4.30.2009

Actual Value Actually Good for the Poorest Among Us


I've had to keep this work of my firm's somewhat under wraps for several months, but it's now more or less able to be discussed more publicly: "BRT Delivers 'Actual-Value' Numbers to Mayor and Council". I'm proud that we've gotten a chance to contribute to this, because, contrary to what some might think, Actual-Value assessments will actually help the poorest among us, to the extent that Philadelphia's hottest neighborhoods from a real estate standpoint (like University City, gulp!) have lagged in their assessments and therefore are currently paying too little relative to the City's more stagnant neighborhoods; Actual-Value assessments will catch those hot neighborhoods up and have them pay a fairer bill, and resultingly more stagnant neighborhoods will pay less.[1]

Of course, a number of unresolved issues remain. Prices will need to equilibriate, in that higher tax bills will lower property values, which will lower tax bills, which will raise property values, etc. What about residents in hot neighborhoods who are otherwise income-poor and constrained in their ability to use the financial markets to adjust their balance sheets to compensate for being house-rich but cash-poor? And is there anything we need to do for long-time renters who are not used to moving around but who may now be priced out of the only home they've known?

One step at a time. For now, let's be glad a very big, very complicated step has been taken.



[1] Here's a back of the envelope example of how that would work. Right now, we collect about $1 billion in City and School District property taxes. At a 8.264 percent rate, that assumes a citywide total assessed value of about $12 billion, or a presumed market value of $35 billion (the City says assessed value is supposed to be 32 percent of market value). Let's assume for simplicity's sake that aggregate actual market value in the City is $100 billion. So the new property tax rate would be 1 percent, since 1 percent of $100 billion gets you the original $1 billion in tax revenues that the City has been collecting (assuming that this whole thing is revenue-neutral, at least at first).

Now let's say we have two houses, one in a poor and stagnant neighborhood (House A), and one in a rich and rising neighborhood (House B). House A's currently assessed at $10,000, which presumes a market value of about $30,000. It's probably actually worth closer to $40,000 or $50,000 in the market; if you assume that the assessment reflects what the house was really worth 20 years ago instead of today, the upper bound of that market value represents about a piddling 3 percent annual increase in the house value. At a current assessed value of $10,000, the current tax bill is $10,000 x 8.264 percent, or over $800 a month. With Actual-Value, even presuming the higher market value of $50,000, the new tax bill would be $50,000 x 1 percent, or $500, a savings of about 40 percent.

House B's currently assessed at $25,000, which presumes a market value of about $75,000. It's probably actually worth closer to $300,000 to $350,000; if you assume that the assessment reflects what the house was really worth 20 years ago instead of today, the lower bound of that market value represents a more robust 7 percent annual increase in the house value. At a current assessed value of $25,000, the current tax bill is $25,000 x 8.264 percent, or about $2000 a month. With Actual-Value, even presuming the lower market value of $300,000, the new tax bill would be $300,000 x 1 percent, or $3,000, an increase of about 50 percent.

So roughly speaking, the people living in House A will see their tax bill fall by 40 percent, and the people living in House B will see their tax bill increase by 50 percent. This is fair, but not because House A inherently deserves the break and let's stick it to House B. It's fair because House B has been underpaying, and, resultingly, House A has been overpaying; Actual-Value can't reverse that past inequity, but it can make things fairer moving forward.
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