Damned If They Do . . .

A month ago, when I commented on Pittsburgh's property reassessment controversy, there was some evidence from a small sample of three streets that the new values still favored the wealthy and discriminated against the poor. Rich Lord of the Pittsburgh Post-Gazette has done a more complete analysis of the reassessments, and the results are as I suspected.

For non-Pittsburghers, let me back up a step. Allegheny County property had not been reassessed since 2002. Failure to do regular reassessments discriminates against low income residents, whose property values are usually stable or declining, while giving a tax break to higher income residents living in areas where property values are on the rise. A coalition of low income homeowners filed suit to force a reasseesment and won. Judge Stanton Wettick ordered that 2012 taxes to be based on the new values. These new values were sent to Pittsburgh homeowners in December, causing much wailing and gnashing of teeth. When Allegheny County Executive Rich Fitzgerald argued that there was not enough time for the appeal process to run its course, Wettick backed down and gave county residents another year of the old values.

The problem is that the new values are also regressive. A regressive tax is one in which the tax rate goes down as the real value of the property subject to taxation increases. Therefore, the burden of taxation falls more heavily on the poor than the rich. Lord found that the reassessment systematically overestimated the value of low-priced land and buildings, while underestimating the value of higher-priced properties.

Lord analyzed 2099 “arms-length” sales that took place in 2011. An arms-length sale is one in which the buyer and seller have no prior relationship to one another. If a prior relationship exists, as when a home is sold to a relative, the sale price may not reflect the true market value of the property. The reassessed values were divided by the sale prices of these same properties to yield a percentage. So, for example, a score of +50% means that the reassessed value of the property is 50% higher than the sale price, as when a home that sold for $50,000 is assessed at $75,000. Here are the percent differences, aggregated by to the sale prices of the properties.

Sale price	% difference between assessment and sale price
$5,000 to $19,999	+295%
$20,000 to $39,999	+134%
$40,000 to $74,999	+56%
$75,000 to $99,999	+17%
$100,000 to $149,999	-3%
$150,000 to $249,999	-17%
$250,000 to $999, 999	-31%

As Lord points out, the houses that sold for between $100,000 and $150,000 are pretty accurately assessed, but the more valuable properties are underassessed. The greatest unfairness, however, occurs among the low-value properties, which are assessed at much more than they are worth. However, an undervalue of 30% on a $500,000 property is worth a lot more money to the owner and a lot more tax revenue to the county than an overvalue of 30% on a $50,000 property.

Click here for a more complete table, showing how these percentages differ by wards within the city. In the interest of full disclosure, I should note that I live in Highland Park (Ward 11), and as would be predicted from the table, our home is assessed at less than we paid for it in 2009.

The reaction to the P-G study of Wesley Graham, the county's acting chief assessment officer, is instructive. He complained that they had not verified that all 2099 sales were between independent parties. Presumably, there could have been some undetected sweetheart deals among the properties with lower sale prices. I must confess, I'm also concerned about including extremely low-end properties in the analysis. Some sellers may have been trying to unload run-down properties by selling them at below market value. However, even if we disregard the top two rows of the table, the figures are still quite persuasive.

Mr. Graham also said that the reassessment values meet industry standards for fairness and consistency. It's not clear from the article what percentage of deviation from the sale prices the industry considers acceptable. Regressive property taxes may be more common than is generally acknowledged. Many years ago, I had a sociology professor who told our class that tax assessment was one of the most important but overlooked ways in which poor people get screwed in this country. He argued that tax assessments are almost always regressive, or as he put it, the assessment curve is always flatter than the curve describing the real value of the properties. (I remember this well because I had a summer job working for a tax assessor at the time.) The people who profit from this are not only people with expensive homes, but also the owners of commercial property, which is almost always undervalued. Does anyone know of any good national studies of this problem?

