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- Good News on PA Revenue But Don’t Count Your Blessings Just Yet
A Real Estate Tax Plan to make everyone happy. (Well, not everyone ... )
Submitted by raideradam on Tue, 06/26/2007 - 1:00pm.
Philadelphia is seeming to be in a standstill involving real estate taxes. We have people that acknowledge the system needs to be normalized and made fair. We have people that are trying to leverage the future reassessment system as political coin and create more divisions. We have people worried about the poor, old and how gentrification affects people. We have people that know we need to generate income. We have people that are disgusted by the lack of collections. We have people that want to use it to increase development and we have people that think it is costing the City money.
We have many problems and no one has a policy that swings a sword wide enough to hit it all.
I propose a restructuring of the real estate tax system that will ease the burden of correct assessments, increase fairness, reward redevelopment of neighborhoods and protect the poor, elderly and middle class in (re)developing neighborhoods in a manner that lessens beaurecratic involvement.
First item to be addressed is correct assessments. The easiest and most straightforward approach is to do assessments based on "reasonable sale price". The greatest indicator of the value of a house is what people will pay for it as opposed to arbitrary assessment based on square footage and other amenities. If a hose is purchased at $200,000 that is the assessed rate. If it is purchased at $40,000, that is the assessed rate. I use the phrase "reasonable sale price" because you always have people trying to buck the system or inter-family sales for $1. It is easy enough to have a computer program, at the input of every sale, to run a computation on the reported sale price of the house against similar buildings in a certain radius. If it flags as below a certain threshold, then an appraiser is dispatched to determine if it is correct and does an override if necessary. This predominantly handles the overwhelming majority of appraisals without needing human intervention.
The logical response is "how do you keep up to date?". You don't. You only change assessments, for primary residences, upon sale of a property or increase in square footage (they add an addition). If someone lives in their house for 40 years, they never have an increased assessment. This accomplishes several goals. 1) developing neighborhoods do not displace residents due to increased taxes since their assessments do not change. 2) Redeveloping old housing by long term residents is rewarded. How many people do you think would flock to "bad" neighborhoods to renovate run down housing stock if they have the opportunity to have their property tax locked at a $30,000 assessment for 40 years? 3) Less government intervention in the tax process 4) encourages long term ownership and neighborhood building
This does not mean the real estate tax base will not increase. It will go up, but at a steady system that also will weather bad times better. Also, it never precludes the City from raising the millage rate to generate more revenue.
Now, the issue with collections. The current process is intolerable. Policy should be very straightforward. Everyday, there should be a run of who is one year in arrears. Notices are sent out indicating status and future fines and threat of seizure. Also, everyday there should be a run of properties two years in arrears. Notices go out with fines and threat of seizure if not brought up to speed. Properties three years in arrears get sent notices that their property will be seized and sold at sheriff sale. After 90 days the property is listed for sheriff sale and if it is not paid by the opening of the sale, it is sold off. All monies gained go to the cost of taxes, leins/mortgages and then remainder goes to the owner. Any programs to help those that can not pay can be inserted at any of the previous intervals.
I propose vacant land be taxed on a different rate schedule and be reassessed every year (or multiplier of). The goal is to eliminate speculation and create a reason to develop such land.
Commercial property and non-primary residential properties are a different issue and outside the scope of this proposal.
Where's government's incentive?
First, I'm assuming that everything is inflation adjusted so that your example of $40,000 will be increased to reflect inflation if not any real increase in property values. I imagine all of the folks who bought into Society Hill when it was a slum for the princely sums of $1500 would have loved if their assessments were based on $1500 in today's dollars. They'd be payings something like $120 bucks in taxes.
Now for the fun part.
How do you respond to those who argue that increases in property values can be due, in part, to actions by the government to make a neighborhood (or whole city) more attractive?
Let's say the city uses resources on improving street-level lighting, fixing sidewalks and streets, cleaning and greening parks and empty lots, creating open space, repairing old infrastructure, providing more police protection to decrease crime (again, in part), lowering business taxes and removing regulations to encourage cool, hip small businesses to enter a neighborhood. The list could go on and on. Partially as a result of these improvements, people with some means come into a neighborhood and begin to buy and fix up older housing stock because they want to live in this great neighborhood.
