Tuesday, May 31, 2005

How property tax assessment limits drive away new homeowners

Yet another interesting post from Otis White's Urban Notebook at Governing.com. This one talks about how property tax assessment caps can keep out the new homeowners a city so desperately needs.

Welcome to Detroit - City to Homeowners: Keep Out!

The Detroit News recently published an article with this arresting lead sentence: “From a purely financial standpoint, buying a home in Detroit is a no-brainer: Don’t do it.” As the article explained, not only do homeowners in the city have to put up with the usual hassles of city life (lousy schools, spotty public services, a scarcity of groceries and drug stores, dicey neighborhoods and crime), but they also get socked with property taxes that are often double what they’d pay in the suburbs. The article focused on one man who had moved from Chicago and was ready to buy a house in the same neighborhood as the mayor’s residence, with a nice view of the Detroit River — until he learned the taxes on his $290,000 house would be $9,700 a year. “There was no way I could afford that,” he said, opting instead for a more expensive home in the suburbs with lower taxes. For a city as desperate as Detroit to bring back middle-class families, crushing taxes (and higher property insurance rates) work like a giant keep-out sign, the News said. “Young professional couples can afford a $250,000 home and they can choose to buy anywhere, but when they look at Detroit and run the math, it puts Detroit at a competitive disadvantage,” one lawyer who lives in the city said. Making things worse, Michigan has a harebrain tax-limitation law that artificially restricts assessments on homes until they are sold. Obvious result: The tax burden is shifted to recent homebuyers, punishing the very people the city most needs to attract. Hence, the staggering tax bill for young middle-class families.

Footnote: So if simple-minded tax limitations aren’t the way to help homeowners, what is? Two things: Much greater commercial development, which strengthens the tax base and eases the burden on homeowners, and drastic downsizing of Detroit’s bloated city government. As leaders there often point out, Detroit has a government designed for city of 2 million supported by an impoverished population of 900,000.

Lessons for Houston? The obvious one: adjust overall tax rates rather than assessments. As far as his recommendation to strengthen commercial development to boost the tax base, I believe that is directly related to one of my pet topics: mobility. Businesses need easy access to customers and employees. If they don't have it, they'll move. Sure, transit can be a small piece of that, but the real foundation of most mobility is the car (at least in Houston and most newer sunbelt cities), meaning investments in freeways, tollways, and fast arterials.


At 1:22 PM, May 31, 2005, Anonymous Anonymous said...

And Detroit has a city income tax too!

By Houston-area standards, a property tax bill of $9,700 on a $290,000 home is rather competitive, but of course we don't have to pay those state and city income taxes. Detroit has a somewhat lower sales tax rate, which I believe is a flat 6% statewide in Michigan.

(I'm wondering about the financial capacities/loan risk profile of the former Chicago resident featured in the article in that a difference in a property tax bill of a few thousand dollars sounded like it would break him. He'll be in for a big surprise when faced with a big ticket item like a roof replacement.)

Regarding your recommendation of adjusting tax rates rather than assessments, can you further explain why that should be Houston's strategy?

Regarding commercial development in Detroit, I think this highlights the issue of underserved communities and the various social factors that have led to and perpetuate this. Here in Houston, a major grocer - HEB - finally tested the "urban" waters by setting up shop in the Third Ward on OST at Scott Street, and the store turned out to be one of the top performers in the state. My understanding is it took a TIRZ and an awful lot of community effort to get what would ordinarily be solved by market forces in our suburbs and wealthier neighborhoods.

At 1:52 PM, May 31, 2005, Blogger Tory Gattis said...

When assessment increases are capped, people and businesses who stay owners of their house or business for a long time end up advantaged vs. new buyers, because the assessments usually reset whenever there is a sale. For example, my understanding in CA is that there are a lot of houses on the books at $200K that are really worth $600K or more - and they would reset to that value (with a corresponding jump in taxes) if they were sold or substantially improved (which partially explains the large number of houses for rent).

The taxes disproportionately hit new developments or new owners of older real estate, discouraging any redevelopment or new investment. And this often applies to businesses as well as homeowners, where taxes, and therefore lease rates, are much lower in an old run-down strip center, making it harder for any new development to compete.

By contrast, if they let assessments adjust normally, but change the tax rate, it affects everybody equally - old and new - avoiding the disincentive problem for new owners or developers.

Not real happy with how I explained that, but I hope it makes some sense.

At 2:36 PM, May 31, 2005, Anonymous Anonymous said...

Yes, I agree - the assessments should reasonably reflect market value, less exemptions. The municipality can then adjust the tax rate as total AV of all properties rises and falls.

I was confused for a moment because I thought you were suggesting not adjusting the assessments, and I know you well enough to know that you wouldn't propose that.

At 12:50 AM, June 04, 2005, Anonymous Anonymous said...

I really hope some folks in power are reading your thoughts on transit.

At 3:43 AM, June 10, 2005, Anonymous Anonymous said...

The problem we have here in Texas is keeping the CAD AV in line with real market value.

Last year, my home was hit with an new AV of 89K.

That AV was a pure fantasy, as the house needs about 30K of work done on it and any duly diligent buyer would have dropped down accordingly.

Any diligent CAD assessor would have noticed as well, but of course, that is not how the CADs are doing things. We are being assessed by computer and the CADs are relying on the protests to adjust toward real market value.

As a result, the homeowners who fail to protest are artificially driving up the AVs of their neighbors with similar properties.

I protested and the CAD adjusted downward --- by 15K.

So I am over-valued by 15K.

The lot is over-valued as well.

The new lower caps on CAD AV's proposed in this session of the Texas Leg are to compensate for the arbitrary and often fantasmagorical AV's placed on Texas homes by the local CADs.

Adjusting the tax rate doesn't solve this problem, as we can't adjust the tax rate on individual homes.

At 3:59 AM, June 10, 2005, Anonymous Anonymous said...

BTW, found your site through Bloghouston. Kevin Whited highly recommends your blog.

One more example of the CAD problem here, and this is a very common one.

A couple I have known for quite some time built a waterfront home a few miles from here and moved in.

Six months later, the local CAD presented them with an AV 35K higher than what they had just paid to have the house built.

Anyway, how would you solve the problem of inaccurate assessments without adjusting assessments?

At 6:39 PM, June 10, 2005, Blogger Tory Gattis said...

I have no problem with allowing protests of assessments to get more accurate valuations. What is dangerous is when caps apply to assessments rather than rates, and after a few years houses are on the books at $200K that would really sell for $300K and above. It creates market distortions. We need accurate assessments, and adjusted or capped rates.


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