To improve the debate on issues surrounding Real Estate Taxation in Philadelphia, Philadelphia Forward is creating an interactive resource using example city homes to give citizens and policy makers a resource to evaluate how proposed Real Estate Taxation changes will affect city properties. The tool will illustrate the current unfairness in Philadelphia real estate taxation to underscore the very real need for change, and model the potential effects of a citywide reassessment — and other proposed policy options designed to improve the system. When complete, we hope citizens and policy makers will be able to use this resource to understand Real Estate Tax issues and why they matter. Most important, property owners will be able to use a special Real Estate Tax calculator to see how the reassessment and other polices will affect their properties.
Philadelphia Real Estate Taxation Background...
ALL UNDERLINED TERMS ARE DEFINED IN A GLOSSARY BELOW
The Real Estate Tax generates nearly $400 million for the city (about 18% of city tax revenues) and more than $530 million for the school district (about 78% of district tax revenues).
The Real Estate Tax Rate (8.264% today) is set by City Council and the Mayor and applied to the value of properties, but the city Board of Revision of Taxes (BRT) “assesses” properties each year to determine the “market value” for each property — what the property would sell for on the open market.
But taxes are actually based on an “assessed value” that is set at 32% of market value (market value x .32 = assessed value); Real Estate Tax bills are calculated by applying the tax rate to the assessed value (assessed value x 8.264% = tax bill).
To correct well-documented fairness issues associated with real estate taxation in Philadelphia, the BRT has adopted the recommendation of the Tax Reform Commission to reassess every city property. When complete, this process will fundamentally reset the values for all city properties, improving overall fairness and accuracy and eliminating fractional assessment so properties are taxed at their true, full value. As a result, the value for every city property will change and city lawmakers will have to weigh various policy options proposed to complement the reassessment and avoid undesirable unintended consequences that could result from the reassessment changes.
The Problem: Current Philadelphia Real Estate Taxation Practices Are...
Unfair — Inaccurate assessment creates a situation where similar properties do not have similar tax bills, and where not all properties pay taxes based on the same percentage of property sale price.
- The average city home is assessed at only approximately 70 percent of its potential sale value.
- Many (often higher-price properties) are assessed lower while many (often lower-price properties) are assessed higher than potential resale value — many property owners are not paying their fair share, while others pay too much.
- The Tax Reform Commission concluded: Philadelphia’s inaccurate and regressive assessments violate "standards of vertical and horizontal equity."
Unpredictable — Assessment inaccuracies distort the real estate market and increase the volatility of Real Estate Tax revenue streams.
- Tax bills that are higher or lower than they should be (because the market value for tax purposes is different from the potential sale price) affect property values, since buyers are willing to pay more for a low-tax property and less for a high-tax property.
- Homeowners and investors live with uncertainty in terms of potential future dramatic changes in tax burden that would result from changes in the system.
- Research for the Tax Reform Commission declared: Philadelphia Real Estate Taxation distorts the market in a way as to "induce greater uncertainty into expectations of future tax revenues."
Confusing — Fractional assessments and technical jargon create unnecessary confusion.
- The terms “market value” and “assessed value” sound alike, but they are very different.
- The relationship between “market value,” “assessed value,” and tax bills is often unclear to taxpayers.
- Taxes are applied to only a fraction — 32% — of market value.
- The fact that the Board of Revision of Taxes sets property values while City Council and the Mayor set tax rates further complicates the situation.
- It is a mystery to most homeowners how values for tax purposes relate to true property resale values, and how Real Estate Tax burdens are determined.
The Problem Exists Across Philadelphia
By selecting example properties across the city, Philadelphia Forward will illustrate the current unfairness in Real Estate Taxation. Most important, we will create a resource to show how the planned reassessment will affect the example properties and their owners’ tax bills, and how additional proposed policies would affect the properties and their tax bills.
Philadelphia Forward will choose homes in each council district to illustrate the problems...similar homes have different tax bills / sale prices vary from values for tax purposes
Making Change And Making Waves: “Fixing” The Problem Is Complex...
The Tax Reform Commission recommended ways to make Real Estate Taxation fair and understandable.
- Complete a full citywide reassessment to establish accurate values for all properties; eliminate fractional assessments (the distinction between “market value” and “assessed value”) so that tax burdens are simply the tax rate applied to the property value.
