May 8, 1973
Page 14757
WHAT IS WRONG WITH THE PROPERTY TAX?
Mr. MUSKIE. Mr. President, last Thursday the Subcommittee on Intergovernmental Relations held hearings on a relatively little known but growing problem of property tax administration – the use of mass appraisal firms by States and local tax jurisdictions to perform reassessments.
The use of mass appraisal firms is a direct result of the shortage, in most States and localities, of qualified professional personnel to perform the assessment function. When, as a result of court orders or legislative mandates, entire counties, metropolitan areas or even States must be completely reassessed, public officials have no recourse but to turn to mass appraisal firms to do the job.
The availability of mass appraisal firms permits States to postpone the development of substantial in-house assessment capabilities, and although such firms are not in and of themselves bad, there have sometimes been conflicts of interest. One such firm in particular – Cole-Layer-Trumble of Dayton, Ohio – was a focus of our hearings last week and is the subject of an article appearing in the May 7 issue of the Nation.
In this article, the author, Peter Gruenstein, has provided a substantial accounting of the questionable activities of Cole-Layer-Trumble, the largest of all mass appraisal firms with past or present contracts in at least 20 States. The facts presented in this article argue strongly for Federal certification of mass appraisal firms – a step which I have proposed in S. 1255, the Property Tax Relief and Reform Act of 1973. I ask unanimous consent that this article, entitled "What's Wrong with the Property Tax," be inserted in the RECORD at the conclusion of my remarks.
In addition, I ask unanimous consent that testimony received during the subcommittee's hearings last week from Mr. Jonathan Rowe, of the tax reform research group, which was inadvertently omitted from yesterday’s printing, be printed in the RECORD.
There being no objection, the material was ordered to be printed in the RECORD, as follows:
WHAT'S WRONG WITH THE PROPERTY TAX
(By Peter Gruenstein)
The Supreme Court's approval in the Serrano case of the property tax as a way to finance local education means that this most maligned of revenue raisers will be with us for some time to come. While there is no doubt that the vast majority of present local property tax system are steeply regressive and grossly discriminatory, much of the criticism leveled at them has been misdirected. It is one of the "least understood subjects of public and official discussion today," says Ralph Nader. "Indications are that the property tax could be a fair, equitable and progressive tax. If the revenues currently lost through under-assessment and maladministration could be regained, the burden on small taxpayers could be much less even under existing laws."
Mason Gaffney, an economist with Resources for the Future in Washington, agrees. Gaffney believes that the property tax is potentially more progressive than the income tax, for the reason that property is more inequitably shared in the United States than is income. Almost everyone has some income, but many own no taxable property; 10 per cent of the population gets 30 per cent of the income but owns 50 to 60 per cent of the real estate. Also, a good property tax can serve to plug income tax loopholes.
In other words, the property tax (which now raises more than $40 billion a year) is reformable, although local property tax systems are usually so riddled with incompetence, inefficiency, conflict of interest and sometimes outright corruption, that it will be no easy task. In fact, if the federal income tax were administered as poorly as the property tax, we would probably have lacked the funds to fight in Vietnam.
A large part of the property tax morass stems from unprofessional or dishonest assessments which produce tremendous tax breaks for large corporations and the wealthy. For example, a study made by Texas University law students found that oil-producing properties in Hector County, Tex., were under-assessed by about 56 per cent as opposed to about 7 per cent for home owners. Union Camp, a large South Carolina corporation, sold to the state for $2,000 per acre land that was being assessed at $20 per acre. Even after the sale, adjoining Union Camp land that was not sold continued to be assessed at $20 per acre. In Appalachia, rich coal lands are being assessed at $10 per acre or less, even though they sell for $200 to $500 per acre on the open market.
One of the most disturbing trends in the assessment of property has been the rise of large national appraisal firms – companies with which municipalities contract to reassess all the real estate within their jurisdictions. By far the biggest of the fifteen or more such firms is Cole-Layer- Trumble, based in Dayton,, Ohio. In a number of cities where CLT has been hired to do reassessments, allegations of gross inefficiency, discrimination and conflicts of interest have been leveled at the firm. Its corporate history and recent troubles provide a fascinating glimpse into the property tax mess.
In April 1970, American Appraisal Co. (AAC) bought out CLT and formed a holding company called American Appraisal Associates (AAA), with AAC and CLT as subsidiaries. Individual companies hire AAC to make private appraisals of their property; such valuations can then be used to fight a property tax assessment or to determine depreciation or insurance rates or help to set terms for sales, mergers, loans and collateral. Another AAA subsidiary, Stone and Youngberg, advises local governments on how to finance various projects such as water and sewer systems. The potential for conflict of interest among the three subsidiaries is blatant.
