May 10, 1971
Page 14238
CONFERENCE ON PROPERTY TAX REFORM
HON. BENJAMIN S. ROSENTHAL OF NEW YORK IN THE HOUSE OF REPRESENTATIVES
Monday, May 10, 1971
Mr. ROSENTHAL. Mr. Speaker, on December 12, 1970, Ralph Nader and his public interest research group sponsored a conference on property tax reform.
We are all painfully aware of the rising property taxes in most jurisdictions around the country. This increasing tax burden stems, in part, from the growing demand for more and better governmental services at the local level. But it also stems from certain inequities in the way in which the property tax laws are promulgated and administered.
It is these inequities which the Nader conference examined. There has been made available to me a transcript of the speeches delivered at the conference.
I am including in the RECORD at this point, the speeches of: Ralph Nader; Senator EDMUND MUSKIE; Gov. Milton Shapp, of Pennsylvania; Mason Gaffney; and Prof. Ferdinand Schoettle:
REMARKS BY RALPH NADER BEFORE THE CONFERENCE ON PROPERTY TAX REFORM WASHINGTON, D.C., DECEMBER 12, 1970
I: INTRODUCTION
Mr. Simon, Ladies and Gentlemen. The remarks I'm going to make this morning deal with the property tax. Only, however, with the administration of the property tax and some of the more blatant outrages. Beyond the actual inequities in the property tax are issues very close to the local communities and very much related to the quality of life in the total community in terms of what its municipal services can provide its citizens. In that respect, the property tax is a system and manifestation of much deeper problems in the local communities and the local power structures.
I think it represents, perhaps more than any other economic-governmental relationship at the local level, a corruption of the political process that in recent days has been given a great degree of treatment around the country.
Of all the taxes levied by governments upon their citizens the property tax is one of the oldest, it is probably the most controversial, and it is clearly one of the most important. It has been and still is the financial lifeblood of local city and county governments. Revenues collected from the property tax have grown sevenfold since 1945 and now amount to over $33 billion a year. This represents close to 80 percent of all local revenues. City, county and some state services are financed almost entirely from the ad valorum tax. Fire protection, police protection, water and sewage services, maintenance of streets and parks are all services financed in part or in their entirety through the property tax. Of course, the local educational systems in our country are almost universally financed through levies upon property.
Despite its importance, the property tax has been subjected to a great deal of theoretical discussion over the years that transcends its administrative inequities. There is, of course, among fiscal specialists a profound difference over the validity of the tax itself and whether there is a more equitable way to exact levies from the local communities. What I'd like to speak about this morning is more the actual operation of the tax, how it is administered, rather than the basic philosophy of the overall concept of the personal and real property taxation which will be discussed by others later in the conference.
The quality of the administration of the property tax is notoriously poor. That could be considered in itself an understatement. It could be called notoriously illegal in many communities. The results are clear. Financially starved cities are losing billions of dollars a year. Taxes on residential property are increasing to a point where the average citizen can no longer afford to own a house, especially in the cities. Entire school systems are considering closing down because of the unwillingness of overburdened property owners to subject themselves to even higher taxes. Senior citizens are literally being forced out of their homes. Many of these elderly citizens are now paying taxes on their homes that are higher than the monthly payments they made to purchase them.
Land use patterns throughout the country are being disturbed and are having an adverse effect on the environment and ecology of many areas.
There are, of course, other factors that contribute to these problems. The costs of city services are increasing rapidly. But these costs are being borne disproportionately by the homeowner and small businessman because of the inequalities in the administration of the tax system. If all taxpayers were to bear their proper share of the property tax burden, taxes on residential and small business property could be decreased as much as 25 percent while increasing revenues for the local governments.
There is nothing new in saying that there are gross inequalities in the administration of the property tax. Inequality has been an issue in property taxation for over a hundred years and citizens have been calling for an end to discriminatory administration for equally as long. For example, E.R.A. Seligman in the late 1800's described a property tax that must have been much the same as the one known by most citizens today. He said–
The general property tax as actually administered is beyond all doubt one of the worst taxes known in the civilized world
It puts a premium on dishonesty and debauches the public conscience; it reduces deception to a system, and makes a science of knavery; it presses hardest on those least able to pay; it imposes double taxation on one man and grants immunity to the next. In short, the general property tax is so flagrantly inequitable, that its retention can be explained only through ignorance or inertia. It is the cause of such crying injustice that its alteration or its abolition must become the battle cry of every statesman and reformer. (Essays on Taxation, 10th Ed., 1928, p. 62).
Seligman's call to battle against inequities in the property tax has largely been ignored. The fact is that up until recently little or nothing has been done to correct inequitable administration.
Effective action to end abuses can be accomplished only if there is a clear and accurate understanding on the part of all citizens of the source and cause of inequitable administration as well as the means by which they may obtain reform. A clear understanding of these factors has been hidden by a brace of myths that have developed and which need to be replaced with facts.
It's also important, I might add, to know the mechanism by which this inequity is perpetuated; that is probably beyond the scope of the conference today. But the partial return of windfalls to large property owners in inequitable assessment is often shared proportionately with the political party machine. This has, for example, been illustrated in the Chicago area. And that's the kind of binders that corrupts the process – in a sense, it ensures its own perpetuation and does probably more to undermine the integrity of local government and county government than the procurement of government services and goods would.
There is a belief that is widely held among those who deal with property taxation that under-assessment and under-taxation applies equally to all types of property and in equal amounts. Many of these people insist that if any property is overtaxed it is commercial and industrial property. The logic of their argument is that since large industrial and commercial property is easy for the assessor to spot and since the owner is a non-voting corporate entity, there is a tendency to assess or tax them more than other property in the jurisdiction.
Not only is the belief that commercial, industrial and mineral property is overtaxed a myth, it verges on being hyperbolically ridiculous. There are a number of factors that have led to this belief, but whatever the basis for this widespread myth, it is, with perhaps a few exceptions, factually just plain wrong. Under-evaluation, under-assessment, and consequently under-taxation of large commercial, industrial and mineral property is of epidemic proportions across the entire country. Studies conducted by my staff, by interested citizens and professional organizations have documented case after case of under-taxation of these large economic interests. A few examples may be cited: in Chicago, a city not known for a lack of official abuses, nearly every major building in the city is grossly under-assessed. The twin Marina Towers, the Merchandise Mart, the John Hancock Building – all multi-million dollar structures – are under-taxed by as much as 50 percent. Ah, but the critics reply, you can't count Chicago – we all know that Cook County is the exception. Look, then, at Houston, Texas. A recent study done by law students at the University of Texas Law School revealed that commercial property was being assessed at a rate that is approximately one-half that used for residential property.
If these two cities are not sufficiently probative, then look at Allegheny County, Pennsylvania or Gary, Indiana or Anmoore, West Virginia. In each of these locations some of the industrial giants of our country devote a substantial amount of time and resources to deliberately avoid the payment of property taxes. United States Steel, for example, refuses to open its records to city or county officials in order to facilitate an accurate appraisal of their property. They even defy the law by refusing to take out building permits whenever they construct additional facilities on their property. The results of these tactics are easy to see. In Pennsylvania, one of U.S. Steel's plants is under-assessed by at least $100 million. Over a five-year period, the company added over $350 million in capital improvements, while their property tax assessment increased only $3 million.
In Gary, Indiana, U.S. Steel's taxes went down this year while the taxes for all other taxpayers increased – Gary, Indiana being one of the largest company towns in the U.S.A.
Another example is the Union Camp Company in Savannah, Georgia. Union Camp is the largest manufacturer of bags and cartons in the country. It produces 35 million paper bags that you see in supermarkets every day. Yet they have a special tax rate that is less than one-half the tax rate which other taxpayers must pay. In addition to avoiding taxes on their plant property, Union Camp held property that was assessed at $10 to $15 per acre but which they sold for over $2,000 per acre. Still another example is Union Carbide, whose plant and facilities in Anmoore, West Virginia, are assessed at 20 percent below residential property.
Under-taxation of mineral and timber property is equally as widespread. Oil properties in east and west Texas, the largest oil-producing state in the union, were shown in two recent studies, again by law students at the University OF Texas, to be under-assessed by more than 50 percent when compared to assessments on residential property. In a ten-county area in east Texas, the same study showed that over $600,000 a year in tax revenues were lost due to under-taxation of timberlands. Coal properties in Kentucky, West Virginia and other Appalachian states escape taxation almost completely. Railroads, which are now before Congress asking for special legislation to protect them from alleged over-taxation, also receive fantastic tax breaks. An example is the B. & O. Railroad in Maryland. In Baltimore city they pay $50,000 in lieu of taxes on over 640 acres of prime land. Moreover, they also receive a special tax rate on their intangible property – a reduction of 75 percent in their rate compared to that of other public utility property.
Commercial and industrial property are not the only types that receive special tax breaks. The homes and playgrounds of the wealthy who control these large economic and corporate interests also receive favorable tax treatment. A study done this summer of country clubs in the Virginia and Maryland suburbs of Washington, D.C. (which we hope to release shortly) showed that, because of special legislation and some double accounting, country clubs are under-taxed. It was determined, in fact, that the average homeowner in these areas subsidizes these clubs to the tune of $25 to $45 per member – members such as Vice President Agnew.
It is these examples and others that demonstrate a clear trend that is in no way related to the common belief – or the myth – that all property is equally under-assessed and that commercial, industrial and mineral property is overtaxed.
There are also myths about why there are inequities. The myth of commercial and industrial overtaxation is a result of even more myths about the reasons for inequitable taxation.
Myth #1: That large economic interests are overtaxed because they are easy targets for the assessor because they don't have the "vote".
Fact: This assertion demonstrates a profound naivete. Economic power and therefore political power is far more important within community power structures in determining who is to receive favorable tax treatment than the possession of one or even one hundred votes. In a political system that depends on expensive media coverage for successful campaigning, the winner is the candidate with the best source of funds very often. In Chicago, for example, to receive favorable tax treatment one must contribute to the local political machine, to the campaign of the assessor, or purchase land in certain development companies. It is the offer of campaign funds that is the quid pro quo for lower property tax assessments. Anybody who wonders what the power of the Mayor is in Chicago and what cement connects the political machine to the economic power systems of that city would do well to study this property tax administration. In a recent election the Mayor exerted fantastic efforts to re-elect the assessor against the challenger who had disclosed many of these illegalities and inequities. I'm reminded of an article in a Chicago paper which observed the scene of election eve when one of the precinct captains came rushing in with great exuberance, saying that he had come in with 360 votes to nothing in favor of the incumbent, whereupon he was rebuked by his superiors and urged to go back and get at least four votes in the negative so that they're not investigated.
Economic strength is perhaps the most important factor in achieving favorable tax treatment.
Industrial units with a national financial base are totally insensitive to the financial needs of the local communities in which they are situated. They are constantly threatening the city with: "If you raise our taxes, we will leave or move." It is simply another example of irresponsible use of corporate economic power and demonstrates a total disregard for the responsibilities of industrial citizenship. Too often, moreover, companies in company towns drain the area of tax revenues and then contribute a fraction of their windfall toward some charitable activity to further their hold on the community.
Myth #2. Another myth contributing to the under-assessment of large commercial and industrial property is the belief that it is impossible to accurately appraise industrial property. The extremely difficult job of industrial assessment is used as an excuse to justify a negotiated settlement between the local government and the particular industry.
The facts, however, are that there are generally accepted methods of industrial appraisal that, if competently used, provide defensible figures for assessment of the industrial plant. There are a large number of professional appraisers who could be retained by a community if in-house appraisal expertise is missing. The extra expenses involved in hiring an outside appraiser will be more than offset by the additional revenue received from the industrial and commercial giants.
