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The Truth About AVI

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By Tom Ferrick Jr.

So many questions, so few answers about AVI, the Nutter administration's plan to re-assess all Philadelphia real estate to reflect market reality.  No one is sure what  impact it will have and that is one reason City Council put off the Actual Valuation Initiative for at least six months.

The postponement gives everyone a chance to explore not only the narrow questions - as in, what impact will it have on me? - but also the broader ones.  Here are a few:

Is AVI fair?  Will the figures on home values generated by its computers comport with reality?  If it those figures do not, it will cause a ruckus, certainly among those who feel they have been assessed at too high a value.

Is AVI a poison pill for the real estate revival underway in a number of city neighborhoods? The good news story in the city for the last decade has been the influx of homeowners who have revived neighborhoods, mostly the ones that abut Center City on the north and south.  Could that end if the real estate taxes in those neighborhoods doubles or triples?

We haven't been able to get answers to those questions because we didn't have the facts.  The new assessments - the actual figures on home values under AVI - won't be completed until October.

The other crucial component of AVI - the tax rate - is also unknown.  This is the multiplier the city will apply to determine individual tax rates.  To date, the multiplier has run from a low of 1.25 percent to a high of 2.50 percent - a large spread.

The key to understanding AVI is to look at the impact of those multipliers and measure it against the average value of properties in city neighborhoods. 

Fortunately, we have data that will let us do that.  The Philadelphia Public Interest Information Network, a new non-profit news and information project affiliated with Temple University, recently released data on all residential homes sales made in the city between February and June of this year. It is valuable because it is the latest data available on real estate values (i.e. the sale price of the home) and a large enough sample to draw conclusions about AVI's impact on neighborhoods (as defined by zip codes.)

If you want to see the interactive map PPIIN has posted on its website that lets you see individual sales click here.

PPIIN also provided Metropolis with a spreadsheet that contained details of each sale.  It included address, zip code, the current appraised value of the house, the amount of property taxes paid and the 2012 sale price.  The data included 4,000nu_AVI_win-lose-map_400.jpg residential properties, a decent and up-to-date sample size.

Using this data, I am able to determine the effects of AVI not only on individual properties, but also whole neighborhoods, as defined by zip codes. To reiterate: Though the data came from PPIIN, the analysis and conclusions are mine.

The results show that slight changes in the formula can lead to dramatic changes in the tax burden on homeowners.

To understand how, you need to know Newton's Law (that's Isaac Newton, not Wayne):  For every action there is an opposite and equal reaction.

If your goal is to raise $1 billion from property taxes and you decide to exempt everyone over 65 from paying any increase, you are going to have to raise taxes more on homeowners under age 65.

If you want to cushion the blow of an increase in real estate taxes on lower income homeowners, you are going to have to increase it on higher income property owners.

In some ways, AVI is simple - or could be.  If the city wanted to raise the same amount from property taxes this year as it did last year - and that figure is $1 billion - given the estimated total value of real estate in the city, the rate would be 1.25 percent.

In others words, your new AVI assessed value x 1.25% would equal your tax.

(Parenthetically, if the city wanted to raise an additional $94 million for the public schools, as Mayor requested, the multiplier would change to 1.26 percent.)

After looking at the data, I would argue that simplest is best.  That this 1.25 percent multiplier is not only a simple way of handling the issue, but also the fairest.

So, how did the city and Council come up with so many other multipliers?  It did it in the name of trying to help various constituencies.

Take the highest figure as an example - a multiplier of 2.5 percent.  That came about because the Nutter administration originally proposed "smoothing" the tax increases over several years so people would not get sticker shock from their tax bills doubling or tripling.

But, if you are going to let people pay just a portion of the increase each year, you are going to have to change the rate so it still yields $1 billion.  For every action (smoothing) there is a reaction (a higher rate.)

The smoothing option was quickly abandoned as AVI got bogged down in Council.  It was too tough a sell.

nu_AVI_Hardest-hit-map_400.jpgThe administration also proposed a $15,0000 homestead exemption for homeowners to cushion the blow of the tax increase.  A homestead exemption works this way:  you get the new assessed value of your home. You subtract $15,000 from that total.  You pay taxes on the lower number.  Again, it is designed to make the new system more politically palatable.

When Council entered the picture, that homestead exemption was increased to $30,000 (action), which resulted in a multiplier of between 1.74 percent and 1.78 percent. For the purpose of this analysis, we used 1.75 percent.

Apply that exemption to the equation and the list of winners and losers changes dramatically.  Why?  Because a $30,0000 exemption has far more value the lower your home's market value is.  To use a concrete example:

If you own a home valued at $300,000 and get a $30,0000 exemption, you save 10 percent on your tax.

If you own a home worth $100,000 and get a $30,000 exemption, you save 30 percent.

Under this plan, which was the one Council was most serious about, there were a number of neighborhoods where property taxes would go to zero.  Why?  Because in these areas, the average sale price of houses is quite low -- $25,000 to $30,000 is the norm - so the exemption eliminates the tax burden entirely.  (Actually, not entirely.  Under the plan being considered by Council, every homeowner would have to pay at least $100 in property taxes.)

The $30,000 exemption plus the 1.75% rate has two major effects: it lowers significantly the tax burden at the lower end of the home value scale.  To pay for this, it significantly raises the tax burden on those with higher value homes.

In other words, it serves as a double whammy on homeowners whose houses are worth $250,000 and above.  They will have to pay higher taxes to begin with because their homes have been under-valued.  And they will have to pay more so the city can give bigger tax breaks to neighborhoods whose average value is less than $200,000.

You could probably guess which neighborhoods are going to get the biggest tax increases under AVI, even under the 1.25 percent version.  Here is a list of zip codes where the average tax will rise 100 percent or more:

 

19102            Center City West

19146            South Phila - Schuylkill

19121            Fairmount

19123            Northern Liberties

19151            Overbrook           

19104            University City           

19122            Spring Garden           

19107            Washington Square           

 

When you switch to the $30,000 exemption/1.75 percent rate, that list of 100 percent-plus grows and looks like this:

 

19102            Center City West

19146            South Phila - Schuylkill

19123            Northern Liberties

19121            Fairmount

19107            Washington Square           

19104            University City           

19151            Overbrook           

19122            North Phila - Spring Garden           

19147            South Phila - Bella Vista           

19103            Center City West           

19125            Kensington           

19130            Fairmount South

 

I hesitate to include exact percentages because even though there are 4,000 properties included in the PPIIN database, it is still a small sample.  In some zip codes, there were only a small number of sales, which might skew the sample.  Finally, there is no guarantee that the average home value included in this analysis is going to be the assessed value under AVI - it very likely could be lower.  With that in mind, to see more detail on the 1.25 percent scenario click here.  For detail on the effect of the $30,000 exemption/1.75 percent multiplier click here.

The data also shows what everyone has been saying:  the city's current assessment system is broken.  It overtaxes some and under taxes others.  It is not only fair, but also required by state law, to overhaul it and update all the values.  The particulars of how you go about doing that, though, are important.  The devil truly is in the details.

Below is a chart that identifies the city's zip codes by neighorhood:

nu_AVI-zip-codes.jpg


           

 

 

 

 

 

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