President’s Message – May 2021
I would like to start this month’s newsletter by referring to an interesting, if somewhat controversial, article published by the US Institute on Taxation and Economic Policy which is based in Washington DC. The article is entitled “Gentrification and the Property Tax: How Circuit Breakers Can Help” and I think it is worth sharing in full.
It states: “The 1991 film Boyz n the Hood is known for tackling the topic of gang culture in the Los Angeles area, but there is a notable scene in which the actor Laurence Fishburn’s character, Furious, gives a monologue on gentrification. Against a backdrop of a “cash for your home sign,” his character explains that gentrification is a process where developers exploit a neighborhood with depressed property values – often due to deliberate disinvestment over time – to turn a quick profit, thereby rapidly driving up prices. While this film was released 30 years ago, gentrification remains a pressing challenge for communities across the nation.
Higher property values bring higher tax revenue for cities, which can go toward the improvement of local schools and services. However, this comes at a price for low- and middle-income families. Homeowners are affected by suddenly rising property taxes on homes they may have owned for decades. But renters are also affected by gentrification as landlords drive up rent, partly to cover the costs of an increasing tax bill, even on properties that may not have been renovated for years.
In some cases, gentrification can lead to displacement. This is evident in the District of Columbia, which has seen a 21.7 percent decrease in its low-income population within rapidly gentrifying neighborhoods since 2000. While the effects are not always this extreme (D.C. was recently ranked the 13th “most intensely gentrified” city in the nation), gentrification is widespread throughout the country. Rising costs associated with gentrification in Detroit, for instance, have played a large role in causing a 10 percentage point decline in Michigan’s homeownership rate among Black families.
Charlotte and Durham, N.C., are prime examples of cities whose real property values have skyrocketed in recent years. Many properties in Charlotte’s downtown neighborhoods saw their assessed value more than double after a 2019 reappraisal. Real property values in neighborhoods close to downtown Durham increased by as much as 60 percent, roughly three times the rate in other parts of the city. Local policymakers and activists in North Carolina have been working on solutions to help those most impacted by rising property tax bills but are constrained by the North Carolina constitution from doing so.
All too often, assessment practices – where homes are assigned a value for tax purposes – make the problems created by gentrification worse. Infrequent assessments can lead to sudden jumps in property tax liability when the time for reassessment finally arrives. Businesses and high-income taxpayers are likely to appeal those new assessments and win substantial property tax cuts, while lower-income families and people of color are less likely to appeal and less likely to win when they do appeal.
Moreover, people of color living in gentrifying areas are often already over-assessed. Homes in neighborhoods with significant Black or Hispanic populations are systematically over-assessed by local assessors relying on imprecise data. Gentrification-induced property tax increases exacerbate the problem.
So, what can states do to help families in gentrifying areas facing rising property tax bills?
Getting tax assessments right with better data is a good starting point. A property tax built on an inaccurate measure of property values will inevitably produce inequitable outcomes.
Aside from that, circuit breakers are an appealing addition. They are effective because they provide property tax relief to families whose property taxes surpass a certain percentage of their income. If a family in a gentrifying area sees their property tax bill (or their rent) surge to an unaffordable level, a circuit breaker credit kicks in to offer relief. This targeted approach assists low- and middle-income families without significantly reducing overall tax revenue.
Of course, the effectiveness of circuit breakers hinges on families knowing that these programs exist. Making the credit available on state income tax forms can help reach many families, but states also need to invest in outreach to make sure that the credits are not overlooked and that eligible non-filers claim them as well.
Circuit breakers have immediate appeal as tools for boosting the economic security of families in gentrifying neighborhoods. But they offer more than just a quick fix to a longstanding issue. These credits have an important role to play in a broader policy strategy focused on affordability and mitigating gentrification. Circuit breakers are among the best options available for targeting property tax assistance to the families who need it most without holding down the revenues that local governments need to invest in broadly shared economic prosperity.
Progress shouldn’t mean that lower-income people of color have to move out of a community for businesses and others to invest. Too often, so-called fixes like tax caps and poorly designed tax incentives exacerbate the problem and transfer even more wealth to the already wealthy. Addressing this will require systemic change at both the state and federal levels as well as a cultural shift.”