This, incidentally, does not mean to disregard the possible risks in delegating the appraisal function to a private contractor. We found that in west Texas, for example, the Permian Basin, that the local taxing districts hired out an appraisal firm which did everything except put the stamp on the envelope containing the bill to the taxpayer. And there are additional safeguards that have to be developed if this delegation of the appraisal function is to be made to private contractors.
The appraisal of industrial property is by no means precise. There are myriad factors that must be considered. But the basics of the appraisal process are well known and there are generally accepted principles that can be applied. Appraisal of any property involves applying three methods of assessment to determine a rational fair market value from the basis of the figures arrived at from each method. The first method is the use of values from sales of the same or similar property. That's obvious. The second method is to determine the reproduction cost of the plants and then subtract depreciation. The third method is what is called the "capitalized income" approach. Under this method, the projected income from the plant is determined and discounted to present value. I might say, this is the one that is subjected to the easiest type of manipulation, particularly with the refusal of corporate management to release accurate projections.
For the purpose of appraising industrial property, the sales method is especially inadequate because of the lack of relevant sales data. The other two methods, however, can be used with a fairly high degree of exactness – of course, depending on the cooperation of the subject taxpayer.
The problem has not been with inexactness of the procedures for appraisal, but with the recalcitrant corporation which refuses to cooperate with the local taxing authority. U.S. Steel is a leading example. The corporation's management here refuses to divulge any cost information from which the assessor as an independent appraiser could determine the reproduction cost of the plant. Similarly, U.S. Steel – as well as other companies, such as Union Carbide – refuse to divulge income information in order to facilitate an appraisal by the income approach.
Myth #3. That tax shelters must be offered to industry in order to attract them. Opposition to industrial tax shelters is allegedly "anti-industrial."
The facts are that there is simply no evidence that the existence of a property tax shelter is a decisive or significant factor in the process involved in deciding where to relocate a major plant. The other factors of production, labor, entrepreneurship, capital, transportation, are all far more important to an industry in determining where to locate than property taxes are.
The existence of these shelters cause more difficulties than they can possibly be worth. This is especially true where suburban communities provide tax-sheltered greenbelts for the purpose of attracting industry out of large urban centers. At the same time, these communities restrict, through zoning laws, the living space within the communities so that the workers still live within the city. The result is an enhancement of the power of an already powerful industry. They now have the leverage – which they use – to threaten urban centers with relocation if their taxes are not lowered. In other words, suburban industrial park tax shelters tend to bring the level of taxation of industry within the entire area down to that level. It is an endless cycle enuring only to the benefit of the industry at the expense of the community and the schools.
In tiny Anmoore, West Virginia (population 960), the town council last week repealed a loophole in a local ordinance which allowed the mighty Union Carbide Corporation to pay sales taxes at one-fifth the rate paid by Anmoore's small businesses. The new influx of revenue will allow the town to pave its streets, install a sewage system for the first time, build parks and recreational facilities – in short, to escape the syndrome of bleak Appalachian poverty which Union Carbide's colonial rule has inflicted upon them. The dollar amount involved was small – a few hundred thousand dollars in the next three years – but the implications are far-reaching for other similar company situations around the country.
There is another fallacy involved in the tax shelter. It is implicit when a tax shelter is offered that the citizens of the community believe that the industry will impose less costs on the community than other property owners. But that is simply not true. No doubt, additional employment is created when a new plant is built. At the same time, the community costs for schools, roads and the like increase. Moreover, the industry poses a serious pollution threat frequently. A relevant example is Augusta, Georgia. An illegal tax shelter was offered to a plant that was involved in reprocessing paper for pulp. The plant moved to Augusta and within a short period of time ruined a new sewage system with its waste products. This was a $14 million sewage system that the citizens had just purchased and installed through their property taxes. The industry did not help pay for it – nor will it help pay for the repair because of the tax shelter.
There is no doubt that the inequities in the property tax are outrageous and that they are caused in large part by political and economic power of large economic interests. The real issue is what can be done to bring about reform of the system. Here again a number of myths have developed that act as deterrents to positive action for reform.
The first one is that many respected authorities on state and local finance claim that it is impossible to have a well administered property tax, and therefore efforts toward reform should be aimed in other directions. Now there are obviously different and alternate taxes that have to be considered here. That, however, is a different subject – not necessarily a displaced concern. We must pay attention to the existing administration of the property tax if only because it's there. And it's likely to be there for a long time – it has very deep political roots. And while there has to be consideration of other taxes – perhaps with a more progressive impact and a more direct relation to the uses to which tax revenues are put, we still have to face the problem of the administration of the local property tax.
High quality administration is, in fact, possible if certain basic reforms are instituted. Most of these reforms will require basic legislative reform in most states. The efficacy of political and economic influence can be substantially reduced if the assessment positions are taken out of the political spectrum. A majority of the assessing officials in this country today are either elected officials or are political appointees. As a result, assessing officials are frequently not qualified. They are also willing to bend to the influence of the politically and economically powerful in order to assure their continuance in office.
The assessor himself is not the only one to be blamed. He is perhaps the most underpaid of all public officials. In many states the assessor is a part-time position and salaries range as low as $1800. It is foolish to expect any sort of quality from this type of administration, but it doesn't mean that there cannot be improvement. Appointed full-time assessors who are paid salaries commensurate with their educational requirements would be a significant step toward preventing inequitable assessments. Professional assessors who are adequately paid in an office equipped with the latest in data processing equipment, would comprise significant steps towards eliminating inequalities. There are additional specific reforms that can be taken by the state legislatures and other legislative bodies that will also avoid many of the inequities in administration. These reforms have been called for as far back as 1963 by the Advisory Commission on Intergovernmental Relations and as recently as last May by a panel of 40 experts in the assessment field. Both these groups claimed that the property tax system can be made to work within reasonably acceptable cost-benefit limitations and in an equitable manner.
The second myth, of course, is the one that has indentured citizens throughout history, namely, You can't fight city hall, or, I might add, You can't fight General Motors. (There's getting to be very little difference now between city hall and General Motors, between government power and corporate power.) The old adage that the average citizen is helpless to work against entrenched political and economic power is perhaps the most frequent reason given for why definite reforms have not been adopted. By the way, the old point about You can't fight city hall is a delightful rationalization for spending millions of hours watching TV soap operas, chatting on the telephone, and playing bridge. So it has a nice correlation with human apathy and laziness.
Fact: There is concrete evidence that hard and courageous work on the part of the average citizen within a community can result in dramatic improvement. In Anmoore, West Virginia the city council, led by Mayor Buck Gladden, a $3.00 an hour laborer, voted to increase the taxes on a Union Carbide plant that had not paid its fair share of the property tax for over 20 years. That increase, which was voted last week, amounted to over 400 percent.
What Anmoore has demonstrated, and what is going on in other communities around the country, is that effective action can be taken by organized citizen efforts with the help and backing of a national organization. This conference, the Property Tax Newsletter, and technical aid and support from our Public Interest Research Group, combined with citizens who are determined and who have the courage to stand up to the frequently abusive tactics of those receiving favorable tax treatment, can achieve positive results.
Anyone working for reform within his community should, in fact, be prepared for the worst. The tactics that special economic interests will resort to are virtually unlimited. There are cases where business and personal affairs of those working towards reform have been severely damaged. In Augusta, Georgia, for example, a group of 40 citizens, including an employee of the assessor's office, began a campaign to eliminate illegal tax breaks offered under the auspices of a "Committee of 100." Within a period of a year the size of the group had been effectively whittled down to six and the employee in the assessor's office had been stripped of all official duties. That, of course correlates with an observation of mine that the speed of exit of a civil servant is directly proportional to the quality of the performance.
The group finally prevailed. Their perseverance resulted in a court action that barred the illegal activity. Yet even to achieve this small victory, the group had to go to another county to find a judge willing to hear the issue. This phenomenon is commonplace: attorneys are unwilling to represent taxpayers for fear that their reputation or financial interests within the community will be hampered; and judges are unwilling to hear the issues or offer outrageous excuses for finding against taxpayers.
Clearly it is not an easy road. There is, for example, no property taxpayer haven in the country the way there is a corporate haven in Delaware. But Anmoore, West Virginia is a shining example of what can be achieved if citizens organize. What happened in Anmoore will be happening in every city and every county in the country. It is time that the myth of corporate responsibility be exposed at the local level and that the facts of corporate irresponsibility be acknowledged. The double ethical standards that have been applied to corporations and to individuals should be remedied at once. Union Carbide, U.S. Steel, Union Camp, General Motors and all the other corporate giants, as well as the large economic interests within the communities, are citizens – presumably – and must exercise the responsibilities of citizenship that are expected of all citizens.
In conclusion, some problems cannot be solved by citizen action in only one jurisdiction. For example, the movement of industry from one state or city cannot be prevented by its citizens when another state or city offers outrageous tax shelters. Inequities in administration are so widespread that, like pollution – which is simply another manifestation of the corporate abuse of power – the problem is national as well as local.
The combined force of courageous citizens in every locality, together with efforts by national organizations and authorities, will rapidly lead to a much more equitable property tax system, with all that means for city and county services, education, small property holders, land use, the elderly and a more honest political structure.
It should not be misinterpreted that a reform of the property tax administration is necessarily going to reduce everybody's property tax at all. It will, of course, provide added revenues which will be absorbed by many desperately needed municipal services. In addition, there is, of course, a greater response on the part of people to the needs of the community if there is a lessening of the gross illegalities and inequities which breed disrespect for the whole process of property taxation.
It can be expected that this conference, with its sincere and knowledgeable participants and speakers, will launch to a new stage of action the quest for tax justice and corporate responsibility.
Thank you very much.
REMARKS BY SENATOR EDMUND S. MUSKIE BEFORE THE CONFERENCE ON PROPERTY TAX REFORM,. GEORGE WASHINGTON UNIVERSITY, Dec.12, 1970
Mr. Nader, Mr. Shapp, Ladies and Gentlemen. I'm glad to be here. We're here to talk about tax reform – property tax reform.
This conference with Ralph Nader and this assembly represents not simply the gathering of some people, but it represents, I think, the development of a program on his part to stimulate the initiation of reform in the property tax area. It's a step forward in that direction. This is an issue which, although it involves local tax policy, undoubtedly deserves a searching national inquiry.
We know these facts, for example:
Property taxes provide at least 40% of all state and local government revenues;
They are assessed by some seventy thousand local governmental units;
They generate more than $33 billion a year in government revenues.
This income-producing mechanism is second only to the federal income and Social Security taxes in importance.
It is the basic revenue source of two-thirds of our cities' expenditures.
It finances 54% of local government cost for education; 41% of their costs for health care and 30% of their costs for welfare.
It is the basic tax we levy on our entire housing stock in this country.
Its very magnitude would be reason enough for a periodic examination of this tax and its reliability.
But the wide variations throughout the country in terms of taxable wealth, administrative performance; fiscal requirements have all contributed up to now to make property taxes a matter of local, rather than national, interest.
That attitude is no longer satisfactory. Taxpayers across the nation are beginning to ask the same fundamental questions:
Are property taxes fair? Are they equitable? Are they sound?
These questions should be answered – thoroughly, and without evasion. Congress should seek the answers, not only for the purpose of educating the public – but also for the purpose of determining how property taxes affect national programs and policies.
For example, major federal expenditures for rehabilitation of urban housing will have little impact if property tax assessments at the local level are increased to the extent that they make any new investments prohibitive. Aside from its effect on current programs, the level of property taxes is directly related to the financial aid which state and local governments are presently requesting.
