Tax Assessment and Gentrification - Crafting Smart Tax Policy
A Rock and a Hard Place – The Crossroads of Gentrification and Tax Policy
We’ve all seen gentrification. You’ve probably seen it when you’re out collecting data and the neighborhood you’re in has a mixture of small, old houses and large, new houses, which is usually an indication that new property owners moving to the neighborhood are buying properties for their lots and have the money to demolish the current house and build a new house. That type of situation is great for a jurisdiction from a tax perspective – property values and tax revenue increase rapidly – but a difficult situation for the property owners who bought their houses well before the neighborhood revitalization started. For them, the tax increases may get to the point that they can no longer live in the neighborhood. The neighborhood is getting “gentrified” because the incoming wealth and investment are displacing the original property owners. Said another way, as higher-income households move in, lower-income residents, often minorities and the elderly, face difficulties in affording the escalating property taxes and move away.
Gentrification, when viewed at a macro level, introduces a complex paradox in its implications for tax bases and revenue. On one hand, the surge in real estate values within gentrified areas often leads to an increase in property taxes, contributing to a potential boost in local government revenues. However, this fiscal benefit is accompanied by a set of counteracting dynamics that impact broader tax bases.
The paradox emerges as the depopulation of gentrified areas unfolds concurrently with rising property values. As people leave the area, a decrease in other tax bases, such as sales tax and excise tax, can occur. Government budgets get tight, and an increased reliance on property taxes to fund a greater proportion of the budget occurs. Eventually, property taxes can’t make up for the lost sales and excise taxes and reinvestment in a jurisdiction becomes nearly impossible.
As areas gentrify, real estate property tax revenue often increases because of newer real estate stock and because of renovations to existing stock. The hidden cost may be a loss of sales tax revenue and loss of a neighborhood's unique cultural and architectural identity.
What can assessors do in these situations? In most cases, they’re being approached by one set of property owners seeking tax relief via abatement and can’t do much to help these property owners because the property values are what they are. Dan Popish, the deputy chief appraiser in Pitkin County (CO), summed up the dilemma nicely this past summer after property values in some parts of his jurisdiction more than doubled: “We are just the data collectors and analyzers. It does take a change in the law at the state legislature to change the rules. We are just the agents following the Colorado state law.” Unless the property owner makes a compelling argument as to how their property was misvalued, there’s not much an assessor can do to address the economic distress the property owner is experiencing in a place that is getting gentrified.
Assessors can, however, help policymakers craft smart policies. When an assessor gathers property data, they collect information about the property’s location, size, age, condition, and recent sales prices of comparable properties in the area. By analyzing this data, assessors can identify trends in real estate values and determine the fair market value of a property. Being the first to see the trends in real estate values, assessors can help policymakers anticipate potential tax policy problems before they occur. For example, if assessors notice a trend of rising property values in a gentrifying area, they can advise policymakers to implement tax relief programs to help property owners who have been in the area a long time and who may be struggling with increasing property taxes.
The laws and local legislation need to address the problem through innovative tax policies and programs. Assessors, with their unique position as collectors and keepers of key real estate data that legislators and governing executives depend on, can drastically help legislators craft thoughtful, anticipatory tax legislation that allows jurisdictions to take advantage of the increased property values and property taxes inherent to gentrification while preserving the original property owner’s viability to stay in the area.
The Lessons of California Proposition 13 – How A Statewide Property Tax Cap Spelled Doom for Public Services
"The long-lasting effects of Proposition 13 underscore the complexities associated with balancing property tax relief and sustaining vital public services.”
When policymakers create well-intentioned but poorly considered legislation, everyone suffers. A well-known example of such legislation is California’s Proposition 13, a landmark California ballot initiative passed in 1978, which unintentionally undermined the ability of jurisdictions to fund essential services like education and health. The initiative, aimed at providing property tax relief to homeowners, imposed severe limitations on property tax assessments and increases. Property taxes were capped at 1% of the property’s assessed value at the time of purchase, and annual property value increases were restricted to 2% or the rate of inflation, whichever was lower. While this provided immediate relief for homeowners, it created a long-term challenge for jurisdictions.