- Implement a Real Estate Tax relief “buffering” system to safeguard against large and unexpected spikes in real estate tax.
- And decrease the tax on structures and increase the tax on land to encourage development, discourage speculation, and reduce tax burdens for most homeowners.
Reassessment Alone Will Increase Homeowners’ Tax Bills
The city’s property assessment agency, the Board of Revision of Taxes (BRT) announced it would end fractional assessments and complete a citywide reassessment to establish accurate values for all properties in 2006 for implementation in tax year 2007. Because the BRT only determines property values — City Council and the Mayor set tax rates and establish tax policy — unless other changes are made, a BRT revaluation will dramatically increase tax bills for city property owners.
- Current tax bill for a house that is truly worth $100,000 = $1,851*
- Future tax bill for the same house = $8,264
- That is a whopping increase of $6,413 or nearly 350%
*Currently, the city’s average house equals the tax rate of 8.264% applied to an assessed value that is 32% of a market value that is about 70% of the property’s potential sale value. Without other changes to the system, the future tax bill for the same house would be the current tax rate of 8.264% applied to an accurate value of $100,000.
Applying The Current Tax Rates To Properties Assessed At Their Full Values Will Dramatically Increase Taxes For Philadelphia Homeowners
Making Fairness More Painless: Officials Have Promising Options...
We must make Real Estate Taxation more fair — maintaining the status quo is nothing short of maintaining a flawed system that forces some to pay too much while allowing others to pay too little as part of an overall system that skews the city’s real estate market. Policy options exist to make the transition to more fair system less painful:
- Reduce the tax rate to create a “revenue neutral” change
- Use a Real Estate Tax relief “buffering” system to prevent dramatic increases in a property’s tax bill.
- Tax buildings less and land more to reduce burdens for homeowners, while encouraging development and discouraging speculation (by making it expensive to hold vacant land and underutilized property)
Reduce The Tax Rate...
The proposed changes to the Real Estate Taxation system are not supposed to generate additional revenue for the city, but eliminating fractional assessment will increase the value of city properties for tax purposes. By reducing the tax RATE, City Council and the Mayor can generate the money the city currently counts on to fund service-delivery efforts, while reducing the “shock to the system” caused by the reassessment.
- Under current assumptions, decreasing the tax rate from 8.264% to 1.909% will maintain the average city home’s current tax burden.
- This “revenue-neutral” change would REDUCE tax burdens for properties that are currently over-assessed, but it would INCREASE tax burdens (in some cases substantially) for properties that are dramatically under-assessed.
A Revenue-Neutral Tax Change Will Reduce Tax Burdens For Over-Assessed Homes, Increase Tax Burdens For Under-Assessed Homes
Buffer The Assessment Changes...
Any dramatic shift in tax policy that is implemented in a single year may have dramatic effects. By using a Real Estate Tax relief program to “buffer” the increases, city officials can phase in a fair system of Real Estate without creating unreasonable spikes in tax burdens.
- Buffering the assessment changes (applying a new “revenue-neutral” tax rate to an average of the current year’s assessment plus the prior two years’ assessments) will implement a system of rolling averages so historically under-assessed properties will not have such dramatic single-year increases in tax bills.
- Owners of historically over-assessed properties would not have as dramatic single-year decreases in their tax burdens.
Buffering Assessment Changes And Applying A Revenue-Neutral Tax Rate Will “Soften The Blow” For Taxpayers Who Must Pay More
Decrease Taxes On Buildings And Increase Taxes On Land...
Because most homeowners own structures that are worth considerably more than the land upon which they sit, a decrease in taxes on buildings and an increase in taxes on land will reduce most tax burdens. By implementing Land-Value Taxation (decreasing taxes on structures while increasing taxes on land) in a way to be “revenue-neutral” for the city, officials can encourage development and discourage speculation while reducing taxes for homeowners.
- Implementing Land-Value Taxation consistent with the Tax Reform Commission’s recommendation would reduce tax burdens for 80% of Philadelphia homeowners.
- Owners of properties where land represents a significant portion of the overall property value (more than 22.5%) would see their tax burdens increase marginally.
Implementing Land-Value Taxation In A Revenue Neutral Manner Will Reduce Tax Burdens For Most City Homeowners
Combining The Policies...