In all likelihood, the 92nd Congress will be asked to expand federal grants-in-aid and to initiate a planned revenue sharing.
Are we fully prepared to do either until we understand both the limitations and the potential of the property tax, until we adequately consider the need for reforms in the property tax structure?
It has been estimated, for example, that the inequalities in local property tax assessments are resulting in a shortage of 20 to 50% of potential property tax revenues. Mr. Nader has estimated that a fair assessment of business properties in America would increase state and local tax revenues by at least $6 billion a year. Monies then could be used to improve health care facilities, a greater housing supply; better elementary and secondary schools, more effective law enforcement, and cleaner air and water. This is not to suggest that property taxes are the only answer to the financial survival of our states and cities, or that they should not be lowered where possible. But it is to suggest that property taxes could substantially ease the financial burden of many localities if they were simply levied in an equitable manner on all property owners.
The question of equality would be, I think, central to this inquiry. Equities between business property and residential property; between houses and apartment units; between land which is improved and land which is unimproved. Is it wise, for example, to offer a low property tax assessment as an inducement to new industry or business concern? After all, the introduction of a new industry would necessarily place a new strain on available services of water and sewage, for capacities of schools – services which localities must find money to support. If they cannot find the money at home, by raising taxes of everyone else in town, then local governments will seek relief from state and federal government. And as a result, many taxpayers have already been placed in the curious position of unwittingly subsidizing a new business in another town.
With unequal assessments across the country, residential housing, the utilities, and small businessmen end up paying the lion's share of the bill on community services.
The case of Anmoore, West Virginia is very instructive. Here, two members of Mr. Nader's Task Force on Union Carbide succeeded in convincing the town to tax the plant on its whole assessed value with an expected revenue gain of about $380,000 by 1973. Moreover, once a property tax inducement is offered and accepted, it is likely to become institutionalized, as it did in Anmoore, West Virginia and has happened in so many small towns in my own region of northern New England. It continues to be a drain on public resources for private advantage.
Are there, in fact, any rational alternatives to this haphazard method of allocating our resources?
If so, should Congress help bring them to light?
We must also ask whether it is fair that our Federal tax laws which permit homeowners to deduct property tax payments from their income provide no relief at all to apartment dwellers, whose rent is increased by their landlords as a result of those same property taxes?
More than 3.5 million Americans – many of them elderly, many of them sick – live in apartments where taxes account for 20% or more of their rent.
Should they bear a special burden of paying for schools and for welfare?
Do many of them, in fact, need increased Social Security benefits because of rising property taxes?
There is still another more basic question: Whether any property taxes should be levied against buildings and improvements or whether they should be levied completely, or primarily, on land value itself.
The argument has been made:
That it is socially undesirable for the land speculator to pay substantially less property taxes than the person who builds improvements on his land.
That cities are decaying precisely because the property tax structure discourages modernization and rehabilitation and replacement of existing buildings.
That absence of sensible land use planning is due in large measure to property tax structures which stimulate land speculation at the expense of coordinated land development.
What is wrong is the all too familiar pattern of irregular growth, disorderly expansion, scattered development of subdivisions, shopping areas and industrial centers often far removed from the center of urban activity and equally far removed from needed municipal services such as water, transportation and other utilities.
Americans have borne the final cost incurred through traveling longer distances to work and to shop and higher costs for gasoline and over clogged roads – in constant need of being widened – to accommodate yet the next wave of suburbanites.
Their water systems, often so small as to be virtually uneconomic to operate and then at rates for services which are far out of proportion to their needs. They've experienced and they continue to experience the inconvenience of gas and electric utilities expansions at substantially higher costs.
On the other hand, would a land tax alone have the effect of promoting the kind of vertical development, of high density living, which is the most undesirable alternative in terms of our environment?
These are fundamental questions that involve not only the local communities which create this property tax, but also the Congress. So the Congress has an undeniable role to play in resolving these arguments, and we must not avoid asking the hard questions.
Do property taxes necessarily have to control a higher fraction of the income of poor families than of families who are not poor?
Must certain industries such as railroads, other mass transit systems, be placed at a price disadvantage because their competition has significantly less property tax to pay?
Can we begin to design methods of uniform property tax assessments which are more real than imaginary?
Are there more sensible ways for local governments to levy taxes by joining together on a regional basis?
If these questions seem complicated it is only because they are. The answers will be neither easy nor quick. Those of us in the Congress shall need your experience, your knowledge, and your insistence that we begin the task.
It has been written that:
"If any tax could be eliminated by adverse criticism, the general property tax should have been eliminated long ago . . .”
This, of course, can be said of any tax, I suppose, in a very real sense. If I may summarize what I've been trying to say, let me put it this way.
We are in the midst of a move into a society which increasingly will be populated heavily and more complex, more industrialized. We are concerned about centralization, government responsibility, and increasingly it is necessary to formulae solutions to the problems which must cross over local jurisdictional lines. Is there a middle: I've been convinced after several years of study in the intergovernmental field, that every live urban area in this country has within its borders the resources to deal with the problems of the people within those borders. The real question is the ability of those regions to apply those resources.
What we're talking about this morning, although the subject is property tax reform, is really not just property tax reform. Because in order to adjust the property tax to the realities of the America of today or tomorrow, we must also get involved. in the structure of our public and non-public institutions.
That's an enormous task. Acquiring a kind of understanding of the total structure we have never fully developed in this country. It involves a focusing of the public spotlight on the real friction points which generate the conflict among our people and then finding the wisdom, the organizational change, which will make it possible for us to change the structure and thus, its resolution. We have in this country as the focus of our Gross National Product and other evidence of the extent of our resources, a great impact, greatest tenacity for dealing effectively with the problems of our people than has ever been assembled heretofore in a single nation.. Yet we have some of the most grievous problems of injustice to our own people that any nation has ever faced before. So what we must do is to close the gap between potential, promise and reality.
I think that Ralph Nader, to a greater extent than anyone else I know, has opened the property tax problem as a significant key to the door in that future. So I compliment him upon undertaking this effort, stimulating and prodding it in the only way that Ralph Nader can. I know, because he's prodded me into the area of property tax reform and I'm sure he's going to prod me into others in the future, so I'm glad to be here this morning to participate in this discussion.
REMARKS BY HONORABLE MILTON T. SHAPP, GOVERNOR OF PENNSYLVANIA BEFORE THE CONFERENCE ON PROPERTY TAX REFORM, GEORGE WASHINGTON UNIVERSITY, DECEMBER 12, 1970
Mr. Nader, It is a pleasure to be here with you this morning to talk on the problems of taxation. I am always introduced these days as Governor-Elect Shapp: the newspapers seem to be full of Governor-Elect Shapp. I never realized the impact this would have on the young mind until a few days ago when a woman came up to me and told me that her five year old daughter had come to her and said: "What kind of first name is "Elect"?
Ralph, I was also wondering about the size of this audience. I understand the only reason you are able to obtain a large place like this for the Conference and have it free of charge is that you are using a tax-exempt building.
Property tax valuation, of course, is quite an art. That is spelled with a capital "A" and a small "a". It was once described as valuation not on the basis of what you own but who you know. As Mr. Nader said a few moments ago, politically, it is Who you own and not What you own.
I am afraid this is a basic problem, this whole reliance on the property tax as a major part of the income of our nation. As many of you know, I was elected Governor of Pennsylvania on November 3rd. That election automatically made me one of the nation's most concerned citizens in the area of taxes.
In the past six weeks since I've been elected, it has become more and more clear to me that my state faces perhaps the most critical fiscal crisis of any State in the nation. Of course, during the campaign I had sufficient information available to me to indicate that Pennsylvania was headed into the red ink during the current fiscal year to the tune of several hundred million dollars.
But today I feel much like President Kennedy felt after he took office. You will recall he said then that he was shocked to find out that all the charges he made about his opposition during the campaign were actually true. In my case, the facts are even more true than I thought they were.
This is a reversal of the usual political process. Ordinarily, candidates are supposed to exaggerate the problem of the opposition and then have an easier time of it when they, as victors, take office.
All during the campaign I thought that Pennsylvania was only $300 million in debt for the current fiscal year. But now it has become apparent that the actual figure may go above the half -billion mark. If you add in the projected budget for the next fiscal year, Pennsylvania must find more than 1.2 billion dollars – perhaps as much as 1.5 billion dollars – in the next 18 months just to stand still. I intend to streamline the operation of the government in Pennsylvania to cut costs, but it is obvious to everybody that unless we are to slash vital services, the huge deficit we face can be overcome only by additional state taxes or by the federal government assuming a greater share of the load, either through federal tax sharing programs or by the assumption of total welfare load or by other means.
Of course, to add to our crisis, Pennsylvania, like most states, has a constitutional requirement of a balanced budget for each fiscal year. Therefore, we must find the funds to balance the budget for this year's operations prior to June 30, 1971. I might add, in this connection, that after the discussion several Governors had at the White House yesterday with the President it is clear that the Federal government is the only one which has the power to resort to deficit spending in order to resolve these problems. The States and cities cannot do so. And this is one reason why the Federal Government must resort to tax-sharing and begin to assume the cost of welfare programs for the cities and states.
Just thinking about all these problems makes me realize what my wife meant during the campaign when she looked up to me and said: "Milt, what happens if we win?"
I don't want to dig into these various problems in any depth today. I just want to mention them so that you can get a picture of the gravity of this whole fiscal situation in Pennsylvania and the nation. For, while we deliberate in Pennsylvania on the state taxes, the National League of cities met this past week in Atlanta. One report from that conference describes the problems facing the cities as the worst since the depression.
The cities and the states all around the nation face revenue shortages. For example, Newark, New Jersey is in a tight squeeze, described by both the Mayor of the city and the Governor of the state, and the problems of her urban areas are going to pull the vise even tighter. The financial affairs of New York City and New York State are desperate and under existing conditions, Rockefeller may have to dip into his personal funds to rescue his state. Even the smaller states are faced with the need to hike taxes upon taxes.
To put the national picture into clear focus, all cities and states must either slash services to the people or raise taxes at a time when we are experiencing a citizens tax rebellion and a citizens demand for an increase in services to be supplied by government.
Make no mistake about the tax rebellion – rebellion it is, but I think that it is faulty reasoning to say that our citizens are merely rebelling against the idea of taxes. Obviously, with a few exceptions, they are not rebelling against the services the taxes provide because no one really wants to close down schools, or hospitals, or stop building highways, or public transit facilities, or to make the poor and aged starve. Everybody wants to clean up our air and water. People are rebelling against the waste of tax dollars due to politics and inefficiency in government and people are rebelling against the idea that somewhere somebody else is not paying his fair share of taxes and that the rest of the community has to pick up his share of the tax burden.
On other occasions, on other platforms, I shall speak about the necessity for, and means of cutting costs of government. Today, my subject is taxes.
Most citizens are convinced that tax inequities exist, even though they do not have proof. But you people today know that such inequities do exist, and in many cases you have been and will be presented proof that such special breaks, incentives and advantages are enjoyed by some to the detriment of others.
Essentially, property taxation, although a necessity, is a bad tax in our present system. It is an outmoded tax, but I don't see any way it can be avoided in the foreseeable future even though it is also recognized to be a regressive tax. Certainly, as we draw further and further away from the old land-based economy which existed when our country was founded, the idea of a property tax as the primary method of financing education and municipal services makes less and less sense, but all our communities and school systems are locked into it. Nonetheless, in the long run, if we are to resolve our problems, the idea of the property tax as a principal tax will become as outmoded as the gold standard – and for the same reason.
