Real Estate Tax (part 2)

In my earlier post (February 15, 2007), I explained why the real estate assessment-taxation process is inherently unfair. I argued for the repeal of this obsolete tax and its replacement by another source for local government revenue. I realized that this repeal would not take place soon, so I proposed the following fix to make the real estate tax more equitable:

1- All assessments are frozen at their current level (or preferably rolled back to their January 2006 level);
2- Owners of real estate pay taxes based on the current assessment until either they sell the property or refinance to access their equity in the property;
3- Sellers or owners of refinanced property pay a real estate surtax at settlement based on the increased value of the property;
4- After sale or refinance the assessment will be adjusted to the sale price or the appraisal that is the basis of the refinancing.

I received a comment from somebody who calls himself the Yankee (I assume that means s/he is a member of some New York sports team.) The Yankee said,


"If you sell your property at a profit, you will owe real estate taxes based on the idea that the value of the property actually increased some time earlier and you weren't taxed at that time on the increased value. Is there a fair way to calculate this belated tax?

"Let's say that you lived in the house for 20 years. If the value was constant for the first 19 years, and then jumped in the last year, the tax should have risen only one year ago. If the value went up in the first year, and then was constant for the last 19 years, the tax should have been higher for 19 years. Since there's no way to figure out how long the house was under-assessed, there's no fair way to calculate the surcharge."

The Yankee misinterpreted my proposal. I did not propose that the entire amount of taxes that would have been paid under a yearly reassessment should be paid when the house is sold. I proposed a one time surtax of five or ten percent of the profit that the homeowner realizes from the sale.

"There are other issues as well. What happens if the property becomes so valuable that the owner can't afford to sell and incur the surcharge? And how does the city stay solvent when revenue falls behind inflation, because 95% of properties cannot be revalued in any given year?"

Since the surtax will only be a percentage of the profit the property owner realizes in selling the property, the property will never get to valuable to sell. As far as the revenue flow to the local government, the Yankee needs to realize that the real-estate tax a property owner pays is only partly dependent on the assessed value. The local government, whether it is a county board of supervisors or a city council still must establish a tax each year. For example, the 2006 tax rate for the City of Richmond was $1.29 per $100 of assessed value. Presumably, if the projected revenue in any year is insufficient to operate the local government, the board of supervisors or city council can raise the tax rate.

"Wouldn't it be fairer if valuations were fixed in constant-value dollars (that is, indexed to inflation) until the property is sold? That would allow the community to maintain its revenue stream without making homeowners pay taxes based unrealized gains caused by a rising real estate market."

This might help a bit. However, when the rate of inflation is one or two percent but the annual assessment rate is going up fifteen or twenty percent, as it has this year in Virginia, indexing will not cure the problem.

"Of course, if the property itself changed (such as by adding another story to the house), a change in the real estate tax would be appropriate. But such a change should be based objectively on the change in the property, not on market prices. For example, if you added a floor to your house, the city might calculate the percent increase in floor space, and then increase the assessment by some fraction of that percentage. That would allow people to improve their property without being slammed by huge tax increases based on rising market prices."

The City of Richmond has a tax abatement program that delays the reassessment of certain property when the homeowner makes improvements. If the house is more than twenty years old and the improvements increase the value of the property more than 20% the homeowner may defer all or part of the increased value for up to ten years.

"If at any time a property owner thought that the calculated valuation was higher than the actual value of the property on the open market, he ought to be able to apply for (and, if successful, lock in) a downward adjustment."

In Richmond, any property owner who disagrees with a reassessment may appeal. However, the burden is on the taxpayer to prove that the assessment was wrong. It may be difficult to establish that the assessment was in error.

"Finally, the valuation would have to be adjusted based on the actual market value of the property whenever the house is sold. In most cases, the new valuation would be the actual sale price. But the city should also do a traditional assessment, and if the city finds that the market price is far too low (perhaps more than 10% below market), it should use its own valuation instead. To prevent unpleasant surprises after the sale, the city should provide a document stating the valuation before closing."

I have to disagree with the Yankee. The sale price that a willing seller and willing buyer agree on is the fair market value of the property. It is not relevant that other properties in the neighborhood may be selling for a higher price. The problem with using the sales of other properties as a basis for assessment is that no two properties are identical. Houses differ in size, model, and age, and each house has a different location. The actual sale price of the property is its fair market value.

Fair Tax?

