Of all the human-made contrivances in the world, few can compete with the elaborate and complex treatment of the property tax. This is the one tax that generally is locally controlled. However, the host state most often sets the parameters under which the locality may craft its own tax plan. Now that the limitation on the SALT deduction is a well-established feature of the federal tax plan, citizens and legislators are exploring avenues for tax relief in other forms. It is a well-known fact that the bulk of the impact over the lack of deductibility will disproportionately affect both coasts and select communities elsewhere. Mature communities with little room for expansion in the base with already high taxes are bound to be affected greatly.
Will the citizens in the most affected communities be relied upon to do nothing? Don’t count on it. After all, the nation was founded on the premise of unfair taxation by a far-away power. And I do not mean Washington.
The real challenging reality for most will be highlighted when individuals file their 1040s next April. Corporations have more constructive ways to deal with property taxes in terms of the cost of doing business.
Two efforts have developed recently in the effort to buffer the impact of this most important and pressing change. California and New York City are showing us the path forward as they often do.
In California, for the very first time since the passage of Proposition 13 in 1978, the so called “Split Roll” has qualified for the ballot in 2020. Signatures had to be gathered and validated in order to accomplish this feat. This means that real concerned citizens want to see a true vote for what until now has just been a concept.
The basics of Proposition 13 limit taxation to 1% of value and taxes may escalate per year by no more than 2%. The real weight of this arrangement is determined by the assessed valuation that is assigned by the tax assessor to the property in question. Properties that turn over go on the rolls at the new valuation. If the property does not turn over or is not modified, the assessment does not escalate more than the 2% limit. There are some property owners who have owned their property prior to the passage of Proposition 13. By adopting the lessons of Malthus, we may conclude that this segment will be much lower over time unless there is an intergenerational passing of the property. Many properties in California are worth well in excess of their taxable values on the open market.
On the commercial side, the properties are generally guided by the same principle. The Split Roll proposal would allow more frequent reappraisal or reevaluation of commercial properties. The tautology goes that many of these commercial properties have a great deal more value than is reflected on the tax rolls. Of course, the commercial interests are strongly opposed. Many communities believe they are being shortchanged by the existing system, though they do not desire to have the commercial interests go elsewhere.
The precise wording of the anticipated ballot initiative will be of great importance. We have witnessed other initiatives failing due to mis-wording. It is also significant that this is the first time that the change agents have been successful in obtaining the ballot box. If the SALT limit is pinching taxpayers more than perceived, this Proposition just may have a chance.
Turning to the East Coast, in New York City, we have been seeing a groundswell of support for making a comprehensive review of the present system. The four classes of city properties dates to the early 1980’s but the last real review of the system dates to 1993.
Traditionally, 1 to 3 family homes in Class 1 have been assessed at the favorable rate of 6% of market value. All of the other 3 Classes are assessed at 45% of market value. In addition, due to the very strong appreciation in the NYC market over the years, increases in value have been phased in over a five year period under different rules for each class except for Class 3. The later represents utility properties that bear the burden using the ratio applied to the actual market value.
The point of this system is clear, that different classes of properties are treated differently by policy choice. Homeowners have always been treated favorably in the system while the commercial and utility properties share a greater part of the burden.
Different appraisal methods are also the norm and there are nuances to each of the methods. The two primary methods are cash flow or comparable sales based evaluations. We will leave discussion of these approaches to another day but each of them can be quite meaningful in the final calculation.
Given there are 1,068,863 parcels in the City that are assessed, it is clear that not all of the properties can be physically inspected each year. Factoring processes are a must. The final outcome is that Total Market Valuation approximates $1.25 trillion and the billable assessed valuation approximates $239.7 billion.
The overall tax rate is set, then the relative share of the total is allocated to each class. Other adjustments are made for the STAR program and other tax relief provisions. Abatements that apply are deducted before the final bill is determined.
The point of the exercise in the Big Apple, other than a periodic review, appears to be an attempt to address some of the criticisms that the city is becoming very challenging for the middle class to thrive in, given the relatively high and rapidly growing property tax burden. A financially healthy and vibrant middle class is necessary for a major city to continue to grow and prosper.
What tax burden is considered appropriate? Should the requirement be 1%, 2%, or 3% of value? In Michigan when property taxes were approaching 3%, a state-wide sales tax was passed in support of schools and to taper the property tax burden by a good measure. The policy choice worked.
What California and New York are facing is just two manifestations of the same root cause. Property valuations have increased apace and the system of taxation has not always captured the growth in an equitable manner. The distribution of the tax burden must be examined and recalibrated periodically in order to assure fairness. Most local governments calculate all of their other anticipated revenues and then settle on an amount that is required from the property tax and bill accordingly. One way or another this amount needs to be raised.
We realize that there are many opinions on differing sides about these topics. The important part in a democracy is that citizens will weigh in on determining how they will be taxed at the local level. Easing heavy property tax burdens is just one aspect of the scenario. Economic growth and financial stability is at stake. And there needs to be a reliable revenue stream to repay all of those bonds outstanding.
