprinted from
GroundSwell, March-April 2007]
Assessment has historically been the Achilles Heel of the real
property tax, and is an important reason why the public resents it.
We really have two taxes, one on land value and one on improvements,
each with very different dynamics, and until people realize the
significance of this, nothing else matters. Buildings depreciate
just like cars, computers and refrigerators, 0.5% to 1.5% yearly;
land appreciates. Land typically increases in market price because
the surplus of community enterprise comes to settle on locations in
the form of economic rent. So, unless one revalues frequently,
things get quickly out of line. A land value tax (LVT) recaptures
that surplus for public use.
The tax on the building part causes many problems: it discourages
responsible maintenance, the highest and best use of sites, fosters
sprawl development, eviscerates urban cores, and depletes the
environment. But taxation of land values is really the superior
revenue source, as some eight Nobel prizewinning economists have
attested. It conforms to all the textbook principles of sound tax
theory -- neutrality, efficiency, progressivity, stability,
simplicity, administrability. Yes, the property tax is progressive,
despite what some people have said. Especially the land part
--tenants pay nothing, and LVT is the only tax that actually fosters
economic development and vitality.
There was a time when critics complained that it was difficult to
assess the land and the building components separately. Hence,
standards for assessment were outrageously low. Now GIS
triangulation algorithms are not only more accurate but also cheaper
and quicker. It would be worth the State's investment to use its
battery of GIS techs to avail itself of and improve upon this work;
the payoff would be enormous. It is now possible for the record of
every parcel sale to be quickly entered into the database, then
passed over to the Assessor's office each night, thereby maintaining
a real-time cadastre of a municipality. Present costs per parcel for
a complete revaluation are anywhere from $60 (upstate) to $100
(downstate), but the cost can be reduced to less than $10 once the
computer technology is instituted. Apportioning land value for
condos and coops is just as easily done.
Many American assessors make the mistake of first valuing
structures and then treating land components as residuals. The
failure to conform to standard practices elsewhere in the world
typically leads to over-valuing structures and gives an advantage
for depreciation on corporate tax schedules. To this extent,
assessors serve the interests of the finance, insurance and
real-estate industries. The distortion can be seen in the fact that
the aggregate land value proportion in a typical American city is
1/4 to 1/3 of the total tax base, far less than in municipalities
elsewhere. Greenwich, Connecticut, a city that employs the building
residual method, has a land value proportion of 71 percent. The
Mastick Commission Report done for the New York State Legislature in
1932 reports that the aggregate assessed land and improvement
component in New York City was $12 Billion for each.
New York State and its people pay a price for not taxing the
surplus that accretes to land sites in the form of economic rent.
Land, one must recall, has a fixed supply --what economists call
inelastic. This means that any tax imposed on land sites is
incorporated -- capitalized -- into the market value. The more tax
is added, the greater the downward pressure on the land price. This
makes housing more affordable up front. It's a simple case of the
buyer "paying now or paying later." (There are economic
pressures that work in the opposite direction that may stabilize
site prices, but that's a secondary point of little consequence
here.) By society not recovering the economic rent from locations,
market prices rise and so do taxes, witness California and Florida.
This rise in values gives some titleholders windfall gains and
prices young households out of the market and leads others to keep
more housing than they need. It is better to collect the rent and
thereby stabilize prices. It helps economic vitality in the long
run. For those who find that any burden is difficult "now,"
they can defer their tax until selling later -- some 24 states have
a provision like this.
It is also important to understand the enormously steep gradient
of land values. Urban locations can be hundreds of times more
expensive than peripheral areas. Since central cities are largely
commercial in nature, residential parcels farther out have a much
lower land value, and farmers' land value is essentially trivial if
not already protected by other save-harmless provisions. The problem
is much of high value urban land sits underused or vacant --often as
much as a third -- and taxing land value fully typically induces the
better use of those parcels. When a property tax is shifted to a
land value tax, most homeowners pay less, and derelict high value
parcels pay more. They are prompted to develop rather than being
held off the market for speculative gain.
The important point is to get the land values assessed at what
they should be, and frequent review is important as much as is
accuracy. Maryland has state assessors that do one-third of the
counties each year, so valuations are never more than three years
old. I have been part of a team that simulates how LVT works
anyplace in Maryland -- see www.marylandlandtax.org. We're doing
similar simulations in New York, though the assessment data is often
far poorer. One can see the results for twelve counties at
www.newyorklandvaluetax.org. Phasing out taxes on improvements
typically gives most homeowners a break. This policy is legal in New
York, and it awaits a trial in a city with good land assessments.
Amsterdam tried doing this a decade ago, but abandoned it after one
year due to poor assessments and lack of public understanding. With
good land assessments, a quick adjustment in the computer
application will both relieve lots of political and economic
pressures and revitalize many moribund urban economies. I have
addressed in passing all the bills in question. But it is especially
important, I believe, to look at the incidence of each component of
any tax on real property - both land and improvements -- because
up-to-date studies are needed.
Some colleagues of mine have done some work in Baltimore, but it
relies on block and zip code data related to housing, and this is
very gross analysis. I know of some studies that have looked at
progressivity but have ignored the burdens on renters and on
non-residential property. My work (unpublished) shows that
households typically pay about half of all property taxes, and the
remainder is paid by by non-residential property owners. With LVT,
although homeowners are the overwhelming number of titleholders,
their burdens are typically small, only the land under their houses.
Taxing only land values immediately relieves the one third of
households, mostly poor people, who own no land at all.