I would like to start this month’s newsletter with reference to a recent property tax report from the Lincoln Institute of Land Policy. The report is titled “Split-Rate Property Taxation in Detroit: Findings and Recommendations” and, as the title indicates, looks at the present property tax system in Detroit and recommends moving to a split-rate system.
The report states that reforming Detroit’s property tax system by taxing land at a higher rate than buildings would help to revive the local economy and reduce tax bills for nearly every homeowner. It goes on to say that with the lowest property values of any large US city and some of the highest property tax rates, Detroit is caught in a decades-long cycle of rising tax rates that still fail to generate enough revenue. In the absence of strong public services, high property taxes increase owner costs, reduce property values, and increase the costs of repair and redevelopment, creating a drag on economic recovery.
The report continues that, like many economically distressed cities, the city copes with this challenge by offering generous tax abatements for new development and for some homeowners. Abatements relieve excess costs and temporarily raise property values, but they can only be given to a small set of residents and new businesses. This leaves high - sometimes destabilizing - tax bills in place for long-term owners. While high taxes remain on most homes and businesses, inclusive and lasting incentives for reinvestment are absent.
The report concludes that having a higher tax rate for land than for structures - known as “split-rate” because there are two different tax rates - would address the problem more effectively and distribute the benefits more equitably. The study finds that taxing land at five times the rate for buildings would result in lower tax bills for 96 percent of homeowners, with an average savings of about 18 percent. Under a revenue neutral reform, tax savings would be fully offset by tax increases on vacant and underutilized property.
“By adopting a split-rate property tax, Detroit can make its tax system both more efficient and more equitable,” said John Anderson, an economist at the University of Nebraska, Lincoln, and lead author of the study. “Efficiency is enhanced by removing the tax-related barriers to capital improvements and development. Equity is enhanced by a reduction in taxes for the vast majority of residential homeowners.”
“Splitting the property tax provides long-time Detroiters with the tax relief that new businesses and residents already receive,” said co-author Nick Allen, former manager of strategy and policy for the Detroit Economic Growth Corporation and now a doctoral candidate at the Massachusetts Institute of Technology. “Our study shows that it is an effective, immediate way to permanently reduce burdens on overtaxed households and restore property wealth. It’s not enough, but it is a required step towards racially equitable recovery.”
In addition, a split-rate tax increases the cost of holding vacant land and reduces the cost of developing it, or of renovating deteriorated buildings. Reduced tax burdens and accelerated investment lead to an average increase of 12 percent in the value of residential property and an increase of 20 percent for commercial property. In a supporting technical paper, the project team also found that the proposed 18 percent reduction in residential taxes would reduce residential tax foreclosures by at least 9 percent.
“Implementation of a split-rate tax in Detroit offers an opportunity to strengthen the property tax system by increasing efficiency, and reducing property tax inequities and tax foreclosure,” said Michigan State University economist Mark Skidmore, a co-author of the study.
Commissioned by Invest Detroit with support from The Kresge Foundation, the study analyzes data from municipalities in Pennsylvania that have implemented spit-rate taxes, as well as real estate and property tax data from Detroit. In addition to Anderson, Allen, and Skidmore, the study’s co-authors include Fernanda Alfaro of Michigan State University, Andrew Hanson of the University of Illinois at Chicago, Zackary Hawley of Texas Christian University, Dusan Paredes of Northern Catholic University in Chile, and Zhou Yang of Robert Morris University.
“If we are to continue the momentum of Detroit’s positive, equitable growth, we must transform our property tax structure to alleviate the burden on majority black homeowners and local developers,” said Dave Blaszkiewicz, president and CEO of Invest Detroit. “This report provides a solution that accomplishes that while also disincentivizing blighted and underutilized properties that hinder Detroit’s growth.”
“With this analysis, Invest Detroit has elevated an equitable approach to taxation that can bring much-needed relief to tax-burdened Detroiters while encouraging investment and growth. This is a timely idea that addresses an urgent concern, and the highly regarded Lincoln Institute of Land Policy has now provided a solid framework for community discussions,” said Wendy Lewis Jackson, managing director of Kresge’s Detroit Program.