Shouldn't the property tax paid, in some way, be connected to that money spent by the government to make those improvements. So the taxes could be based on the "reasonable sale price" not at the time of original sale but on what the owner could reasonably expect to get, ie full market value. At this point we just go back to the full value assessment plan with all of its included protections for low income residents, senior citizens and long-time residents so that no one in those groups is forced out of their houses. It also assumes that elected officials do their jobs well and set the millage rate at a low enough level to avoid the windfall that would occur due to the new assessments.
I just think your plan (at least the first part) doesn't give enough credit or benefit to government when they actually do succeed in helping to revitalize a neighborhood.
No, I am not saying to
No, I am not saying to increase due to inflation. That is the assessed value until deed transfer. The thing to keep in mind is, housing stock will always turn over either through transience, choice or death. So, you will always be getting refreshed values n properties. Some will change over after 5 years, some may stay with the same owner for 5 years.
As for your Society Hill example, yes, people that bought in would be paying minimal taxes if they still owned now, but so would the financialy less fortunate. Inherently you will either create mixed income environments or financial gains for poor choosing to cash out.
Incentives for legislators to make neighborhoods better is: 1) increased valuations on the housing stock turn over and 2) it's their job and if they don't do improvements, they get voted out.
And no, the property taxes paid should not be linked to improvements. Has that system helped Philly? We have a City of extreme wealth and extreme poor. The best way to accomplish it is to empower people to make their own neighborhoods better because it will cost them nothing extra. As an aside, many people let their house run down so as to pay less property tax, which tax increase cushions don't prevent.
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"yes adam gave some informative comments but he also seems to sprinkle a little adam dust on it." - merkin
You lost me
Last thing, first.
The very existence of the cushion would mean that people wouldn't have to resort to lowering the value of the structure on their property to avoid paying higher taxes. If you couple that with a slight revision of your "vacant land" proposal to shift more of the reassessment to the value of the land, we could avoid that tactic altogether.
That system isn't currently in place in Philly. What we have is a more-or-less arbitrary system of assessment that has resulted in such huge disparities in tax bills even between neighbors who both bought their houses at the same time. It would be nice to see a system where the level of property taxes is linked to the actual value of the property (of course with protections for long time residents).
On point 1, I guess you and I really don't disagree all that much. I'm just worried that in the long run, your system will result in the same disparities and inequities that we have now (ie. two families, side-by-side with houses in similar conditions who pay wildly different taxes). On point 2, to borrow your question from above, has that system helped Philly? How many elected officials have left office in the last two decades for a reason other than retirement, term limits, criminal conviction or death?
How would full market valuation be different so long as you protect long term residents, and fixed- and low-income residents with exemptions or safety nets?
Under your plan, how could City Council have a set of information that's accurate enough to set millage rates that will generate sufficient revenue to cover expenses? The system would be just as unpredictable as it is now.
If someone inherits a property would they pay property taxes based on what their beneficiary paid for it at the original purchase? If not, you'd need to come up with a way to figure out what the value would be and we'd be right back to using all of the same assessment tools that give fair/full market value.
Ok, now I'm going out of order.
The data for sale prices of similar buildings in a certain radius could be 20 or 30 years old. Do you mean reported recent sale prices say for houses sold within the previous year? If not, you have a situation where someone games the system, pays a buck for a house, gets reassessed based on sale prices from 30 years ago and still ends up paying an artificially low property tax compared to his neighbor who paid a price establish by the market. If so, you have a pretty small statistical sample given that the housing market could slow to the point where only a couple houses have sold in whatever time period you choose.
The very existence of the
Cushions prevent your taxes from going up. Letting your property crumble will actually lower your tax. So, the cushion does nto prevent that.
Proposed full market value would still be arbitrary, to a degree. It is still up to the BRT to pick and choose what similar comps are.
Yes, there will be disparities, but the disparities will be based on when the person bought into the neighborhood. I have no problem with someone paying cheaper taxes because they invested in a blighted neighborhood than the person that moved in ten years later after it was all cleaned up. That is why I said part of the benefit is the incentive for people to move into neighborhoods to help fix them up. It also benefits the people that lived in hell for 20 years and stuck it out. It solves the gentrification fear.
As for elected officials, that is something that can be solved by ourselves.
Because in the full market valuation plan, you would have to legislate every single piece of that while trying to determine some numbers that adequately solve the problem. The beauty of my plan is the simplicity without the need to differentiate different categories of people and numbers. It affects everyone equally. And don't forget, middle class needs as much protection in property tax rates as the poor.
