Dr. Herbert Barry's Proposal to Really Reassess Allegheny County
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Dr. Herbert Barry's Proposal to Really Reassess Allegheny County


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Incentive Taxation

Dr. Herbert Barry's Proposal to Really Reassess Allegheny County

UrbanTools got underway as the Henry George Foundation of America in Pittsburgh in 1926.  Through the years, some of the most respected elected officials in Western Pennsylvania such as Pennsylvania Gov. David Lawrence, and mayors Scully and McNair served on our Board of Directors.

During those 85+ years, Pittsburgh and other Allegheny County cities and school districts have utilized land value taxation as a tool to discourage private land banking and to encourage all levels of investment and labor inside municipal boundaries.

In the year 2000, Allegheny County already weakened by the collapse of the steel industry, and subsequent depopulation and disinvestment commissioned a re-valuation of all properties in the county.  It was a disaster, with land values in the city of Pittsburgh having no rhyme or reason.  In the ensuing political arguments, land value tax was rescinded.

In that time assessments have remained frozen, as the elected leadership of Allegheny County could not decide the best course of action to take. Sometimes, doing nothing is the best answer, but not here.  Poor neighborhoods and cities became continually and dramatically over assessed as overall economic performance declined but values on real estate remained the same.

Fast forward to the past couple of years, and class-action lawsuits and a determined judge led to a state Supreme Court order for Allegheny County to reassess.

Just last week, values released to the city of Pittsburgh and school district where the subject of much discussion and angst.  As of January 13, the new County executive ran the risk of being held in contempt of court for not implementing the new assessments, values had increased over the 2002 values, and the judge in charge of the case ordered the values to be held over to the year 2013.  So far so typical.

It doesn't have to be like this.  Most states require genuine revaluations with a uniform system statewide.  Assessment is no longer an art, is a science.  And with the resurgence of respect for the real property tax – after the failure of other forms of taxation during the great recession of 2008-2012 - the property tax will be around for a very long time to come.

There is an alternative proposition to government revaluation however. With government in so much doubt over its ability or political viability to conduct a reassessment, why not put the decision of values in the hands of the citizens?

Dr. Herbert Barry III, and UrbanTools board member has written a short essay that respects the intelligence of the citizens of Allegheny County, and may provide a long-term solution to fear of assessment. His solution? Self-assessment.

"Protests against decisions by Allegheny County property assessors indicate the advantage of a feasible and greatly preferable policy. Property owners should assess their properties.   Before the end of November, each owner’s assessment for the next year would be listed on the County website. In the first two months of the next year, a bid for 5% or more above the assessed value, and the identity of the bidder, would be added to the web site. 

The bid would be replaced by any subsequent bids that are higher by 5% or more. An option for the owner would be to decline the sale by accepting the higher assessment with an appropriate fee to the highest bidder.   

Many owners would object to this policy because of the annual threat to their ownership. All property owners should realize that ownership of a part of the earth’s surface is a privilege. This privilege should be relinquished when a purchaser accepts a higher assessed value.   

An advantage of this proposal is that most owners would choose to assess above the market value to deter bids. Tax revenues for the County, its municipalities, and its school districts would thereby be increased. The administrative costs for the County would be much less than the salaries of assessors and the costs of considering appeals of the decisions by assessors.   This proposal would also benefit owners who need or desire to sell. They could induce bids by assessing their property below market value."

This blog post, courtesy of Dr. Barry will be the first of many semiregular posts on the subject of property valuation/assessment and taxation. What do you think of this proposal?