As I said in my introduction, I think the article raises an important issue and one which is by no means limited to the USA. Gentrification and the associated increase in property values that result from it clearly give rise to problems within property tax systems. Views may differ on whether “circuit breakers” are the right approach to dealing with the issue, but it is a thought-provoking article.
Moving on to IPTI business, we have had another busy month with various events and projects.
During April, I had the pleasure of chairing a panel session at the (virtual) annual conference of the Alberta Assessor’s Association (AAA). The session was entitled “Valuation During COVID-19 – Tax and Assessment Policy” and I was joined by four distinguished panel members who spoke about tax policy responses by different levels of government and the valuation impact on different types of property of the restrictions imposed to limit the spread of the pandemic. The presentations were informative and interesting, and we had a good range of questions during the discussion session.
IPTI has been involved in a series of webinars delivered in partnership with the AAA on different aspects of COVID-19. These have included looking at the impact on hotels and nursing homes; shopping centres and office buildings; and the effect on valuation processes of government support for businesses. We have had some very experienced and able presenters sharing their views on these important topics. I am sure the participants in these various AAA-IPTI webinars have found them helpful in dealing with some of the many challenges facing taxpayers, assessors and municipalities during the pandemic.
We also delivered another webinar in the series that we are presenting in partnership with the Institute of Municipal Assessors (IMA). The latest webinar looked in detail at the valuation of shopping centres and, in particular, the “bricks and clicks” issue involving traditional stores and online shopping. It also considered the changing significance of traditional anchor stores, the redesigned mix of retailers to attract a specific demographic and the addition of residential condos and apartments in the current landscape as mall owners adapt to new consumer preferences. Our two experienced speakers focussed on the practical steps involved in applying the income approach while taking into consideration the new reality for these properties. Details of forthcoming IMA-IPTI webinars are on our website.
IPTI also held an online event for its corporate membership on the topic of “The Impact of COVID-19 on Valuations of Various Property Types – Assessor’s Responses”. As we all know, the lockdown and other restrictions imposed by various jurisdictions to limit the spread of COVID-19 have had a major adverse impact on the market value of a number of property types. The pandemic timeline shows a growing awareness of the virus in the early months of 2020 with a substantial impact on people, business and properties. Although at present some restrictions are being lifted, many remain in place and their impact will continue to be felt for some time to come. During this session, our corporate members discussed and shared various experiences in dealing with the impact of COVID-19 on the assessment valuations of selected property types. In particular, the experienced Session Leader – with the assistance of IPTI’s Corporate Advisory Committee members – considered assessment authorities’ responses to the pandemic in various jurisdictions.
I was also pleased during April to be invited by the Royal Institution of Chartered Surveyors (RICS) to make two presentations to practitioners who are studying for their specialist qualification, the Rating Diploma. Rating is the name given to the non-residential property tax system in the UK and the Rating Diploma Holders’ Section (RDHS) of the RICS are members who specialise in this particular area of property valuation and assessment practice. My presentations related to their “International Module” and covered some universal principles for good property tax systems along with a relatively detailed look at several examples of how property tax systems operate in various countries around the world. As always, the presentations led to some interesting discussions with participants on key property tax issues.
Looking ahead, we have a number of other interesting events coming up details of which are, as usual, available on our website: www.ipti.org.
I would like to take this opportunity to thank two strong supporters of IPTI who have recently retired. They are Elizabeth Stair, former head of the National Land Agency in Jamaica, and Wayne Forde, former Director of the Land Valuation and Assessment Department of the Barbados Revenue Authority. I would like to thank them for their many years of support for IPTI and participating in IPTI events, and wish them both a long, happy and healthy retirement.
