WAYS & MEANS: Anticipating the Backlash to Property Tax Reform

The Pew Charitable Trusts releases a report giving some background to the Actual Value Initiative, a potential reform to Philadelphia’s property tax and assessment system.

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Ways & Means is a weekly column by Mark Alan Hughes on economics, politics and sustainability in Philadelphia.

There was a reason my first two columns dealt with property reassessment and Philadelphia’s ambitious Actual Value Initiative: It’s the most important policy issue on the 2013 agenda.

Now, the Philadelphia Research Initiative of the Pew Charitable Trusts has released a great backgrounder on the same subject. Regular Ways & Means readers will be relieved to know that you got all the important stuff last summer — what are the critical choices we face, and what principles should define those choices.

But the Pew report provides some very useful context for this issue.

First, other states have solved the constitutional issue of the “uniformity clause,” which requires that “All taxes shall be uniform, upon the same class of subjects.” In Pennsylvania, the courts have interpreted this to mean that cities may not tax residential and commercial property at different rates. But according the Pew report, 47 states have a similar provision and yet it is “commonplace” for courts to allow differential rates.

According to Pew, the cities of Boston, Washington, Hartford, Conn. and Chicago all use differential rates. The fact that we can’t means Philadelphia draws a larger share of its property tax revenues from residential property than these other cities. The Pew report also describes three amendments to the Pennsylvania constitution used to remove the uniformity clause’s prohibition on specific property tax policies. Even more helpfully, the report describes the courts’ support for the Use and Occupancy Tax, which provides a clever workaround for extracting more revenue from commercial property without running afoul of the uniformity clause.

The other thing I learned in the report is that Philadelphia draws only 14 percent of its general revenues from the property tax, about a third of what we draw from our local taxes on wages and profits. The Pew report shows that we collect far lower taxes from property than comparable U.S. cities: $729 per resident compared to $2,799 in Washington, D.C., $2,213 in Boston, $1,631 in Baltimore, and $1,181 in Chicago.

The report’s authors note that this low yield helps explain why assessments and the property tax have attracted so little reform energy over the years. But I think there’s a bit more going on here than just slim pickings.

As we say in Philadelphia, nothing is so screwed up that somebody isn’t making out. The basic reason for the low property tax effort is a longstanding tacit bargain between the City and its more affluent residents. The City will tax wages but keep property taxes low, in the hope that people won’t move to the suburbs. No one admits to the bargain, but it exists and it starves public education (which relies on the property tax) and depresses housing prices (which capitalize the wage tax).

Revenue sources for the City of Philadelphia. Credit: Pew

The bargain also makes it even harder to improve assessments, because those most protected are also those who benefit from distortions in the lousy assessments as they are now. This gives the winners in the current system even more reason to protest the Actual Value Initiative.

The report concludes with a thoughtful discussion of well-understood mechanisms to cushion the impact of reassessment, both the transition and the ongoing effects. I share the author’s view that engaging the public on AVI early and deeply is a smart move for reformers.

But in the end, some amount of backlash will happen with any mass reassessment — usually because of a court case or state requirement, which was another useful finding of the Pew report.

The best way to prepare for February 2013, when reassessments start to arrive in property owners’ mailboxes, is for the mayor and City Council to agree to the common principles motivating AVI, stand by the process and its outcomes, and hold on long enough for people to see that the earth doesn’t stop spinning on its axis.

The real challenge for leadership in City Hall and on the Council will be to give the new assessments the chance to prove their worth in terms of fairness and prosperity. After all the columns and reports, that’s something only politicians can do.

Mark Alan Hughes is a faculty fellow of the Penn Institute for Urban Research and the former chief policy adviser in the Nutter administration.

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Mark Alan Hughes is a Distinguished Senior Fellow at PennDesign and an Investigator at the US Department Of Energy’s Energy Efficient Buildings Hub at the Philadelphia Navy Yard. He is a Faculty Fellow of the Penn Institute for Urban Research, a Senior Fellow of the Wharton School’s Initiative for Global Environmental Leadership, and a Distinguished Scholar in Residence at Penn’s Fox Leadership Program. He has been a senior fellow at the Brookings Institution, the Urban Institute, and a senior adviser at the Ford Foundation. He was the Chief Policy Adviser to Mayor Michael Nutter and the founding Director of Sustainability for the City of Philadelphia, where he led the creation of the Greenworks plan. Hughes holds a B.A. from Swarthmore and a Ph.D. from Penn, joined the Princeton faculty in 1986 at the age of 25, has taught at Penn since 1999, and is widely published in the leading academic journals of several disciplines, including Economic Geography, Urban Economics, Policy Analysis and Management, and the Journal of the American Planning Association, for which he won the National Planning Award in 1992.

Tags: philadelphiareal estatetaxes

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