Table VII.4 presents the proportion of improvements in Upward Transitional neighborhoods that resulted in reassessment. It also lists the proportion of investors representing fear of reassessment as a major obstacle to improving their properties.

Table VII.4 conceals a wide range of circumstances in the various upward transitional neighborhoods in our sample. Of particular interest is the situation of Queens Village, an upward transitional neighborhood in Philadelphia. All five Queens Village properties with rehabilitation expenditures were reassessed. Despite these reassessments, as noted earlier, the effective tax rates of these Queen Village properties were far below the rates found in other neighborhoods in the city.

The case of Philadelphia suggests that generalization is a risky business. On the basis of our sample, however, it would appear that the marginal disincentive to investment provided by the practice of taxing property improvements has been exaggerated. The evidence from the properties in our sample indicates that anything less than a thorough going "gut" job is unlikely to lead to reassessment. Table VII.4 shows that of the 26 rehabilitation investments in our upward transitional sample costing less than $3,000 per unit, only 5 were reassessed. In all only 25.5 percent of all rehabilitation investments in upward transitional neighborhoods were reassessed. Excluding Queens Village drops this figure to 16.7 percent. While even these low rates of reassessment may discourage some investment, most respondents agreed that the prospective capital gains in upward transitional neighborhoods were so large, that fear of building specific reassessment played a decidedly minor role in their investment strategy.

Sample:

Obstacle

Private market residential structures built prior to 1961 with any rehabilitation expenditures in the period 1966-1970.

Notes:

See Tables 11.10 and II.11 for comparison of reassessment by neighborhoods.

Source:

ADL Investor Interview questions 17a, and 20a; ADL Homeowner Interview question 14, 17 and ADL Property Data Sheet question 4.

Assessing Neighborhoods for Increases in Market Value

Neighborhood reassessment assesses entire geographical areas to reflect the changing market values of properties. The extent of neighborhood reassessment varied greatly among our sample cities. Detroit reassesses every neighborhood in the city on the basis of the previous year's assessment/sales ratio. Oklahoma City has not had a neighborhood reassessment since 1952. The remaining cities fall between these extremes, with neighborhood reassessments carried out at intervals of different lengths. Chicago attempts to reassess neighborhoods every four years; Baltimore has a neighborhood schedule which calls for reassessment every five years.

Like building-specific taxation, neighborhood reassessment on balance increases the tax burden of investors in upward transitional neighborhoods, because property values, by definition, are increasing in these neighborhoods. However, the marginal effects on the housing stock of the two measures is quite different. If the entire neighborhood is reassessed, no special burden is borne by the investor who upgrades his property. There is no marginal disincentive to investment in the housing stock. In fact, reassessing properties by neighborhood is a form of land value taxation, since the distinguishing feature of a neighborhood is the location of its residential land. In theory, neighborhood assessment should tax properties according to the optimal use for land in that neighborhood. Since in the case of upward transitional neighborhoods, the optimal land use involves upgrading (or replacing) the existing housing stock, neighborhood assessment ought to encourage housing investment. This is just the reverse of the marginal effect of imposing a tax on building-specific improvements.

That is the theory. However, several respondents reported that in practice neighborhood taxation can also discourage upgrading. Large investors feared that reassessing neighborhoods on the basis of a few sales of upgraded properties would make it impossible for commercial rehabbers to operate in the area. These firms typically buy up a number of properties at one time. Some of the properties they rehabilitate immediately; others they hold until neighborhood revival generates more demand. If all properties in the neighborhood are reassessed on the basis of the first sales, the cost of carrying unimproved properties for future rehabilitation becomes prohibitive. Planned phasing of rehabilitation then becomes impossible, with the risk that neighborhood revitalization never will get off the ground.

Long-time residents of neighborhoods where land prices recently have begun to increase feel that assessing the land at the new, higher value is especially prejudicial to them. Although their income stream has not increased, these families are obliged to pay higher taxes. Many feel that the city's assessment policy is driving them from their homes.

Neighborhood assessment undoubtedly imposes some burden on long-time residents and, if pushed too soon, may shut off some neighborhood upgrading, but its disincentive to investment in upward transitional neighborhoods is minimal. In fact, applied prudently, it should provide a positive incentive to investment. Since, as we have argued in previous chapters, neighborhood assessment has highly beneficial consequences for the poorer sections of the city; it seems a desirable policy to encourage.

Abatements

Assessors in several cities reported that, in their judgment, there are two factors in elastic supply to the cities, which can be affected by assessment policy. One factor is the supply of capital to the housing market. The second factor is white, middle-class population. Special concessions have been made to retain both factors. In addition to the de facto abatements on housing improvements granted in Chicago and Oklahoma City, as well as in certain neighborhoods in other cities, Providence has adopted an explicit abatement policy, which promises investors five-years' freedom from reassessment on improvements. Just as these measures are designed to keep capital invested in the city, so other concessions seem to have been made to retain white middle-class families in the city. Though no assessor admitted to deliberately under-assessing upward transitional neighborhoods in order to keep professional whites in the city, many expressed their fears that if assessments became too high in these neighborhoods, the white population would desert the city. Among other undesirable consequences, this exodus would slow down drastically the upgrading of the residential housing stock in transitional neighborhoods.

Conclusion

Concern about the effects of property taxation often focuses on the deterrent the tax is supposed to provide to neighborhood upgrading. Our analysis suggests that this concern has been exaggerated. At present, relatively few housing improvements are reassessed. Overall, the level of property taxation in upward transitional neighborhoods is lower than that found in other neighborhoods. This was especially true of the upward transitional neighborhoods in Baltimore, Chicago, Philadelphia, and Providence. All evidence indicates that the poorer neighborhoods of many cities are being forced to subsidize heavily, through tax payments, the special tax concessions granted to residents of upward transitional neighborhoods where revitalization is strongest, capital appreciation most likely, and residents most affluent.

We have no desire to minimize the importance of neighborhood rejuvenation nor underestimate its effect on the spirit of a city. However, the potential capital gains to investment in upward transitional areas are very large. No additional tax subsidy is required to provide attractive investment opportunities. As reported by investors, the primary obstacle to the neighborhood upgrading is the unavailability of financing for property improvement, especially at the early stage of neighborhood revitalization. Tax concessions represent a considerable income transfer to the wealthy residents of stable and upward transitional neighborhoods; but they are an inefficient way to encourage housing investment, which is better achieved by direct subsidy or improvement loans.

CHAPTER VIII

STABLE NEIGHBORHOODS

By objective standards stable neighborhoods suffer little from the property tax. Owners of property in these neighborhoods generally pay taxes at a lower rate than blighted neighborhoods, are usually able to pass on the tax to tenants, and rarely cite fear of reassessment as an obstacle to improving their properties. Moreover, property taxes as a percentage of gross rents typically have been declining. (See Table VIII.1.)

Source: Derived from Tables II.5, II.11, II.12 and IV.14 and ADL Investor question 15a.

* The tables summarize information obtained from 228 owners regarding 420 individual properties in ten cities.

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