Why Revitalized Towns Have Tax Inequalities

A revitalizing town creates a lot of buzz. People are always coming up to me and telling me how much they enjoy going to Phoenixville or South Street. The people who invested money in the downtowns were responsible for the revitalization.

Once a property is revitalized, it is because there has been an investment to the systems, the building envelope, and some cosmetic improvements. Although many people like the way the buildings looks, in most cases the most expensive part is what you do not see, the roof, HVAC and the electrical improvements.

The building is improved, and a new business moves into the building at a higher rent than was charged before, based upon the improvements. The building is then reassessed. The borough, school district and the county will benefit as the building is worth more and more taxes are garnered.

A consequence of the revitalization means additional cost for the governing municipality. Additional cost could be for streetscape improvements, police protection, additional services and a plethora of smaller things like increased attention to pocket parks etc.

If you are not a pioneer and have an existing building in the downtown, life is good for you. Your taxes do not go up as long as you do not sell or improve your building. You can charge more rent because everyone else is paying more. You have a sudden swell of equity because your building is worth more. 

Normally this is when the old timers cash out. In Phoenixville, buildings that were selling for $185,000 - $215,000 were suddenly selling for $500,000. Long time property owners were not content to just hold on to the building and take the appreciation and increased rents. They wanted the big cash by selling the property. 

I have stories where owners sold properties that were occupied by relatives, which created family problems. Stories where an owner died, the heirs closed the family business because they could get more out of the property than being involved in a borderline business run by one of the heirs. Things can get out of hand sometimes.

The people who hang on to the properties are content to have the increased rent or if they are a business, the increased sales as well as garnering the increased value. This affects the tax base. The value is almost hidden value. Although the values can decrease at any time due to recession or depression, for the most part they stay about the same or continue to grow. How does this affect the municipality? I would think that it depends upon the number of properties restored.

If one third of the properties change hands and are improved, that means that they are reassessed and have more taxable value. This could be viewed as enough critical mass for a revitalization to appear. This relates to two thirds of the properties now woefully undervalued. Couple the two thirds of the properties undervalued with the upgrade in services and you have a recipe for a tax increase.

When the commercial properties appreciate, in most cases the residential properties go up in value too. In most cases, there are more residential properties in a town than there are commercial properties. The increase in value in the housing stock will relate to more taxes for the political subdivision. There will be more residential sales than commercial sales.

Is this a case for another means of reassessment or some kind of reassessment reform?  I think so. I think the system is flawed. 

When Chester County had a reassessment in the early ‘90s a group called Cole, Layer and Trumble did the reassessment analysis. They created a giant regression (attribute) analysis of all the properties. These values were assigned to different attributes of the real estate, steep slope, flood plain, desert, tundra, lake . . . whatever. All of the information was recorded on what was termed at the time as “land disc.” It would appear that if the physical characteristics did not change, it would be easy to reassess every few years based upon the sales and the attributes. 

Could a system like land disc work to keep everything up to date. Probably it would do a good job, but there would need to be an increase in workforce to keep up just with the data increase. So, what can be done to keep taxes from making it impossible for long-term residents to stay in their homes as the cost of everything goes up? I guess that is the sixty four thousand dollar question. 

Recently there have been some bills introduced to fund schools by an increase in the sales tax and the personal income tax. School districts normally generate the largest tax bills by a large margin. County taxes and borough taxes are really just a spit in the ocean compared to school taxes. Subtract 20 mils from your annual tax bill and you are talking real money. 

The proposition is complicated because property taxes are deductible and there are many in opposition to taxing food and clothing. Also what about the poor? We will be making to poor pay more taxes. A 20 mil decrease in property taxes certainly would make rent less . . . how much less no one knows but the market would have to have a readjustment. Properties would appreciate, as affordability would definitely increase, so there would be an increase in the tax base for the county and the boroughs. 

It is worth a look. I think it is a good idea . . . check out the report by Independent Fiscal Office on the analysis of HB 1176 and SB 1400 and you will see how complicated it can get. Whatever the solution . . . there needs to be one . . .because what we are doing is not working and hinders revitalization.