Property Values as Gentrification Engine

19 07 2011

The Atlantic’s Ta-Nehisi Coates and Think Progress’ Matt Yglesias consider the case of one Pamela Johnson, a D.C. resident who saw her property tax bill skyrocket as the property she owned appreciated rapidly in value. She couldn’t afford to pay her property taxes out of her income, so was forced into a situation where she was forced to sell.

Yglesias:

The public expenditures on improved conditions are leading to higher land values, which is leading to higher property tax assessments. The investment, in other words, pays off. But Johnson is upset. The question is why, exactly, is she upset? According to the article she’s upset because her property tax bill has tripled, which is putting her at risk of losing the building she owns in a tax sale. But doesn’t this mean her building has tripled in value? Ceteris paribus, I’d rather pay less property tax than more.

But having your investment in a building appreciate is better than having it decline in value and then you get a tax break. At the same time, it seems like we should take Johnson at her word that some feature of this situation is making her worse off. But I wonder what it is, exactly. If you buy low and then wind up needing to sell high because you can’t cover the property tax out of your income, it seems to me that you’re still coming out ahead. At a minimum, it’s hard to see how she could have been better off had the city not invested in improved infrastructure adjacent to property she owns.

Coates:

I actually think it’s fairly easy to understand Johnson’s beef. She likes her neighborhood as it is. She may well be able to “sell high,” but the fact is she doesn’t want to sell at all. She probably would love to see her property values rise, but the neighborhood isn’t simply, for her, a financial instrument–it’s an emotional one. In that sense, Johnson isn’t very different than millions of other humans who invest in neighborhoods.

Her contention that the city is “driving us out of here.” is very much debatable. But it’s worth noting that a class of owners with a commitment to something more than a naked financial return is a good thing. When Matt asserts that the city is trying to make H Street a “desirable place to live,” I am compelled to ask “desirable for whom?” I’m not being obtuse here–I understand, in the aggregate, his larger point. But very often people find a kind of value in their living condition that eludes socioeconomic data.

Yglesias again:

That makes perfect sense. But I do think it’s worth saying that the alternative being put on the table here is a conservative one, and the mere fact that the successful investor who doesn’t like high property tax rates is black doesn’t change that fact. After all, what concrete policy steps could the DC government take to avoid more people being stuck with the problem of rising property values that lead to higher property taxes. Well, I see two:
1. The city could stop investing in improved public services and public safety.
2. The city could reduce property taxes, especially on well-heeled property owners.

There is a third alternative (that is arguably a species of number 2). First off, some background on D.C.’s property taxation, specifically, D.C. pegs the assessed value of property to the market price.

Under this regime, caps on increases where there has been no recent sale would be another option. In other words, with no sale (or certain types of lease/assignee agreements, estate transfers or devises) in the preceding calendar year, you could institute a cap on assessed value increases. If the value of the property jumps 150% in a single year, you only tax on the first, say, 30% of the increase. So if you were being taxed on $100,000, then the property jumps to $250,000 in value, you only get taxed on $150,000. At the current D.C. rate, that would have been a savings of about $1,700. The tax on any sale would be on the full market price, but the tax paid if the owner chooses to stay put would be limited. If they choose to sell and realize the appreciation of their investment, then the new owner would start at the new price (and the difference could be negotiated freely as part of the sale price). Transaction taxes could be restructured to ease the disincentive for buyers. Otherwise, the owner could stay put if they so choose, and so long as they’re not cashing out, they aren’t being pushed out by taxes. To ensure neighborhoods don’t become static, one property could have a limit on the number of consecutive years on which the cap would apply. Another compromise would be progressive caps based on the base value of the property–so if the previous taxing year the property was in the top 10% of valuations, no cap, next ten percent, 80% and so on down. The idea is that people who own property with lower values are less likely to be able to sustain proportionately massive jumps in valuation.

Now, here’s the thing: Ms. Johnson’s property appreciated because of the building of a trolley through the neighborhood. Projects like trolleys meant to improve neighborhoods are good things, and if they are financed by bonds issued against projected localized property tax revenues after anticipated appreciation, then you just won’t get these projects. I don’t know how the trolley was financed, but such programs are typically financed by a combination of federal money, bond issues, and/or special taxing districts.

In any case, displacement is not something to just shrug at. Between 2000 and 2010, Chicago lost almost a quarter of a million African-Americans, many from middle-to-low income areas. If you look at an indicator like median income in those neighborhoods, you may see a rise, but it is only because low-income people were displaced by higher-income people, not because people saw their incomes rise over time. That’s not progress. That is deck chair shuffling. Communities aren’t merely a bundle of data points.

Here’s the theory part–Coates is looking at property as personhood. Under this view, there is a value to property just as real as its market value but not necessarily measurable, particularly not by markets. This is the view that the Black Hills Sioux took when the U.S. government tried to compensate them for the violation of the Fort Laramie Treaty in the 1870s. The spiritual value of the Black Hills simply could not be quantified, and the Sioux Nation has yet to accept the condemnation settlement–which stands at over $600 million. There is no market mechanism to cope with this. The market forces are nevertheless acting as a form of coercive pressure forcing people to sell property because the current tax regime simply ignores this conception of property.


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