The Awful Distributional Politics of Philadelphia's Underassessed Land Values

30Jun

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This observation Sandy Smith tucked into a post on a new mixed-use Ridge Avenue development is important to flag, because it highlights a persistent problem with the implementation of the Actual Value Initiative - the city's land assessments are still wrong:

The value of this property on city records is an example of the problems the Actual Value Initiative was designed to correct: in 2013, the market value of the vacant lot – which changed hands the year before for $60,000, remember – was listed as $24,900, $7,968 of which was the assessed taxable value; in 2013, the market value and the assessed value were both revised to $11,400. We expect this to jump next year, when this building should be finished.

The land sold for $60,000 in 2012, and then a year later the city assessed it at $11,400 - five times less!

It's understandable why some people might think it'd be hard to fairly assess land values for properties with buildings on them (it's not actually - we could just use landlords' asking rents as a proxy for land), but in this case we have the recent selling price for a blank piece of land.

We know that's how much it's worth. So why didn't that show up in the most recent assessment? How is it this far off? And more importantly, why are we seeing land systematically under-assessed across the city?

Why should you care about this? Well, thinking about the distributional politics of systematically undertaxed land, this is basically an equity nightmare.

By now everybody's heard about Capital in the 21st Century - Thomas Piketty's new book about the rise in wealth inequality. His thesis is that capital is back, and labor's share of economic pie is going to keep shrinking in the future as more and more of the proceeds from growth accrue to idle wealth.

As economist Karl Smith has pointed out (with clarity added here by Matthew Yglesias), a lot of what Piketty generalizes as wealth is really land:

The value of owning land in places like New York City, Washington DC, or San Francisco keeps increasing as those cities keep getting more nice amenities and more wealthy individuals seek out housing there. And the same dynamic is playing out at a slower rate in Philadelphia, even though we aren't seeing anything like the housing affordability problems in those places. 

If you own a vacant lot in a city that is expected to keep getting nicer, you can be pretty sure the lot will fetch more in the future than it will today. So it makes some sense to just camp on it for a while until somebody's willing to pay you the higher prices of the future. Maybe you turn it into a surface parking lot for the time being, or maybe you just forget about it for a couple decades and let it become an illegal neighborhood dump. Eventually you'll get more money, not because of anything that you did, but because of things that other people did - building houses and opening businesses and creating nice pedestrian plazas and parklets nearby. 

This is pretty parasitic behavior, but the city encourages it by underassessing land, and then by taxing land less than buildings. The vacant lot being developed on Ridge Ave is worth $60,000, but the owner is paying the tax bill on just $11,400. There's no tax penalty for holding the land off market, and that encourages vacancy and low value uses like surface parking.

Meanwhile, the people who are adding value by building housing and opening small businesses have to pay more in taxes than they would if the Ridge Ave property owner's tax bill was accurate. 

Philadelphia is only going to keep getting nicer over time, but regular people aren't going to share in the economic gains from growth in population and amenities if our tax system keeps underassessing and undertaxing land wealth. More and more of that wealth creation is going to accrue to people who own land in the most desirable areas of the city. Rittenhouse real estate prices are guaranteed to keep climbing, driven almost solely by the value of the location, but with low land taxes, the property tax bills there won't climb commensurately and the rest of us will be stuck paying the difference.

Last Updated: Monday, 30 June 2014 @ 14.37
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jongeeting's picture Jon Geeting About the Author:

Jon Geeting is a Philadelphia-based freelance journalist and policy researcher. His writing also appears at Next City, Primary Colors, and Keystone Politics, where he covers politics and elections, land use and transportation, and urban economic policy. He also writes a monthly Political Machine column at Philly City Paper.