10 Comments to Dr. Herbert Barry's Proposal to Really Reassess Allegheny County:

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Logan Boettcher on Thursday, January 26, 2012 7:35 PM
I like the idea of self-assessment because it allows the market to set the tax rather than relying on assessors, which can be expensive, corrupt, or both. But more importantly, self-assessment removes the need for appeals based on what true market value should be. The question I would have for Dr. Barry’s proposal is how it would compensate owners for the loss of fixed improvements put on the land. For example, if Tom and Jerry both put bids on a piece of bare land, and Tom wins with a bid of $1,000 per month to Jerry’s $950, Tom would then start building on the land. Let’s say Tom drops $300,000 cash down to construct a house and finishes it before the next year comes around. At the next bidding period, Tom is ready to bid the extra 2% increase in the value of the land (due to either inflation or the area's wage growth) should any other bidders come around. Jerry, though, can come back with a bid over the true market price for the land of $1,020. Even though he might value the land at $969, he figures that the house that Tom built is worth about $1,600 per month (if he gets a mortgage at 5% for $300,000) and therefore the total amount he would be willing to pay is $2,569 per month. Jerry can therefore put in a bid between $1,021 and $2,569, because if he wins, he gets the house and the land for the price that he feels is his limit. Tom, on the other hand, would not be able to outbid Jerry for very long because he already has spent the money on the house and can only afford the land portion of the property. Jerry could probably get the land and the house by bidding just a couple of hundred dollars above Tom’s bid and Jerry would receive a windfall. How would this be solved? Would there need to be an assessment of the house to determine what Jerry would need to pay Tom for building the house? And what assessment method would be used? Historical cost of construction minus depreciation? Current fair market value? If there was a mortgage on the structure, would the bid winner have to get the mortgage? Or would a second bidding need to happen for any immovable structures? This part needs to be solved in order for self-assessment to work, I believe.
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Grey Tilden on Saturday, January 28, 2012 11:42 PM
I agree thoroughly with the comments made above. The desire to find a free market solution to fair land value taxation is an exciting one and certainly deserves continued thought and examination. A minor criticism would be the difficulty for the average property owner to seperate the value of land and fixed improvements. This could be overcome with time through education and example. As far as the larger issue of whether the highest bidder would have a right to buy the fixed improvement itself, I would suggest instead to frame the process as purchasing the right to rent (mortgage) the land to the building owner, not necessarily to remove buildings and vacate individuals from the land. This would create incentive for individuals to fairly assess their property, but would remove the threat that they would be evicted; they would just take the risk of having to pay rent! It would also create incentive for individuals or enterprises to bid on undervalued land as they could still capture the margin between what they pay in one year for undervalued land and what they can obtain at fair market value. Of course, this process still runs the risk of having the maverick individual (or corporation) who would buy something well above market value and charge exorbinant rent that would force the occupant to move. However rare this irrational behavior would be, I'm sure the very threat of it would make most individuals wary of a proposal like this. Additionally, this "right of rental" may not be anything recognizable legally (some sort of restricted property right perhaps?). Nonetheless, if criticisms could be effectively answered, I think this has the potential to be a major breakthrough in the implementation of LVT.
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Logan Boettcher on Tuesday, February 07, 2012 5:37 PM
On further thought, the problem of compensation for improvements would remain even with an honest bid from someone other than the owner. If a third bidder, Steve, outbid Tom for his tax liability and that bid was a true reflection of what Steve would bid for the unimproved land, then the problem becomes how would we create an incentive for both Steve and Tom to come to a rational agreement about the market price of the improvements. I think the right of rental idea would surely be abused, even by honest bidders. Why wouldn't an honest bidder for the land go on to dishonestly charge an unrealistic rent to the former owner for the use of the land and improvement? One month in arrears and voila, the former owner is out on the street with nothing and the new owner with everything. I think the answer lies in a different right, and that is the right to destroy. It does sound a little sinister, but it does make sense. Currently, when a property is sold, anything on the property, both mobile and immobile, can be subject to negotiation. For example, the seller might include the appliances or furniture in the sale, even though the seller could easily move them off the lot. Sometimes the buyer will prefer this option, even though they could easily buy their own appliances in lieu of paying for the existing ones. But the main takeaway from this type of market calculation is that the seller can move the appliances to the new house or sell