Property Tax: Biases and Reforms
|January 9, 2007||Posted by Staff under Progress Report, The Progress Report|
Tax Expert Urges Reforms
Property Tax Reform Priorities
by Mason Gaffney, Ph.D.
Priority #2: Enforce Good Laws
Reassess Land Frequently
It is important to assess land for tax purposes often, especially on a rising market. (Landowners will see to it you do so on a falling market.) Land appreciates most years, while buildings depreciate physically every year. Lagging assessments therefore automatically overtax buildings relative to land.
New Hampshire Assemblyman Richard Noyes has circulated data on the effect of reassessment in NH. The land fraction of assessed value rises each time there is a reassessment. Keene, NH leads with frequent reassessments, a high fraction of land in the mix, and a strong track record attracting enterprise and jobs.
In California, where we used to have good assessment, we now have bad assessment legally mandated by Prop. 13. So long as land is unsold, and/or not newly improved, its assessment rise is capped at 2 percent a year, while market prices soar. Here is one example of the results. This year the Metro Water District of Southern California (MWD) condemned 410 acres for its new Domenigoni Reservoir to expand the system (to accommodate land speculators in the desert boonies). The jury hit them for $43 million, which works out to about $1.95 a square foot.
The question occurred to me, how does that square with the assessed value for property taxation? I asked Ted Gwartney, a professional appraiser with the Bank of America, to check the assessed value. It is about seven cents a square foot; The condemnation price, supposedly based on market value, is about 28 times the assessed value.
This is not the result of fractional assessment. In California we assess property at 100 percent when land changes ownership or there is a new building. Rather, this is the result of Prop. 13 and its prohibition of market reassessment until land sells.
I thought that was startling, but Mr. Gwartney’s reaction was, “What else is new?” He, who works with such data every day, has a rule of thumb that market land value in California today is about eight times assessed value. That is important enough to repeat: our assessed land values are routinely at 1/8 of true land value. I wouldn’t dare say that on my own authority, but Mr. Gwartney is here to confirm it. He is a veteran appraiser; for many years he was Director of Assessments for the entire Province of British Columbia.
Does this help you understand why California landowners are now so slow to adapt to new demands? In 1945 the assessors were building fires under landowners, so they sought new strategies to meet new circumstances. Today there remains a weak incentive to improve to improve property: tax collectors generally cost them money when they make improvements. Sit still, lie low, hire no one, hang on, produce nothing, and your holding costs are negligible.
A little of the old magic lingers. In October, 1995, a 225-acre parcel in Corona, the Chase Ranch, was sold to a builder, Coscan Davidson Homes, for building 967 units. The previous owners, “GGS,” including a Japanese insurance firm, were “seeking a way out. They were behind in tax payments and GGS was losing its staying power,…” quoth Stephen Doyle, spokesman for the buyer. It is that “staying power” that stifles land use and production. Coscan wants to build immediately. Even so, though, they plan to take five years to build out the project – if everything goes well. This is the new, post-Prop. 13 meaning of “immediately.”
In spite of extreme underassessment, the assessed value of taxable land in California is 40 percent of the total real estate value. Imagine what it would be if assessed values were real values, “marked-to-market,” as the law used to stipulate. It would be over 70 percent, as in 1917. “Staying power” would go down; land use, jobs and production would rise.
End of Part Three. Part Four will appear on Thursday, March 26.
This paper was originally presented at a property tax reform conference at the Jerome Levy Institute at Bard College, New York, November 3, 1995.
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