When our community was founded, there was an unlimited supply of land and there was a plentiful supply of gold. The only limitation of their usage as the coin of the realm was their development or mining. Today, however, the supply of gold cannot keep pace with the need for coin, so we exist on a paper currency worldwide. The price of gold is controlled artificially. So it will soon be with the price of land when the United States runs out of develop-able land. Then, real estate value as a taxable commodity will diminish.
We can see this happening already in Pennsylvania. A recent study by the Pennsylvania Economy League shows that the growth in market value of land in the Commonwealth of Pennsylvania is being far outstripped by the growth in per capita income. Between 1948 and 1968, the market value of Pennsylvania's taxable real estate increased 93 per cent. But the value of real estate per person increased only 69 percent and, more importantly, the value of the state's real estate per dollar of personal income declined by 29 percent. In other words, the personal income of the state's residents has increased at such a rapid rate that the value of the Commonwealth's real estate has no relationship to it.
The Pennsylvania Economy League concluded, then, that real estate is becoming a less valid measure of trends of total wealth. Sooner or later, we must face reality. If we are to have a system of taxation that is fair and also enables to finance the needs of our citizens, it is wealth that should be taxed. This is simply another aspect of placing heavy reliance upon property taxation. Taxing property is taxation without relationship. Our forefathers ignited a revolution over the issue of taxation without representation.
One of the flames under the current kettle of rebellion is the fact that the value of real estate has no bearing – no relationship – on, for instance the cost of educating a school child. There is no relationship between the value of a gas station located across the street from William Penn High School in Harrisburg, and the cost of educating a pupil there. There is no relationship whatsoever between the value of the home of a 69 year old retiree living on social security and a small pension in the Strawberry Mansion section of Philadelphia and the cost of educating a school child in that economically-depressed section of the city.
For the senior citizen, particularly, and widows and other persons on fixed incomes, the rising burden of property taxes which can and does force many out of the ownership of their homes is an inequity. It becomes especially inequitous when they believe – and rightly so – that somebody somewhere else in their city is getting a big break on his real estate tax bill through a low assessment of value. It becomes inequitous when they believe – and rightly so – that special tax breaks have been written into the law for railroads and pipeline companies and other public utilities. We have tax breaks for industry, particularly for railroads.
It becomes especially inequitous in a city like Harrisburg where 30 per cent of the land and buildings are tax exempt because they are owned by the state. The existence of these buildings. The cost of providing police and fire protection, highways, and other services for the people. The traffic generated by people working in Harrisburg increases city taxes – but the state of Pennsylvania makes no effort to help out the city in these costs.
It becomes especially inequitous in a Borough like State College in Centre County, where some 60 per cent of the real estate is tax exempt because it is occupied by an institution of higher learning which – like any other industry – forces increases in the need for municipal services.
And there are other inequities less obvious but equally noted by taxpayers. One is the hodge-podge methods used to value real estate. In Pennsylvania as in most states, real estate tax rates are based on a percentage of the market value of a piece of property. But the percentage varies wildly across the state – from a low of 20 per cent in rural Elk County to 69 per cent of market value in Philadelphia, the state's largest county.
In fact, a recent court decision in Washington County, Pennsylvania, noted that property there was assessed at anywhere between 1 per cent and 150 per cent of market value. It has been loudly rumored for years that in many Pennsylvania counties the assessed value of property varies depending upon whether its owner is registered as a "D" or "R" and that this situation is so partisan in nature that the high or low valuation for "R's" and "D's" varies from county to county depending upon which party is strongly in the saddle.
The question of assessments in Pennsylvania, and I would guess it is similar in most other states, is left up to elected assessors or political appointees. In either case, the door is open for wheeling and dealing and politics. As long as the property tax forms a major base for financing our governments, there is obviously need for (1.) professional assessment, and (2.) a uniform base for assessment.
It was proposed, and wisely so, during the recently ended session of Pennsylvania's General Assembly, that the assessment of land be made uniform statewide and that both professional assessment and the uniform base be adopted. The legislation, proposed by a special committee of the State House of Representatives called for assessment at 100 per cent of market value – to be updated regularly. This last reform would have a double benefit; it would make it easy for the homeowner to determine if his property were being assessed fairly, and it would cut down on costs of assessment by cutting down appeals.
There would be another savings too. It costs the state more than a half million dollars annually merely to operate a tax equalization board whose only job is to equalize the various rates of assessment and rates of taxation among the 67 counties and 51 cities into a formula to provide a comparable base on which to compute the state aid to local school districts.
The House Committee made some other valid proposals for reform as has the Pennsylvania Economy League. The Committee suggests that the owners of tax exempt property such as school and lodges and fraternal organizations be required to pay a public safety charge – a pro rated share of the municipalities fire and police costs. The precedent is already established in Pennsylvania in the form of a requirement that non-profit institutions pay their own pro rated shares of the cost of sewer and water facilities.
The Committee also suggests that the state be required to make payments to municipalities in lieu of taxes to help alleviate the burdens their facilities place on communities like the State Capitol City. In addition, I support the proposals for real estate exemptions for senior citizens living on fixed incomes to alleviate one form of injustice of the property tax as a measure of wealth.
None of these proposals, however, attack the problem of the special tax breaks awarded to big business. Almost all of these tax breaks – in Pennsylvania and elsewhere – are justified on the. basis that low taxes will attract industry and create jobs. Yet, in Pennsylvania, some of these tax breaks are guaranteed by decisions of the State Supreme Court for certain industries and not others.
One such tax break is that granted to public utilities. Last year in Pennsylvania, the State finally succeeded in taxing part of the real estate owned by public utilities, but the major portion of it still goes exempted as does all of the operating land and facilities of railroads outside Philadelphia and Pittsburgh. Pipeline companies are similarly exempted.
The defensability of these tax breaks is fast waning as the activities of public utilities become more and more akin to manufacturing and production and less aligned with their original franchises as public service companies. Let me explain. In Pennsylvania we tax coal mines as real estate. Ten and twenty years ago, the product of these mines was hauled cross the country hundreds and thousands of miles to coal-fired electric generating stations, where the electricity was manufactured for local needs. Today, new generating stations are located at the very mouth of the coal mines and the electricity is manufactured there and shipped via wire across the nation and even into Canada. Electrical generators, through the nation's system of interconnections between utility companies, no longer service localities, but are part of a regional and perhaps soon-to-be nationwide system of shipment of power-by-wire.
I am not saying that I am against the building of generating stations at the mouths of mines. Nor am I against the development of atomic power-generating plants in Pennsylvania if they can be shown to be safe and create no danger to the public. What I am saying, it that these generating plants are a form of manufacturing and, therefore, should be subject to fair taxation in the state.
If we were to follow the precept that generators manufacturing electric power are public utilities because they service a public need, then the steel mills of Pittsburgh and Johnstown are public utilities too, because they serve a public need. So we need equitable taxation of the real estate owned by public utilities – to be fair to other industries as well as to be fair to the taxpaying homeowner.
But some industries – the steel industry to name one specific type – are also protected from certain kinds of real estate taxation in Pennsylvania by court decree. This situation arises because Pennsylvania is one of only four states to exempt tangible personal property from taxation. In the case of industry, "personal property" means machinery.
But the Supreme Court of the State of Pennsylvania has gone a step further where the steel mills are concerned. The court has stated that the heavy foundations of buildings which support furnaces are exempt from taxation because they would not be needed were it not that steel was being manufactured. The courts have ruled that ore yard facilities, slag pits, blast furnace stock bins and even the roof supports to which cranes are attached, are part of the production machinery and are not part of the real estate.
Because of the specific nature of the court decisions – down to the point of naming such facilities used in steel manufacturing – other manufacturing firms do not enjoy such tax breaks. Is it any wonder overburdened citizens and even small businesses think that they are bearing someone else's tax burdens?
The answer to tax breaks for big businesses is not an easy one. Even without court decisions, there are the under-evaluations of property owned by manufacturing firms. One reason is that it is difficult to determine the fair market value of a blast furnace or a machine shop or a drop forge which has never been on the market, and probably never will be. The Special House Tax Committee I referred to had one recommendation in this area – allow tax assessors to use replacement cost as a determination of market value.
But so long as there is interstate competition for industrial development, there will be the temptation to give new plants special breaks on real estate taxes. And this practice, I believe, is detrimental to the tax system in the long run because it encourages the belief that a tax system can be inequitable in some ways as long as it serves some long range public good. I think the nation would be better served by an end to this kind of business incentive. This is why I think that we should shift emphasis and a greater bulk of our taxes should be collected at the national level and distributed locally. Only the federal government can levy a tax that will be equal and uniform on all classes of people and corporations in the nation.
I think we will see more and more of this trend as the demand grows – not for a drastic reduction in taxes and a concurrent reduction in government services – but for greater equity in taxation. It was James Madison who wrote in the Federalist papers that the inequities in the distribution of property was one of the principal causes of factionalism in history. Nothing has happened since the American colonial period to contradict President Madison's maxim. But I think we can safely add the corollary that inequities in the rates of taxation on property only adds to discord. At a time when democratic institutions everywhere are being attacked, it is necessary to strengthen them by erasing undemocratic injustices which exist in their structures in order to make them work better.
It will take a long time to change the nature of America's tax structure. We are so deeply committed to the personal property tax and so many of America's communities are so deeply locked to this form of taxation that it would create an upheaval to make drastic changes too quickly, but we should start moving in the direction that logic tells us to go. For only by developing a logical and equitable system of taxation can government continue to meet the increased demands for services from our citizens and end the growing trend toward tax rebellion.
WHAT Is PROPERTY TAX REFORM?
(By M. Mason Gaffney)
You people are so different, you remind me of the son who worried his dad by becoming a campus militant. The dad tried to pal up to the boy in the old fashioned way by talking sports. It being that season, he opened the sporting news one night and asked "Son, what do you think about the Indianapolis 500?" Son: "They're all innocent!"
As I say, you're different. You are in the most hopeful and constructive movement of our times, and I salute you. You are becoming, I hope, the answer to Norman Cousins' question "Who Speaks for Man?" While others were losing their heads you kept yours. Now the tumult and the shouting dies, you are center stage. It's your turn. You may not feel ready, but the world is suddenly quiet and listening for you.
Today the subject is property tax reform. You want to represent the unrepresented. How can property tax reform help them?
The answer is pretty obvious, and it is not property tax relief. Property is owned by people of property – the rich. Ownership of this rich tax base is concentrated in a few hands, much more so than income. The top l0 % of income receivers in the U.S. receive something like 30% of the income, and we call that concentrated. But a high share of that 30% is property income, while lower bracket income is more composed of wages. Most property income receives privileged tax treatment of various kinds, so the effective income tax rate applied to property income is much lower than that on labor earnings, and official definitions of income are so sloppy that much property income isn't even included in the data, much less taxed.
As to concentration of property, about half the people own none, they are tenants. So we begin the top 50% of families owning 100% of the property. They are not an underprivileged class, but some are more equal than others.
Among property owners I estimate the top 10% – that's 5% of all families – own around 60%. I find no overall data relevant to the property tax base, but here are some items.
The top 2.3% of farmers had 43% of the farm land as long ago as 1950. I pulled that figure from my Ph.D dissertation, which also showed that if the census measured farm land by value instead of area the concentration would not have been any less, and if you want to check me out, it's available on microfilm from the University of California Library.
Since 1950 the rate of engrossment has not slackened, so today control is even tighter. Federal subsidies lavished on these favored few in proportion to their land holdings are legendary. The effective rate of rural property tax is about 1 %.
Urban concentration is less well documented. I analyzed the assessed value of real estate on the west side of the Milwaukee C.B.D. in 1969. The top 10% have 53% of the assessed value there and more elsewhere. I feel confident that if I knew the names lurking behind the disguised ownerships the top 10% would have a good deal more.