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 in Canada, the “red hot” housing market has attracted the attention of policymakers who have announced various plans to deal with it. A capital gains tax on principal residences has been proposed as one way to cool Canada’s housing market. A recent article states that the argument for taxing capital gains on the sale of owner-occupied principal residences is twofold. First, the tax will decrease demand for houses and condos, putting a stopper on “illogical” price appreciations. Second, governments are starved for tax revenues, and taxing these gains would help fill that gap. However, the author says that, in practice, neither of these is likely to play out as expected. He states that the current tax exemption for principal residences significantly lowers the cost of relocating to another owner-occupied home. Taxing the capital gains would increase the cost of moving to another home, resulting in some people choosing to stay in their current homes rather than relocate. For others needing to relocate, renting their current home and becoming renters themselves elsewhere may become a more tax-advantageous option – benefiting from the fact that owners who rent their homes can deduct mortgage interest and property tax from their income, unlike owner-occupied homes. Either way, the capital gains tax would then have a negative impact on supply (new listings), offsetting gains on the demand side. The hoped-for reduction in housing prices would not be realized and, at worst, house prices could increase.
Another suggestion, specifically for Ontario, relates to increasing annual property taxes. In the Greater Toronto Area (GTA), an article reports that the Home Price Index has appreciated from $400,000 in 2011 to over $900,000 in 2020. Those who are not so fortunate to own property would have seen their rent increase by 1.9 per cent per year, according to the Ontario rent increase guideline. A simple measure to begin to address this inequality is to increase annual property tax rates at the provincial level. Since tax increases are invariably unpalatable, it could be offset by a universal housing credit to Ontario residents, similar to the carbon tax credit. Moreover, a property tax that places a higher rate on the land versus the building would encourage more efficient land use and densification, which aligns well with climate goals. Toronto’s city tax rate for 2020 was 0.45 per cent plus 0.15 per cent of provincial tax for education. In 2011, the city rate was 0.56 per cent with 0.23 per cent of provincial tax for education. So, as home prices have doubled, the city and province have taken measures to ensure those that benefited the most from that appreciation would pay less tax as a percent of their assets. The author says that, at a time when home prices are spiralling upwards, wealth and income inequality are growing, urban sprawl continues unabated and Ontario has the largest sub-sovereign debt in the world, it would seem that we should consider increasing such an elegant tool as the property tax. We will see how this suggestion goes down!
Moving on to the USA, a mayoral candidate for New York City says it’s time to nix city property-tax breaks for Madison Square Garden, top private universities and large hospitals. This call was reported to be the most eye-catching part of a 21-page “property tax reform plan” posted by the candidate. The candidate said the cash generated would go toward a massive expansion of the NYPD, hiring thousands of new officers and resurrecting disbanded police units. He also said taxing mega city landholders like New York University and Columbia University could generate a billion dollars annually. Higher-education tax breaks cost the city $483 million in 2016, and exemptions for non-profit hospitals cost another $599 million, according to an Independent Budget Office analysis. Most private hospitals and private universities qualify for the sweeping exemptions due to their non-profit status according to the city’s Finance Department. The origins of the Madison Square Garden tax break can be traced to a 1982 state law passed amid fears that the Knicks and Rangers could bolt to New Jersey! Removing similar exemptions for the Garden would add an extra $42.4 million annually to city coffers it is claimed. Religious institutions would continue to keep their property tax exemptions under the plan. The tax reform plan also includes calls for a 2% cap on increases of the city’s annual property tax levy; a property-tax deduction for seniors with household incomes below $75,000; and a review every 10 years of all city properties receiving tax exemptions to make sure they are justified. If the candidate is elected, it will be interesting to see what happens.
The Syrian government has introduced a new real estate sales tax law in a bid to increase state revenue, compounding upward pressure on property prices that have already soared as a result of the steep depreciation of the Syrian pound. The new law issued by the President means real estate tax will now be calculated on the basis of a property’s current market value rather than the book value listed in the Ministry of Finance’s records since the 1980s. The new tax rates range between one to three percent, depending on the location of the real estate property and its use (whether for housing, trade, industry, or land), amongst other factors. While that is significantly lower than the previous tax rate of 15 to 20 percent, current real estate values, which are the base reference for calculating the tax, are much higher, meaning taxes have effectively increased. The Ministry of Finance said the law would help the government collect more taxes from properties sold. It has sought to present the new method for calculating tax as a tool to achieve “tax justice” between Syrians, as the market rates in the new law differentiate between real estate zones. That means property sales in prime areas will be subject to a higher rate of tax than those in less attractive districts. The Ministry said the new mechanism, which will employ a special platform and app to provide an instant assessment of a property’s value prior to taxation, would help protect against corruption by reducing the human element. According to the law, however, a special commission in each real estate zone will review property prices every six months.