For example, might CLT, when making citywide assessment of property, be tempted to give a break to a corporate client of AAC? Might it be inclined to accept a prior appraisal made by AAC of one of its corporate client’s property (which may have been purposely assessed as low as possible) rather than make its own higher assessment and risk the indignation of the client?
Suppose CLT does make its own assessment of an AAC client and the client challenges the new figure, how hard will CLT fight to sustain its valuation? What about potential clients? Will CLT tend to be more lenient with corporations than with ordinary home owners, hoping that grateful companies will subsequently call on the services of AAC? Similar questions can be asked about the activities of Stone and Youngberg which, for example, advises its municipal clients on how to finance a new sewer system. Will the system be financed by issuing bonds (which corporations like) or through a user fee (which corporations, as the largest users, tend not to like) ?
Ettore Barbatelli, president of the AAA holding company, maintains that there is no conflict of interest. In a letter dated February 15 he stated:
"American Appraisal Company and CLT operate completely separately from each other. They do not communicate with each other, have no access to the other's records, no knowledge of the other's clients. They do not exchange information; each uses separate and different valuation procedures because of the nature of the work; they do their own pricing and research; they take separate records, and have separate staffs that are not co-mingled in any way. Each company manages itself, elects its own slate of officers, has its own Board of Directors, and fashions its own policy."
On January 18 Barbatelli told the Nashville Tennessean, "There is absolutely no relationship or interchange between [AAC and CLT]." Not quite so.
The day the merger between CLT and American Appraisal Company was completed, CLT sent a memo to its clients, stating:
"This merger combines our services in the governmental appraisal field with the most outstanding company providing full valuation service for private business.
"In our first discussions with officials of American Appraisal ... it developed that each company had the same goals and objectives for business development in our respective fields ... We feel that the alliance of the two companies will enable us to better serve our clients through the exchange of technical knowledge and will enable us to offer you total valuation services" (emphasis added).
On February 21, William Gunloch, president of CLT, and Barbatelli, who is president of AAC as well as the holding company, admitted that one AAC employee was transferred to CLT and then back to AAC. Even more revealing was a memo dated November 30. 1970, from AAC in Pittsburgh to CLT in Columbus, Ohio, thanking the public assessing company for providing "sales and field data" to the private company. Six weeks later, CLT in Pennsylvania gave AAC in Columbus appraisal data for an Alcoa plant in Westmoreland County, Pa.
Barbatelli's statement that "each company manages itself, elects its own slate of officers, has its own Board of Directors, and fashions its own policy," is at best misleading. Five of the ten CLT officers and directors own stock in the holding company and thus have a direct interest in the success of American Appraisal Company (which accounts for 44 per cent of the holding company's receipts of more than $40 million). The five CLT officers and directors have almost $6 million invested in American Appraisal Associates and seven of the twenty-seven officers of the holding company have $257,210 invested in the success of CLT.
But CLT's conflict-of-interest problems are more than potential or theoretical. On January 16, the Nashville tax assessor, Clifford Allen, charged that twenty-one gas stations owned by major oil companies had been given assessments by CLT, which had been hired to do citywide reappraisals that was as much as 60 per cent below fair market value. (Since all twenty-one stations had been bought after 1970, it was easy enough for Allen to determine their minimum market price.) Said Allen:
"This appraisal company had the purchase prices staring them in the face when they made the appraisals. These are not mere isolated mistakes made by some inexperienced appraiser. Rather, they are typical of the low appraisals which this out-of-state firm has placed on properties owned by the major oil companies throughout the country. They follow a consistent pattern and deliberate policy, obviously established by those in a policy-making position, to favor the big oil companies with low appraisals."
Allen, a past president of the International Association of Assessing Officers, also charged that a third of the 35,000 to 40,000 Nashville properties sold in the previous three years were appraised either too high or too low. (General assessment standards allow a deviation of 15 per cent from the purchase price of property sold within the previous three years.)
On February 13, Allen filed suit in federal court to enjoin CLT and the holding company from engaging in monopolistic practices, and requiring the conglomerate to disclose the names of its corporate clients in Nashville. The class-action suit charged the conglomerate with conspiring to give large Nashville corporations tax breaks at the expense of home owners, farmers and small businessmen. Allen was prompted to go to court by a strong suspicion that at least some of the corporations favored with low assessments were AAC clients. While continuing to maintain there was no conflict of interest, AAC declined to list the names of its Nashville clients.