There is a fair tax movement afloat in the land. Fair tax? Is that an oxymoron? I thought the only fair tax is one my neighbor pays but I don’t. LOL.

But, really, what is this fair tax stuff? I’m always a little suspicious when somebody labels something as “fair.” It’s sort of a propaganda ploy. It’s like conservatives labeling the federal estate tax as the “death” tax. Or a former candidate and then governor of the Commonwealth labeling a portion of our property tax as the “car” tax. Of course, there is no “death” tax or “car” tax. But, it surely helps to convince people by using this kind of labeling. Who could possibly object to a “fair” tax?

Let me first explain the fair tax proposal. It would eliminate all federal income-type taxes—individual and corporate income tax, payroll tax, self-employment tax, capital gains tax, gift tax, alternative minimum tax—and replace them with a twenty three percent federal sales tax on new retail sales of goods or services in the United States. In essence, the fair tax proposal would substitute a tax on consumption for our current taxes based on income. The twenty-three percent is the level at which the sales tax must be set to produce the same revenue for the federal government as the income-type taxes that are being eliminated.

So, if the proposed new tax is fair, I must assume that the old income-based tax is unfair. But, is it? The Internal Revenue Code is huge; it contains hundreds of pages, thousands of sections. The implementing regulations, issued by the Internal Revenue Service, are bigger still. Our federal tax system is an adversarial game between the taxpayers and the IRS. The taxpayer’s goal in the game is to pay as little tax as possible; the IRS’s goal is to make the taxpayer pay as much as possible. And, because the rules of the game—the Code and regulations—are so complex, the taxpayer who has the best accountant, tax lawyer, tax service, or tax preparation software, ends up paying the lowest tax. The basic unfairness in the system is that two taxpayers can have identical incomes but will pay different amounts of taxes depending on how well they (and their people) play the tax game. So, if the fair tax proposal eliminates the tax game, it’s got to be fairer than the current system, right?

Wait, wait, wait! Twenty three percent seems like an awful high sales tax. That means for every dollar I spend, I have to pay another twenty-three cents to the federal government. But it’s not that high, the fair-taxers tell me. For one thing, under the current system more than fifteen percent of the retail cost of the goods and services I buy represents federal taxes paid by the manufacturers, middlemen, and retailers. With the federal income and related taxes gone, these costs will be saved, and the pressures of the market will guarantee that these savings are passed on to me, the consumer. That means that the effective rate of the federal sales tax will be only about eight percent. And, don’t forget that I will no longer be paying federal income-type taxes so my take-home pay will be significantly higher. So, an eight percent sales tax is not that high.

Okay, but I thought that a sales tax is very regressive. Since economically disadvantaged people spend a much higher proportion of their income on subsistence consumption, charging everybody the same sales tax rate results in a regressive tax. Poor people will necessarily pay a larger part of their income on the sales tax than will wealthier people. Does the fair tax program provide an exemption for food and other subsistence items to reduce the inequity of the regressive rate? No, there are no exemptions for any kind of purchase. That would make the system too difficult to administer. Instead, the fair tax proposal includes a "prebate" for poor people. In my opinion, this is the weakest part of the fair tax proposal.

Under the prebate, the Social Security Administration will mail to every family in the country with an income lower than the poverty level a monthly check to offset the costs of the sales tax it pays for subsistence consumption. The amount of the prebate is based on an annual consumption allowance that varies with the size of the family. For example, a single-adult household with three children has a consumption allowance of $20,650, while a two-adult household with four children has a consumption allowance of $34,340. The first of these families would receive a monthly prebate of $396; while the second would receive a monthly prebate of $658. According to Americans for Fair Taxation, if the fair tax proposal was enacted now, 113 million United States households would qualify for prebates in 2007.

In the opinion of this maven, the prebate constitutes a serious flaw in the fair tax proposal. For one thing, it is an invasion of privacy; it requires families to publicly declare and prove their poverty. Worse than that, however, is the fact that the federal government will be disbursing 113 million payments per month. Although the fair taxers were smart enough not to create a new agency to administer the program, payment of prebates will place a significant extra administrative burden on the Social Security Administration. It is a needless burden, because it would be much simpler to simply exempt food and other subsistence consumption from the federal sales tax than to collect the tax and then return part of it to 113 million households in the form of a monthly check.

Doesn’t the fair tax proposal have loopholes? Can’t an American citizen avoid paying the tax by making purchases outside the United States? If I were a rich man, and I wanted to buy a $5,000,000 yacht, I could avoid paying the federal tax by purchasing my yacht in Italy and then sailing it home. This loophole must be plugged.