As for City council, I am not sure what you are asking. You can easily calculate the millage rte for the initial implementation just as you would with full market valuation. Basic math. Current revenue generated divided by reassessed total property value equals milage rate. Or are you speaking of future years?
In those situations, BRT would have to do an assessment of comparables. You are never going to get away from having to assess the non-standard purchases. It is less intrusive than having to reassess all the housing stock every couple years, though, under full market value.
Yes, within recent time frame. I would assume you would go by standard real estate comparable procedures. You don't need that large of a sample size to know if the sale price was in the ballpark.
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"yes adam gave some informative comments but he also seems to sprinkle a little adam dust on it." - merkin
Land value, land value, land value...
The entire idea of basing a tax on the assessed value of the real estate itself- no matter how you assess that value- is fundamentally, flawed, since you always run the risk of penalizing someone for making improvements to their property. I understand that part of the idea is to make it unlikely that property owners would be hit for improving their house in many ways, but the potential is still there. In addition, this plan does nothing do discourage one of the worst possible land uses in a city: street-level parking.
Tax based on land value, and you both wind up with a system which does not penalize for improving a house and discourage the use of swaths of property for street-level parking. It would probably take more convincing to make this change than the one based on how you assess property value, but the end result should be better.
I hope,
-Z
Street level parking on lots
Street level parking on lots would fall into commercial real estate taxing, so was not in the scope of my proposal.
You say basing tax on the assessed value of the real estate itself is flawed. Where do you get your numbers on the land value? The land value still has to be assessed, correct? Land value just moves the assessment to the plot and from the structure, as far as I know.
As for my proposal, the only people that get penalized for fixing up a property are future buyers into the neighborhood. I would prefer higher taxes be shifted to the people that opt-in for them as opposed to the people that don't. It also empowers people for more control over their tax liability.
As for street level parking on lots, that is also easy. Make it a zoning designation. That way neighborhoods, communities and government can discourage it by saying "no parking on that lot unless you make it multi level. That should be a zoning issue, not a tax issue.
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"yes adam gave some informative comments but he also seems to sprinkle a little adam dust on it." - merkin
Improvement "Penalty"
I don't really understand this argument ("basing a tax on the assessed value of the real estate... is fundamentally flawed, since you always run the risk of penalizing someone for making improvements to their property").
The city already has a ten-year tax abatement program for improvements made by owners to their property. You could further cap year-to-year increases at a percentage of the current value, which would prevent sudden increases with a single reevaluation. This seems to me a totally reasonable approach to whatever disincentives might prevent people from making improvements.
Ultimately, the reason why you base property taxes on the assessed value is that taxes then correspond to real wealth. If your taxes go up, as long as the assessment is fairly done, guess what -- your wealth has risen too, not just absolutely but proportionally. It's the same reason we base income tax on one's level of income and sales tax on the value of the object bought. You add abatements and caps and penalties to create positive market incentives in extreme cases, but otherwise, the fundamental formula is sound.
Furthermore, raising a large portion of governmental revenue from property taxes is more stable, predictable, flexible, and progressive than raising revenue from sales, wage, or transfer taxes, or the help of state or local government. It's easier to raise money for schools, police, fire, etc., when services tied to property ownership are funded from property ownership, and when people and corporations with large property wealth support those services for people who own less. Property owners don't like it when their taxes go up. Neither does anyone else. And yes, property taxes in New Jersey and some Pennsylvania suburbs are astonishing. But I really very strongly believe that Philadelphia and its local budget would much better off if our attitude towards real estate taxes were driven less by hysteria, unique counterfactuals, and half-baked hypotheses and more by a serious discussion of what the city, county, and school district need in order to function.*
*Oh, yes -- I am totally aware that the same thing can be said about the BPT and the wage tax, too. I am perfectly willing to be the Stan Shapiro of property taxes on YPP. :-)
The Real Estate Tax Plan is Illegal and Not Pragmatic
Raidaradam:
While I applaud you on the thinking and the idea, your concept is illegal under Pennsylvania law.
