Equity in Assessment Practices
H. William Batt
[Transcript of testimony before the New York State
Assembly, 6 February, 2007. H. William Batt serves on the boards of
the Robert Schalkenbach Foundation (New York) and the Center for the
Study of Economics (Philadelphia, PA. He can be contacted via email at
HWBatt@yahoo.com, or by telephone at 518-462-5068]
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.[1]
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.[2] It conforms to all the textbook principles of sound tax
theory -- neutrality, efficiency, progressivity, stability,
simplicity, administrability. [3] Yes, the property tax is
progressive, despite what some people have said.[4] Especially the
land part -- tenants pay nothing, and LVT is the only tax that
actually fosters economic development and vitality.[5]
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.[6] 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.[7] 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.[8] 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 ¼ to 1/3 of the total tax base, far less
than in municipalities elsewhere.[9] 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.[10]
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.[11] 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.[12]
It is also important to understand the enormously steep gradient of
land values.[13] 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[14] -- 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.[15]
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.[16] 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 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.
NOTES AND RFEERENCES
- Taxing land value has its
origins in classical economic theory, and was most clearly
elucidated by 19th century advocate Henry George's Progress
and Poverty, a book that sold more copies by 1906 than any
work ever published except the Bible. Today, the power of
computers and the increasing availability of data make it possible
to test Georgist hypotheses empirically for the first time. This
exciting prospect has absorbed my attention since leaving the New
York State Legislative Tax Study Commission in 1992 after serving
there for close to a decade. What had been only plausible ideas
now are proving valid-for many instances online, see
www.urbantools.org . Sweden and Norway have just this past summer
allocated $10 million each to a network exploring and advocating
land value taxation and capture, and growing attention to such
regimes now constitutes a worldwide dialogue. See, for example,
the UN Habitat sponsored project under the auspices of the
Earthrights Institute at
www.earthrights.net/projects/globallandtool.html
- See, among others,
www.taxreform.com.au/economists.php
- www.progress.org/cg/battprincip02.htm
- Only two empirical studies
have ever been done on the subject, but both concluded that the
real property tax is mildly progressive. When land and
improvements, the two elements of the property tax, are taken
separately, it becomes even clearer why this is so. See Peter
Mieszkowski, "The Property Tax: An Excise or a Profits Tax,"
Journal of Public Economics 1 (April 1972): 73-96, cited
and discussed extensively by James Heilbrun, "Who Bears the
Burden of the Property Tax?" in Lowell Harriss (ed.), The
Property Tax and Local Finance, Proceedings of the Academy of
Political Science, Vol 35, #1 (1983), pp. 56-71; and Henry J.
Aaron, Who Pays the Property Tax: A New View, Washington:
the Brookings Institution, 1975. These are reprinted and further
discussed in Dick Netzer and Matthew P. Drennan (eds.), Readings
in State and Local Public Finance. Oxford: Blackwell
Publishers, 1997, Chapters 7 -- 10. See also Harvey S. Rosen,
Public Finance, 2nd Edition (Homewood, IL: Irwin Press, 1988), pp.
483-489; Mason Gaffney, "The Property Tax is a Progressive
Tax," Proceedings, National Tax Association, 64th
Annual Conference, Kansas City, 1971, pp. 408-426. [Republished in
The Congressional Record, March 16, 1972: E 2675-79.
(Cong. Les Aspin.) Resources for the Future, Inc., The Property
Tax is a Progressive Tax, Reprint No. 104, Oct., 1972], online at
www.schalkenbach.org/library/progressivet.pdf.
- One study calculated that "on
average, a one percentage point increase in the tax (buildings :
land) differential will yield an increase in the total value of
construction of 17.8 percent." Tideman, Nicolaus and Florenz
Plassman, "A Markov Chain Monte Carlo Analysis of the Effect
of Two-Rate Property Taxes on Construction," Journal of
Urban Economics 47(2)216-247. This researcher found that a
$128 million highway investment of eleven miles generated
additional land value of $3.734 billion within a limit of two
miles on either side. "Value Capture as a Policy Tool in
Transportation Economics: An Exploration in Public Finance in the
Tradition of Henry George," The American Journal of
Economics and Sociology, 60(1)195-228 (Jan. 2001); reprinted
in Laurence S. Moss (ed.), City and Country. Malden MA: Blackwell
Publishers, 2001. www.urbantools.net /
pdf/ValueCaptureAsAPublicFinanceTool-BillBatt.pdf. Still a third
study compares state tax burdens and their economic plights, and
New Hampshire, which has a tax bearing most heavily on land values
(albeit in the form of the conventional tax on real property)
fares favorably with states that rely more generally on a balance
of income, sales, and property taxes. See "The
Income-Stimulating Incentives of the Property Tax," by Mason
Gaffney and Richard Noyes, in The Losses of Nations:
Deadweight Politics versus Public Rent Dividends, Fred
Harrison, Editor. London: Othila Press, 1998, also at
www.cooperativeindividualism.org/gaffney_noyes_lossesofnations1.html
. Fortune Magazine published an article in August, 1983, titled "Higher
Taxes that Promote Development," reprinted at
www.cooperativeindividualism.org/breckenfeld_on_land_value_taxation.html
- By far the largest proportion
of land value is in cities, typically upwards of 90 percent, and
the ability to accurately assess such parcels is very much
dependent upon data on adjacent sites. The official handbook of
The International Association of Assessing Officers states (p.547)
that "the chief measure of uniformity [in aggregate analysis]
is the coefficient of dispersion (COD), which, depending on the
nature of the properties involved, should not exceed 10.0-15.0 for
residential properties, 15.0-20.0 for commercial properties, and
20.0 for vacant [i.e., rural] land." Joseph K. Eckert, et al,
Property Appraisal and Assessment Administration, Chicago: IAAO,
1990. The revolution in computerized assessment is fast making
such tolerances far too generous, and will soon in fact at least
be halved.