Allen's charges stemmed partly from the experience of his principal appraiser, William S. Nichol, who was assigned to work full time on CLT's assessments. In a sworn deposition taken for the suit, Nichol states:
"There are innumerable other parcels of rural property in the out-lying sections of the country, which are miles removed from any access to public water, sewers and other necessary public utilities that have been appraised by Cole-Layer-Trumble Company on pure speculative values, in violation of the express provisions of its contract and Sections 67-605 of the Code, at 100 to 200 per cent higher than the amount paid for such properties within the past one, two and three years by their new owners.
"By contrast, CLT's appraisals on large industrial and commercial properties are almost consistently low. This is true not only of the properties recently acquired by the major oil companies, twenty-one of which are appraised at more than 56 per cent below what the oil companies paid for them, but also with respect to innumerable other properties owned by large, national corporations such as make up the clientele of CLT's affiliate, the American Appraisal Company, Inc."
Nichol cited several examples of such corporate favoritism: a Sears-Roebuck store, built in 1969 at a reported cost of $2,661,000, was given a CLIP appraisal of $1,755,030 – a depreciation of $905,970. (Sears's concern for favorable assessments is suggested by the fact that each year it throws a party for the assessors at their national convention.) A J. C. Penney store was assessed in 1972 by the local Board of Equalization at $5,009,000; CLT appraised it at $4,30b,890. A representative of the Oscar Mayer Meat Packing Plant in Nashville admitted in sworn testimony before the Tennessee Board of Equalization that the plant cost $11 million to build; CLT appraised it at $7 million.
When Nichol cited these underassessments as examples of poor CLT work, he had no idea which Nashville corporations were clients of AAC. Under court order, the firm in March released the names of its Nashville clients. J. C. Penney, Oscar Mayer, American Oil Co., Shell Oil, Chevron, Exxon and Mobil Oil were among those on the list.
CLT also ran into trouble on a $1 million reappraisal study in Westmoreland County, Pa., just east of Pittsburgh. On December 22, 1972, several tax groups, including Ralph Nader's Tax Reform Research Group, asked the Pennsylvania Attorney General to investigate the "irregularities" of the CLT assessments. In 1971, the tax groups charged, Richard Mellon Scaife purchased 178 acres in Westmoreland County for $589.55 per acre. CLT appraised the property at $132.65 per acre. Yet another 312-acre tract of Mellon property was appraised at 64¢ per acre. The former chairman of the assessment board in Ligonier Township, Westmoreland County, charged that CLT had increased appraisals on Mellon property by only 2 per cent, while non- Mellon property in the township was being appraised at an additional 40 per cent. A Chrysler plant, whose construction cost was $50 million to $60 million, was assessed by CLT at $10 million.
Troubled by the apparent irregularities, the Westmoreland County Comptroller and District Attorney ordered a study to be made of CLT's appraisal activities. The report concluded, among other things, that in many cases, CLT had simply copied the county's old assessment records; failed even to look at some buildings it was appraising; used nonprofessional employees who had been given only a few days of training in assessment practices; used assessment formulas invalid under Pennsylvania laws; broke various provisions of the contract; and failed to return maps and provide progress reports to the county. The Pennsylvania Attorney General's office is now investigating CLT's Westmoreland reassessments.
When Newcastle County in Delaware decided to update nineteen-year old assessments, it contracted with CLT for the job. The chief county assessor, David R. Reed, became suspicious of CLT's assessments of downtown office buildings and discovered that "apparently, some of the offices have taken tremendous cuts," according to the Wilmington News-Journal. According to Reed, who had worked twelve years for CLT before becoming Newcastle assessor, among the buildings which had been devalued were several owned by the Dupont Co. Less than three weeks later, a CLT official admitted that its sister subsidiary, American Appraisal Company, had performed work in Delaware for Dupont and other Newcastle County companies. (Dupont was also listed as an American Appraisal Company client in Nashville.) A month later it was reported that Dupont had persuaded CLT to reduce its original assessment of its property by $4 million.
When assessor Reed asked CLT for data on which the reduced assessment had been made, the firm refused. In usual practice, such data are routinely made available to the public officials who contracted for the assessment study in the first place. The Newcastle County government has hired a new firm to assess the CLT assessments.