As noted in Pennsylvania Legislator’s Municipal Deskbook, Third Edition Update (2007),
"Pennsylvania assessment laws require that real estate be valued according to its “actual value” and at a bona fide rate and price for which the property would separately sell. The courts have interpreted actual value to mean market value. Market value has been defined by the Pennsylvania State Supreme Court as “the price in a competitive market a purchaser, willing but not obligated to buy, would pay an owner, willing but not obligated to sell, taking into consideration all the legal uses to which the property can be adapted and might reasonably be applied.” To establish the “actual” value of property, the county may use current year market values or it may adopt a base year for market values. For the most part, properties are assessed at a set percentage of base year values. Property is only assessed at current market value when a countywide reassessment has been conducted and implemented. Unless a county reassesses all properties every year, the property assessments will be predicated upon base year values (the last year in which the county reassessed). The same methodology must be used to value property throughout the county; that is, when a county adopts a base year for market value, then all property in the county must be valued as of the same base year."
Also, how would your idea fly politically and with the populace when there would be huge discrepancies in taxes between similar properties (right now there are discrepancies, but not to the degree there would be under your proposed plan, not to mention the attention the discrepancies would get once the new plan was rolled out and implemented). Also, (while you do not appear to note if your plan would start with purchase in the future and a future start date for implementation or would use retroactive sales dates) your plan could not work on a retroactive basis, due to the huge amount of research and data input it would take to determine the sales dates and prices paid for all properties, and a huge decrease in tax revenue to the City and the School District. You could possibly do some type of parrtial homestead exemption for seniors and/or long-term homeowners to help offset part of an impact of higher assessments.
A land value tax idea is a model that should be seriously considered by the City due to the fairness of such a system and the benefits of lessening the tax penalty to people who improve a property and increasing the taxes on people who underutilize land.
The current real estate assessment and tax system is broken and a City wide reassessment needs to be done for fairness sake and to follow the law. I am actually amazed that no one has filed a lawsuit to force a reassessment. The other issue that should be addressed is the fact that the City and School District have not raised real estate taxes for many years at the expense of other City taxes including the wage tax. Other PA local jurisdictions, especially school districts tend to raise the real estate millage rate most years, with school districts doing so at rates that tend to exceed the local CPI. While this is not a call for increasing Philadelphia taxes, the real estate taxes have been kept artificially low by the failed assessment structure, methods, policy and execution, and the failure to raise millage rates to adequately pay for services including schools. It would be good to have a real estate tax system that was fair and honest and one that was done in conjunction with a review of other tax policies and structures.
Well, if that is how the law
Well, if that is how the law is worded, then obviously the plan is worthless. C'est la vie. I highly doubt it is worth trying to get the state law changed.
As for when to take in affect, you would need to normalize all properties currently and then start the procedure from that day. You would not be able to go retroactive.
As for political, it would be a windfall. I don't know about you, but I would love to campaign on the idea that "I will keep your property taxes from going up". Again, the only people that pay more are the ones that buy into the community later. Again, I don't have a problem with that.
I do completely agree that the real estate system needs fixing (hence the post). Raising property tax for the school district is a red herring, though. Nothing says more money can't be given to them out of other revenue streams. Plus, raising property taxes doesn't completely go to the schools. Only about 50% of it does, if I recall. So, you would be raising taxes for the school and the general fund (assuming that is where the other 50% goes).
So, it is back to the drawing board and onto the next real estate plan to devise.
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"yes adam gave some informative comments but he also seems to sprinkle a little adam dust on it." - merkin
School and City Millage Rates Are Separate
The Philadelphia School District and City of Philadelphia's tax rates are already separated out. The City's rate is 3.474% and the School District's rate is 4.790%. These rates could be changed each year by the City and/or the School District. Each rate and the ability to change them are independent of the other.
So did Wilson Goode's
So did Wilson Goode's legislation lower the City rate 3.31% and raise the School rate to 4.96%?
So when you say raising the property tax, you are saying to keep the City share at 3.31% and raising the 4.96% to a higher number?
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"yes adam gave some informative comments but he also seems to sprinkle a little adam dust on it." - merkin
From 58-42 to 60-40
The millage rates are separated in the Philadelphia Code - I changed both - but the overall tax rate is the same.
The City will now receive 40% of real estate tax revenue instead of 42%.
The School District will now receive 60% of real estate revenue instead of 58%.
It wouldn't make sense to change the overall rate before new tax assessments but it is possible to raise one rate without lowering the other.
WWGjr
Some Info on Property Taxes
A long time ago, I posted a whole lotta buncha data about city property taxes in a thread titled "Other Taxes in Philadelphia." The rate data is pre-Councilman Goode's recent bill. Here are some highlights:
And