Category: tax policy

Hate tax revaluation time? Then let’s do it more often. Seriously.

Tear-downs that make way for large new houses, like these in the Cherry neighborhood, drive up property values of smaller, older houses nearby. Photo: Mary Newsom

It’s tax revaluation time! Are you excited? We aren’t either. Seeing your property value skyrocket is only fun if you are planning to sell it ASAP.  For most of us who aren’t real estate speculators, higher values don’t mean more money shoots into our bank accounts, because we can’t easily convert property into extra income unless we decide to raise goats, chickens or marijuana in the back yard.

Nevertheless, revaluations are an important equity tool. If you wait years to do them, you’re giving a tax benefit to wealthier property owners with rising values and giving a comparative tax penalty to properties whose values did not go up as much, or not at all.

If that sounds confusing, read on.

Mecklenburg County has been revaluing its property every seven or eight years. That means someone whose mansion was valued at (we’ll keep to round numbers here) $1 million at the last valuation has been paying taxes on that figure,
even though that same mansion is now valued at $3 million. So $2 million of its value has been, essentially, tax free for some of those eight years.

Now, consider someone whose house was worth $100,000 eight years ago and is now worth $150,000. Yes, they’ve gotten $50,000 in value tax free for some of those eight years. But … compare that with $2 million.

Finally, someone whose property value went down has been paying taxes on a value that’s too high. For this particular revaluation there aren’t likely to be many who fit that description, since the 2011 revaluation came amid a deep real estate slump with hundreds of foreclosures, followed by recent years of dramatically higher land prices.

In 1990, then-Charlotte Observer reporters Liz Chandler and Foon Rhee did an exhaustive comparison of land sales prices versus assessed values from the previous revaluation in 1983. They wrote:

“Thousands of Mecklenburg County homeowners will pay more than their share of property taxes this year. And their extra taxes will allow tax benefits for a smaller group of homeowners – most with higher-priced homes. Property is being taxed unfairly because county officials are not keeping up-to-date tax values on homes, according to an Observer study of 3,425 home sales last year. That’s because the tax office only appraises property countywide once every four years.” [In recent years the county has revalued every seven or eight years.]

The reporters explained:

“If the tax burden was evenly spread this year – the last year before a new appraisal – all homeowners would pay taxes on 83 percent of the market value of their homes, the study indicates. But that isn’t the case. Areas where home values have risen sharply are likely to be taxed on less than 83 percent. And slower-growing, low- and middle-income areas are more likely to be taxed on more than 83 percent.”

The Observer research, comparing sales prices to assessed tax value, found that during those years county tax officials generally undervalued commercial property more than residential property. That means residential property owners were, in essence, subsidizing business properties. Commercial properties were, on average, assessed and taxed at 65 percent of their market value, the newspaper found, compared to an overall property valuation countywide of 79 percent of its market value. (County tax officials responded that commercial property was harder to assess.)

Some important caveats are needed:

One: A tax revaluation does not automatically mean everyone’s tax bill rises. Elected officials set a tax rate, and they can lower the rate so that, on average, no one’s bill goes up. But if your property is above or below the average, your tax bill would still change, going up or down, depending. If you’re a politician, you know rising property values will have many voters angry, even before the tax rate is set. So if they’re going to be angry regardless, it’s tempting to go ahead and bring in a bit more revenue by not setting a so-called “revenue-neutral” tax rate, since city and county needs are growing along with the population.

Two: According to analysis from Charlotte Observer writers Ely Portillo and Gavin Off, some of the highest percentage increases in value this year are in close-in, predominantly black areas: Grier Heights, Washington Heights, Druid Hills, Villa Heights and Belmont. “On average, property values in those neighborhoods increased by 126 to 156 percent. Many individual properties doubled or even tripled in value,” the Observer wrote.

That means “equity” in property assessments this year could look inequitable, if low-income and minority property owners are hit with proportionately higher tax values. (See Her home’s tax value nearly tripled.)

