It is difficult to overstate how ongoing population loss has devastated Detroit. Between 1900 and 1950, when the rise of U.S. automobile manufacturing made the city one of America’s premier industrial and cultural centers, the population spiked from 300,000 to 1.85 million. Beginning in 1950, however, it began to fall. And its decline has been continuous to the present day, plummeting to just 700,000 in 2010, at a rate of descent nearly as swift as the rate of ascent in the first half of the 20th century.

Despite Detroit’s decades-long effort to keep pace with population loss by removing dilapidated housing stock, roughly a quarter of its 380,000 parcels are now abandoned, managed by the city or other public entities. As of July 2014, 114,000 properties have been razed, and 80,000 more are considered blighted (Austen 2014).

While the downtown is recovering and the suburbs remain vital, the “unfathomable dissolution of [the] built landscape” in vast areas of the city may shock the unsuspecting visitor (Austen 2014).

The first installment in a two-part series, this article considers the fiscal causes and repercussions of Detroit’s surplus of housing and vacant property: from the extent and location of abandoned homes and lots throughout Detroit to the downward spiral of house price declines leading to overassessment, property tax delinquency, and foreclosures; the public acquisition of that property; the pattern of land values across the city; and, finally, some potential ways to reconcile the remaining number of people with the amount of vacant and publicly held property. These measures range from targeting densely populated neighborhoods for redevelopment to establishing a greenbelt and reclaiming vacant parcels for public use as parks, forests, industrial buffers, retention ponds, and other open space (Austen 2014).

Factors Behind the Fall

The reasons for Detroit’s demise are numerous and perhaps too familiar. Federally subsidized transportation infrastructure, such as the Interstate highway system, facilitated rapid suburbanization, which was further enabled by permissive development codes. Racial tension, global economic forces, and corruption corroded what remained of the city proper. In the early stages of the malaise, higher-income residents, most of them Caucasian, left for the suburbs in search of a better quality of life, as shown in table1. By 1990, the African-American population had peaked as well and began to drop in the first decade of the 21st century. Beginning in the 1960s, Michigan auto manufacturing began its long, precipitous decline, disproportionately impacting Detroit and Flint. The loss of well-paying middle-class jobs further harmed the urban demographic and economic base, as households sought new employment opportunities elsewhere. Rising crime rates and continued erosion of public services induced another wave of exits.

Table 1 illustrates this downturn in the city’s demographic and economic conditions from 1950 through 2010. By 2012, according to government sources, median household income was just $25,000, less than half of the national median income. Poverty and unemployment rates were 38 and 27.5 percent, respectively. The labor force participation rate was 54 percent (compared to 63 percent nationwide), and for every 6.35 employed workers, there was one person receiving Social Security Disability benefits (compared to 1 of 12 nationwide). More than 34 percent of the city’s population received food stamps, and 81 percent of children in the Detroit Public Schools qualified for the Free and Reduced Lunch Program. Revenue streams became increasingly dependent on external sources, including nonresidents, as discussed in box 1. In 2013, when the city finally succumbed to the weight of accumulating fiscal challenges and declared bankruptcy, its debt and unfunded liabilities amounted to $18 billion—or $68,000 per household, which is about 2.7 times the median household income (Turbeville 2013).

The Failed Housing Market

The enormous excess supply of housing that accumulated over decades as a result of winnowing demand in Detroit corroded the value of that property. The real estate crisis of 2007–2008 dealt the final blow, resulting in the near-complete breakdown of Detroit’s housing market. By 2010, the average price of a residential property had plummeted to about $7,000 from $57,000 in 2006 (Hodge et al. 2014a). Detroit’s current excess of land and housing would likely suppress real estate price recovery in the coming years even if the population were to stabilize.