In the 1960s, West Virginia undertook a reassessment of all of the properties in the state. Cole- Layer-Trumble was engaged to do more than half of the work, including the industrial properties in Mercer, McDowell, Wyoming and Harrison Counties. As part of its work, CLT appraised properties owned by Consolidation Coal Company in these counties at $39.7 million. A year later, however, CLT reduced the coal company's assessed value by $12.3 million. The new assessments were distributed to the four county assessors without the knowledge of the state tax commissioner and other top tax officials. The state tax department learned of the new "Consol" assessments when one of the four county assessors called the state office and said he couldn't understand why the assessment had been reduced $3.6 million in his county when Consol had just built an expensive new plant. The state then decided to reassess Consol's property in the four counties, using its own assessors. The $12 million cut was restored.
A Fulton County (Atlanta), judge on April 9, 1971 voided all CLT assessments there on the basis that there was "potential discrimination. ... There exists innumerable inequities and a lack of uniformity growing out of the reappraisals, between properties of the same classification."
In Cleveland, city officials were deluged with 48,000 complaints from homeowners after CLT completed a reassessment. Many complained that inexperienced college students were making the on-site assessments. (CLT said this was common practice.) One woman's chicken coop was inaccurately appraised at $10,048. In Hamilton County (Cincinnati), the president of the county commissioners called the CLT assessments inequitable after more than 10,000 complaints were received.
It is difficult to generalize about mass appraisal firms because very little is known about them. Some certainly have better records than does CLT; others probably have worse. Reassessing an entire metropolitan county – especially when it has been many years since the last assessment – is no easy task. Even when the appraisals are done well, the taxpayers are very likely to be irate when their property assessments jump 30 to 40 per cent in one leap.
Yet, there is little question that something is radically wrong with the mass-appraisal system used by most cities. Jonathan Rowe, the Nader Tax Group's property tax expert, believes that cities should avoid mass-appraisal firms and do the job themselves. He notes, for example, that in many states mass-appraisal firms may not be subject to conflict of interest criminal statues, freedom of information statutes, or other laws designed to protect the public. Attributing much of the unpopularity of the property tax to infrequent assessments, Rowe wants states and local governments to develop a permanent, in-house assessing capacity, so that reappraisals of property can be made far more frequently, perhaps every year.
Unfortunately, few politicians in Washington have taken a serious interest in property tax reform. The extent of the Administration's interest was some noises about a Value Added Tax (in essence, a national sales tax), the receipts of which would have been used to reduce the property tax burden. The silent majority's reaction to the regressive VAT was deafeningly negative and the proposal was withdrawn. Sen. Edmund Muskie (D., Maine) began hearings last spring on property tax reform in his Inter-Governmental Relations Subcommittee. At the urgings of Rowe and others, he has agreed to hold hearings on mass-appraisal firms some time in the future.
Muskie and Sen. Charles Percy (R., Ill.) have introduced legislation that would subject the mass-appraisal industry to federal regulation.
Muskie and Percy have also introduced legislation in the Senate, entitled "The Property Tax and Relief Reform Act of 1973," which, among other things, would provide grants and interest-free loans to state and local governments willing to make their assessment procedures more open, honest and professional.
A system of intelligent federal incentives to get local governments to reform their property tax structures makes sense. Unfortunately, most members of Congress and the Administration seem uninterested. "Nixon is always criticizing liberals for wanting to throw money at the problems," states Rowe, "and yet, how does he propose to revitalize state and local governments? By throwing revenue-sharing money at them. The mass-appraisal quagmire illustrates that it is going to take much more than federal money."
STATEMENT OF JONATHAN ROWE BEFORE THE SENATE SUBCOMMITTEE ON INTERGOVERNMENTAL RELATIONS, MAY 4, 1973
Mr. Chairman and members of the Subcommittee. Thank you for inviting us to testify on S. 1255, the "Property Tax Reform Act of 1973," which the Chairman has introduced. I head the property tax reform project of the Tax Reform Research Group, which is associated with Mr. Ralph Nader's Public Citizen Inc. With me is my colleague, Barry Greever, who also has been working on property tax matters, and especially on problems arising from mass appraisal firms.
I will address the Chairman's bill generally. Mr. Greever will focus on mass appraisal problems.
At this time last year, members of both political parties were proposing wholesale, across-the- board cuts in property taxes. This year the focus has shifted to more carefully targeted relief, and to reform.
The reasons are important. First, it is becoming clear that taxes on property, in some form, will not be wished away. Second, the Supreme Court has refused to uphold a school financing case which would have been a spur to property tax reform. Third, it is clear that not everyone needs property tax relief. Many wealthy homeowners and renters – let alone commercial and industrial taxpayers – reside in low tax havens and could well afford to pay more. Cutting everyone's property taxes would lavish benefit on those who don't need it, while depriving those who do.
But most important people are realizing that there is nothing inherently wrong with a tax on property. Property is wealth, and such a tax need not be regressive or unfair. The problem with taxes on property today is the way they are structured and applied.