The team also produced three technical papers to support the study: Assessment of Property Tax Reductions on Tax Delinquency, Tax Foreclosure, and Home Ownership, Split-Rate Taxation and Business Establishment Location Evidence from the Pennsylvania Experience, and Split-Rate Taxation: Impacts on Tax Base, all published by the Lincoln Institute.
As far as IPTI is concerned, the report is an interesting contribution to the debate on how to address similar issues that arise in many jurisdictions. However, there are a number of challenges that are associated with split-rate property tax systems, not the least of which is the accuracy of valuing the land on which improvements have been built. With a dearth of reliable open market evidence of transactions in undeveloped land in major urban areas, valuations of the land component in isolation are difficult and open to appeal. However, it will be interesting to see Detroit’s response to the report.
Moving on to IPTI activities, we recently held a virtual meeting of IPTI’s Board of Advisors which, among other matters, discussed the Lincoln Institute report already mentioned. We are hoping that IPTI Board Members will be able to get together in person at one or more of our future events planned for later this year.
During early April we held another in our series of professional webinars that we deliver in partnership with the Institute of Municipal Assessors (IMA). This IMA-IPTI webinar was on the topic of “Portfolio Sales Involving Multiple Properties - What Value Goes Where?”. As many readers will be aware, portfolio sales most often occur for investment grade properties. These sales can include many specific properties in the portfolio transfer. In an increasingly uncertain economic environment, some corporations are turning to their existing real estate as a source of liquidity, with the sale of portfolios becoming a common strategy. Acceleration of portfolio sale-and-leasebacks is being attributed to the current coronavirus volatility. Sale-and-leaseback deals, where companies sell their own real estate to unlock capital then lease the asset back, are set to continue in popularity, building on the momentum of the past five years. Our very able presenter explored these types of transactions, provided and analysed real examples, and proposed a best practice course of action for segregating out individual values for analysis and defense.
A recent event in which I was personally involved was another in our series of IMA-IPTI webinars. This webinar was on the topic of “Statutory Valuations” and involved a review of the extent to which statutory valuations of properties are different to other types of property valuation. The key point that I and my very experienced co-presenter made is that, particularly for property tax valuations, assessors, appraisers, valuers, etc., need to fully understand the “framework” within which their professional valuation skills need to be exercised. This involves an understanding of the relevant legislation that applies in the jurisdiction concerned, knowledge of any case law which may have interpreted and applied that legislation, and awareness of professional valuation standards that may be applicable. Whilst assessors, appraisers, valuers, etc., involved in the provision of, or challenge to, statutory valuations are not lawyers, they do need to have a good working knowledge of the legal framework within which they exercise their professional valuation skills. We also emphasised that legislation will always override any relevant professional valuations standards, e.g. the International Valuation Standards, but those valuation standards will apply to the extent that they are not incompatible with the legislation or case law.
Looking ahead, we have our forthcoming Mass Appraisal Valuation Symposium (MAVS), a virtual event, taking place on 22-23 June. This will be a joint IPTI-IAAO event and the MAVS agenda is now available on our website. We are also planning an in-person IPTI event in Canada during September details of which will be available shortly.
We have a number of additional IMA-IPTI webinars coming up covering a wide range of topical issues and our (in-person) Caribbean conference which is being planed for Montego Bay, Jamaica on 13-14 October.
IPTI is in the process of planning the next Conference of Valuation Agencies (CoVA 2022) which, again all being well, is intended to be an in-person event in early December held at an Oxford college in the UK.
As usual, for full details of forthcoming IPTI events, please visit our website: www.ipti.org.
Now it’s time for a quick look at what is making headlines concerning property taxes in selected jurisdictions and countries around the world.
