Saturday, January 14, 2012

(Far far) Back to the Future

There are just under 89 thousand local governments in the United States. Remember, I even have a picture for Pennsylvania* of just how convoluted local government can be.  I worked it out and 66 thousand of those local governments collect at least some property taxes for at least part of their revenues. All of that property tax collected is based on assessment values set on individual properties just like here.   If even the smallest fraction of all those other local governments had anywhere near the angst, anger and outright fear that we do in managing assessments then there would be no time for any other subject to ever be covered in the media anywhere. Somehow most of the municipalities, counties and school districts that assess property taxes muddle their way through this process with less pain.

But it is not that way here.  One thing I hear that that comes up repeatedly in the discussions of assessments is a straightforward argument.  Lots of folks are looking at an increased assessment value that they feel, likely correctly, that the increased value is the result of their investment and improvements.  Why, they wonder, should they be penalized for choosing to invest in their properties, makng them better and along the way improving our communities?  That is what their core issue is with an increased assessment value, almost regardless of whether it will cause their tax bill to go up or go down.  Their point boils down to an argument that they should not be taxed on the incremental real estate value they create. You might argue you really want to encourage investment in real estate because it is the type of invesment that results positive benefits for a lot more than just the individual property.

You know.. I agree. (with a !)  Not only that, but there was a fellow named Henry George who argued that very point.  His argument was that if tax was inevitable it should only be placed on the value of the land and that there should be no tax on the structures we build on the land.  The argument was that such a tax encouraged investment, density. discouraged speculators, and kept land from being unused. George's Land Tax concept inspired a movement.  It was the least objectionable way to tax, he argued, if indeed some tax was inevitable.

Of course history is strange.  Most everyone in town** has already forgotten, but it turns out that the City of Pittsburgh actually implemented a George inspired land tax and was for the better part of a century the largest government in the United States that did so. Technically it was a tiered tax with not all, but most taxes placed on the value of land. Some, but a much smaller fraction of tax, was place on the value of built structures. The history of split tax rates locally is really why you see local assessment data broken out into the value of land vs. the value of buildings.  In the assessment/appraisal models the breakout is always there, but in lots of jurisdictions they don't bother to even show you the two numbers, just what the total value is of a property.  What was the impact of the split tax over the period from 1916 when it was put in place here, to 2002 when it went away, is a perpetual debate.  At the core of that depate is whether the land tax had something to do with say the density of our Downtown and its ability to retain a concentration of large buildings that in a lot of other similar cities have diminished.  

So I am not jumping on board all of a sudden.  There really is little political will, or understanding to really go back to a complete land tax.  Yet, there are some intermediate policies that are gaining traction.  In Philadelphia there are folks who argue that a city abatement on residential investment has been responsible for population gain in the city for the first time in decades. One of those things that is virtually impossible to prove definitively given all that goes on in a city.  Still, that abatement works out to be very similar to a land tax at the end of the day.  While there is a limited abatement on similar investment in place for some City of Pittsburgh neighborhoods, it just isn't anywhere near the same thing. I have argued that we should follow Philly's example a bit more closely and implement a city-wide abatement on virtually all new residential invesment.  It would make news. It would put the City on the map and might even be worth its own cost in sheer publicity value that could encourage investment.  There just have to be a few investors out there who would be excited to pay taxes valued for a vacant lot on new apartment building, condo or home they invest in. 

The strongest counterargument for doing something like that is that the city needs revenues and cutting out so much revenue will hurt the city's ability to function.  Thing is, for the City of Pittsburgh there is no cutting out of revenues.  Pittsburgh revenues from the property tax have been extremely flat going back many years.  There are not a lot of reasons to expect property taxes to jump anytime soon.  An abatement does not cut taxes, but abates future investment that has yet to happen.  It is giving away future tax revenue that may never be coming, yet the payoff could be a spike in investment and a population reversion that is really what plague the City of Pittsburgh.  Lots of good stories around the region, and in the city, but population trends are still down and you really need to encourage families to stay.. families who are the ones likely to be investing in real estate for the longer term.   Given the minimal amount of new residential investment compared to what there should have, Pittsburgh may be a poster child for a place that has the most to gain, but the least to lose from a comprehensive residential tax abatement.

History is even stranger.  If you think there is something at all to my abatement argument or go farther and really think the land tax is some antidote to the assessment miama that we currently endure... then it gets really strange actually.  The demise of the land tax in Pittsburgh is really tied to the political anger that erupted upon learning the original Sabre Systems assessment numbers in 2001.  The higher rate on land, and the adjusted land valuations meant that the sticker shock that is bad this cycle was far far worse for a lot of properties in the city back in 2001.  It was easiest, and certainly politically expediant, to quickly end the split tax in the city of Pittsburgh.  A century earlier it had been implemented after a public debate and analysis over years. It would go away in virtually hours without any analysis or debate.  Folks had forgotten why it was there and the political costs of keeping it was far too much.

Still.. if you want more stability in your assessment values, want to incentivize investment and maybe at the end of the day get people to move into the City...  could our problem be our solution. 

and if that does not strike you as the way forward, there are other ideas.  One local Georgist has a bit more creative solution to our assessment mess
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* I do have a US version of that graphic, but it is too big a file to do all that much with. 

