Protecting the Elderly from Large Tax Increases

Brett Mandel

[A presentation at the annual conference of the Council of Georgist Organizations, held at Kansas City, Missouri, 10 July, 2008. This version is based on audio tapes and notes taken by Nadine Stoner. Brett Mandel is Director of Philadelphia Forward. Reprinted from GroundSwell, 2008]

There is a tremendous disparity in what they are paying in taxes. Taxation is unpredictable; you don't know what is going to happen from year to year. In Philadelphia like many places the value of houses has gone up and up in recent years and then backed off last year. So our taxation authority, the Board of Revision of Taxes that value homes for tax purposes, didn't change the value for five years and then last year nudged it up. The poster child for bad assessments in Philadelphia is a State Senator who had a house valued on the market for about $6 million but it is valued for tax purposes at $250,000.

We have a market value that is supposed to be what your house would sell for but we say we will take a fraction of that as your assessed value and apply a tax rate to that. But market values doesn't really mean what market value should mean, so it is confusing. Nobody really understands what is market value or assessed value. In Pennsylvania that is also illegal. So we are threatening to sue our assessing officials to get this right. We are currently in negotiations with them as we try to avoid a lawsuit. We have to value every single year, we have to value accurately, we have to value uniformly, and we are currently not doing that.

The problem is getting worse and we studied this as part of the tax reform commission in 2003 and found that the average property in 2003 had a market value of about 70% of true market value. When we revisited those numbers we found that the average property now is valued at 32% of what it could sell for.

The northeast part of the city and some of the outlying areas have been paying too much. The areas in and around the center city tend to pay too little. It would be fairly straightforward just get the values rights. It is another thing to make a transition from where some paid too much and some too little. If you do fix the problem in revenue neutral way, there will be winners and losers. You can buffer the change in and phase it in over a number of years -- average the assessments over 3 years, 5 years, 10 years. Of course, we think of taxing land more and buildings less. It makes a lot more sense not only in terms of encouraging development and discouraging speculation but it creates a subtle tax shift with untaxed residential properties mostly and increased taxes on Walmart and center city parking lot owners. So it is desirable policy and helps protect vulnerable homeowners.

There are any number of other policies that politicians will debate. Obviously one of the first things you can do in terms of taxes is limit how much you can tax. Some states have laws that say jurisdictions can only raise tax rates X% or they can only raise collections by X%. That has the attractiveness of protecting taxpayers and providing some stability and some predictability. The downside is that if you are not going to get the revenue you want from the property tax base then you have to tax other bases that will provide more damage to the local economy. Philadelphia is the poster child for that. We have not taxed comparatively but instead taxed business activity and wages of workers in Philadelphia and over the past 50 years Philadelphia has suffered an exodus of jobs and residents in part because we taxed the wrong stuff. So if you limit how much you can get from the property tax base, politicians tend to find other solutions that don't make much more sense.

Another alternative is you can shift the tax burden. There are assessment growth limits which would provide a limit on how fast the assessments can go up. They may provide some predictability. They are a very popular program with homeowners and certainly homeowners understand that very well. That creates an inequality in the market place. With my house and the house next to mine we are going to have unequal assessments. With split rate taxation we don't have that.

Homestead exemptions make some sense in terms of helping some people but you have to apply for the program or have someone apply for you. But you also have a subtle shift because you are untaxing homeowners and uptaxing the shift to commercial taxpayers.

Abatements and freezes in terms of direct relief. It can be attractive to some people but on the other side it can be misused as a political favor.

Circuit breakers usually done at the state level are policies that say if your income doesn't go up as fast as the value of your house, the state pays the difference. That's not a bad thing to help taxpayers but, of course, it is very costly to the government.

Finally there are deferrals. Under that method the tax value will increase with the property but you won't have to pay that tax bill until the time you or your heirs sell the property.

Philadelphia Forward in our advocacy work have come out against the idea of freezes, as you start off with assessments unequal on homes. One value grows faster and in five years you have created an inequality system.