The largest owner in the small study area is the William Plankinton Trust, at $6 million. That is the value of 1,200 slum dwelling units at $5,000 each (many in Milwaukee go for less than that).
Think about that the next time someone speaks of the poor man's stake in property tax relief.
The Schlitz Company is on the rolls for $3 million in the small study area. This omits the brewery that made Milwaukee famous; it omits the family's (their name is Ulhlein) 200 acre "farm" on the choicest residential site in the County, by the lake in posh Bayside where land goes for $20,000 an acre (200 x $20,000 equals $4 million); it omits the Polo grounds on the speculative northwest side, and who knows what else?
The larger the ownership in one area the more likely is the owner to hold land outside it, often around the country and the world.
On the East Side of Milwaukee's C.B.D., I found the top 10 % to have 60 % of the value. I ranked Milwaukee's industrial firms by assessed value and found the top 10% to have 89% – yes, 89% – of the assessed value of industrial land and buildings. In this study I also found evidence that assessment of industrial land (I do not know about buildings) is regressive, indicating the top 10% have a yet higher share of the true value of property – but that's another story. 89% is high enough. You get the point.
Taxable property is highly concentrated in the hands of a few, even in Milwaukee which is notable for diversification. Imagine what you find in Seattle, Dearborn, and Gary.
It's also interesting that these big fellows with 89% or more of the property employed only 69% of the workers. It's the small shops that hire more men in proportion to their assets. Neat time they dwell on the importance of big employers to fight unemployment you might think on that, too.
Turning to expenditures, much of the tax money raised from this progressive base is used redistributively, to pay for schools and welfare.
The property tax is the traditional .means in American law whereby the poor assert their equity as citizens in the property to which the rich hold title. It is as good a claim as the other, the one we call 'property' in fee simple. The public claim in fact is prior in law – taxes are senior to mortgages, for example. The public claim is not limited. The fee holders' right to retain what is left after taxes (land, debt service) is not a contract between him and the state, it is a matter of legislation and common law. Like eminent domain, taxation of real estate expresses the ultimate sovereignty of the state. I speak not as a revolutionary but a believer in law and order in a nation whose laws are radical enough to let the poor accomplish more than any revolution, if they only will learn how.
The property tax base is big and strong. The national levy on property now is around $35 billions. There is gnashing of teeth and rending of garments. The pain of the wealthy is loud and they never lack sympathy. And yet the market value of this tax base keeps rising, rising in the teeth of higher tax rates and higher interest rates, the latter at 8% making most tax rates (about 2%) look small. Allen Manvel estimated the value of taxable real estate in 1967 at $1.4 trillions, double the 1957 value; and to that you may add minerals, timber, water rights, and a great variety of miscellaneous forms of property of unknown but high values. The owners of nearly $2 trillions of real estate value are not a collective welfare case. They just sound that way – it's one of their special skills. That is not so funny when you look at the punitive and destructive way we treat many real welfare cases.
"Property tax relief" for the orphaned blind widow in the ivy-covered cottage is a popular theme, but that means sloughing the social obligation of property onto others – how? Sales taxes hit the poor. What we fondly call the income tax has degenerated into a payroll tax primarily, because property has learned to duck it, in a thousand clever ways. "Social security" is a slick name for another payroll tax, the most regressive one going. The corporation income tax can't touch unincorporated property and is full of loopholes that corporations can use by misallocating their resources.
Naturally property owners resist sharing with the propertyless. But the struggle of the poor in America has been fought before, and won. It is a repetitive theme in our history. Each generation of poor must fight the battle anew, must rediscover the levers of power that our system avails them. The Nation survives because the establishment has some give, and is attuned to accommodate – however grudging – some of the demands of the poor.
That requires pressure from the poor, and this we have. There are plenty of excitables ready to march, confront, agitate and demonstrate: It also requires know-how, so far not much in evidence. Pressure alone is not enough. If the poor could rout the police and loot at will they would enjoy only a one-shot gain, with nothing to loot tomorrow. But know-how! There is a permanent revolution built right into the system we already have, with the police coming down on the side of the poor.
The method is taxation, which is tempered looting according to rules that can be quite constructive and provide a permanent support for welfare, education, and many other things.
Why don't the poor know-how? It's not that no one tells them, and it's not that they never listen.
The problem is so many are telling the poor so many and complex and confusing thing they don't know whom or what to believe, and their energy is lost charging down blind alleys – following delusions. Property's spokesman ask for tax relief and the sales tax. They defend regressivity in the rhetoric of progressivity. But ev'rybody talkin' 'bout Heaven ain't gwine dere.
The defense of property is to generate negative information to clog the channels of communication. This is the problem. And you are the solution, because you are dedicated to finding and publicizing positive information – some call it truth.
Negative information on the property tax now circulating makes a long scroll. But high on the list is the refrain that it is regressive. A high powered organized well-oiled campaign has been mounted to persuade us that we can help the poor by shifting taxes off property onto the Federal Payroll Tax – usually called the income tax for PR purposes.
To make the property tax look as though it socks the poor when most property is so closely held calls for some fancy sophisms. I have in my security blanket here – this large briefcase – a list of seventeen fallacies in basic studies alleging the property tax to be regressive, and a copy is yours on request. The main argument has to be that the tax is shifted. Indeed some go so far they seem to say that big owners shift it and only widows and orphans really get stuck with it. I exaggerate, but not much.
To the extent there is any truth in the shifting thesis, and there is some, it can be stopped by reforming the property tax. That is my theme this morning.
Reform Priority No. 1 is the assessment of land. That is Step One, and as the day is too short for the next 29, I will dwell only on it. A quarter of what is wrong with the property tax can be remedied by upgrading land assessment, so it is a big Step One, sufficient alone to benefit us greatly and necessary to most other steps.
I have seven reasons why land assessment is Priority No. 1.
1. Taxing land encourages good use; taxing building doesn't.
2. Land is more under-assessed than buildings.
3. Land is a large share of real estate value.
4. Land ownership is more concentrated.
5. Regressive assessment is most-evident with respect to land.
6. Citizen involvement is most-feasible with respect to land.
7. Correct land assessment is necessary to close loopholes of the income tax.
1.TAXING BUILDINGS IS OFTEN COUNTER-PRODUCTIVE
A critic of the pork barrel once defined an engineer as a man who tells you the very best way to do something that shouldn't be done at all. The same might be said for the art of assessing buildings. My city of Milwaukee illustrates the tragedy of good assessment applied to the wrong bases. For years Tax Commissioner Thomas Byrne was one of the best: honest and true, capable and respected. And did Milwaukee then flourish? The record shows that it did little but grow older under this exemplary regime. A heavy tax on capital is not much more attractive to investors by virtue of being levied accurately.
To when youdemand higher taxes on buildings you meet a counterargument that you may stifle renewal. Newarks, Boston, and in lesser measure Milwaukee, each with real tax rates over 4%, serve as cases in point.
Now I don't advise you to cave in before every counterargument, but this one makes some sense. When buildings are taxed, the tax on a parcel of real estate depends on the use to which the owner puts it. If the tax is high enough to matter it biases owners against the heavier taxed use. It biases them against supplying new floor space and shelter and in favor of billboards, gas stations, junkyards, open storage, parking lots, baronial estates, obsolescence, speculation, and dilapidation. In general it favors old over new and ranks high among factors that retard urban renewal. It tends to restrict supply and maintain rents paid by the poor, thus shifting some tax to the poor and putting what regressive element there may be in the property tax.
Taxing buildings raises the spectre of interurban competition and puts a ceiling on feasible property tax rates, limiting the revenues it can raise. Capital has loose feet. Land, on the other hand, has only square feet; you can tax the very all out of land and not one square foot will get up and walk out of town not one.
So to help the unrepresented, it makes more sense to raise land than building assessments.
2. LAND LS MORE UNDER-ASSESSED
Every study of assessment discrimination finds land to be the most underassessed class of property. The most comprehensive study is the 1967 Census of Governments, Vol. II. On p. 42 we find a summary for the whole U.S. The Census compared assessed values to sale prices of parcels of real estate sold over a period, and arranged the results by classes of property. For "all types" the assessment to sales ratio is 31%. That is a measure of fractional assessment conventionally practiced. Let's call it "parity." Any class assessed at 31% is assessed at 100% of parity; 15½ is 50 % of parity; and so on.
The lowest assessment to sales ratio is for the class called "Acreage and Farms," at 19%. That's 61% of parity. Next is "Vacant Lots" at 24%, which is 77% of parity. "Residential" is at 35%, or 113 % of parity; and "Commerce and Industry" at 36%, or 116 % of parity. So you see that interclass discrimination of a gross order is the rule nationwide.
Interclass discrimination like that is not reflected in the Census statistic assessors usually cite to evaluate their work. This statistic is the "Coefficient of Dispersion." It is a kind of average of the deviation of assessment ratios from 100% parity. Coefficients under 20% are considered passing – sort of like a. D grade in school – and under 10% pretty good. Many assessors flunk.
But those who earn high grades (low coefficients) and wave them around are not necessarily doing a good job. "The" Coefficient of Dispersion is really only "a" Coefficient of Dispersion, a partial score. It is computed from one class of property only – single family residences. An assessor can enter land at zero and still get good marks on his Coefficient.
Let's look at Maryland. It gets the best marks for a low Coefficient of Dispersion, and enjoys the highest reputation for good assessment. Yet its interclass bias is bad. On p. 44 we find that assessment parity in Maryland is 43%. "Acreage and farms" show an assessment to sales ratio of 18% – that's only 42% of parity. Vacant lots are at 29%, 67% of parity. But residential gets soaked for 117% of parity. Comparing classes directly, that means residential is assessed nearly 3 times too high compared to acreage and farms. Three times too high! That's not just one deviant; that's a systematic bias between classes. And that's not a chamber of horrors case from Arkansas, Mississippi, or Alabama. That's shining Maryland, a beacon light in the assessment jungle.
The truth is even sadder than the Census shows. Census Table 9 which I have been citing doesn't dig the worse abuses. The Census omits that class of land most under-assessed: unsubdivided acreage inside SMSAs. Its class called "Acreage and Farms" is only outside SMSAs; and "Vacant Lots" means subdivided, improved lots. But a large share of all land inside SMSAs, maybe half or more, is unsubdivided acreage. This is the stuff assessors can't see, and the Census hasn't touched it.
Let's look. at Michigan. The Census gives Michigan fair marks on interclass bias; parity is 29%; acreage and farms are at 25% – not bad by Maryland standards. But Professor Dan Fusfeld of the University of Michigan studied Michigan assessments independently in 1969. He zeroed in on the neglected class-acreage inside SMSAs. He pronounced it a "scandal" of under-assessment.
One Michigan city, Southfield, wrought a modern economic miracle by electing itself a mayor in 1962 who had acreage assessed at value. He – James Clarkson – and his assessor, Ted Gwartney, tell me that this meant multiplying previous land assessments several fold.
This jibes with my findings in Milwaukee. The Census says that parity in Wisconsin is 49%; acreage and farms are at 35%; and vacant lots at 23 % or 47% of parity. That sounds bad, and it is. But I found worse. After extended study and data collection and map analysis I estimated Milwaukee land values to be $2.3 billions. The assessor's values, when equalized, tote up to $700 millions – that's 30% of parity. You'll find the detail in a new book edited by Daniel Holland, The Assessment of Land Value, University of Wisconsin Press, 1970.