There is a better way. Revalue property more often. Every two years would be more equitable and  prevent the heart-stopping (and for some people, budget-busting) increases that come from long delays between revaluations. Since 1983 the county has for a variety of reasons mostly deviated from its every-four-years revaluation goal, although they say they plan to resume it.

The 1990 Observer article found that across the country, many local governments revalue more often than every eight years. The reporters wrote:

“In Phoenix, Maricopa County tax assessor Ira Friedman, said: ‘If you have spiraling increases in values, it makes sense from an equity standpoint to revalue property every year. It’s commonly done nationwide. It’s really a simple system.’ ”

Tax code uber alles

A recent piece in Smithsonian magazine, The Death and Rebirth of the Mall, points to a 1996 article by Tom Hanchett, staff historian at the Levine Museum of the New South, that I read almost 20 years ago. As always, Hanchett’s thinking and research were impressive. But this article opened my eyes to a reality: Our cities and our neighborhoods are shaped less by city planners or the wishes of the people than by intricacies in tax laws and financing strategies.

It’s like the time I realized (because David Walters told me) that the reason suburban sprawl didn’t happen in Britain and Europe the way it does in the U.S. is because the laws there don’t allow developers to build outside of the urban growth boundary. Until then I thought it was because Europeans were somehow more in tune with the beauties of nature and the importance of farms. Nope. It’s what their laws say.

Hanchett’s 1996 article, “U.S. Tax Policy and the Shopping-Center Boom,” in the American Historical Review, describes how a small change in the U.S. tax code in 1954 – creating something called accelerated depreciation – “fundamentally altered the economics of real-estate development in the United States.”

If you read the whole article you’ll get a clear explanation of things like 200 percent declining balance and sum-of-the-years’-digits accelerated depreciation. If you’re a real estate finance expert, you already know that stuff.  But here’s the key information: This tax incentive applied fully only to new construction, not to renovating existing buildings.

“Suddenly, all over the United States, shopping plazas sprouted like well-fertilized weeds,” Hanchett wrote. The
amount of shopping center square footage shot up from an average of 6 million square feet yearly in the early 1950s to an average 30 million a year starting in 1956.

The tax incentive encouraged quick turnover, selling the property after six or seven years when the tax deduction was about to end. It was a disincentive to upkeep, and by 1970 this one tax break equaled a fourth of the total federal annual budget deficit, Hanchett wrote. And like so many federal provisions starting in the 1930s, it did not assist those who would have preferred to renovate older buildings in cities, and instead helped people building new construction in the suburbs. (See “Yet another way the feds promote sprawl.”)

Transit, taxes and Tampa

This one is for transit and tax-policy wonks. It’s a piece from Yonah Freemark, in The Transport Politic, about the problems many transit systems are facing with sinking revenues. “When the recession strikes, little maneuvering room for transit” He points out that one reason for the problem is over-reliance on a very volatile revenue stream: sales taxes.

Most cities have been especially affected by the recession because of their reliance on the sales tax to provide revenue. Of the recent referendums on transit expansion programs, almost all have involved a 1/2 cent or one cent increase in that tax; few cities have looked to other forms of revenue, like an income tax or a payroll tax. The consequences of this decision, however, have been devastating because sales tax revenues have fallen considerably as a result of the recession and the reduced standard of living experienced by the majority of Americans over the past few years. A more stable financing program for transit, using other forms of taxation, would ensure that planned projects actually get built.

If you want to get deep in the weeds of transit finance, follow the link on “financing program for transit,” above. I haven’t read it all the way through yet, but it looks at the New York and Paris transit systems and how they get and spend their money.

In other transit-related news, here’s a piece about Charlotte that ran Sunday in Tampa, Fla., where voters next month will decide on – you guessed it, a sales tax – to pay for transit as well as roads and other transportation needs.

