It would be a bad idea to replace property taxes to pay for public schools
No one who has studied the economics of the real estate tax would advocate its abolition and the substitution of any other tax for it. Yet some local governments in Allegheny County want to do just that. And some conservatives would abolish it, too.
The real estate tax is the only tax local governments levy that does not cause people or businesses to flee the taxing jurisdiction; it is more progressive than a sales tax; the burden cannot be shifted to others, neither tenants nor prospective buyers; and it is economical to administer.
The only trouble with it is that it is often abused by politicians and frequently badly administered. But bad administration is almost always caused by political interference with the assessment process.
The real estate tax, when properly administered, is the best tax local governments can levy. It is a progressive tax and progressivity has to be calculated relative to income. The fact that all property is generally taxed at a fixed rate does not mean it is not progressive with respect to income. Rich people tend to live in homes disproportionately more valuable than homes of people less rich and tend to have more than a single property. Moreover, a large proportion of the tax in urban areas is commercial and industrial real estate, hotels and apartment buildings, all of which are owned preponderantly by the wealthy.
Add to this the fact that a homestead exemption gives luxury homes a much lower rate of benefit than modest homes. The burden of the tax falls upon the landowner. It is not shifted to other taxpayers or to tenants. The burden of existing taxes is borne by whoever owns the land. A prospective buyer — when he makes an offer for a parcel of real estate — takes into consideration what his tax liability will be. He is said to buy “free” of the tax but he is really paying a lower price equivalent to the negative value of his annual tax liability.
His offering price is lower by the capitalized value of the real estate tax, as economists would say.
The fact that the tax is borne by the owner of the land and lowers its market value was the basis for Henry George’s proposal for taxing only land and not improvements. But my own research indicated that both the tax on land and the tax on improvements is borne by the owner of the land. If another tax, say the sales tax, is substituted for the real estate tax, land values would skyrocket and it would cost more to buy a parcel of real estate. It also follows that the existence of the real estate tax makes it possible for more households to own a house.
The problem of making good assessments and keeping assessed values current has been achieved in many jurisdictions. All the highly populated counties of Florida, for example, have excellent assessment administration. The trouble in Pennsylvania is that so many politicians know little or nothing about how good assessments are achieved and interfere in the administration of the tax.
Two Allegheny County Republican commissioners made a mess of a good assessment organization in 1996 by freezing assessments and firing about 40 assessors. It was declared unconstitutional and the county was forced to rely on outside assessors to reassess the entire county at a cost of more than $30 million.
Two years later a badly advised county executive ordered a second assessment at the additional cost of about $10 million. There were so many appeals and complaints that Dan Onorato, a Democrat, froze the assessments for four years. Needless to say, it took an additional two years and the expenditure of additional millions for outsourced assessors to bring assessments reasonably up to date. It is said to be under control. There is hope for it.
Keeping assessments current is a continuous process with assessors analyzing sales data throughout the year to note what and where significant changes are occurring and adjusting individual property values and neighborhood values accordingly. During the freeze those owning property in Squirrel Hill and Shadyside, inhabited by the well to do, benefited greatly from low assessments while poor communities like Braddock, Duquesne and McKeesport were grossly overassessed.
The appeals process can be relied upon to correct most of the serious inequities between comparable properties. Indeed, by the time the assessments were frozen for the second time, assessments were fairly equitable for comparable properties. The outsourced assessment organizations did a competent job and the appeals system worked.
And the county has been wise enough to appoint Charles Blocksidge, the chief assessor at the time of the first freeze, to the position of secretary of the new Board of Property Appeals and Review.
Ray Richman is a professor emeritus of public and international affairs at the University of Pittsburgh. He has been a real estate tax consultant to the City of Philadelphia and the State Tax Equalization Board. He directed the preparation in 1971 of the commonwealth’s “Assessors Handbook.”