Actually, two kinds of reform are necessary. One concerns property tax structure – the property that is taxed, the size of taxing jurisdictions, rate structures, and the like. Closing property tax loopholes could relieve excessive property tax burdens even more than closing income tax loopholes could help take the income tax burden on the wage earner.
The second kind of property tax reform is more modest. It concerns administration – enforcing the tax laws as they already stand. This means making assessment and tax collection effective and fair, making sure that taxpayers have convenient ways to appeal unfair assessments. Above all, it means providing taxpayers the information they need to evaluate their local property tax administration.
The Chairman has introduced legislation, S. 1255, which combines carefully targeted relief with the second, more modest type of reform – the better enforcement of existing law. Under this legislation, the Federal government would provide half the cost of state programs to relieve excessive property tax burdens of the low income and elderly. In return, the states would have to administer their property taxes openly and fairly. They could still structure their property taxes in any manner they wished. And they would have very broad leeway in choosing how to administer these taxes. The Federal government would require, in the main, only a set level of uniform performance, however the states chose to reach that level.
The goals of this legislation are responsible and progressive. The bill would encourage long- needed overhaul in the way property taxes are applied. And reform in administration could lead as well to reform in the way the property tax burden is structured.
Last year President Nixon announced a different plan. He sought to cut everyone's property taxes in half, and to replace the revenue with a national sales tax. Whether or not he has abandoned this wasteful and regressive plan, we do not know. But this week Treasury Secretary Shultz submitted a more limited relief plan to the House Ways and Means Committee. Under this Administration plan, the Federal government would provide property tax relief only to persons over 65; households up with to $25,000/year adjusted gross income would be eligible. The plan would do nothing to help or encourage the states to clean up and improve their methods of taxing property. Nor would it help overburdened property taxpayers who are not over 65. The first question is whether this Administration plan is "cost-effective" – whether it targets the most aid to those who nerd it most. We are mindful of the needs of the elderly. But a $25,000/year income hardly classifies one as needy. In 1971, less than 6% of all taxpayers filed tax returns showing income of $20,000 or more. It is true that the Administration plan would phase out relief at income levels over $15,000 a year. But people with incomes $15,000 and over still represent the top 15% of all filing tax returns.
Do persons over 65 making that much really need relief more than middle-aged breadwinners making much, much less?
There are other serious defects in the Administration Bill.
1. It steps in with relief only after property taxes exceed 5% of income, at all levels of income covered. The Chairman's bill, by comparison, steps in faster where need is greater. When household income is under $3,000, relief is triggered when property taxes exceed that income by 3%. When income is between $3,000 and $7,000, the bill would relieve property tax burdens over 4% of that amount.
2. It falls prey to the "Reagan Effect," where very wealthy individuals report little or no income. Under the Administration bill, the measure of income is "adjusted gross income" – AGI. (Plus certain items like social security and interest from tax-free municipal bonds.) But AGI can conceal more income than it reveals. It does not show income from the very tax preferences the wealthy use to bury their gains: one half of capital gains, percentage depletion, intangible drilling costs, excess depreciation on real estate, the bargain element of stock options, exempt earnings from foreign sources, interest on life insurance savings, and the like. In other words, the Administration proposal would grant additional benefits to wealthy taxpayers already profiting from income tax "loopholes."
The Chairman's bill moves toward a more realistic measure of income. But it seems to leave much discretion to the Secretary of the Treasury in deciding whether or not certain key items – such as capital gains – are included.
The bill should specifically include gains of every kind in its measure of income. This is a time to be closing loopholes, not extending them. As suggested by economist Henry Aaron, the bill should contain wealth, or net worth, limits as well as income limits, as do the circuit-breaker plans in Maine and Colorado. This would prevent relief from being wasted on wealthy households that contrive to report low incomes.
3. The Administration bill lays down an inflexible 15% as the amount of rental payments it considers as property taxes. Such a rigid amount is neither realistic nor fair. The percentage of rental payments that goes for property taxes varies from state to state and from locality to locality. It even varies for property of different value. By contrast, the Chairman's bill recognizes the need for flexibility. It allows the states to set any level between 15% and 30% as the amount of rent it deems paid for property taxes.
4. The Administration bill shuts out from relief people who receive family assistance or who benefit from any state, federal or local housing subsidies. It is arbitrary and unfair to single out for punishment people who receive assistance of these kinds, especially when the Administration bill shuts its eyes to income from the tax "preferences" listed above. Why should wealthy persons who get hidden welfare through the income tax laws remain eligible, while persons who receive an open welfare payment be cast out?