And here’s a fun contrarian piece from the Market Urbanism blog, “The Great American Streetcar Myth,” by Stephen Smith, who contends it wasn’t General Motors and Standard Oil who killed off streetcars as much as the Progressive Era and New Deal planners and politicians. Fare-increase restrictions, labor union requirements, publicly paid street-paving and road-building all combined to finish off streetcars, he writes. It’s an interesting perspective. Smith also points out:

“While the status quo’s more libertarian-minded backers will point to the gas tax as a user fee, the highway funds are hardly adequate to cover the true costs. Though state and federal governments do now cover most of the capital and operating costs of the highways, local roads are still paid for almost entirely out of general revenues. And when you consider the forgone taxes and opportunity costs, roads start to look severely underpriced – to say nothing of the last hundred years of subsidized road building (the mainstay of FDR’s WPA), eminent domain, anti-urban federal home tax breaks and lending programs, positive feedback loops, and density-limiting zoning and parking policies.”

Transit, taxes and Tampa

This one is for transit and tax-policy wonks. It’s a piece from Yonah Freemark, in The Transport Politic, about the problems many transit systems are facing with sinking revenues. “When the recession strikes, little maneuvering room for transit” He points out that one reason for the problem is over-reliance on a very volatile revenue stream: sales taxes.

Most cities have been especially affected by the recession because of their reliance on the sales tax to provide revenue. Of the recent referendums on transit expansion programs, almost all have involved a 1/2 cent or one cent increase in that tax; few cities have looked to other forms of revenue, like an income tax or a payroll tax. The consequences of this decision, however, have been devastating because sales tax revenues have fallen considerably as a result of the recession and the reduced standard of living experienced by the majority of Americans over the past few years. A more stable financing program for transit, using other forms of taxation, would ensure that planned projects actually get built.

If you want to get deep in the weeds of transit finance, follow the link on “financing program for transit,” above. I haven’t read it all the way through yet, but it looks at the New York and Paris transit systems and how they get and spend their money.

In other transit-related news, here’s a piece about Charlotte that ran Sunday in Tampa, Fla., where voters next month will decide on – you guessed it, a sales tax – to pay for transit as well as roads and other transportation needs.

And here’s a fun contrarian piece from the Market Urbanism blog, “The Great American Streetcar Myth,” by Stephen Smith, who contends it wasn’t General Motors and Standard Oil who killed off streetcars as much as the Progressive Era and New Deal planners and politicians. Fare-increase restrictions, labor union requirements, publicly paid street-paving and road-building all combined to finish off streetcars, he writes. It’s an interesting perspective. Smith also points out:

“While the status quo’s more libertarian-minded backers will point to the gas tax as a user fee, the highway funds are hardly adequate to cover the true costs. Though state and federal governments do now cover most of the capital and operating costs of the highways, local roads are still paid for almost entirely out of general revenues. And when you consider the forgone taxes and opportunity costs, roads start to look severely underpriced – to say nothing of the last hundred years of subsidized road building (the mainstay of FDR’s WPA), eminent domain, anti-urban federal home tax breaks and lending programs, positive feedback loops, and density-limiting zoning and parking policies.”

Best tax revenue bang for the buck? Not what you’d think

RED WING, Minn. – If you’re worried about local government’s fiscal crisis – and if you’re not, you should be; it’s why hundreds of local teachers are getting laid off, libraries closed and hours slashed – then you should read this.

I’m listening as Peter Katz, a local government official from Sarasota, Fla., shows a series of charts and graphs and talks about property taxes in Florida. In terms of land development in Florida, he says, “It’s like we’re falling off the edge of the earth. People are completely freaked out.”

So he decided to look at exactly where local property tax revenues come from. He shows bar graphs showing residential property tax revenue per acre in Sarasota County. The biggest revenues come from city residential areas.

Next he shows bar graphs showing revenue per acre for retail development. Here comes surprise No. 1. Wal-Mart/Sam’s Club development brings in only about as much, per acre, as city residential. (Think of all those acres of parking lots.) The biggest revenues come from Southgate Mall, an upscale shopping center. That’s not so surprising.

Then he shows the one that blows away the room – and this is a room of growth policy geeks, remember. He shows a bar graph on a whole different scale. In terms of property tax revenue per acre, high-rise downtown urban mixed use projects bring in more local revenue than even Southgate Mall, by what looks to my eye as a factor of about 10.

Next highest is mid-rise urban mixed use projects.

