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X +Y x Z = Huh?

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blackboard-equations-istock_000003015755xsmall.jpgThe great thing about the debate over the city's Actual Valuation Initiative (AVI) is that it allows me to write an entire piece using the future conditional.

For those of you who have had brushes with grammar, you know that there are far too many verb tenses: present, past, future are the simplest, but then we get into an array of complicated why-are-you-making-me-learn-this verb constructions, such as the pluperfect, the subjunctive, the past perfect and the ever popular future perfect continuous.  Arrrgh!

The future conditional means what it says. Something may happen in the future, but only if certain conditions are met.  Examples: 

If it rains tomorrow, I will go to the movies.

If  I get my unemployment check, I will run out and buy pizza and beer.

The Nutter administration wants us to think that the AVI is in simple future tense: all city property will be reassessed to reflect true market value; taxes will be adjusted accordingly; the city will tack on $94 million in additional taxes and give it to the public schools.

In reality, all of the above is conditional.  It depends upon the actions of others.

For instance, the state legislature must pass a package of bills that enables the city to

institute AVI. It has not done so.  Council must pass legislation to set the new tax rate.  It has not done so.  The re-evaluation must be done and the numbers must be right or else all hell will break loose. That re-evaluation has not been completed.

Treating the future as preordained - instead of conditional - can lead to weird moments for those of us who must live in the present tense.

For instance, last week Mayor Nutter held a news conference to urge people to file for a homestead exemption that will be allowed under the new taxing system.

A homestead exemption is the amount of money you can deduct from your assessed value to give you credit for being a homeowner.  An example: if your property is assessed at $400,000 under AVI, a homestead exemption of $15,000 would reduce the assessed (and therefore taxable value) to $385,000.

To hear the mayor talk, the homestead exemption is a done deal, a program in place.  It is not.  The city does not have the power to offer a homestead exemption.  It must get approval to do so from the state and that requires a bill to be passed by the legislature and signed by the governor.  Such a bill has not passed. 

To summarize: Last week, the mayor urged people to hurry and apply for an exemption that does not exist, to lower an appraised value they have not received, to effectively lower a tax rate that has not been set.

Is that clear?

Let me switch to algebra to help explain. Full disclosure: algebra is not one of my strong suits, but I do know that it involves extracting answers when not every factor is known.  So, in the simple equation x + 7= 10 the x equals 3.

When it comes to AVI, there are a number of factors that will be tossed together to create one number - the amount of real estate  taxes you will owe.

One factor is the value of your home.  Currently, the odds are the assessed value of your home has no relation to market reality.  AVI is supposed to change that. To put it another way, if you own a home that you could reasonably expect to sell on the open market for $400,000, your new value should be somewhere in that vicinity.

Under the current system, they do a two-step to determine your value.  They take the value of your home (let's say it is $100,000) and tax it as 32 percent of that value. So, you pay taxes on $32,000, not the whole $100,000.  The tax rate is 9.432 percent.  So, that equation looks like this:

Assessed Value x .32 = Taxable Value x .09432 = Tax.

$100,000 x .32 = $32,000 x .096 = $3,018

Under AVI, they want to get rid of that two-step rigmarole and tax you based on your full assessed value.  You see the problem here.  Suppose under AVI your house, which was assessed at $100,000 under the current systen, goes up to $400,000. Apply the old formula and you get this:

$400,000 x .094 = $37,732.

Yikes! Obviously, this cannot be.  In fact, the AVI plan has always envisioned lowering the tax rate - fairly dramatically - to make the math work.  One figure mentioned as a multiplier has been 1%.

The equation then becomes:

$400,000 x .01 = $4,000.  Voila! Your new tax. (Notice: you are paying more.)

But, here comes that old future conditional back again.

The city does not have the power to lower the tax rate on its own.  It must get approval from the state.  There is a bill in the state Senate to bequeath that power unto the city, but it has not passed.

