AVI Without Tears

I have an op-ed in today’s Daily News about AVI. I think the argument there is correct, but it is highly compressed. I’ve tried to set out my argument at a little greater length here. (Note that in the op-ed and in this piece I made a mistake and said that AVI shifts the tax burden from residential to commercial property. It does the opposite. I’ve corrected it here. Councilman Green’s proposals minimize the shift.)

So much has gone wrong in the city’s move to the Actual Value Initiative (AVI), that many people are fearful about its consequence. And one of the things that has gone wrong is that people who know better are playing on this fear for their political purposes,

I think the fear is over blown. AVI is a good thing if it is implemented properly and I think it can be implemented properly this year.

The biggest step to tax fairness Philly will ever take.

The most important thing everyone needs to understand about AVI is that it is the biggest step to tax fairness Philly will ever take. It corrects decades of property assessments that were biased, corrupt, and unfair. The unfairness was both systematic and random, a result of political corruption and incompetence. People and businesses that were connected got good low assessments from the city. People and businesses that were not connected got higher assessments. People who had assessors that were angry or drunk or dumb got assessments that varied a great deal from reality. The result was that on any given street, assessments for two similar houses could be wildly different.

Even worse than the random unfairness was the systematic unfairness: city wide, assessments, and taxes, relative to market value were higher in poor and working class neighborhoods than in upper middle class neighborhoods.

The Actual Value Initiative corrects this inequity in two ways. First, it required a complete reassessment of every property by a new, professionally run agency, the Office of Property Assessment. Second, instead of assessments being a fraction of the actual market value, they will now be actual market values. It will thus be easier for us to determine if our assessment is unfairly high.

Progressives have talked for years about making taxes more progressive in the city. We supported the Cohen Wage Tax Rebate and other policies. But, there is nothing we could do that would reduce taxes for poor and working class people more than moving to AVI. That’s why, unless there is a very good reason to delay, we need to institute AVI this year.

Some people will pay more under AVI even if we don’t try to raise another $94 million for the schools though the property tax this year. But the truth is that they should pay more because their taxes have been too low relative to their neighbors. (I’m one of them and frankly, I should be paying more.) But the systematic bias of the system against working class neighborhoods means that, if implemented properly, about half the homeowners in city will see their taxes go down. Estimates provided by Councilman Goode suggest that about 250,000 homes have a value below median of about $120,000. The vast majority will see their taxes drop. Almost all will do so if Council and the General Assembly implement a homestead exemption at least $40,000, which will deduct that amount from the assessed value of every house before taxes are calculated.

We have the information we need

Some of those people who should know better have been carrying on about how we need to delay because the city has not released assessment data for every property.

It is true that in an ideal world we would have all the information about the reassessments before moving forward to AVI. But, because of incompetence at the Board of Revision of Taxes, the city had to restart the assessment process last year and final assessments are not ready. It would be a mistake to release property by property assessment information until they are checked and cross-checked because that will lead to anger about assessments and appeals.

At any rate public policy should not be made to benefit any particular homeowners. That’s what was wrong with the assessments we must replace. What we do need to do is set general policies that are fair to everyone. And in the last week or two we have received enough information to make those judgments. Some additional fine tuning may be necessary next year. Moving to AVI need not be once and done thing. But we have enough information to make the horrible, corrupt, crazy quilt lack of system that’s been in place for 100 years a whole lot better.

We can take account for inequities in the transition: the commercial to residential shift.

There are always issues in the transition to a new tax system. Councilman Green has, rightly, warned us that AVI will shift some of the tax burden from commercial to residential property. (I initially had some doubts about this given that many businesses made sweetheart deals with the BRT. But I’ve looked at Councilman Green’s numbers closely and did some spot checking of commercial assessments and determined that he is absolutely right.)

This is an unfortunate consequence of both moving to a fairer system of taxes and of Pennsylvania’s uniformity clause which prohibits us from doing what many cities, such as New York, do, taxing commercial property at much higher rates than residential property.

There are long terms ways to deal with this issue such as moving to Land Value Taxation (LVT). But Councilman Green has proposed two short term fixes that can be instituted this year. The first is a higher homestead exemption which will reduce the burden on residential property.

Green’s second suggestion, to raise the additional money we need for the schools through the Use and Occupancy (U&O) Tax instead of the real estate tax is also a very good idea. It will further minimize the size of residential to commercial shift next year. The proposal also deals with the whole issue of whether the administration has been trying to raise revenues for the schools through a “back door tax increase.”  I personally think the charge is overblown. But it may not be possible to save the Mayor’s proposal now.

We can take account of inequities in the transition: neighborhoods with increasing real estate values.

Councilman Kenney has pointed out that even if the old system was grossly unfair, there is also some unfairness when people who have planned their lives around it are forced to adjust. That’s especially true for long term residents in neighborhoods where real estate values have been rapidly rising, such as gentrifying neighborhoods in South Philly.

Council President Clarke has introduced legislation that will cap taxes for people who are long term residents in neighborhoods with rapidly rising property values. I don’t have the detailed information to make a recommendation about exactly who should be eligible for the cap. But I don’t see any reason that Council can’t find a reasonable solution.