Starting with New Zealand, a recent article looked at how tax on property in New Zealand compares to other countries and concluded that, despite an extension of the “bright-line test”, New Zealand’s property sales are still lightly taxed compared to the rest of the world. It states that, unlike comparable countries such as Australia, Canada and England, New Zealand does not have a capital gains tax, and it no longer has estate taxes or stamp duties on property sales or transfers. Commentators say this has generated enormous, unearned capital gains for property owners and that the easy access to wealth via property investment has been a key driver in the housing crisis. This led the National Government to introduce the “bright-line test” in 2015 which was intended as an income tax on speculators “flipping” properties and applied to the profits generated by sales within two years of purchase; subsequently the bright-line test was extended to five years. However, it did little to slow demand and, with the housing market in the grip of an unprecedented boom, recently the Government announced the bright-line test would be extended to ten years. Properties which are the owners “main home” remain largely exempt from the bright-line test, as do inherited properties, although there are some situations where people can be caught out. The article refers to OECD figures which show that, compared to Australia, Canada and the UK, New Zealand property taxes make up a much smaller percentage of GDP, with Canada and the UK’s proportion almost double. The author says, “Taxing property is a hyper-sensitive issue in NZ because people fear they could lose a lot as a result of them, and that fear effect, along with self-interest, overrides the practical implications.” Broadening the tax base with more extensive property taxes does not automatically mean people will miss out, he says. “Instead it would bring a fairer tax system and give the government more options to better address significant issues such as health care, the rising cost of living, and the impacts of climate change.”
Moving on to Canada, Nova Scotia's finance minister seeks to defend two new taxes on non-resident property owners. The taxes, he says, are necessary to help Nova Scotians gain access to housing at a time when vacancy rates are extremely low. But it's still an open question, he admitted, whether the deed transfer and property taxes will result in non-resident property owners selling to local interests and making more housing supply available. It's also unclear whether the new taxes - included in the recent provincial budget - will help ease skyrocketing house prices, he added. “That remains to be seen,” he said, “There is no way to concretely know for sure until this is implemented.” The housing shortage is especially acute in the Halifax area, where the vacancy rate for residential buildings fell to one per cent in October of last year, according to data from the Canada Mortgage and Housing Corporation. The minister said that, while he understands some out-of-province property owners may feel frustrated, the government believes it needs to do what it can to increase the housing stock. According to the Finance Department, there are about 27,000 properties in Nova Scotia that are owned by non-residents, more than half of whom come from Ontario. The government estimates the new taxes will generate $81 million in revenue in the 2022-23 fiscal year. Under the tax measures, which took effect April 1, non-residents who buy property and do not move to the province within six months of the closing date have to pay a transfer tax of five per cent of the property's value. A property tax of $2 per $100 of assessed value of residential properties owned by non-residents is also being levied. The tax doesn't apply to buildings with more than three units or to those rented to Nova Scotia residents year-round. There has been a great deal of complaint from owners about the new property taxes.
Staying in Canada, but moving to British Columbia, property owners in the City of Victoria are being given the option to pay an additional property tax that goes towards the municipality’s two local First Nations. The annual property tax mail-out package this year will include information on how residential and business property tax owners can make a voluntary tax contribution, such as an amount equal to 5% or 10% of their property taxes. For example, based on a 10% rate, the voluntary contribution from the property owner of an average assessed single-family house in Victoria - valued at $1.07 million, according to BC Assessment - would be about $550 annually to the First Nations. The revenue collected by the city would completely go towards the Songhees First Nation and the Esquimalt First Nations. “The two nations on whose land the city sits, they are not a charity or cause. They are sovereign nations. And through the process of decolonization, they have been removed from the heart of the territory, and those of us who now live in the heart of the territory benefit from the wealth of their lands,” said the Mayor. She continued, “This proposal is really to recognize the principle of reciprocity and responsibility to the Indigenous nations.”. However, the policy was criticized by a council member who asserted the process for the proposal lacked transparency, and was beyond the jurisdiction of a municipal government. It will be interesting to see how property taxpayers respond.