Why are property values almost always regressive? Dominic Gambino, former manager of the Office of Property Assessments, said, “It's very hard to catch those quickly appreciating properties.” He didn't explain why the P-G could catch them while the county couldn't. One of Mr. Graham's comments may have been closer to the truth. He said assessors are “a little gun-shy about putting on the value that they're seeing” on high-end properties. Could it be that they know that affluent people are more likely to appeal their assessments than poorer people?

The Post-Gazette also reported some anecdotal evidence that suburban assessments, which have not yet been posted on the web, are also regressive. For example, property values in low income communities like Braddock and Duquesne appear to have increased more than those in wealthier suburbs like Monroeville and Plum.

Chris Briem has pointed out that, in spite of their bias, the new values are more accurate than the 2002 figures. Whether the county uses the old assessments or the new ones, however, it looks like the poor will always be shortchanged.

Kicking Assessments

This post deals with a local Pittsburgh controversy. My apologies to out-of-towners. Maybe Pittsburgh's political buffoonery is similar to foolishness taking place elsewhere.

The following was written on Friday, December 30:

Judging by media coverage of our tax reassessment controversy, Pittsburgh property owners will soon be marching on city hall with torches and pitchforks. I'd like to take a step back to see whether all this confusion and anger is really justified.

Property values in Allegheny County have not been reassessed since 2002. When there is a long time between reassessments, this places an unfair burden on people whose property values are static or declining, while unfairly benefitting those whose property has increased in value. Since the second group is generally more affluent than the first, failure to reassess is a Robin-Hood-in-reverse social policy. It steals from the poor to give to the rich.

Our politicians and the media have stoked fears that reassessment will lead to tax increases, but it shouldn't if our elected officials follow the law. State law prohibits windfall profits from a reassessment. Municipalities are required to adjust their millage rates downward to ensure the changes are revenue neutral. The magnitude of the tax increases that our more affluent citizens must pay should be balanced by declines in the taxes of less affluent residents.

That doesn't mean Allegheny County's reassessment will be completely fair. Any errors will be heavily publicized by the media, but the appeal process is intended to remedy them, provided they are random and not so numerous as to overwhelm the system.

There will also be families whose personal circumstances do not match those of their neighbors, i.e., people on fixed incomes living in prosperous neighborhoods. Whether their tax increases are unfair is debatable. People benefit from living in a nice neighborhood regardless of the value of their own home. The homestead tax exemption is a partial solution to this problem. We can also take perverse comfort in the fact that Pittsburgh is highly segregated by social class, thus minimizing these mismatches.

Both the outgoing and incoming Allegheny County Executives, Dan Onorato and Rich Fitzgerald, have argued that the county should not be required to reassess its properties unless the rest of Pennsylvania is also forced to do so. I agree that the other counties should be required to update their assessments, since that is fairer to the residents of those counties. However, if frequent reassessment is a beneficial social policy, Allegheny County should do it regardless of what other counties are doing. The only people harmed by this policy are homeowners who are currently getting a free ride. Their taxes will be higher than if they lived in some other county. But their taxes should be higher. To call this unfair is a bit like saying that if Allegheny County enforces laws against DUI but Butler County does not, this is unfair to the drunk drivers of Allegheny County. Is this really a compelling argument?

Our public officials, nominally members of the Jackass Party, have wasted our time and money by refusing to implement the reassessment. This would seem to be a clear indication of their class loyalties. The working poor seldom make campaign contributions. While their rhetoric is intended to mislead us into thinking they are trying to protect poor people from losing their homes, it is the wealthiest persons (and “corporate persons”) who benefit from the delay.

These class loyalties would be more obvious if the news media did a better job of presenting the issues involved in reassessment. Unfortunately, the Pittsburgh Post-Gazette and the other media have added to people's confusion and anger by framing their news stories primarily as “the looming threat of a tax increase,” rather than using the more accurate frame of “restoring fairness to our tax system.”