Since we don't know the new values and we don't knew the new tax rate it becomes impossible to figure out what your new tax will be.  The equation would look something like this:  Y x Z = X.  We can't tell what X is because we don't have a clue what Y and Z is.

Now, let's add yet another wrinkle.  As if we needed one.

Originally, the plan was to make AVI revenue neutral.  While individual property owner's taxes could go up or down depending on the new valuations, the overall amount in real estate taxes collected by the city would remain the same as it was this year: about $1 billion, with 40 percent going to the city and 60 percent to the school district.

Then the mayor changed his mind.  He decided he wanted the school district to get $94 million more from the city this year and to do that you have to change the tax rate. So, instead of it being one percent, folks on city council are talking about anywhere from 1.2 percent to 1.7 percent. [Update June 7: Council has apparently decided to go to the high end of 1.7 percent or higher.]

Here's how the equation changes for that homeowner with a $400,000 home under this scenario:

$400,000 x .017 = $6,800.

To summarize, your real estate tax bill, which was $3,072 last year could more than double this year.  In short, you are screwed.

The administration has argued that it is not really raising taxes, but is simply "capturing the value" of the rise in real estate values in recent years.  (They do not mention that they have already captured a chuck of those rising values by raising real estate taxes 15 percent over the last two years.  By the way, those increases were supposed to be "temporary."  They are being made permanent under AVI.)

Let's get out of algebra and go back to the future conditional.

If the legislature approves the package of bills before it, the city will be able to offer a homestead exemption and it will be able to change the tax rates.  The mayor, it seems has done his best to make the legislation hard to pass.  By trying to tack on a tax increase with the AVI re-evaluation, he has - politically speaking - screwed the pooch.

Philadelphia legislators who vote for the bills will now be open to criticism that they sanctioned a tax increase on their constituents.  Republican and rural legislators, who have gone on record as being against any tax increases period, may be reluctant to go along, even though their voters are not involved.

This week, Philadelphia state Sen. Larry Farnese plans to introduce an amendment to the enabling legislation to make AVI revenue neutral again - to take away the city's right to raise the $94 million through real estate taxes this year. [Update June 4:  On Monday, Farnese withdrew the amendment after getting assurances Council will take two votes:  one of on AVI and one on the $94 million tax increase.]

City Council, aware of potential difficulties in Harrisburg, is already mulling a Plan B - raising some other taxes to supply money to the district.  One tax mentioned is the Use and Occupancy Tax, paid by tenants in commercial buildings.  (Read: Center City.)

The situation, as they say, remains in flux.  The future remains conditional.

Last week, the mayor went on the offensive, sort of, by holding a news conference urging the legislature to man up and pass the enabling legislation. He said it was time for leadership. (Whenever the mayor uses the word "leadership" it usually means higher taxes. In the name of leadership, he has already increased the sales tax, the parking tax and real estate taxes.  In the name of leadership, he has tried to institute a tax on trash collection and sugary drinks. Unfortunately, his definition of leadership has not included lowering the cost of city employee health and pension costs, of facing down municipal unions in contract negotiations. His leadership is leadership absent bravery.)

There is a de facto deadline here: The legislature wants to recess for the summer by the end of June.  City Council must pass a budget - with the AVI numbers in it - by July 1.

If the legislature fails to act it effectively kills AVI.  You can't go ahead with new valuations if the city cannot change the multiplier.

I think AVI should be instituted.  The current system is broken, subject to lawsuits, and has no relation to market realities.  That makes it inherently unfair.

But, I would separate the tax increase from AVI.  The AVI experience is going to be bad enough without folks getting hit by additional taxes.  Find another source to raise money for the school district.

By combining so many unknowns - all those X's AND Y'S AND Z'S - people will view a change that was meant to be fair as something that is unfair. This is not good.

By combining the tax increase with a major re-valuation, Nutter has created a public policy train wreck. He is going to need help to get out of it, so it's time for the legislature and council to exert, ahem, real leadership and make AVI work as intended.

-- Tom Ferrick

 

 

 

 

 

 

 

 

 

 

 

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