Actual need should be the only criterion.
5. The Administration bill sets up a separate federal system of property tax relief. The Chairman's bill, by contrast, works through, and strengthens, state relief/reform programs.
The most important question, however, is that of reform. It would be simply wasteful to bail out local property tax systems without giving them a beneficial nudge towards reform. The aim of federal property tax relief, and of this Subcommittee, should be to make state and local governments stronger and more effective. The Chairman's proposal, by encouraging reform, would do just that. The Administration proposal, relief without reform, does just the opposite. It would increase reliance on Washington.
True, that is probably the easier way, politically. But as the President has so often reminded us, the path that is politically the easiest is not always the correct one.
One result of relief without reform would be to tempt state and local governments to increase assessments on the elderly, knowing that the U.S. Treasury would pick up the tab. The elderly would then become mere conduits for extra revenue sharing from Washington. Thus assessment fairness tests, such as those in the Chairman's bill, not only help strengthen state and local government. They protect the federal treasury as well.
But most important, the Administration bill cuts most American property taxpayers out of what should be theirs. It is not only the elderly, or even the elderly and low income together, that deserve a better property tax shake. Everyone who pays property taxes deserves relief from unfair and arbitrary property tax administration, just as much as some need help meeting property tax bills. For decades, studies have deplored the glaring defects in the way property taxes are administered and applied. These defects affect all taxpayers. They open up the tax to the under- the-table dealing with which it is rife. Problems with mass appraisal firms, for example, are just a symptom of these basic defects.
Relief alone will just diffuse much of the pressure now building for reform.
The Administration cannot say that making property taxes open and fair is strictly a state and local matter. The federal government already has hand and foot in the property tax system – among other ways through the $2.7 billion in property taxes it allows homeowners to deduct from taxable income. The new Administration proposal is still further federal interference of exactly the wrong kind. In effect, it would be an expensive federal crutch for shoddy administration. If anything, it would delay needed reforms.
Is the Chairman's bill the best way to encourage the desired revamping? The bill would establish an office in the Department of the Treasury called the Office of Property Tax Relief and Reform.
This office would make certain that the state relief programs meet the broad guidelines that the bill lays down, and that tax administration is sufficiently open and fair. Among other functions, the office would certify private firms that contract with state and local governments to perform property tax appraisals.
The bill stresses fairness of performance rather than specific practices the states must adopt. That is the right direction. Bureaucracy and red tape should be cut to a minimum – and then some. One way to do that is to strengthen those parts of the bill dealing with access to information.
The property tax can be, in large measure, a self-enforcing tax. Taxpayers need only the tools to do the job. These tools include complete, accurate, property tax information, and effective, convenient forums in which to challenge inequities.
To an extent, the Chairman's bill, S. 1255, would help provide these tools. But there is more the federal government can do to encourage effective citizenship in the property tax arena, and to help state and local property tax administrators as well.
1. Corporate Property Data: The federal government should collect from corporations detailed accountings of their real estate holdings, including location and value. Such properties are major sources of local property tax revenue; information about them would be of great benefit to both assessors and taxpayers.
Corporate real estate information is important for other uses, as well:
(a) Investor Protection. Such recent episodes as the Penn Central bankruptcy and the Equity Funding scandal show the need for much fuller reporting of corporate assets generally – of which real property holdings are an important part.
(b) Aid Land-Use Control. Before we can decide how to use our land, we need to know who owns it, how they are using it, and how they plan to use it in the future.
(c) Plot Trends in Housing, Agriculture, Resource Development, and other important areas of economic activity.
The SEC, the Census Bureau, the IRS, the Office envisioned in the Chairman's bill, or some combination of agencies, could assemble this data on corporate real estate. Or the bill could require states to compile aggregate property holdings for large taxpayers.
Such disclosure is practical and tested. The SEC already requires a degree of corporate asset disclosure, so does the IRS. The State of Minnesota requires corporations to report all their farm holdings. In Wisconsin, corporate income tax returns have been made available to the public.
2. Sales Price Data: The federal government should reenact the nominal property transfer tax which lapsed in 1968. It should apply this tax, moreover, to the full sales price, not just to the equity transferred (price minus mortgage) as was the case before. Property transfer tax data appeared right on the deed of sale. Reenactment of the tax would provide valuable information to assessors, and would give taxpayers a way to check the accuracy of property tax assessments.
3. Census of Governments: Since 1957 the Census Bureau has included in its Census of Governments a volume called "Taxable Property Values." This volume gives detailed state by state breakdowns of property tax data, including total assessed valuations, and average assessment levels, for each type of property.