Further, the proposal will be disruptive of the planning of many American families. Millions of families, in purchasing homes, have counted on a yearly tax deduction for the mortgage interest they will be paying. Under the fair tax proposal there will be no federal income tax and therefore no deduction for homeowners. This will make home-ownership more expensive because the federal government will no longer be subsidizing part of the monthly payment.

The proposal may also have disastrous effects on the ability of charities to raise funds. Will people continue to make contributions to charities if the federal government is no longer providing a subsidy in the form of a tax deduction? Fair taxers say it won’t make much difference. I’m not sure.

If you want to know more about the fair tax proposal go to fairtax.org, the website of Americans for Fair Taxation. The site has plenty of propaganda explaining why the fair tax proposal will save America.

The Real Estate Tax Must be Fixed

Real estate assessments are skyrocketing and the natives along both banks of the James are getting restless. Governor Kaine supports an amendment to the Virginia Constitution that would allow local jurisdictions to exempt as much as 20% of the value of a home from real estate taxes. Mayor Wilder has proposed that increases in property assessments be limited to 10% per year. The Richmond City Council is considering a proposal that would allow homeowners to defer payment of any annual real estate tax increase in excess of 5%. Unfortunately, none of these proposals go far enough in dealing with what is perhaps the most oppressive tax we have to pay.

Although real estate taxes have been the predominant means of local government financing in Virginia for hundreds of years, the tax on real estate is the least fair of taxes. The tax is unfair because it bears no relationship to the ability of the taxpayer to pay or to the level of municipal or county services that she or he receives.

I bought my Richmond home only two years ago. Since then, the assessed value of my property has gone up more than $60,000. My assessment notices have not explained how the assessor determined the basis of this increase. The Code of Virginia and the Richmond City Code requires the assessor to assess for tax purposes all real estate in the city “at its fair market value.” There is, however, only one way to actually determine the fair market value of property—to put it on the market and see what price the seller and buyer agree on. Any other determination is only an approximation based on recent sales of property that may be different in style, condition and age and may be located some distance from the property being assessed.

Even if the assessment does approximate the actual market value of the property, taxes levied on the assessment are unfair. If I bought my house for $200,000, and then a neighbor on the next block sells his for $230,000 and another neighbor sells hers for $225,000, I have gained nothing. To me, my house is worth no more than what I paid for it. My neighbors may have sold their homes at a profit but I received no part of their profit. It could be argued that the equity in my home has increased, but until I sell my house, or refinance it to get access to the equity, it is merely a hypothetical gain. It is grossly unfair to increase my real estate tax when I have gained nothing from the property sales in my neighborhood.

Further, it is terribly unfair for taxpayers in a jurisdiction to pay different amounts in taxes for the same municipal services. In the City of Richmond, a citizen receives the same level of city services whether he or she pays $2,000 or $4,000 or more per year in real estate taxes.

Of course, our elected representatives—whether supervisors or council persons—love the real estate assessment process. It provides them with significant increases in revenue to spend each year without ever having to vote to increase taxes. In fact they can appear to be heroes by cutting the tax rate by two or three cents, and still have most of the increase revenue.

In the interests of fairness and to avoid further alienating citizens who are suffering significant hardships in paying constantly rising real estate taxes, our legislators need to act to fix the real estate tax. Unfortunately, none of the existing proposals provide the necessary fix.

Governor Kaine’s proposal, if fully implemented, would leave homeowners still paying taxes on 80% of the assessed value of their property, and would have no effect on rapidly rising assessments. Also, because it relies on a constitutional amendment, it cannot be implemented quickly.

Mayor Wilder’s proposal would necessitate a change in state law. Currently, Title 58.1, section 58.1-3201, of the Virginia Code requires real property to be assessed at 100% of its fair market value. The City’s Assessor has no authority to restrict assessment increases to 10% as suggested by the mayor. Further, even if authorized by the General Assembly, under Mr. Wilder’s proposal homeowners would still face yearly increases of 10% in their real estate taxes.

The proposal in the City Council would merely allow homeowners to delay the pain of paying taxes on the constantly increasing assessed value of their property. The taxes would continue to accrue and eventually the homeowners who chose to defer would have to pay the entire amount of the deferred tax, plus interest.