Fortunately, I didn't post the preceding note because I hadn't yet worked out some of the kinks in my blog. Since then, there have been several developments that have added some nuance my opinion.

It was announced that Pittsburgh residences have increased in value by 46% due to the reassessment. The average for commercial properties is 71%, for an overall average of 57.89%. This should give homeowners an idea of whether their taxes will increase or decrease and by how much. For example, my assessment went up 76%. Subtracting 58% from 76%, I should expect my taxes to increase about 18% as a result of the reassessment. Chris Briem has analyzed these changes in value and found that approximately two-thirds of Pittsburghers will see their taxes drop, while fewer than 5% will be hit with a tax increase of 100% (double) or more. If this is true, Pittsburghers have been hit with an epidemic of false consciousness.

There are some indications that inconsistencies in the reassessment are not random. Rich Lord of the Post-Gazette analyzed the new values in three neighborhood blocks. In increasing order of affluence, they are Sheffield Street in Manchester, Pius Street on the South Side Slopes, and Saint James Place in Shadyside. Contrary to what we might have expected, the assessments increased by 118% in Manchester, 66% in on the Slopes, and only 21% in Shadyside. The average assessment exceeded the average recent sale price in Manchester, but was lower in the other two locations.

Ruth Ann Dailey, the P-G's most conservative local columnist, has suggested there was social class bias in the reassessment: “I'd bet dollars to data entry clerks that we'll find this situation holds true throughout the city—the percentage increases in poor neighborhoods' assessments will be much greater than the increases in the wealthier ones, because assessors can't conceive that anyone's home could be worth so little.”

It is important to find out if this allegation is true. The P-G's sample is far too small to draw a firm conclusion. Someone should analyze a much larger sample of reassessments randomly selected from around the city. If there is evidence of social class bias, they must be all discarded.

Ms. Dailey's benign explanation for class discrimination is not entirely convincing. If data entry clerks were systematically mistaken, I'd bet dollars to campaign contribution checks that these biases were somehow transmitted down the food chain from the politicians at the top. As Lily Tomlin said, “No matter how cynical you get, it's impossible to keep up.”

This morning's paper reports that Rich Fitzgerald has “thrown out” the reassessments. Our 2012 tax bills will use the old rather than the new values, setting up a confrontation with Judge R. Stanton Wettick, Jr., who ordered the reassessment. Fitzgerald has said he will go to jail rather than give in. Judging from some recent reports of conditions in our state prisons, it might be a good idea for all incoming government officials to spend a few nights there, just to give them an additional perspective on how some of their citizens live.


Update (1/14/12)

On Thursday, Allegheny County Executive Rich Fitzgerald faced off against Judge Stanton Wettick. Wettick blinked. The reassessment has been postponed for a year. Poor people will continue to pay more than their share of taxes while rich people and corporations will continue to benefit. Fitzgerald calls this “a great victory.” Next year, they will fight the same battle again. In Pittsburgh, nothing ever gets settled.

After the commercial property assessments were released, the business community, with the help of its friends at the Post-Gazette, went into a front-page, full-court press. We were told that the reassessments of the downtown skyscrapers had no rhyme or reason, and that if corporations were forced to pay their fair share of taxes, they would leave Pittsburgh and throw the city into another recession. The one-year delay gives their high-priced lawyers an opportunity to appeal the reassessments. Should they win some of these battles, reductions in the assessed values of $200 million buildings will have a significant impact on the overall 58% increase in value of city property. If that percentage drops, homeowners will pay more taxes.

One helpful development is that some local journalists, notably Len Barcousky and Brian O'Neill, started to get it, and to inform their audience that the majority of Pittsburghers would have been helped, not hurt, by the reassessment. Blogger Chris Briem's analyses played an important role in spreading that message.

Fitzgerald says he will use the next year to persuade state government to order a reassessment of all the real estate in Pennsylvania. With the Elephants in total control of every branch of state government, it's hard to believe he's serious.