This volume could be a key tool for both assessors and local taxpayers in making the property tax work. The first "Taxable Property Values" study in 1957 helped spark the landmark, two-volume ACIR study, The Role of the States in Strengthening the Property Tax, from which in large part, current reform proposals and efforts have sprung. The property values study is a federal effort that can make the federal system stronger and it should be expanded. The property values study should be done more often – each year at best – so that taxpayers have up-to-date information on property values and assessments. It should show the "dispersion ratio" along with the average assessment level for each type of property and at different levels of property value. Moreover, it should do so not just for each state, but for taxing jurisdictions within each state as well.
Most important, the Census should include assessment studies of the highest value properties, since these are the most important revenue providers. Currently, the Census excludes all property worth over $500,000, since there are so few sales of such property to compare with assessments.
But the Census could check assessment levels of this high-value property through spot appraisals. States like New York do so in comparing local assessment levels for school aid purposes.
These spot appraisals can be of great benefit to local taxing jurisdictions. For example,
studying assessment differences between different levels of property value would help lay bare the regressive assessments uncovered in a recent HUD study of 10 cities. These regressive assessments inflict undue property tax burdens on the poor and promote urban blight. (This study is now a Committee print, entitled "A Study of Property Taxes and Urban Blight.)
In 1968 a state appraisal showed that the Reynolds Aluminum plant in Massena, New York, was underassessed by at least 60%. Previously, the town had accepted figures Reynolds itself provided because it could not afford to make an appraisal of its own.
Despite the importance of these Census Bureau studies, essential parts of the program are being slashed this year for budget purposes. This is wrong. The administration has oft repeated its commitment to strengthening the governments that are closest to the people. The Census of Governments is one means to that end.
And it is a low-cost means. The estimated cost of the entire 1972 Census of Governments – of which the Property Values Study was just one part – was only $1.4 million. By contrast, the Commerce Department spent twice that amount, an estimated $2.8 million merely to offer a "Business Research and Data Service" for major industries.
4. Coordination of Existing Federal Government Appraisal, Property-Holding, and Value Data.
The Advisory Commission on Intergovernmental Relations, in its recent study, "Financing Schools and Property Tax Relief – The Report in Brief," lists at page six existing federal programs which could provide valuable data to property tax administrators and taxpayers. I submit this brief summary for the record. The Chairman's bill should specifically instruct the Office it would set up to coordinate this data and make it widely available. This could help cut the costs of property tax administration. And it could weed out overlapping federal information programs as well.
5. Develop Specific Ways for the IRS to Share Data on Property, Especially Intangible Property, with the States.
Recent studies have shown that we could cut property tax rates an average of one-third nation- wide, by restoring modest taxes on intangible property – stocks, bonds, and the like. Originally, the property tax included such property. But most states have stopped trying to tax intangibles because of enforcement problems. Now, however, the IRS has data on all dividend and interest payments of over $10. And federal law specifically provides for the sharing of such information with the states. The IRS should devise specific ways to effectively share this data, so that states can, if they choose, tap intangible property as a way to ease the property tax burden of homeowners and renters.
PROPERTY TAXES AND LAND USE
The Chairman's bill also directs the contemplated Office to develop plans to "coordinate state and local real property tax policy with the requirements of sound land use planning." Property taxes and land use are a major problem. In cities, underassessment of land and over assessment of buildings encourage decay, blight, and acres of vacant lots and parking lots. On urban fringe areas, sprawling suburbs and real estate manipulators drive up property values and force small farmers to sell their land.
The Committee should avoid the false start many states have made in dealing with this problem. And it should consider steps it can take now without waiting for the hoped-for report from the office the Chairman's bill would establish.
Many states have passed laws to allow special low assessments for "farmland" and open spaces. Backers usually sell these bills to the public as ways to preserve open lands and protect them from development. But for the most part, special "farmland" assessments have turned out to be just bonanzas for real estate speculators and developers.
Maryland was the first state to enact such a law. USDA and other studies have shown that the market for farm tracts in fast-developing Montgomery and Prince Georges Counties, where farm land most needed protection, remained brisk. In 1965, nine years after the act was passed, one-third of all farm tracts there had been acquired in the preceding five years. About one-half had changed hands in the preceding ten. And it wasn't farmers that were buying this land. The sales prices ranged between $2,000 and $4,000 per acre – far more than genuine farmers could afford.
The Washington Post shed light on who was buying this land. Levitt and Sons and Boise Cascade had both bought up thousands of acres of "farmland" in Montgomery County, the Post reported.
