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Forum:The property-tax reform charade

It's great politics to look for alternatives for funding schools. But scrapping property taxes is bad policy

Sunday, October 06, 2002

By Raymond L. Richman

The Pennsylvania Legislature has been in special session since early September to consider in Gov. Schweiker's words "a solution that will stem Pennsylvania's longstanding property tax problem once and for all." A pretty tall order for a tax that has been in constant flux since William the Conqueror's Domesday Survey, an assessment roll recording the ownership of everything of value in the British isles in the year 1084.

  Raymond L. Richman, professor emeritus of public and international affairs at the University of Pittsburgh, lives in Shadyside (rayrwtcr@aol.com). He has been a real estate tax consultant to the city of Philadelphia, the State Tax Equalization Board and other public bodies and major corporations. 

The governor stated that the solution must be fair, equitable and affordable, reduce property taxes and make the reductions stick. He noted that Pennsylvania made record investments in public education during the past eight years at a rate double the rate of inflation while local school-board spending grew at a rate triple the rate of inflation. He proposed limiting future increases in school taxes to the rate of inflation, adjusted for changes in enrollment, unless the increase receives prior taxpayer approval by referendum.

All the candidates for office pledge real estate tax reform. Ed Rendell, Democratic candidate for governor, has been running ads pledging to reduce the reliance of school districts on the property tax without specifying how he proposes to finance the revenue loss or contain school spending. Attorney General Mike Fisher, the Republican candidate for governor, likewise has come out for unspecified property tax reform. County Chief Executive Jim Roddey, not running for office but under criticism for poor assessments, recently proposed the elimination of the school property tax. He wrote to the Post-Gazette, "While I am not advocating any single tax as a replacement for the property tax, my proposal allows the voters to decide for themselves by referendum the form of taxation to be used in support of our public schools."

Decide for themselves? What options do they really have? They want the tax abolished or reduced, not replaced.

Failure to keep the costs of local government under control has resulted in increasing tax burdens. In 2002, the effective rate of combined city, school and county taxes on real estate in the city of Pittsburgh was 2.93 percent. School taxes alone accounted for about 47 percent of the total property tax burden in Pittsburgh; city taxes, 37 percent; and the county tax, 16 percent. At what point does the tax become confiscatory?

It seems fitting that the commonwealth put a cap on the escalating burden of school property taxes. But what benefit will taxpayers get by shifting from the real estate base to income or sales taxes? The latter is more regressive and not deductible under federal tax law, while the former will make the state less attractive to potential employers.

Escalating school taxes is not the only real estate tax problem. Two successive countywide reassessments in Allegheny County appear to have accomplished none of the goals set out for them and cost taxpayers $40 million, not counting the legal and appraisal costs, and the time and frustration imposed on the 180,000 taxpayers that filed appeals.

It turns out that the methodology employed by Sabre Systems, responsible for the 2001 reassessment, and Cole, Layer & Trumble, responsible for the 2002 reassessment, was defective. To this observer, the evidence is overwhelming.

As I have argued in this space before ("Now, Hold On," Feb. 14, 1999), the real estate tax is the best tax local governments can levy from the standpoint of equity, progressivity, cost of administration and economic effects. I have to admit that the egregious administration of the real estate tax in Allegheny County during the past decade strains the credibility of that belief.

I did not foresee that there would be two successive countywide reassessments in 2001 and 2002 that employed a flawed methodology -- computer-generated assessments -- with the result that taxpayers were faced with wild fluctuations in their tax burdens, from year to year. The two firms that did the reassessments were out-of-state firms which employed computer algorithms appropriate only for relatively homogeneous communities.

The computer is a wonderful assessment tool when it is used as part of the assessment process. But there is a big difference between computer-assisted and computer-generated assessments.

To make matters worse, Allegheny County has frozen the assessments for the next three years, which will require another general reassessment for 2006. Legislation is required to prevent such a fiscal disaster from happening again here or elsewhere in the commonwealth.

Assessment is a continuous process. Whenever a property is sold, the assessment organization is alerted to the fact that the sales price may vary significantly from the property's current assessed value.

When it does, as in any statistical quality control process, a change in its assessment and in comparables may be indicated. It requires analysis by an assessor which is what he is paid to do. Higher or lower prices may indicate a neighborhood trend and the assessor should determine the trend and make adjustments in assessments.

The assessment officials claim they do not have enough assessors to value the 500,000 plus parcels. That is because they do not know what their job is. Only in a general reassessment does the value of every property need to be re-determined.

There were only 11,000 sales of residential properties in 2001. You need a sufficient number of assessors to analyze 11,000 sales a year and only those that show a significant departure from existing assessed values need to be investigated. The commonwealth, through STEB, should monitor the assessment organizations in every county.

The price at which a parcel sold in an arms-length sale is the best single piece of evidence of its market value. Assessment authorities in Allegheny County are on record as stating that the sales price can be disregarded if comparables identified and selected by computer show a different market value.

The law should declare that the burden of proof that the sales price falls short of fair market value should be on the assessment authorities. The sales price enables the buyer to calculate what his real estate tax liability will be. Indeed, real estate brokers should be obligated by law to inform buyers what their real estate taxes will be under current city, school and county levies.

The dollar is the most sensitive nerve in the human body. A lot of home-owners have been screaming bloody murder and muddying the bath water.

The politicians in Harrisburg and Allegheny County are responding. Let us hope they don't throw the baby out with the bath water.

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