In Ireland, the Local Property Tax (LPT) may soon be a thing of the past as the government considers replacing it with a site value tax. A group of experts have been asked to examine how the tax works and whether change is necessary. The LPT is a self-assessment tax so it is calculated based on an individual’s own declaration of the market value of the property. The government’s Revenue Department does not value properties for LPT purposes. The property tax has proved contentious since its introduction in 2013 and groups such as Social Justice Ireland have said that a site value tax is fairer. The tax paid is still based on 2013 valuations. As house prices have risen significantly since then, the government fears that updating the valuations would result in much larger bills. The Finance Minister launched a commission on taxation and welfare, which will look at a broad range of issues. The terms of reference state it will “consider the appropriate role for the taxation and welfare system, to include an examination of the merits of a site value tax, in achieving housing policy objectives”. A local economist said the site value tax should replace a series of other taxes on properties. He said: “The biggest bang for your buck would be replacing not just the local property tax, it should replace commercial rates and development levies as well. It would definitely help if it were levied instead of the LPT. It is more equitable, it’s basically a wealth tax on social wealth. If it applies to all land, not just land under private homes, then you have a strong incentive for land to be used well, in particular, publicly owned land.” The commission will report back to the Minister by July next year, in time for the budgetary process.
It remains unclear whether – or when – China will introduce property tax as it gets no mention in the 2021 Legislative Program. It is reported that the Standing Committee of the National People’s Congress recently published its legislative work program for this year. It does not mention a property tax bill, suggesting that the keenly watched for tax will not be introduced in 2021. The 14th Five-Year Plan, which runs through to 2025, talks about promoting real estate tax legislation, but it does not say when the legislative procedure would be completed or when the property tax would be levied; so, effectively there is no timetable for the legislation. However, a number of tax experts believe that, although such legislation is difficult, the government has not given up on it. It will continue to improve the draft law and promote the legislative work at the appropriate time. And despite the lack of a property tax bill this year, there will be significant progress in stamp duty tax law and tariff law, they said.
There has been talk that Singapore, one of the world’s main wealth management centres, might introduce a form of wealth tax to raise revenues as the city-state opens up after the pandemic. A number of countries are said to be considering it, including the USA. The record of wealth taxes is patchy: Sweden, once a “poster child” for high-tax socialism, got rid of them a few years ago. Switzerland, however, has a form of a wealth tax at the cantonal level. France introduced such a tax but scrapped it in 2017. Globally, there has been much discussion on raising additional taxes to fund COVID-19 spending. There has been a spotlight on wealth taxes to raise taxes as well as help address a rising inequality divide which has only become wider during the pandemic. Wealth tax can come in different forms ranging from a pure wealth tax (e.g., a flat percentage tax on an individual’s total net worth) to other forms of wealth taxes such as inheritance/estate tax, capital gains taxes and property taxes. We will watch the position with interest.
And finally, many years ago, there was an advert in the UK for coal (which shows how long ago this was!) which said, “Come home to a real fire”. At the time, there was a great deal of concern in Wales about English people buying cottages in Welsh villages as second homes and, in the process, pricing locals out of the market. Local activists decided to show their frustration by setting fire to a number of such homes. This prompted a wag to change the advert to “Come home to a real fire – buy a cottage in Wales”. It seems that local authorities in Wales are now trying a more subtle approach by doubling the local property tax premium on such second homes. I suppose that is rather less “brutal” than burning the properties down!
Paul Sanderson JP LLB (Hons) FRICS FIRRV
President, International Property Tax Institute
President’s Message 2021
President’s Message 2020
President’s Message 2019