In the USA, a recent report asks: “Will Working from Home Cripple City Budgets?”. The report, from the Institute on Taxation and Economic Policy (ITEP), examines lost tax revenues from a weak office sector. Linking data on offices with employment information (especially on working from home), ITEP worries many cities will face declining revenues. It says that the pandemic has led to increased working from home for some who formerly commuted to central city offices, although analysts are divided on how big or permanent this change will be. But, as it argues, some increased level of “hybrid working is here to stay.” ITEP studied eight US cities, focusing on how much they depend on property tax revenues, especially from commercial property. They estimate “that demand for space, and prices for commercial real estate, will fall by between 12% and 25%.” New York and San Francisco “are the most vulnerable of the 8 cities, with predicted commercial price drops ranging from 25% to 43%.” Such a decline, they say, will eventually cause “proportional declines in assessed values and ultimately the amount of property taxes.” They find that all of the eight cities they studied “face significant fiscal risks.” However, they say that some markets are showing large annual office rent increases - Charlotte (+10.7%), Miami (+12.2%), and Boston (16.4%). The biggest year-over-year declines in rents were found in Portland (-7.2%), San Francisco (-9.5%), and Manhattan (-13.5%). The report states that cities rely on higher-income office jobs for tax revenue, restaurant meals and jobs, mass transit fares, and tax valuations of commercial property. If working from home causes a more permanent negative shift in cities’ employment base, especially among higher-income workers, the report concludes it will seriously strain city budgets.
In the Philippines, concerns surround property tax reform which aims to broaden the tax base used in ascertaining the property-related taxes of the national and local governments through a just, equitable and efficient valuation system. The expansion of the tax base would enable the government to increase its revenues without imposing new or additional taxes which ordinary taxpayers would eventually shoulder. A bill was approved on third and final reading by the House of Representatives and is pending at the Senate. It provides, among other matters, for the establishment of “a single valuation base for taxation, through the adoption of the SMVs (schedule of market values) of LGUs (local government units).” With the valuation base already fixed by law, the valuation of real properties in LGUs would be insulated from political considerations or influence. But the responsibility of setting, adjusting and regulating the tax rates and assessment levels of those properties will remain with them. The proposed obligatory updating of tax valuations by LGUs assumes significance in light of the devolution to them by the national government of certain public services. Under a recent Supreme Court decision, the national government is obliged to remit to LGUs 40 percent of all collections by the Bureau of Internal Revenue and the Bureau of Customs. However, that revenue allocation alone would be insufficient to adequately fund, among others, health and social welfare services, infrastructure facilities for residents and mass housing programs. The periodic updating of the tax valuation and assessment of real properties, whose values are expected to rise through the years and as the LGUs develop, would provide them with additional sources of revenue other than those allowed by the Local Government Code to meet the funding requirements of devolved public services.
And finally, an interesting question for readers to consider - with the assistance of a couple of photos - is this a house or is it a boat?
See picture HERE
This is a “floating home” anchored off Miami Beach’s exclusive Star Island. Lawyers representing the owner argue that it is a boat, not a house and, as such, the owner should not be liable for the $120,000 property tax bill. It has been manufactured by a company that specializes in what it calls liveable yachts and floating islands. This one, a rectangle-shaped house boat, has all the trappings of a floating mansion: a luxury kitchen, spacious living room, two upstairs bedrooms, gym space and a patio overlooking the sparkling waters of Biscayne Bay. It was built by two French engineers who live in South Florida and have dedicated themselves to renewable energy and environmental preservation amid the threat of climate change and sea-level rise. But, despite the fact that it is registered with the U.S. Coast Guard and can travel the seas at a modest five knots, Miami-Dade County says it’s not actually a boat. The owner filed a lawsuit against county officials saying they are violating a Florida constitutional ban against levying annual property taxes on boats. The owner purchased it last year for $3.3 million. The property appraiser’s office issued a tax bill in November 2021 valuing it at $5.1 million; ironically, the assessor valued it by looking at the value of other yachts! So, is it a house or boat? That’s the $120,000 question; you can decide.
Paul Sanderson JP LLB (Hons) FRICS FIRRV
President, International Property Tax Institute