In one case, the family of Washington mortgage banker Floyd Davis had a 194 acre tract on busy U.S. Route 270 across from a shopping mall. The tract was zoned for commercial and industrial use and was worth at least $13 million. But the Davis family made sure a small part of it was farmed. So this $13 million tract received a special farmland assessment of $38,590.
The Post estimated that it was costing county residents up to $10 million to provide property tax breaks for landowners like the Davis family, Levitt and Sons, and Boise Cascade. That came out to $52 for the owner of a $30,000 home.
A recent study by the Center for the Analysis of Public Issues, Princeton, N. J. reached a similar bleak conclusion regarding New Jersey's farmland assessment law. The Center found that 20% of New Jersey's land gets special low assessments. Other taxpayers in the state or paying $48 million per year to make up the difference. (The state, by contrast, has invested only $140 million over the past 11 years to purchase land under a "Green Acres" program.) In 50 New Jersey municipalities, taxes on a $25,000 home have gone up over $200.
Who gains? Again, big gains are going to large scale land developers. The study found, for example, that a land developing subsidiary of the Interstate Utilities Corporation, one of the nation's one-hundred largest corporations, was getting special low assessments on 5,000 acres in one county. Levitt and Sons, the land development subsidiary of ITT, saved over $40,000 on 500 acres in one county. A subsidiary of the Atlantic City Electric Co., the study said, is getting a 90% assessment reduction for land already approved for development.
In state after state the story is similar. In California, "Dun and Bradstreet Sodbusters" like J. G. Boswell Inc., the Kern County Land Co., The Irvine Co., and the Southern Pacific Railroad are getting millions of dollars in property tax breaks under that state's "Williamson Act." These same landholders, it turns out, are cashing in on Federal Crop subsidy payments in a big way, as well.
For example, the J. G. Boswell Co., which in 1970 received a Williamson Act property tax break of almost three million dollars, that year received the single largest Federal Crop Subsidy payment in the nation – almost four and one half million dollars. Giffen Inc., which received the nation's second largest farm subsidy handout, also gleaned a $183,000 tax break from California taxpayers. And far from preserving open spaces, the Williamson Act seems to be forcing development onto prime but unprotected lands close to cities.
A Rhode Island official responded candidly to this Subcommittee's inquiry about the state's farmland assessment law, "... the law is largely ineffective in preserving open space, but it does provide a tax shelter for land speculators."
It is clear that property tax breaks for developers will not preserve farms and open spaces. Still, genuine small farmers do need property tax relief. And properly applied, such relief could indeed help preserve farmland. To that end, the Subcommittee could extend the relief under the proposed bill to genuine small farmers. To qualify for this relief, a state program should have to meet several minimal conditions. For example:
1. Residency requirements: relief should go only to farmers who actually live on their farms. Absentee landowners and corporations should not be eligible.
2. Size limitations: these could be in terms of acreage, value, and/or number of employees, depending on the kind of farm and its location.
3. Effective deterrent to development: this deterrent could be the recapture of all taxes that were forgiven, for at least the five most recent years, plus interest at the normal commercial rate; a stiff land transfer tax; an "unearned increment tax"; a "zoning-up" tax; and/or some similar measure.
The goal would be to make sure the public really gets farmland and open space for its tax dollars.
Such programs could apply to non-agricultural land, such as forests and open spaces, with like safeguards.
Further steps are a subject for future hearings. But before embarking on solutions to the property tax/land use problem, the Subcommittee might well consider how the federal government is helping to create the problem to begin with. Property taxes on farmland and open spaces go up largely because land values go up. And federal programs and policies are partly to blame for the enormous increases in rural and urban-fringe land values. These programs and policies include:
1. Mortgage-guarantee programs which encourage people to build and buy homes in the suburbs.
2. Highway programs which send development sprawling further and further out into the countryside and inflate property values there.
3. Federal tax preferences for real estate development that encourage new building and discourage rehabilitation of existing buildings.
4. Federal income tax deductions for homeowner property taxes and mortgage interest, but not for taxes and interest borne by renters.
5. Capital gains treatment of unearned increases in land value.
6. Exemption of land value increases until sale. This encourages developers and speculators to buy up rural land long before they intend to develop it. Property values leap and small farmers then have to sell their land.
7. Provisions which allow tax-loss farming. These further sweeten the pie for developers and speculators. They can farm their tax losses until they are ready to sell or develop.
Reversing such Federal policies could save taxpayer money, recoup extra revenues for the Treasury, promote better land use. Most of all, it would reduce the need for the Federal government to step in to solve a problem it was helping to create.