** Apologies to ADB

11 Comments:

Anonymous Patrick said...

I agree that property taxes, as they are currently constituted, create a dis-incentive to improve properties, particularly owner occupied residential properties.

The owner of a property that is leased, whether it be residential or commercial, has an incentive to maintain and improve the property - higher rent from tennants. Sure, the assessed value of the home goes up, but so does the owners rental income.

A property owner who lives in their property does not realize any gain from improvements (financially) until the property is sold. A higher assessment is a real financial blow to the household income - on top of the fact that they have to pay for the remodeling/improvements in the first place! Not to mention that property owners in the city pay a much steeper deed transfer tax than any other municipality, and that is based on the sale price/value of the property at the time of the transfer.

My solution? Expand the homestead exemptions - dramatically. Sure, this will shift the burden of the property tax onto rental property, but rental propety generates income. Owner occupied properties do not. This will mitigate the problem of gentrification forcing seniors out of their homes, as well as encourage homeowners to invest in their properties without fear that they will be taxed out of their home for their trouble.

Saturday, January 14, 2012 9:22:00 PM  
Anonymous MH said...

The owner of a property that is leased, whether it be residential or commercial, has an incentive to maintain and improve the property - higher rent from tennants.

Have you seen Oakland?

Saturday, January 14, 2012 9:46:00 PM  
Blogger ColPash said...

How would a Georgist approach address the fact that one-third to half (no one seems to know for sure) of real property in the city of Pittsburgh is tax-exempt? Two of the largest "non-profits" are the University of Pittsburgh and the UPMC. In 2006, according to City Controller Lamb, Pittsburgh lost close to $15 million in lost property tax revenue from Pitt and more than $8 million from the UPMC, and the figures are actually much higher because property owned by these "non-profits" is underassessed, by most accounts. Another question: how can one possibly achieve the goal of uniform property assessment within the County, as represented by a COD of 15% or less and a PRD between .98 and 1.03 as Judge Wettick desires, if the assessment does not include tax-exempt property? The question assumes, as you have been stating on your blog, that assessed value and taxes are two separate things.

Sunday, January 15, 2012 11:23:00 AM  
Blogger C. Briem said...

I think you are mixing assessment with revenue when it comes to the metrics. PRD and COD are not calculated based on revenue collection, but assessment value.

On the George angle here is a hypothesis to test: the non-governmental tax exempt land in the City of Pittsburgh is some of the most developed land. Worth pondering.

The bigger issue you touch upon is that there is indeed a breakdown in applying a land tax not because of exemption issues, but because so many city parcels are tax delinquent. Tax policy can be used to incentivize development on a land without an owner in lots of cases and the markets will not clear. That is one of the main reasons a lot of values need to be dropped relative to the average to help push that along.

Sunday, January 15, 2012 11:35:00 AM  
Blogger ColPash said...

I understand your point about mixing assessment with revenue, but I'd like to know what the 2012 assessed values of places like 200 Lothrop or the Cathedral of Learning are, or even if they were assessed. Since the county took the 2012 numbers down, I can't check. At a 2002 assessed value of $140 million, the Cathedral would be a steal at that price today, especially if BNY Mellon Center is assessed at $242 million. In the past, much tax-exempt property was assessed based on a cost basis rather than current market value, which would certainly underestimate the value. If the 2012 reassessement didn't do a better job of assessing tax-exempt property, the goal of uniformity would still seem to be elusive.

Sunday, January 15, 2012 12:40:00 PM  
Blogger C. Briem said...

If the Alcoa Building is only worth 10-30 million its hard to see what the market value of the Cathedral of Learning as a building is.. it's a pretty dysfucntional building in lots of ways as those who work there know. Not much sq footage in the floors, ancient infrastructure, world's slowest and most sporadic elevators. I'm not sure it could be given away.

but since it is not a residential structure I don't know it's new assessment value either.. as notional as it may be for so many reasons.

Sunday, January 15, 2012 12:44:00 PM  
Blogger ColPash said...

I'd be happy to take the dysfunctional Cathedral off Pitt's hands. It might have just enough resale value to enable me to pay my anticipated property tax increase! That being said, please allow me to thank you for your blog. You are an undervalued Pittsburgh asset.

Sunday, January 15, 2012 1:35:00 PM  
Blogger C. Briem said...

thanks much..

if the Cathedral is not available.. I do suspect the School District would give you the former Schenley Building (or a few other unused buildings) for only minimal cost. Might even be willing to pay you to take a few of them of their hands.

Monday, January 16, 2012 11:33:00 AM  
Anonymous MH said...

Somebody should pressure the district to move its central offices to some cheaper real estate. They could sell the current building, put up a new one in Hazelwood or somewhere and save money while maybe helping spur something like economic growth in another part of town.

Monday, January 16, 2012 1:23:00 PM  
Anonymous BoB said...

"should they be penalized for choosing to invest in their properties, makng them better and along the way improving our communities".. I guess there is no reason to get an education, because education may lead to a higher income which equates to higher taxes..

Monday, January 16, 2012 3:06:00 PM  
Anonymous MH said...

You can major in philosophy if you are worried about that.

Monday, January 16, 2012 3:09:00 PM  

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