them on Craigslist if the property buyer does not agree to buy them at market price. But the house itself (if not a mobile home) cannot be moved off the lot and sold separately. This puts the out-bid owner of the improvement at a disadvantage because the rules of bidding mean that the control of the land gets control of everything still left on the land, hence why the right of rental would be abused. But if the out-bid owner had a right to destroy the immovable structures/improvements, then the calculus would change. Suddenly, if the winning bidder does not give the losing owner a fair market value for the improvements, then the losing owner can destroy the improvements. This would seem to give the former owner a power to veto the property transfer, but the right to destroy is not given to just the loser but also to the winner. Why does the winner get the right to destroy the loser's improvements? The answer is simple: if the loser demands a price too high, the winner can invoke the right to destroy and providing a check on over-valuation on the loser's part. Also, on a philosophical point, the winner's bid represents the unimproved value of the land, so if no agreement can be made on transfer of the improvement's value and the improvement is destroyed, than the winner is left with exactly what he paid for: bare land and the right to use it. So if the house in the above example is truly worth $300,000 to Steve, he will put in the offer to Tom. Tom can accept the offer (getting fair value) or threaten to destroy the house if he believes he can get more. But Tom runs the risk of Steve invoking his own right to destroy and consequently getting nothing for the improvement, so any fair offer should be taken, regardless if Tom feels slighted by being kicked off the land. But what if Steve presents an unfair offer to Tom, knowing that Tom wants his money back? Say Steve offers only $150,000 for what he truly values at $300,000. Would not Tom agree to such a proposal to cut his losses, knowing he's going to lose the house anyways? No, because Tom knows this: if Steve wants a $300,000 house, and Tom destroys it because he was given an unfair offer, than Steve would have to rebuild the same value of house while incurring costs for demolition, cleanup, taxes, and possible alternative living arrangement costs (motel, apartment) during the construction phase. Thus, the incentive created by the mutual right to destroy works in both ways: Tom dares not to reject a fair offer for fear of getting nothing, and Steve dares not to propose an unfair offer for fear of losing both money and time rebuilding exactly what he could have got immediately and without extra cost. But what if Steve wants to demolish the house anyways because a new mass transit line is being built next to the property and Steve's plans for the property involve either a high-rise apartment complex or office building? Steve would rebuff any offer from Tom for $300,000, and instead invoke his right to destroy the house immediately, given that his plan is to raze the building regardless. Tom would get nothing in return. This would seem antithetical to the goal of giving Tom fair value for what he put into the land. Maybe an ancillary right given to Tom would be the right to sell his improvement to anyone willing to pay the winning tax bid also. So, if Steve wins the bid against Tom and intends to raze the property, Tom can still hire a real estate agent to advertise the property to other buyers who might also want the property. This probably will not affect the outcome, because the magnitude of the increased land value will guarantee the razing of the improvement and therefore no other candidates will emerge to pay extra money than the original winner of the bid. But giving Tom the right to sell gives Tom a chance to get back the money put in for his improvements. Unfortunately, there might be cases like this, but it is preferable to allow isolated cases like this rather than allow the systemic and ongoing misallocation of land, the deadweight loss caused by taxation of earned incomes, letting unearned income have privilege over earned income, and chronic boom and bust cycles in the economy. To summarize, the complete process would go like this. 1. Bids are cast for the right to use land for the next year, with the highest bid winning (bidding process to be determined). 2. The current owner of the land, if not the winning bidder, is allowed to 30-60 days to sell his property to anyone willing to pay the winning bid, including the bid winner. 3. If the property remains unsold (i.e. no one offers monetary or in-kind consideration for the transfer of the property) at the end of the selling period, then the current owner is allowed to choose any and all property improvements on the lot to be destroyed and it will be destroyed at the bid winner’s expense. The bid winner would then take control of the land.
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Justin Keith on Saturday, May 19, 2012 8:53 PM
Agreed - the right of destruction is critical. There are other ways to work around this too. Insurance, making houses more modular and reusable, so they can be stripped down for parts without losing a lot of value. The biggest issue that remains really is what happens if the bidder wants to destroy the improvements anyways. You've touched on workable solutions, but it still is a tough sell for many people.

technical writing jobs on Friday, March 30, 2012 10:04 AM
I am sure, this proposal is a good idea. It is really benefitial for the owners, so economy in general would only win. It is also advantageous for the County, its municipalities, and the schools.
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