Don't think it's easy to get such facts publicized: Perry Prentice of Time, Inc. managed to get some press for the Milwaukee findings in the Nations Cities Magazine for May, 1970, and you may be interested in what happened next. The Milwaukee Journal, which feuds with the Mayor, changed its spots and rallied to his defense. It ran a front page editorial demanding an apology. Nations Cities ran a long, rambling screed from Milwaukee's Tax Commissioner. Neither would run my reply, although Nations Cities had it in galleys before Editor Pat Healy zapped it. Make of these facts what you will. "Establishment cop-out" is, I believe, the new idiom. I have spare copies of the reply here for you who like facts and figures.
Then we could open the chamber of horrors and look at Edgartown, Massachusetts, where some land was not even on the tax rolls until 1969 when they started finding it on aerial photographs; Sonoma County, California, where the state paid 62 times the assessed value for Salt Point Ranch; Jasper County, Missouri, where an assessor was forced out after using a University soils expert to help reassess farm land; Texas, where Nader's Raiders have documented systematic under-assessment of oil and timber lands; but enough! You get the point. Land is No. 1 reform priority because assessors are favoring it scandalously.
3. LAND IS A LARGE SHARE OF REAL ESTATE VALUE
Most people have no notion of how high a share of real estate value is land value. Returning to Milwaukee, the present land assessment is only 23% of the whole. My calculations triple the land figure. That does not triple the land share because it also raises the total, and I don't know by how much because some of the increase represents simply a reallocation of value from building to land while some is a net gain – the detail gets complex. But I'm sure land is over half the total, when land is rigorously assessed by comparison with current sales of adjacent land.
The District of Columbia enjoys superior assessment. Assessor John Rackham worked over land values a few years back and brought them up to 43% of the total. I suspect my approach would put them higher yet, but one new broom can only sweep so clean in a complex institutional setting.
In California, Ron Welch of the State Board of Equalization estimated land values at 43 % of real estate. That was a few years back. Ron and I have a friendly disagreement about the use of maps to infer and interpolate land values between sales data points, and if he says 43 % my methods would probably yield a higher figure. More recently Bob Gustafson, a whiz-bang young statistician who works with Ron, set the figure at $70 billions. That's as much as anyone would admit the whole U.S. was worth a few decades ago, which gives you an idea.
These figures apply only to land in an orthodox limited definition. They do not include many natural resources held by license or other exotic legal-administrative form. Reform of land assessment should include the project of getting these penumbra properties classified as taxable real estate.
For example, the California figures I cited do not include the value of hydroelectric power drops controlled by PG&E and SCE. There is no market in waterfalls, so they give up and call the value minute, which is nonsense. Big western stockmen graze their herds on our Federal land at nominal rents. These rights are worth millions, maybe billions, but they are not directly taxable.
Broadcast licensees enjoy virtual tenure of a non-depreciable frequency band – tax free. And so on. Get these assets in the property tax base and the widow in her ivied cottage could truly find tax relief.
4. LAND OWNERSHIP IS MORE CONCENTRATED
Reforming land assessment is Priority No. 1 because the rich are heavy on land relative to buildings.
Wednesday night I tuned in the Nader Report and heard about the under-assessment of Union Camp Corp. in Savannah. I was glad to hear them mention UCC's Savannah land holdings. They might also have mentioned 1,600,000 acres of other land UCC owns in the southeastern states: This is mostly just timberland, but several new interchanges are on UCC land. A recent inventory by UCC disclosed 40,000 acres they held worth more than $400 per acre. 40,000 x $400 comes to $16 millions, and that is much less than the total value of this fraction of their land.
Continental Can, another Savannah firm, has 1,300,000 acres of land in 7 southeastern states.
It was not by chance that the Savannah Raiders stumbled. on landowning corporations. The. corporate form of organization originated as a landholding device, and it still is – that above all. For a collection of information on this I again refer you to my chapter in Dan Holland's book The Assessment of Land Value.
There is a tendency for larger corporations to go heavier on land: Ranking corporations by value of assets, 6 of the top 11 are mineral-based: U.S. Steel and 5 oil companies. And it's not just minerals. There are 324,000 gas stations in the U.S., mostly in cities on hot corners, the land toting up to $16 billions or more as an educated guess. Professor David Martin of Indiana University has shown that larger mineral corporations tend to hold more land reserves in relation to output.
Turning to residential, the share of land in residential real estate value rises steadily with total value. If you doubt it, check me in the Kaiser Commission Report, Technical Studies, Vol. II, p. 351. Or see the study by Professor Harold Brodsky of the University of Maryland on the District of Columbia. He ranked Washington Census Tracts by median income and found the land share in real estate to rise with income. His method was multiple regression analysis, but all you really have to do is tour Foxhall Drive and use your eyes.
At the bottom of the heap, 23%v of the families in Milwaukee cover 3% of the residential area. These are the slums, where you pay a base price for a roof over your head regardless of the neighborhood. The poor use little land area per person, and the land is cheap because of the neighborhood. Several studies show that the poor think shelter while the rich think neighborhood – that is, land value. And the super-rich? 1,000 acres of front yard is nothing in the upper crust, and several estates scattered around the jet age world. They have lain field to field until there be no place that they may be alone in the midst of the land, in the words of Isaiah, a prophet who foretold more than Christmas day.
Turning to commerce, I've told you I ranked the holdings of the Milwaukee C.B.D. by value. Then I figured the share of land in each decile – that is 10% of the holdings. The share rises with size of holding. The trend is less steady than I would like, but I think that is because of the small numbers and some technical data problems I'll be glad to discuss with interested people.
As to industry, I ran a study of 626 industrial firms in Milwaukee. Here my data were better – I had a way of estimating market value of land from my map, rather than relying on assessed values. For the top 10% the land share is 35%; and they reported much additional land held for expansion.
For the smallest 10% the land share is very low – under 5%. You must understand that these smallest industrial firms are often little more than old garages converted to tool and die shops.
So I have the data to say that the land share rises with value of real-estate holdings. Theory also predicts this, but we can skip that. Raising land assessments therefore will make the property tax bear heavier on larger owners than it does now, and be more progressive.
5. REGRESSIVE ASSESSMENT OF LAND
It is the custom to assess large industrial tracts at less per acre simply because they are larger. Assessors defend this on the grounds that large tracts sell for less per acre. You'd think no one ever heard of subdivision. Yet at the same time, the City of Milwaukee land bank is stockpiling large industrial tracts as bait for giant industries that allegedly put a premium on large, unsubdivided tracts. Fascinating !
These attitudes obviously lead to regressive assessment of land. I never dreamed how far this went, however, until I ran my study of the 626 industrial firms. Since I had my own estimate of market value of land to compare with assessed values, I could figure assessment to market value ratios for each firm and then compare the treatment given the large and the small. The findings bowled me over. The top 10% had their land assessed at 20 % of parity; the bottom 10 % had their land assessed at 200% of parity – 10 times too high compared to the biggest firms.
I cannot believe it's really that bad. Probably there is some compensatory underassessment of the buildings of the small firms. But I have. no way of checking that. All I know for sure is that the assessment of industrial land in Milwaukee is regressive beyond the wildest accusation I ever heard.
A key factor in this pattern is the bias against subdivision. The smaller the parcel, the higher unit value the assessor gives it. That is no secret – assessors actually rationalize and defend the practice. Another angle is that raw acreage is left at farm valuation until subdivided. Then they raise the value – not just by the cost of subdivision but by all the pure unearned increment that has accrued over 30 years. So the big owner – no matter whether you call him a farmer, speculator, investor, or orphan – the big owner gets the low assessment, and the 50 small fellows he sells to get high ones. That is not just an industrial pattern, it is universal. The result is regressive land assessment.
Since most residential land is subdivided and most industrial land is not, this is also a bias against homeowners relative to industry.
I know of no comparable pattern leading to regressive building assessment. Land assessment is reform priority No. 1 because that's where assessment is demonstrably regressive and reform is demonstrably easy: use a map and apply standard unit values regardless of parcel size.
6. CITIZENS INVOLVEMENT
It is more feasible for average citizens to check on land than building assessments. Anyone can read a map, and anyone can use known values to estimate unknown values nearby. That's how I, an amateur, could estimate industrial land values. I inferred them from sales of all land round about. God did not label His product "industrial," or "residential." Land is versatile, and all uses compete for it. So residential land values, which everyone knows, tell a lot about industrial land values. House values on the other hand tell little about overhead cranes, warehouses, pulp mills, and breweries.
The assessor who wants citizens to get involved can publish city land value maps. It doesn't cost that much, and it's been done before. Milwaukee did it in the early thirties, and I have a collection of land value maps from Budapest, Copenhagen, Chicago, Vancouver, Sydney, etc. They make good conversation pieces, along with aerial photographs.
Assessors really don't know much about valuing big industrial complexes, and they say as much. How could they? – the stuff never sells. There's no objective reference point. How can the citizen inquire intelligently into a subjective judgment? With land there is a foolproof test of good assessment. Theory and common sense tell us that you demolish a building to salvage the land underneath. That means the bare land is worth more than the land with old building together; and this means the old building has no value. In fact it has a minus value – the cost of demolition.
So to test the assessor, check on the eve of demolition. The land share should be 100% or, more – the building worth zilch. It is that simple. Most assessors flunk cold on this one, which gives the timid inquiring citizen the confidence he needs to ask more questions – pretty soon he's an expert!
In Milwaukee I checked 2500 demolitions and the assessor was generally alloting half or more of the value to the old junkers, less than half to the land. That gives you an idea of what to expect.
I hasten to add you may generally expect friendly treatment from assessors, even when you're critical. They are pleasant human beings – how else could they survive in that job? They take a lot of flack from the ignorant and neurotic, so give them a chance to discover you're different. Then you'll get through, unless they're crooked, but I've never met that. The problems are philosophical, not motivational.
7. LAND AND THE INCOME TAX
Last, land assessment is Priority No. 1 to close a huge loophole in the income. tax. You probably know that landlords can depreciate buildings but not land to reduce their taxable income. When they buy an old building they can depreciate it all over again – outrageous, but true. They can depreciate their cost – what they paid – less the value allotted to land. They then allott as little to land as possible. Now what happens if they're audited and challenged? They cite their friendly local assessor's land valuation, that's what. The income tax instructions invite them to – that is virtually conclusive. The result: they depreciate land, not just once but several times. They depreciate it even though it is actually rising. They sell out and pay only capital gains rates on the book profit. They sell for a higher price because the buyer can depreciate the land again – and sell to repeat the cycle again, again and gain. This tax shelter depends entirely on understating land value.
So your friendly assessor is under great pressure from local influentials to underassess land, even if that means overassessing buildings, so they can pay less income tax so you and I may have more withheld from our paychecks to cover their share. There's more, but that's enough. If we want to make property a taxpayer instead of a tax shelter, we have to reform land assessment.
In conclusion, there are seven reasons why reform of land assessment is Priority No. 1:
1. Taxing land encourages good use; taxing buildings doesn't.
2. Land is more underassessed than buildings.
3. Land is a large share of real estate value.
4. Land ownership is more concentrated.
5. Regressive assessment is most evident with respect to land.
6. Citizen involvement is most feasible with respect to land.
7. Correct land assessment is necessary to close loopholes of the income tax.
Let's get on with it.
REMARKS BY PERRY I. PRENTICE BEFORE THE CONFERENCE ON PROPERTY TAX REFORM, WASHINGTON, D.C., DECEMBER 12, 1970
I don't know anything that could be more important to the cause of property tax reform than getting Mr. Nader to turn his people loose on the subject. I've been working on this problem for at least ten years and I'm already learning things from Mr. Nader, although I would not object that Mr. Nader still has things he's got to learn from me before he gets through.