Property Tax Delinquency, Abandonment, and Public Acquisition of Property

Tax officials have not recalibrated assessment values to reflect house price declines. The resulting overassessment is as high as 80 percent (Hodge et al. 2014a), contributing to a general unwillingness to pay taxes, according to Alm et al. (2014). Their research also shows that additional factors such as high statutory tax rates and limited services such as public safety worsen this delinquency as well.

In the midst of the real estate crisis, property tax delinquency reached an alarming 50 percent (Alm et al. 2014). Figure 2 (p. 13) shows delinquency rates by neighborhood across the city in 2010. Property tax collection depends on a jurisdiction’s ability to impose sanctions for nonpayment of taxes, as noted by Langsdorf (1973). When real estate values collapse, taxing authorities have no workable enforcement mechanism; homeowners’ savings from nonpayment of property tax are greater than the value of the house they own and would lose in the instance of foreclosure. Further, proceeds from the sale of low-valued tax-foreclosed property are insufficient to cover back taxes owed and the government costs of initiating foreclosure proceedings.

Widespread failure to pay property taxes and the subsequent abandonment of homes has resulted in the public acquisition of thousands of properties throughout Detroit. Fifteen percent of the parcels within the 139-square-mile city are now empty, and nearly 25 percent of Detroit’s land area is now nontaxable, owned and managed by the city or some other public entity (Sands and Skidmore 2014), as illustrated in figure 3.

The Downward Spiral of Foreclosures

Currently, the number of properties flowing into public hands via tax foreclosure far outpaces the number of publicly held properties being purchased back by private taxpaying owners.

In Michigan, delinquent property taxes are subject to a 4 percent administration fee and 1 percent monthly interest on the delinquent amount computed at a non-compounded rate, beginning in the first month of nonpayment. After one year of delinquency, the city forfeits the property to county government, and the owner becomes subject to an additional 0.5 percent monthly interest charge. During this two-year period, owners may redeem their properties by paying all outstanding taxes and fees.

If property taxes go unpaid for more than two years, the Wayne County Treasurer initiates foreclosure proceedings. After a show cause hearing in the Circuit Court, the County Treasurer publicly auctions the foreclosed parcels. The starting bid equals the unpaid property taxes plus interest and penalties, and the proceeds are distributed proportionately to the taxing jurisdictions. If the property doesn’t sell at the first auction, the county lowers the minimum bid to $500 and holds a second auction. This procedure has led to further tax evasion, as some homeowners elect to ignore their tax bills with the expectation that they will be able to repurchase the parcel for $500 at the second auction.

Property that doesn’t sell at either auction may be transferred to a public body (city or state) or to a state or local land bank, or it may be held for a subsequent auction. County records indicate that 80 percent of the parcels sold to private buyers at auction over the past two years are once again delinquent on taxes (MacDonald 2013). Given that the tax delinquency rate is 67 percent for non-homestead property owners (Alm et al. 2014), it seems likely that a significant proportion of buyers at auction are absentee landlords who intend to reduce their operating expenses and increase their net rental income by never paying property taxes.

Property taxes are effectively optional on low-valued parcels as well. To minimize the backlog of tax-delinquent lots (MacDonald 2013), the county does not foreclose on homeowners who owe less than $1,600 in taxes and penalties in aggregate, effectively rendering these debts optional.

Expected revenue from the sale of low-valued parcels is insufficient to cover legal expenses associated with tax foreclosure and unpaid property tax balances. The end result is an increasing rate of delinquency and a growing inventory of unwanted property that ends up in the public sector, where it generates no revenue for the city.

Where to Go from Here?

Another wave of property tax-related foreclosures is expected in late 2014 and early 2015. What can be done to stabilize the situation?

Curbing Property Tax Delinquency

As mentioned, delinquency will abate when tax payers perceive that they receive commensurate returns for their money. Thus, improving the tax-service package by upgrading core services such as public safety will reduce evasion and lateness (Alm et al. 2014). Under the leadership of recently elected Mayor Mike Duggan, city government is taking steps to improve basic public service provision and put its fiscal house in order. For example, just 35,000 of 88,000 streetlights currently work, so Duggan plans to install 2,400 functioning streetlights per month (Austen 2014). He also increased the number of operating buses from 143 to 190, and improved snow plowing during the particularly harsh winter.

