Let’s Fix the Property Tax

Posted by & filed under CGR Staff, Rochester Business Journal.

I’m not in the “tax as theft” school. How else can we come together to fund public schools, get our streets fixed and plowed, and finance support for the needy? Sure, some of that could happen without coercion, but I’m not one to campaign for a radical shrinkage of the public sector. Taxes are a necessary evil.

If you are still with me, then the question turns on how to tax and what to tax. Odd as it sounds, I write today in defense of the poor, embattled property tax. In recent forums sponsored by CGR’s New York Matters campaign on Long Island and in Rochester, several participants spoke in favor of shifting from the property tax to the income tax, particularly for the support of public education. The sales tax, too, is clearly preferred by voters to an increase in the hated property tax. Elected officials have certainly gotten this message—counties across the state choose an increase in the sales tax over a property tax hike when money is tight.

Why should we keep the property tax?

At the municipal level, the bulk of the property tax supports services to property, principally streets and sanitation, and public safety (police and fire). That makes sense—individual communities can tax themselves for the services they think appropriate. In Monroe County, the towns that want their own police (instead of coverage from the County Sheriff) can pay for it through the property tax. You might also argue that more expensive property gets more value from local services, e.g. more stuff for the police to protect, a more valuable building to save in the event of fire, more street frontage to plow, and so on. OK, there are many things—public education, obviously—where this connection is more tenuous, but that’s another column.

The property tax also allows us to impose a local tax on business. While there are some places that impose a local tax on business income (most of Ohio’s cities, for example), this is very messy to administer. And again, the value of a business establishment’s local property has something to do with the costs it imposes on local government.

Finally, the property tax captures support for local services from people who have wealth but little income. This is controversial, I’ll grant. But just because a person’s well-being is tied up in an asset doesn’t make him or her poor. One improvement we can make in the property tax is more effective use of a “reverse mortgage” vehicle that allows people with substantial assets to pay their share of the tax burden without forcing a sale of the asset.

So why is the property tax as popular as leeches in a swimming hole? Part of the problem is that many of us actually know what we’re paying, unlike the sales tax where we never see the whole bill. I’ll bet most of us are a bit shocked when we see how much sales tax we pay on a “big ticket” item like a car or an appliance. Think how we’d feel if the state kept track during the year and just sent us a bill at the end. And the income tax, bothersome as it is, is deducted bit by bit from our paychecks. While we may see the bill in April, few of us have to write out a check.

Furthermore, I think that many of us believe that the property tax is unfair. Unfortunately, we’re right. The property tax is the most poorly administered tax in the tax arsenal.

Why? First, the property tax is complex. This business of “fractional assessment” in which we base the tax on some fraction of the market value of the property causes no end of confusion. If you own property with a market value of $100,000 in the City of Albany, for example, your assessed value should be $71,000. That same market value across the Hudson River in the City of Troy, however, would be assessed at $17,500. By way of contrast, City of Rochester assessed values are right at the market value while in Yonkers, that same $100,000 in value would be assessed at $2,900.

Confused yet? Fractional assessment doesn’t make the property tax unfair—as long as all your neighbors’ properties are assessed at the same fraction of market value as yours. But it makes it hard for the average property owner to make sense out of his or her tax bill, maybe fueling some sense of suspicion and unhappiness about the whole process and making it harder for property owners to hold the assessor accountable.

And if the problem with residential properties isn’t bad enough, assessing the value of commercial and industrial properties is even more difficult as many of these properties are, in some sense, unique. With fractional assessment as a kind of smokescreen, it is common for an assessor to quietly favor one “class” of property over another. Vacant land is often underassessed, for example. And these biases can persist forever if a community never conducts a revaluation. There are taxing jurisdictions—particularly in downstate counties—that haven’t done a “reval” in decades.

New York State’s Office of Real Property Services (ORPS) assesses the equity of assessments and publishes these figures annually. But unlike the school report cards released by the NYS Department of Education, no one seems to pay much attention to these figures. The most important number is the “coefficient of dispersion,” which measures the average variation around the average “assessment ratio,” the share of market value we discussed above. Suppose the Village of Everytown assesses property at 50% of market value on average, but that half of the properties are assessed at 75% of market and the other half at 25% of market value. This would lead to a coefficient of dispersion (COD) of 50%: The typical assessment in Everytown is off by 50%.

Unfortunately, some assessing jurisdictions in New York State are even worse than my hypothetical Everytown. The City of Peekskill’s coefficient of dispersion was 53% in its 2002 tax roll (the latest year measured by ORPS), the worst record of any NYS city. White Plains and Rye are just behind at 47% and 46%. At the other end of the scale, Utica’s COD was 13%, Syracuse was 12% and the cities of Lackawanna and Tonawanda both had a coefficient of dispersion of only 9%. Kudos to their assessors! Among more densely populated towns, Clifton Park and Colonie in the Capital District do the best with CODs of 6% and 7%, respectively. The worst record among these towns is found in Westchester County’s Ossining and Mount Kisco with CODs of 45% and 36%.

The property tax CAN be greatly improved. I’ll talk about this in my next column. In the meantime, find out how your assessor is doing by going to http://www.orps.state.ny.us/cfapps/MuniPro/. Search for your county or municipality, then click on “Assessment Equity Statistics.”