Now, the most important event in the history of the United States, of the history of America, is the Columbus discovery. But the most interesting thing about Columbus discovering America is that he died without having any idea he discovered it. He thought that he found India, and he thought the principal importance of what he found was that it would be cheaper to get spices to Europe because they could bring it home from the west instead of bringing it home around Africa
Actually the discovery of America turned out to be a great deal more important than that.
The single most important event in the history of the United States probably was that in 1607 some white men came to live here. Once again, the white men who came here had no idea what they had found; and the first afternoon they got off the boat they all rushed out into the James River and started panning the James River for gold. And when they didn't find any gold, why a lot of them began thinking they might as well go back to England because there was no gold there. Between you and me and the lamp post, the United States was much more important than any amount of gold that they could have found in the James River. I don't think they have found any there yet.
Now I want to say something nice. I've just come from the most interesting session where your local groups were exchanging information on their local problems. This was fascinating, because all of a sudden I think a lot of your local groups were finding out that somebody else was working on the same problems and finding just about the same kind of scandal that you've been finding in your operation. Misery loves company.
I think all of you will be able to operate more effectively at the local level because you've found out that other people are working on the same problems and they're going to be developing answers to it.
What I want to tell you, though, about this assessment scandal is that the most important reason for correcting what's wrong with assessments is that you can't correct what's wrong with the property tax itself until you correct what's wrong with assessments. What can you do to correct the property tax when this man is assessed at three percent of the value of his property and this man is assessed at 80% of the value of his property?
Property tax reform has to start with providing a sensible base from which you can start property tax reform. But the principal importance of assessment reform is that once you have good assessments, then you can go after what is fundamentally wrong with the property tax. What is fundamentally wrong with the property tax is that people fail to understand that the property tax is not one tax; the property tax combines and confuses two completely different taxes. The results of those two different taxes fused and confused in the property tax couldn't possibly be more different.
Now, the common expression is to say that property tax is a combination of tax on land and a tax on the improvement. But, more precisely, the land component is defined as the unimproved value of the land; or, in other words, the value of land in its location without the improvement. Still more precisely, this component is what land in this location would be worth if the owners of the land had never done anything, never spent anything to improve it. I want to repeat that again. It is what land in its location would be worth if the past and present owners of that location had never done anything, or spent anything to improve it. In other words, it is the tax on the value which is entirely – I'm getting too old to use an extreme, so I'll say – it's a tax on the value which is 99.44% created not by what the owner has done or spent, but by an enormous investment of other people's money and other taxpayer's money to make land in its location accessible, livable and richly salable. And let's talk about how big that investment from other people's money is.
The Regional Planning Association in New York published a breakdown a couple of years ago that showed the investment of other taxpayers' money required to make accessible the land for one more residence in the nine-county New York metropolitan area added up to $16,750. That was in 1965. The Chairman of the Regional Planning Association says that now the other taxpayers in New York have to put up more than $20,000 to make the location for one more residence in the New York metropolitan area accessible.
In southern California a research council associated with a large California university arrived at a figure only about $1,000 less than what it cost the taxpayers in New York to make the land for one more residence in Los Angeles livable and salable. Gentlemen, this does not include the private investment of other people's money that is required to make that land valuable. But just taking the other taxpayers' investment, this comes out to a subsidy for land in the New York metropolitan area of, say, $20,000 to enable the owner of that land to sell the land for, say, $8,000. A $20,000 tax subsidy put up by other taxpayers to enable the landowner to get $8,000 for his lot is one hell of subsidy.
Unless I'm very much mistaken, this is a subsidy which adds up to substantially more across the country than the farm subsidy that we hear so much about. It is my speculation that this land subsidy is costing the taxpayers more than the federal subsidles for agriculture and costing the taxpayers of this country more than the federal appropriations for foreign aid.
This, in case you're curious, is how Marshall Fields made his money – everybody thinks he made his fortune in the department stores, but this isn't true. He got the start of his money in department stores and then took to land speculation, and that's where he made his money.
Marshall Fields said, "I would not call holding land a good way of making money. I would not call holding land the best way of making money. I would call buying land the only way to make money." What he meant was that it's the only way to make money because other people and other taxpayers have to put up the money to make your land valuable before you sell the land. You are the only person who is in a position to cash in on this enormous investment of other people's money and other taxpayers' money.
Now, at this truly fascinating session of community action groups upstairs, you heard it spelled out over and over and over again how under-used land is assessed at only a very small fraction of what land that is put to good use is assessed at. One reason for this is, no doubt, skullduggery.
But the other reason for this is that assessors tend to confuse the property tax with the income tax and if land isn't being used to bring in an income, why the assessors figure that you can't collect a big tax – you know, you can't get blood out of a stone and you can't get taxes out of land that's being held off the market and not producing any revenue.
The end result of it is that the land, sure enough, is grossly undertaxed. Land is under-assessed and under-taxed almost in direct proportion to how completely it is underused. Conversely, if you start putting it to good use, then all of a sudden the taxes go up.
Now, the other half of the property tax is the tax on the improvement, which is another way of saying the other half of the property tax is a tax on what the owners have done or spent their own money to do. This is a tax on their investment. Now I'll quote from a round table that I arranged with the National League of Cities, a round table on urban finance, which says: "It should be obvious to anyone that heavy taxes on improvements will discourage, inhibit, and in many cases prevent these improvements from being made." On the other hand, the round, table said: "Heavy taxes on location values obviously cannot prevent the creation of those locations." God did that, you know, before John Smith came to America. On the contrary, heavy taxes on location values would put heavy pressure on the owners of that land to put that land to good use or sell it to somebody who would.
To the best of my knowledge and belief, heavy taxation of land is the only kind of taxation that actually results in increasing the available supply. You put heavy taxes on production and you discourage production. But you put heavy taxation on land and the land comes out of cold storage.
Please don't underestimate for a minute the millions of acres that are being held off the market in this country right now in anticipation of the enormous investment of other people's money and other taxpayers' money. This investment of others' money in nearby land, combined with inflation, will multiply its price. The tax structure on land, the undertaxation of land values, is such that it is not very far from standard that one can hold a million dollars' worth of land off the market for a year at a net tax cost as low as $5,000, while inflation of this investment and investment of other people's money to develop the community around it is increasing its value of $60,000, $70,000 or $80,000.
This ends up being one of the biggest reasons why we have a housing shortage in this country, and one of the biggest reasons why – to quote the chairman of Urban America – "America has failed to develop even one really good city. " I'll quote the Chairman of the Center of the Study of Democratic Institutions: "Today's property tax subsidizes and encourages almost every bad public policy possible. It subsidizes slum formation, urban decay, premature subdivision and sprawl. By undertaxation it penalizes, discourages, and prevents improvement and good land use."
You can't have good property taxation unless and until you have good assessments, but please don't overlook the fact that the goal of assessment reform is property tax reform. Without property tax reform, you're never going to meet the need for good housing in this country.
This is a good point for me to ask you the basic question: Why is it that private enterprise and the profit motive, which has given this country such an abundance of almost everything else – so much food that the government feels it has to pay farmers to raise less food, so many cars that the government can't build new roads fast enough to keep the cars moving, so much of practically everything else that just getting rid of what we throw away is creating a new multi-billion dollar problem for local government – why has private enterprise and the profit motive been unable to come anywhere near meeting our needs in housing? Let's face it – we may be a two-car society, but we have only nine housing units for every ten families that have to be housed. Every tenth family has to live in a pigpen because we haven't been able to provide enough decent housing to provide even one decent home for each family. Once again, why hasn't private enterprise, which has given us so much of everything else, been able to give us one decent city?
I think the answer to that is another $64,000 question. How can you expect private enterprise and the profit motive to give us enough housing and to give us good cities when we harness the profit motive backwards and make it more profitable to let property decay than to put it to good use?
Now, there's one thing that came up this morning that really alarms me and that was the Governor of Pennsylvania indicating that he thought that the property tax was just a no-good tax and should be abolished. I would like to tell you a story. Back in 1962, I organized a group of about 62 leaders of the housing industry and took them to Europe for three weeks to see what the housing industry in America could learn from the housing industry in Europe. There was a good deal they could have learned. For example, we are eight years late and we're only beginning to hear a terrific amount of talk about borrowing the European system of modular construction. My party could have seen that in Europe. There are a lot of things they could have seen. But they didn't learn anything. And the reason they didn't learn anything was that they were appalled by how little you get for your money when you buy housing in Europe. They just sat around for an hour and a half every evening over their cocktails patting themselves on the back on how much better value we were giving home buyers in this country than they're giving in Europe. The fundamental reason that housing in Europe is so much more expensive than housing in this country is that for all practical purposes they don't tax property in Europe. Most particularly, they don't tax land as land in Europe.
In England, for example, they have what you call a "rate". So long as you use your land for fox hunting and it doesn't produce any income, you don't pay any taxes on it. But if you put your land to good use, you pay an income tax on your land. But just so long as you use it for fox hunting or for admiring the view or for anything you like, no tax. I can't be specific about what they do in Europe. I can only tell you that I've heard a housing official in France speak and he says one of the nice things about it is that there are no property taxes at all. I can tell you that my mother-in- law in Switzerland owns what I call a one-and-a-half bedroom house (I call it that because there is one full-sized bedroom and one bedroom so small that if you get out of bed there is hardly any place to stand) – but she turned down $85,000 for that one-and-a-half bedroom house. My roommate at Yale has retired and had a house in, Switzerland, but he wanted to move and sell his house and move to an apartment.
And he asked me, "You're a rent-housing expert – what do you think I should be able to get for my house?" For once in my life I had sense enough to keep my mouth shut and said, "Well, you're more familiar with local conditions than I am." He said he was asking $150,000. My jaw dropped, because if I'd answered him I'd have said, "Oh, you might get $35,000 for it." He actually sold it for $135,000. I've got a Swiss nephew who has four acres and he tells me that he could sell his place for one million dollars. I just gasped at this. But this is what happens when you don't tax land.
I will not swear by the accuracy of the figures I'm about to give you, but last year there was a group sent over by the French government to study housing in this country and I had lunch with them. I thought I would impress them with the fact that I knew something about European housing conditions by saying, "Well, of course, your conditions are different from our conditions here. My impression is that 50% of all homes in France are public housing units built by the government." But I didn't impress them at all. They all looked at me as if I had given them a wonderful demonstration of my ignorance: I forget whether they told me that 80% of all the housing in France has to be built by the government because private enterprise can't do it, or whether the figure they gave me was 90% of all new housing in France has to be built by the government because private enterprise can't provide housing at a price that anybody can afford.
You'll find that condition all over Europe, including Sweden, where they have the screwiest system of subsidy that you ever heard of. Some construction over there has five different kinds of mortgages piled one on top of the other, each with a different amount of government subsidy for that particular level of housing. Don't kid yourself that housing is good in Sweden. You see these pictures of beautiful apartment houses out in the park and you say, "My, isn't that nice." But you go inside and then all of a sudden you find out that you have to have two children, before you can get a government priority to get a one-bedroom apartment. And this, incidentally, is one reason for the high rate of illegitimacy in Sweden, because you have to have two illegitimate children before you can get an apartment. So please don't let anybody tell you that conditions in this country would be improved if we abolished the property tax. Sure enough, what we ought to do is abolish, or almost abolish, the tax on improvements. Don't underestimate the weight of that tax.
NOTES ON THE PROPERTY TAX AND LEGAL REMEDIES
(By Prof.Ferdinand P. Schoettle, Law School, University of Minnesota, Minneapolis, Minnesota)
The following notes have been prepared for use in connection with an afternoon workshop concerning reform of the property tax. Source materials have been grouped under headings so that participants in the workshop can be spared the chore of taking notes.
