Mike Walsh is one of many Philadelphia homeowners who learned this year that his property taxes would more than double.
But Walsh chose not to join the thousands of property owners who appealed their new values this year 2018 — even though his annual tax bill jumped by 113%, to a total of $4,884.
That’s because he thought the market value that city assessors assigned to his triplex on Wharton Street was correct. The property, in South Philly’s booming real estate market and blocks from the famed cheesesteak corner featuring Pat’s and Geno’s, had not been reassessed since 2014.
“I just didn’t like the fact that my real estate taxes are going up over 100%,” he said last week. “And I don’t think real estate taxes should ever go up over 100%.”
In some other major cities, large tax increases like Walsh’s are prohibited because governments place caps on hikes. In New York City, for example, significant increases are phased into tax bills over a few years. Maryland caps the amount that an assessment can rise in one year at 10%. Louisiana voters approved a ballot measure this year requiring that increases greater than 50% to be phased in over four years.
In Philadelphia, however, there is no limit to the amount by which assessments — the value used to calculate property tax bills — can increase in one year. The median value of a single-family home increased 10.5% in the new assessments of residential properties released this year.
And unlike other counties in Pennsylvania, Philadelphia’s reassessments are not revenue neutral, meaning that increasing property values mean a boost in tax dollars for the city. City spokesman Mike Dunn said the city and school district will receive about $85 million in additional revenue based on the increased 2019 assessments, after accounting for successful appeals and other factors. Last year’s reassessment of commercial properties was expected to bring in $118 million in additional tax revenue.
The result, said Robert P. Strauss, a professor of economics and public policy at Carnegie Mellon University, is a growing reliance in Philadelphia on the property tax.
As property tax revenue grows, Strauss said, the city is “using reassessment kind of as a smokescreen.”
Since 2014, the city has aimed to perform more frequent assessments and assess properties at 100% of market value, which is the amount at which a property would sell. However, this year marked the first time that all residential properties were reassessed since that new system began.
With the new system, known as the Actual Value Initiative, the city launched some programs to help struggling homeowners. They include a discount for owner-occupied primary residences, installment-payment plans, and tax freezes for low-income seniors.
“It’s a really important issue because property values can change unexpectedly and sometimes dramatically, and it’s essential for a property tax system to have a way of easing the burden on a homeowner who faces a sudden change,” said Joan Youngman, a senior fellow at the Lincoln Land Institute.
Councilman Mark Squilla, who has previously proposed that assessment changes be phased in, said he would support a cap on increases, but that would violate the state constitution’s uniformity clause requiring that all properties are taxed at the same rate.
“I believe there’s still a way to do that,” he said, “whether we do it ourselves or we do it through working with our legislators in the state to give us our ability to do that.”
Dunn said the Kenney administration believes that “capping assessments will, over time, create greater inequities in the property tax system” because it would shift the tax burden, leaving residents whose property values did not increase to pay a higher tax rate relative to their market values than those with rapidly rising values.
How have property tax limits worked out in other places?
While many states and cities do have limits that have assisted taxpayers, experts warn that they can come with downsides.
“It’s not hard to freeze (taxes) but it’s really hard to thaw,” Youngman said. “You have to be very careful that whatever you puts in place addresses the problem with the minimum of future difficulties.”
Caps can shift tax burdens, and they can make it difficult for people to move, such as in California where Proposition 13 froze taxes at 1970s levels and limited increases to 2% per year. But when a home is sold, it is reassessed at market value — placing a much larger tax burden on new residents or first-time homeowners.
A 2010 report by the International Association of Assessing Officers acknowledged that market-value assessments can create problems with predictability and affordability of taxes, but advised against caps — recommending instead the types of safety nets that Philadelphia already has in place.
In some places, taxpayers push for “truth in taxation,” Youngman said, which amounts to government acknowledgement that rising values can impact taxpayers.
“The idea is if you’re going to increase your revenue collections because the values go up, that under these rules you need to go through all the same steps you would go through if you would change the tax rate, … whether it’s a public notice or a hearing or a vote.”
Youngman said experts admire Philadelphia for making the move to market-value assessments in 2014. But what can be done about the lack of upper ceiling on how property taxes can rise amid the success of the city’s real estate market?
Strict revenue neutrality, as is mandated for other Pennsylvania counties, may not be practical because government costs do increase, Youngman said. But she said reducing the tax rate to some degree when there is a large assessment increase is an accepted practice.
“These silent tax increases where the base rises and you’re not just bringing in a normal increase of a few percent but you suddenly have a large increase simply because of value changes, that’s always something to be extremely cautious about,” Youngman said.
Dunn said the mayor is always open to considering tax policy changes while working with city council on annual budgets.
“However, mandated revenue neutrality would hamper the city’s ability to continue to provide the level of services that residents need and expect, as we would likely need to reduce services to pay for rising non-discretionary costs.”
City council commissioned an audit of Philadelphia’s Office of Property Assessment this year. It was scheduled for completion in September, but it hasn’t yet been released. Jane Roh, a spokeswoman for Council President Darrell L. Clarke, said the Office of Property Assessment is currently reviewing the report.
If the audit shows that property assessments are accurate, Squilla said, city council should look at reducing the tax rate to make up for assessment increases.
“Some people would argue that now you’re reducing the amount of money that goes into the general fund (and) you’re reducing the money that goes to our schools,” he said. “But we have to be able to balance that on the backs of the residents and also the city services and our school district.”
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