As property values in California soared in the years after Proposition 13 passed, especially in gentrifying areas, property tax revenues didn’t keep pace. In fact, tax revenue fell significantly short of what counties needed and led to a significant reduction in the funding available for essential public services. Education, in particular, suffered as schools heavily depended on property tax revenues. The inability to capture the full value of appreciating properties limited the funds available for maintaining and improving educational infrastructure, hiring qualified teachers, and providing necessary resources for students. Similarly, health services faced constraints as jurisdictions found themselves with inadequate resources to invest in healthcare initiatives and facilities.
Inadvertently, the statewide blanket property tax cap introduced with Proposition 13 shifted the burden of funding essential services away from property taxes, placing strains on alternative funding sources and hindering the overall well-being of communities. The long-lasting effects of Proposition 13 underscore the complexities associated with balancing property tax relief and sustaining vital public services.
The Philadelphia Story – Balancing Gentrification with Community Well-Being
“While Proposition 13 in California and Philadelphia’s Longtime Owner Occupants Program (LOOP) both address property tax concerns, their mechanisms and impacts are distinct.”
Philadelphia faced a similar situation to California. In the case of Philadelphia, the city underwent a significant property taxation system overhaul known as the Actual Value Initiative (AVI) in 2013. The AVI’s goal was to reassess the market values of all properties, aligning them more closely with actual market values. This reform sought to rectify the misalignment between assessed values and market values, but its implementation led to varied and sometimes substantial increases in property taxes, particularly in gentrifying neighborhoods.
To mitigate the adverse effects of gentrification on long-term low- and middle-income homeowners in neighborhoods with significant property value increases, Philadelphia implemented the Longtime Owner Occupants Program (LOOP). LOOP operates by freezing or capping property tax assessments for eligible homeowners. The freeze or cap prevents the property tax assessments from increasing beyond a certain limit for homeowners who may otherwise struggle to afford the escalating taxes associated with gentrification. To qualify for the LOOP program, homeowners often need to meet specific criteria, such as a minimum number of years of residency in the property, ownership status, and income thresholds. The program is designed to target those who have been part of the community for an extended period, acknowledging their contribution to the neighborhood and providing a measure of protection against displacement due to rising property values.
While Proposition 13 in California and Philadelphia’s Longtime Owner Occupants Program (LOOP) both address property tax concerns, their mechanisms and impacts are distinct. Proposition 13, implemented statewide, imposed a cap on property tax increases, which unintentionally led to challenges in funding essential services like education and health. In contrast, LOOP is a local-level initiative specifically designed to aid long-term homeowners facing rising property values, particularly due to gentrification. LOOP achieves this by freezing or capping property tax assessments for eligible homeowners, offering targeted relief without the broader implications seen with Proposition 13.
Circuit Breakers as Mitigation Strategies
Similar to Philadelphia’s LOOP program, circuit breakers provide relief to families facing rising property tax burdens in gentrifying neighborhoods. They function as financial safeguards to prevent excessive burdens on low- and middle-income families when property taxes surge beyond a certain percentage of their income. Currently, 18 states offer property tax circuit breakers for eligible homeowners.
These circuit breakers operate on a targeted and needs-based principle, aiming to assist those who are most vulnerable to the adverse effects of gentrification-driven property value increases. When a family’s property tax payments reach an unaffordable level relative to their income, the circuit breaker kicks in to offer relief, ensuring that essential services like education, public safety, and infrastructure maintenance continue to receive adequate funding at the local level.
Circuit breakers can help maintain overall tax revenue for local governments while preventing the disproportionate impact of gentrification on vulnerable communities. These targeted strategies are crucial for preventing economic displacement while fostering sustainable community development.
Conclusion
As policymakers deliberate on effective strategies, the pivotal role of property assessors cannot be overstated. The role of the tax assessor is key in providing policymakers with accurate property data that can guide policy decisions related to tax policies and programs, such as when and how to introduce programs like LOOP and circuit breakers. Assessors provide insights into real estate trends, fair market values, and the appropriate tax rate for each property, which are essential for balancing the need for revenue with the fair treatment of property owners. By ensuring that property data is accurate and up-to-date, assessors can help policymakers make informed decisions that promote equitable tax policies and support the provision of essential public services. This collaboration not only ensures that property tax relief is directed to those who need it most but also fosters sustainable community development. The intricate understanding of local dynamics by assessors, coupled with policy adjustments, becomes instrumental in mitigating the adverse effects of gentrification and fostering inclusive urban transformation. As both assessors and policymakers work in tandem, they play a critical role in creating resilient, thriving communities in the face of urban evolution.