Complementing the citywide reassessment required to improve Real Estate Taxation fairness with policies proposed to make the transition less shocking can create an equitable and transparent Real Estate Tax system that can be implemented in the most effective and painless manner possible.
- A tax-rate decrease to ensure that the reassessments are revenue-neutral for the city will create a reasonable basis for the changes.
- Using a Real Estate Tax relief program to “buffer” changes in assessed values will eliminate the most dramatic one-year changes in tax burden.
- Land-Value Taxation will reduce tax burdens for most homeowners as it encourages development and discourages speculation.
Implementing Positive Policies Can Establish A Fair And Understandable Real Estate Tax System In The Most Acceptable Manner
Policies To Protect Vulnerable Homeowners
To ensure that Philadelphians are never forced to sell their home to pay their Real Estate Tax bill, the city can implement additional policies to help vulnerable homeowners:
- Create Real Estate Tax deferments so vulnerable homeowners can live in their homes today and pay their tax burden in the future when they sell their homes.
- Establish a Taxpayers’ Advocate to educate about Real Estate Taxation and help residents appeal unreasonable assessments.
- Allow taxpayers to pay Real Estate Tax bills in quarterly payments so homeowners can spread payments throughout the year.
- Apply tax payments to the current year’s tax liability so delinquent taxpayers making tax payments can qualify for state assistance.
- Advocate for increased property tax relief from the Commonwealth of Pennsylvania: a state circuit-breaker property tax relief program could hold down Real Estate Tax increases for those on fixed incomes; state-funded low-income property tax relief programs could be expanded for truly needy taxpayers.
Policies To Avoid
Policy makers must beware: other policies presented to address these issues could do more harm than good.
- Do Nothing — Real Estate Taxation in Philadelphia is unfair, uncertain, and confusing. Doing nothing maintains a flawed system where some pay too much while others pay too little.
- Cap Assessment Increases or Freeze Assessments — Assessments must keep pace with changes in value or the system will become even more unfair. Rate reductions or tax deferments are better tools to help homeowners.
Assessments Must Keep Pace With Changes In Value Or The System Will Become Even More Unfair
If assessment increases are capped at 5% and two homes worth $100,000 today increase in value at different rates (one at 5% per year and one at 20% per year), after five years the owner of the first house will be paying taxes based on an assessment of 100% of potential sale value but the owner of the second will be paying taxes based on an assessment of only 51% of sale value.
Philadelphia Real Estate Taxation Glossary
Assessed Value — The property value for tax purposes (currently 32% of market value)
Assessment — The process used to determine property value for tax purposes
Board of Revision of Taxes (BRT) — The city agency that determines property values for tax purposes (but does not establish tax rates)
Caps (Assessment Increase Caps) — A limit set on the increase in property values for tax purposes
Circuit-breaker Property Tax Relief Program — An income tax reduction when Real Estate Taxes rise faster than household income
City Council — The city legislature, which, along with the Mayor, sets Real Estate Tax rates
Fractional Assessments — Property values for tax purposes set below 100% of market value
Freezes (Assessment Freezes) — Prevent an increase in property values for tax purposes
Land-Value Taxation — Taxing the value of land exclusively or at a higher rate than structures (as opposed to traditional Real Estate Taxation, which taxes land and structures equally)
Market Value — The price a property would sell for on the open market
Mayor — The city’s chief executive, who, along with the City Council, sets Real Estate Tax rates
Quarterly Payments — Payments of a portion of the total every three months (instead of a single, once-per-year total payment)
Real Estate Tax — The tax on the value of property, including land and buildings and improvements on the land, which supports city and school district spending
Real Estate Tax Bills — Invoices to property owners calculated by applying the tax rate to assessed value (assessed value x 8.264% = tax bill)
Real Estate Tax Deferments — Programs to allow homeowners to put off payment of Real Estate Taxes until a later date, often after the sale of the home
Real Estate Tax Rate — In Philadelphia, 8.264% (applied to the assessed value of properties)
Revenue Neutral — Generating no more and no less revenue or expenditure for the city budget
Standards Of Vertical And Horizontal Equity — Horizontal equity is when likes are treated alike (similar houses have similar tax bills); vertical equity is when appropriate adjustments are made to reflect differences (houses that are worth more have higher tax bills)
Tax Reform Commission — The voter-established agency that drafted a plan to make Philadelphia taxes more fair and less onerous