The situation is different for people with middle and upper middle class incomes whose houses have in some cases doubled and tripled in value. There is no question that some of them will be stretched to pay much higher property taxes. Yet, when they sell their houses, many of them will make hundreds of thousands of dollars, a profit that is in some part the result of public policies that have helped spur development in their neighborhoods. The city already has in place a program that enables people in this situation to defer part of their property tax increase at a low interest rate. Few people take advantage of it. Some Council members are trying to figure out how to modify it to make it more accessible to people. Others want to reduce the interest rate. If properly designed such a program would enable people to put off a portion of their property tax until they sell their home. That would reduce but by no means eliminate the large profit they will have made on their homes.

These fixes need to be included in legislation this year—although some of them, such as the deferral program, do not have to be put fully into place until the fall.

A final goo-goo objection rebutted

A final objection to moving to AVI this year is that the city is not following a sound procedure because the tax legislation introduced by the Mayor calls for setting a revenue target and then letting the tax rate be whatever it takes to meet that revenue goal once we find out the final total value of property in the city.

It is true that the usual practice is to for Council to set a tax rate knowing the total property value and with an estimate of how revenue will be generated. But, through no fault of anyone in office today, we can’t do that. And, at any rate, most of the people complaining about this procedure are the same ones who insist that the move to AVI be revenue neutral—that is not raise more money through the real estate tax than we before the shift. This is an utterly inconsistent position for the only way to move to AVI in a revenue-neutral manner is to set a revenue goal and then let the tax rate be whatever it needs to be.

This objection—like the insistence on revenue neutrality itself is—I believe a dodge put forward by people who are posing as opponents of AVI precisely because they know that some people are going to pay more in taxes, will be angry about it even if they have been under taxed for years, and might be motivated to punish incumbent office holders as a result.

This is terribly unfair and dishonest. And it puts our priorities out of whack. Revenue neutrality and full information about every parcel—which is not necessary to make broad policy decisions—are not the only values at stake.

Ending the corrupt and unfair assessments and finding money for our schools are the most important things Council should do in dealing with taxes this year.

The complications arising from having to attain these goals now, without final data for every property, will make the transition to AVI a little more difficult but not impossible for us to evaluate once the final numbers are available.

The problem with not moving forward this year

Finally, it strikes me that some of the people who are most vociferous in calling for a delay have a hidden agenda: they really don’t like the idea that we are finally going to lift the excessive tax burden off poor and working people in this city.

There are ways—I’m not going into details—to put the unfair burden back on those from whom AVI would remove it. But there is at least one “progressive” who a month ago was supporting a high homestead exemption who is backing away from that support now that it has dawned on him that the policy means that his well-off neighborhood will pay higher taxes.

One reason upper middle class liberals like me insist on government transparency is that we are prepared to analyze and utilize the data government provides. People and community associations in poor and working class neighborhoods don’t have the capacity we do to make use of that data. Nor do they have the same capacity to give campaign contributions to or lobby Council members.

That’s why I think it is imperative to figure out the best way to move to AVI and to do it now. The burden of proof—and the need to round up 9 or 12 votes in Council to make further changes in the tax system—should fall next year on those who want to make changes to the fundamentally fair  system AVI will create.

We probably don’t have a choice anyway

At any rate, Council may not really have a choice but to move to AVI. Whether we use new the property values for real estate taxes is actually up to the administration not Council. Once the administration certifies those values, they go into effect for the next budget year. Because AVI sets assessments at the full market value—which is substantially higher than the fractional value used now—tax rates have to be dropped by about a third to raise the same amount of money. If Council does not act—or if the Mayor vetoes whatever action Council takes—tax rates from last year will go into effect. That means that our taxes will go up by roughly three times.

Council could do nothing and then dare the Mayor to certify the new values. But the Mayor is a lame duck while Council members will be running for reelection in three years. That may not be a gamble Council wants to take.

And, at any rate, even if the administration does not certify the new values, the city could be forced to do so by the courts which shown themselves willing to call into question unfair assessments in Pittsburgh. It would be difficult to explain to the Pennsylvania Supreme Court why Philadelphia won’t use fair assessments instead of the unfair ones in place now.

Let’s move ahead and be proud of what accomplished

I doubt, however, that it will come to a court case. Council has been handed a difficult task by the Mayor. After talking to some members of Council last week, it strikes me that they are dealing with the issue in about as a sensible way as one can imagine. Different members have been pointing to different aspects of the issue and have been putting forward the data we need to evaluate the project as a whole. And a consensus slowly seems to be emerging in support of setting tax rates appropriate for AVI while also creating some of the protections discussed here.

There is much that Council needs to do this month. But despite recent difficulties, I’m optimistic that we’re going to get where we need to go. Dealing with AVI is a major test for the new members of Council, and especially for new Council President Darrell Clarke. I’m a lot more confident this week, that they will rise to the challenge.

And when the dust has settled—and when people get used to their new tax bills—we might even be proud of creating a property tax system that finally end the radical injustice of the existing chaos.

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