“From a fiscal standpoint this really puts hair on your chest,” Katz says to chuckles in the room.
Less than an acre of downtown high-rise mixed use urban development brings in more property tax revenue than a 21-acre Wal-Mart Supercenter, he says.
Update here, Thursday 7/1, after I get some information from Katz: He says, ” Less than an acre (.75 actually) of downtown high-rise mixed use urban development brings in more property tax revenue than a combination of the 21-acre Wal-Mart Supercenter and the 32-acre Southgate Mall, the county’s highest end commercial property with Macy’s, Dillards and Saks Fifth Avenue.

Then they looked at the payback time for the infrastructure costs for the development. The payback time (measured in property tax revenue, I believe) for the urban mixed use development was three years. Want to guess the payback time for infrastructure built for a planned mixed use development out at a highway interchange? It was a whopping 42 years.

Some disclaimers: Katz notes that they weren’t measuring sales tax, only property tax. He also notes that there’s obviously a limit on the market for high-rise mixed use projects in any downtown. And I’ll note that this posting is a real-time one, and I haven’t had time to check with Katz to ensure that I’ve totally gotten his stats correct.

Update No. 2: Katz notes that the tax analysis was done by Joe Minicozzi of Public Interest Projects, Inc., in Asheville.

(The event is a yearly conference among people affiliated with the Citistates Associates, a loose coalition of planners, economists, think-tankers, current and former elected officials, Chamber of Commerce execs, etc., who share an interest in metro region growth issues.)

Without tax reform, is NC bond rating at risk?

State Treasurer Janet Cowell, speaking Wednesday night to the annual dinner for the Centralina (NOT Metrolina) Council of Governments, said something that perked up my ears considerably.
She said, in response to a question from Belmont Mayor Richard Boyce, asking what the role of the state treasurer is in comprehensive tax reform:

Cowell said that in talks with bond rating agencies N.C. officials were told that they want the state to reform its tax structure, so it’s more stable. Without reform, she said, we could be put on a watch list. Cowell says she told this to N.C. Senate Majority Leader Martin Nesbitt, D-Buncombe. “I don’t think we have the luxury of doing nothing,” she said.

Here’s why this should be of interest to more than just tax policy geeks (I plead guilty to being one). The state’s revenue system, which depends primarily on income taxes and sales taxes, was set up in the Depression. It doesn’t recognize the many economic changes that have taken place in the 80 years since then – the loss of manufacturing, the rise in the service economy, the explosion of online commerce (most of it untaxed). The sales tax is among the most volatile of taxes, fluctuating greatly when times are good, or bad. Income taxes are less volatile but still show big dips and surges depending on the economy’s strength. (Update: 4:45 PM – State Sen. Dan Clodfelter tells me that the problem in North Carolina is that income tax revenue is more volatile than sales tax. “The single most volatile, unpredictable, unreliable tax is the corporate income tax, and that fact has nothing to do with exemptions, loopholes, concessions, or anything of that ilk,” he e-mailed me. He’s a major mover pushing for tax reform and wants to do away with the corporate income tax.)

The state keeps going to those same buckets – sales taxes on goods, and income taxes. A tax reform proposal in the legislature would lower the general sales tax rate but extend the sale tax to some – not all – services. It would do other stuff, such as tinker with business privilege license taxes – which has alarmed the folks at the city of Charlotte, which gets about $16.6 million a year from that little revenue stream.

The upshot of all this is that many states have attempted comprehensive tax reform and few have succeeded. Every business with a loophole fights like mad to keep it. Because the reform would raise some taxes and lower others, some of the “I’m anti-tax” blowhards take up sloganeering against it on grounds that it raises taxes, carefully neglecting to mention that some taxes go down (like, say, the overall sales tax rate).

But for Cowell to weigh in with the specter of bond rating repercussions does imply that folks in the power offices in Raleigh are taking this reform effort seriously. Or at least, that they ought to.
(And if you’re still with me here, you are clearly a tax policy geek, too, in which case you’ll enjoy the latest State of the States 2010 report from the Pew Center on the States.)