- Personal conversation with
James Dunne, Director, Policy Unit, NYS Office of Real Property
Services, January 29, 2007; personal conversations with Ted
Gwartney, Assessor, Greenwich, CT, January 30, 2007, and Matthew
Harris, President, Geotrends (www.geotrends.net/), Austin, TX.
- Michael Hudson, "The
Land-Residual vs. Building-Residual Methods of Real Estate
Valuation: Some Prefatory Remarks to the N.Y.U. Real Estate
Institute," Oct. 25, 2001, www.michael-hudson.com/.
- This researcher has collected
data on some 2,700 of the 10,000 assessment districts in the
nation, and calculated the mean land aggregate land value of each
of those districts. The mean of all those total means is
approximately 39 percent land value. My city of Albany had a
percent land value for the total 28,000 parcels of a bit over 17
percent. The residential parcels taken separately had an aggregate
18+ percent land value; the non-residential parcels a bit over 11
percent. One can understand how it is more advantageous to be able
to depreciate 80 or 90 percent of a real estate asset rather than,
say, 50 percent. A recent study found that land's share of single
family housing in the top 46 metropolitan regions aggregated was
about 51% in 2004, ranging from 23.3% in Oklahoma City to 88.5% in
San Francisco (See Tables 6a-6g); the New York area was 67.4%;
Rochester was 28.1%; Buffalo 28.7%. Outside these top regions the
aggregate average was 27% in 2000. See Morris A. Davis and Michael
G. Polumbo, "The Price of Residential Land in Large US
Cities," Federal Reserve Board, Washington, DC, May, 2006.
- Report of the New York
State Commission for the Revision of the Tax Laws, February
15, 1932. (Popularly known as the Mastick Commission Report after
its Chairman, Seabury Mastick), p.37.
- For an extensive discussion of
the history of Assessment in New York City, see Mason Gaffney's
newly published New Life in Old Cities, available in hard
copy at www.schalkenbach.org/store.php and online at
www.masongaffney.org/workpapers/2006_New_Life_in_Old_Cities.pdf.
- State Tax Policy & Senior
Citizens: Second Edition, Washington: National Conference of State
Legislatures, 1994; David Baer, State Programs and Practices for
Reducing Residential Property Taxes, Washington: AARP, 2003;
www.aarp.org.ppi; and "Research Memo," by Don C.
Richards, Senior Research Analyst, Wyoming Legislative Service
Office, July 14, 2006.
- For graphics showing
differential land value of Tompkins County, NY, prepared by this
researcher, see www.taxpolicy.com/batt/ . City land values are
also reflected in its skyline: tall buildings, high land values.
- Ted Gwartney, "A Free
Market Strategy to Reduce Sprawl," Groundswell,
www.progress.org/cg/tedg00.htm Even in the five boroughs of New
York City, normally thought to be densely developed, 7.5% of its
land, or 18.6 square miles, is vacant. NYU Furman Center for Real
Estate and Public Policy, cited at
www.progress.org/2005/davies35.htm.
- In 1982, Harrisburg,
Pennsylvania was adjudged the second most depressed city in the
nation under Federal distress criteria. Since that city's phase-in
of ever greater tax rates on land than on improvements, Mayor
Stephen Reed notes that "Harrisburg has registered in excess
of $3.1 billion in new investment. The number of businesses on the
City's tax rolls has increased from 1,908 to more than 5,900.
Taxable real estate values have increased from an aggregate of
$212 million to over $1.6 billion. The number of vacant properties
has been cut by 85%." (Letter to Philadelphia Controller, May
1, 2003.)The crime rate has been reduced 54% and the fire rate has
dropped over 76%. Mayor Reed, re-elected continually since 1982,
was just named one of the world's most outstanding mayors.
www.worldmayor.com/results06/profile_harrisburg.html. The City's
tax rate on land values is six times the rate on improvements.
Twenty other Pennsylvania cities are now following suit.
www.urbantools.org . Renewed interest in LVT is coming from many
quarters; Joseph Haslag, a University of Missouri Economist, has
recent issued sseveral papers through the ShowMe Institute,
www.showmeinstitute.org.
- A. 127 - Requiring localities
to assess every 10 years or S. 1054 requiring localities to assess
every three years; A. 1015 - Creates a "Blue Ribbon
Commission" which includes provisions to review assessment
practices as well as real property taxation in general; A. 1572 -
Constitutional Amendment requiring assessment continuity; A. 1573
- Authorizes assessors to grant certain retroactive non-profit
exemptions under certain conditions; and A. 1574 - Assessments of
Condominiums and Cooperatives.
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