The only real solution to the inequity of the real estate tax is for the tax to be eliminated and for some other mechanism for financing local government to be found. It is not likely that this will happen any time soon. In the mean time, the General Assembly and the Richmond City Council need to take action to rein in real estate assessments. I suggest the following approach:
1- All assessments are to be frozen at their current level (or preferably rolled back to their January 2006 level);
2- Owners of real estate will pay taxes based on the current assessment until either they sell the property or refinance to access their equity in the property;
3- Sellers or owners of refinanced property will pay a real estate surtax at settlement based on the increased value of the property;
4- After sale or refinance the assessment will be adjusted to the sale price or the appraisal that is the basis of the refinancing. The owner of the property will then pay taxes based on the new assessment.

I certainly am not an expert on the law of real estate taxes. I do not know whether my proposal needs a constitutional amendment, a law passed by the General Assembly, or an ordinance passed by City Council. I urge Governor Kaine, Mayor Wilder, members of the General Assembly, and members of the City Council to get serious about the tax hardship being faced by homeowners. Only a change in the assessment process can fix the real estate tax.

Mayor Wilder, again

Mr. Mayor,

I am deeply disappointed by your press conference yesterday, in which you suggested that spending by Richmond Public Schools is somehow related to increased real estate assessments in the City. Mr. Mayor, you know as well as I do that real estate assessments, by law, are based on a determination of the fair market value of property. These assessments have nothing to do with spending by RPS or any other city agency. Yet you are using obvious citizen dissatisfaction with their increased assessments to stir up public outrage against RPS. I believe your statement, which seems deliberately misleading, is highly irresponsible.

In your conference you also indicated that you intend to spend taxpayer money for a second audit of RPS. You apparently made this decision despite the fact that the city auditor just completed an audit which resulted in a report that is 149 pages long and contains over 50 recommendations. For you to procure a new audit is a total waste of public funds. As a taxpayer, I object to your wasteful spending.

Finally, I am very upset that you continue to try to divide the citizens of Richmond with your inflammatory language. When you were elected mayor, I expected that you would be a unifying force. Instead, I see you as the great divider. Mr. Mayor, please stop playing politics with the Richmond Public Schools. For those of our children whose parents cannot afford to move to the suburbs or to put their children in private schools, our public schools our the only hope they have to succeed in life. Your constant attacks can only harm our public schools and our children.

Hurray Airport; Boo USAir

Well, it's getting harder and harder for a maven to maintain his credibility. Just after I wrote my blistering attack on Richmond International Airport, I was called by the top dog at the same. He apologized for my baggage experience but told me that it was the airlines, rather than the airport, which handled baggage. He added that some of the carriers at RIA, to cut costs, are hiring low wage inexperienced people to unload their planes. He told me that many fliers, including some Chamber of Commerce types, are not happy with the services provided by the airlines.

Okay, so USAir, it was you that had me and my wife waiting at the airport until nearly 11:30 last night. We, and the many other passengers at the baggage carousel, are not happy with your service. Instead of concentrating all your efforts on gobbling up Delta, you need to start taking care of your customers. There are other airlines, you know.

Richmond International—Get it Right!

They’ve been spending many millions on redoing Richmond International Airport. (I don’t know how they call it International; I have yet to see any flight on the arrival or departure board entering or leaving the country.) They say they are turning it into a first-class airport where flying will be fun and easy. After years of construction inconvenience the place is really starting to look great. But—

Last night, my wife was flying in from Charlotte (that’s a REAL airport). Her plane arrived at the gate at 10:40 PM. I met her and we went to pick up her baggage. Hundreds of other people, from five or six arriving flights, were already gathered around the baggage gates. Nothing was happening. To make our long late-night story short, the baggage from the Charlotte flight was not unloaded until after 11:20!

How can it possibly take forty minutes to unload a plane? Why spend millions making your facility look nice, if you can’t even get baggage from the plane to the baggage carousel? How can you talk about running a first-class airport if you can’t provide the most basic of services?

When you arrive at the parking facility at RIA, the sign says that if you park in the hourly garage the parking is free if you stay 30 minutes or less. What a meaningless promise! How can you possibly stay for less than 30 minutes if it takes 40 minutes to get your luggage?

Come on, RIA, you are embarrassing to the Greater Richmond Metropolitan Area! You need to start providing decent service or people are going to go back to flying in and out of Dulles, or Norfolk, or Newport News, or Williamsburg, or Stafford Regional Airport, or…