I. PROBLEMS OF VALUATION
Most state statutes specify that property shall be valued for purposes of taxation at "market value", "fair market value", "true value", or use similar language.
Whatever the statutory language, value is a necessary element in any property tax assessment. The courts normally define market value as the price at which the property to be valued would be sold by an owner willing but not compelled to sell to a buyer willing but not compelled to purchase. The following materials explicate some of the difficulties presented in proving the price which would have been paid in this hypothetical sale.
1. J. C. Bonbright, "The Valuation of Real Estate for Tax Purposes," 34 Columbia L. Rev. 1397 (1934). In addition Professor Bonbright's two volume treatise, The Valuation of Property (1937), is still the most comprehensive and lucid exposition of problems of valuation.
2. Assessed value not equivalent to price received in recent sale. Bliss Hotel v. Thompson, 378 P. 2d 319 (Okla. 1962) (actual sale accepted as "substantial evidence of value"). Great Plains Supply Co. v. County of Goodhue, 268 Minn. 407,129 N.W. 2d 335 (1964).
3. The relevance of reproduction cost. Florida East Coast Railway Company, 178 S. 2d 355 (Fla. 1965) (held not to have been given undue weight). People v. Miller, 38 NE 2d 465 (N.Y. 1941) (reproduction value less depreciation as a ceiling). Joseph E. Seagram & Sons, Inc. v. Tax Commissioner, 231 N.Y. Supp. 2d 228 (1963), affirmed, 251 N.Y. Supp. 2d 460 (1964) (building which had recently been built at a cost of $36 million was assessed at $20.5 and $21 million for the years involved. The owner argued that an income approach dictated a valuation of $17.8 million).
4. Special uses. C. C. Anderson Stores Co. v. State Tax Commission, 337 (Idaho 1967) (garage adjacent to department store). People ex rel. New York Stock Exchange Bldg. v. Cantor, 223 NY Supp. 64 (1927) (court approves use of reproduction cost minus depreciation).
II. ADMINISTRATION OF THE TAX ON REAL PROPERTY
Unlike the income tax and sales tax which are self administered, the real property tax is administered by the state which places a value on the property through its assessment procedure.
Although almost all states require that property be assessed by full value, the invariant "practice" of assessors seems to have been to assess property at some figure less than fair market value.
One of the problems which arises in connection with the tax is to determine the quality of the job being performed by local assessors. Even if assessors were diligent in once valuing every property at some figure approximating fair market value, inflation, alterations in the property, changes in the neighborhood and changing patterns of demand make it likely that the fair market value once established would not remain constant. The relationship between the fair market value and the assessed value is known as the "assessment ratio" and is typically determined by dividing the assessed value by the fair market value. Thus a house which had a fair market value of $10,000 and was assessed at $4,000 would be said to have an assessment ratio of 40%.
In order to determine whether real property tax assessments are being fairly administered it is necessary to determine relative assessment ratios. For example, if a $20,000 house were valued at $6,000 and a $10,000 house at $3,000 we might find that because both houses had the same 30% assessment ratio there was no inequity in the tax system; as the relative tax burdens between the owners of the two houses remained the same. If though the $20,000 house were valued at $6,000 and the $10,000 house at $6,000 there would be an obvious inequity; the owner of the less expensive house has been unfairly over-assessed.
There are a number of studies which attempt through statistical means to present a picture of what sort of a job the assessor is doing. Typically such statistical studies use words and concepts with which the lawyer is not ordinarily familiar. Unfortunately, a fairly good grasp of these materials may be essential if the lawyer is to convince a court that administration of the real property tax system may be so bad that the court should grant extraordinary relief. Furthermore, proof of an assessment ratio is an important element of most modern cases involving the property tax.
The essential truth of the modern real property tax system is that it is being unfairly administered. Owners of inexpensive houses are paying too much tax relative to other homeowners. Furthermore, because the system is not well administered taxpayers are able to enjoy special advantages pursuant to "private" understandings with public officials. The materials which follow illustrate the current picture concerning administration of the tax on real property.
1. Baldwin Construction Co. v. Essex County Board of Taxation, 16 N.J. 329, 108 A.2d 598 (1954); Dalton Realty, Inc. v. State, 270 Minn. 1, 132 N.W.2d 394 (1965).
2. U.S., Bureau of the Census, 1967 Census of Governments, Vol. 2, Taxable Property Values (1968).
3. F. L. Bird, The General Property Tax: Findings of the 1957 Census of Governments (1960) (explains the census figures. The theoretical explanations are applicable to the 1967 Census).
4. O. Oldman and H. Aaron, "AssessmentSales Ratios Under the Boston Property Tax," 18 National Tax Jour. 36 (1965) (an excellent study of Boston).
5. U.S. Department of Commerce; State and Local Government Special Studies No. 52 Property Assessment Ratio Studies, (1969) (reviews procedures and gives a bibliography of state studies of assessment ratios).
6. A. D. Lynn, Jr. (ed.), The Property Tax and Its Administration (1969).
7. H. F. McClelland, "Property Tax Assessment" in The American Property Tax: Its History, Administration and Economic Impact (1965).
III. PROOF OF ASSESSMENT RATIOS IN COURT
One of the serious problems confronting a taxpayer attempting to show overvaluation is proof of the assessment ratio or ratios which may prevail for the relevant taxing jurisdiction. A number of options confront the litigant. One approach is for the litigant to introduce evidence he has developed for the purpose of providing the relevant assessment ratios. Proof of such ratios may entail substantial expense. Furthermore, unless care is taken the court may reject the entire procedure adopted by the litigant.
A second approach is for the taxpayer to attempt to introduce into evidence assessment ratios which have been developed by various government bodies. Most states make equalizing payments to school districts. One purpose of such payments is to help those school districts which have a lower than average tax base. As we have seen, assessed value will not ordinarily give a true picture of a school district's wealth for one does not know whether the property has been assessed at 10% or 100% of market value. Thus for purposes of distributing state equalization payments to school districts it is necessary for the state to develop an equalization ratio which will allow the state to convert assessed value to market value. For the litigating taxpayer such ratios, if accepted by the court as proof of assessment ratios, can be quite useful.
Finally, some states have provided by statute for the proof of assessment ratios.
A. Proof of assessment ratios by the taxpayer
1. Deitch Company v. Board of Property Assessment, 417 Pa. 213, 209 A.2d 397 (1965).
2. In re Brooks Building, 391 Pa. 94, 137 A.2d 273 (1958) (taxpayer held to have satisfied burden of proof by evidence of assessment ratios of 3 or 4 similar buildings.)
3. Atlantic Richfield Company v. Warren Independent School District 453 S.W. 2d 190 (Texas 1970) (it is not unusual to lose in the lower court).
4. In Re Shope, 214 Pa. Super. 315, 257 A.2d 635 (Pa. Super. 1969)
B. Introduction into evidence of equalization ratios
1. Schenley Land Company v. Board of Property Assessment 205 Pa. Super. 577, 211 A.2d 79 (Pa. Super. 1965)
2. In re Appeals of Bents 2124 Atlantic Avenue, Inc., 34 N.J. 21, 166 A.2d 763 (1961).
C. Statutes concerning assessment ratios
1. Oregon Revised Statutes, Chapter 309 (requires the assessor to make a publicly available statistical study of assessment ratios).
2. New York, Real Property Tax Law Section 720 (as amended) (provides for selection of properties by the litigants).
3. Rosett, "Inequity in the Real Property Tax of New York State and the Aggravating Effects of Litigation", 23 Nat'l Tax Jour. 66 (1970) (This volume of the National Tax Journal contains a valuable symposium on Problems of State and Local Government Finance.) .
4: Minnesota Statutes 'Section 273.11 provides as follows:
"Each assessing officer responsible for the determination of adjusted market value shall annually file with the county auditor the ratio which he has used of adjusted market value to market value of all the taxable personal and real property within the taxing district, except property which by law, custom or practice is valued by the commissioner of taxation."
IV. LEGAL ENTITLEMENT TO A PARTICULAR ASSESSMENT RATIO
Once the litigant has somehow presented the facts concerning existing assessment practices, there still remains the problem of determining to what assessment ratio taxpayers are entitled.
Suppose, for example, that assessment ratios are almost randomly distributed from 60% to 10% of fair market value. To what assessment ratio is a taxpayer entitled? Should the taxpayer be entitled to have an assessment at the mean (average), median (the middle item of a series), mode (that point about which the most assessments are clustered) or at some other point? The courts have not resolved this question. Justice Roberts opinion in Deitch Company v. Board of Property Assessment, 417- Pa. 213, 209 A. 2d 397 (1965), presents some of the possibilities. After indicating that the taxpayer was entitled to have his assessment set at the "common level" the Justice went on to say:
"Of course, the question arises as to the definition of the term "common level." Where the evidence shows that the assessors have applied a fixed ratio of assessed to market value throughout the taxing district, then that ratio would constitute the common level. However, where the evidence indicates that no such fixed ratio has been applied and that ratios vary widely in the district, the average of such ratios may be considered the "common level" . . . Furthermore, it may be that the evidence will show some percentage of assessed to market value about which the bulk of individual assessment tends to cluster, in which event such percentage might be acceptable as the common level."
Other cases are no more helpful. However, the following materials will at least provide some enlightment, if not answers.
l. Chang, "The Common Level of Assessment in Property Taxation," 23 Nat'l Tax Jour. 50 (1970)
2. In re Dulton Realty, Inc., 270 Minn. 1, 132 N.W. 2d 394 (1964)
3. The Supreme Court provides no clear guidance for making such interstitial choices:
Sunday Lake Iron Co. v. Township of Wakefield, 247 U.S. 350 (1918)
Sioux City Bridge Company v. Dakota County, 260 U.S. 441 ) 1923)
Cumberland Coal Co. v. Board of Revision of Tax Assessments, 284 U.S. 23 (1931)
Nashville, Chattanooga & St. Louis By. v. Browning, 310 U.S. 362 (1940)
Township of Hillsborough v. Cromwell, 326 U.S. 620 (1946)
V. CHOICE OF AN ACTION
The citizens group contemplating property tax reform may find that State laws concerning "standing" determine litigation strategy. If the law does not permit a taxpayer to complain about the particular assessments of others it may still be possible to bring an action seeking reform of the entire system. Such matters vary from hate to state; the statutes of some states specifically accord standing to all taxpayers, in others standing to complain about an assessment has been held to be limited to the complainant's property.
The trend of the decisions over the past decade or so, has been toward more active judicial review of the decisions of taxing authorities. In a number of cases, the courts have considered and granted petitions that assessors be compelled to perform their statutory duties. The following materials may be helpful.
1. Annotation, "Who May Complain of Underassessment or Nonasssessment of Property for Taxation," 5 A.L.R. 2d 576 (1949).
2. In the following cases taxpayers sought and were granted a remedy to compel taxing officials to improve their assessment practices. Pierce v. Green, 229 Iowa 22, 294 N.W. 237 (1940) ; Bettingale v. Assessors of Springfield, 343 Mass. 223, 178 N.E. 2d 10 (1961) ; Russman v. Luckett, 391 S.W.2d 694 (Ky. 1965).
3. New Jersey started the property tax revolution. Baldwin Construction Co. v. Essex County Board of Taxation, 16 N.J. 329, 108 A.2d 598 (1954): Switz v. Township of Middletown, 23 N.J. 580, 130 A.2d 15 (1957); Village of Ridgefield Park v. Bergen County Board of Taxation, 31 N.J. 420,. 157 A.2d 829 (1960).
4. Note, "Inequality in Property Tax Assessments: New Cures for an Old Ill," 75 Harv. L. Rev. 1374 (1962).