The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
REAL ESTATE RESEARCH
March 27, 2014
Limiting Property Tax Assessments to Slow Gentrification
A recent New York Times article on gentrification discussed a number of cities—including Boston, Philadelphia, and Washington, D.C.—that are planning to freeze
property tax assessments for long-time homeowners in gentrifying neighborhoods. The concern is that rising house prices will also raise property assessments, forcing
low-income residents to move to escape the greater tax burden and thereby accelerating the pace of gentrification. Although the desire to protect existing residents
from gentrification appears to be new, laws capping assessment growth for all property or all primary homes ("homesteads") have been around since Californians
passed Proposition 13 in 1978. After California, a number of additional states passed laws limiting how quickly an individual property's assessed value could increase.
The bulk of these laws passed in the early eighties to the mid-nineties, and advocates for the law were concerned, at least in part, with limiting the size of local
government. If this tax backlash of the previous decades is uncorrelated with more recent gentrification pressures, this may be a good test of statewide assessments
caps.
Using a data set of low-income central-city neighborhoods that Dan Hartley of the Cleveland Fed assembled from the 2000 census and the 2007 American Community
Survey, we can look at the share of neighborhoods that gentrified in capped and uncapped states. Hartley shows that a central city moving from below-median-MSA
house price to above-median house price is a good indicator of gentrification. Relying on the table of statewide assessment caps that Haveman and Sexton compiled,
we identify 10 states and the District of Columbia (plus the city of New York) with the strictest limits. In these states, assessed value can increase only at the rate of
inflation or by a fixed percentage ranging from 2 percent (California) to 10 percent (Texas). Table 1 presents the share of neighborhoods that gentrified in capped and
uncapped states.
Note that neighborhoods protected by assessment caps actually gentrified faster than those in states without them.
However, we might worry that the decision to impose statewide assessment caps was not random. In the case of Prop 13, rising home prices was certainly a factor in
rising property taxes. It is possible that some underlying factor may drive statewide price up but also cause poor inner-city neighborhoods to appreciate faster than
other homes in the metro area. One candidate is restrictive zoning laws that limit densification of already desirable neighborhoods. Such laws could both drive up
aggregate house prices and push homebuyers into more marginal neighborhoods, causing them to appreciate relatively faster. However, assessment caps are only
one possible response to rising property taxes. If voters wish to limit the growth in property taxes, they don't need capped assessments—they can restrict the growth in
property tax revenues directly. At the same time, assessment caps that don't also cap the property tax rate don't actually constrain property taxes, but instead shift the
tax burden from longtime owners to new buyers. In Table 2, we limit the sample to states that have a binding revenue growth cap or that jointly cap assessments and
municipal tax rates. In this case, we assume that, conditional on imposing a tax expenditure limit, the decision to cap assessments rather than property tax revenue is
random. We rely on the work by Hoyt, Coomes, and Biehl (2011) to identify various statewide tax expenditure limits.
Limiting the sample to states that have chosen to constrain the property tax in some way, we still observe assessment caps seeming to accelerate gentrification rather
than slow it. How can that be? One possibility is that because these are state-wide limits, the caps have reduced the turnover in more desirable neighborhoods, driving
new homebuyers to marginal central-city neighborhoods. In that case, targeted assessment caps that apply only to currently low-priced neighborhoods could still be
efficacious. On the other hand, the existence of an assessment cap may increase the long-run return from "pioneering" in a low-priced neighborhood.
So far, we have been using change in relative house prices as our definition of gentrification. However, advocates for assessment caps are plainly concerned about the
ability of homeowners to stay in their home in the face of rising home values. While the in-migration of higher-income residents and house prices are highly correlated,
we do not observe the duration of time that existing residents remain in their home. Unfortunately, there are few individual-level data sets with sufficiently granular
geography to allow such an analysis. As an alternative, we can look at the change in median income of residents. This value is available at the census-tract level in the
2000 census and the 2007 American Community Survey. Table 3 presents change in median income for all census tracts and for gentrifying tracts with and without
assessment caps. While median incomes rose in gentrifying neighborhoods (even as they declined nationally), they rose faster in tracts subject to an assessment cap.
However, this difference is not statistically different from zero (p value 0.303).
Finally, assessment caps do nothing for renters, who may be impacted much more immediately by rising neighborhood quality than homeowners. It is possible that
assessment caps could still allow a small share of long-time owners to stay, and the observed effects are just dominated by the movement of renters. If we had access
to administrative data with finer geographic identifiers, we could look at whether neighborhoods that gentrified with assessment caps now exhibit more income or racial
heterogeneity than neighborhoods without. However, looking only at aggregate data, property taxes do not appear to be a primary driver of neighborhood change, and
concerns about gentrification do not appear to warrant interfering with the assessment process.
Chris Cunningham, research economist and assistant policy adviser at the Federal Reserve Bank of Atlanta
March 27, 2014 in Housing demand, Housing prices | Permalink
REAL ESTATE RESEARCH SEARCH
Search
RECENT POSTS
@FedFRASER