Assembly Testimony on Equity in Assessment Practices

by H. William Batt, Ph.D.,
Schalkenbach Foundation, Center for the Study of Economics
hwbatt [at] yahoo.com — 518-462-5068
February 6, 2007

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 third14 -- 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 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.

1Taxing 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

2 See, among others, www.taxreform.com.au/economists.php

3 www.progress.org/cg/battprincip02.htm

4 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.

5 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

6 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.

7 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.

8 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/.

9. 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, www.federalreserve.gov/pubs/feds/2006/200625/index.html.

10 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.

11 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

12 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.

13 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.

14 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.

15 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 recently issued several papers through the ShowMe Institute, www.showmeinstitute.org.

16 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.