Lowering tax rates would modestly reduce delinquency as well (Alm et al. 2014). Roughly double the regional average, Detroit tax rates are at the state’s maximum of 67 mills and 85 mills per assessed value for homestead and non-homestead properties, respectively. While a reduction would improve the competitive position of the city relative to other communities in the region, currently there is no discussion of reducing property tax rates.

Aligning assessed values more closely with actual market conditions will also reduce delinquency. Mayor Duggan recently promised to lower assessments by 5 to 20 percent across the city to reconcile them with state guidelines. However, Duggan’s promised reductions are just a small fraction of the 80 percent cut needed to bring assesment to market levels, according to Hodge et al. (2014a).

Removing Land from the Market

In the absence of robust demand for land, which seems unlikely in the near future, the excess must be removed from the market for a period of time in order for real estate value to improve broadly across the city. Given that public entities now hold so much property, it is within the power of government authorities to credibly remove it from the market. Without this type of policy action, the possibility that these parcels could be quickly transferred to the private sector serves to hamper price recovery.

Currently, public lands are held by many public entities. Authorities from the City of Detroit, Wayne County, and state government are working to consolidate these parcels under a single entity that can manage them more effectively. Detroit Future City (2010) details the extent of the fragmented ownership of public lands:

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Public land in Detroit is held by many separate agencies, including city, county, and state agencies, as well as autonomous or quasi-governmental entities such as the Detroit Public Schools, the Detroit Housing Commission, and the Detroit Economic Growth Corporation. Few other cities have such fragmented holding of their public land inventory. There is no consistency of policy, procedure, or mission among these agencies, while many are hamstrung by burdensome legal requirements and complex procedures. The Department of Planning and Development controls the largest number of properties, yet its ability to do strategic disposition is constrained by procedural obstacles, including the need to obtain City Council approval for all transactions, however small and insignificant from a citywide perspective.

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While this consolidation process is necessary, it is not sufficient. Financial resources are required to remove blight and implement land use plans. City leaders are focused mainly on strategies to return these parcels to private ownership. If they can stimulate greater interest in Detroit property, this approach might be viable.

Indeed, opportunities for private ownership are emerging in the central business district (CBD). Daniel Gilbert, founder of Quicken Loans, has moved his headquarters to downtown Detroit and invested $1.3 billion in city real estate (Forbes 2014). And downtown renewal has led to substantial rental price increases (Christie 2014).

Land values are very high in the CBD, as depicted in figure 4 (p. 16) by the black parcels, which represent the very highest land values on the map. Detroit’s land value gradient is very steep, however. While several areas within the donut around the CBD have retained some worth, land values plunge rapidly as distance from the CBD increases, though they rise again near the city’s border, probably because amenities such as shopping are available in the nearby suburbs.

Given the weak demand outside the CBD, it may be more effective to determine which publicly held properties should return to private taxpaying parties, which properties should be taken off the market for a decade or two, with the option of returning land to the market should conditions change, and which should be permanently removed from the market.

The 2012 master plan, as outlined by Detroit Future City, calls for the reclamation of land for parks, forests, industrial buffers, greenways, retention ponds, community gardens, and even campgrounds (Austen 2014). Full implementation of this ambitious proposal requires significant financial resources. But consider how state and federal authorities intervened in the last major episode of mass tax foreclosure. During the Great Depression, many homesteaders on marginal agricultural lands in Michigan, Minnesota, and Wisconsin were unable to pay their property taxes, and this default resulted in a mass wave of tax delinquency, foreclosure, abandonment, and eventual forfeiture. In these states, county governments frequently became the owners of thousands of acres, much of which was eventually sold to the state and federal governments. The six national forests in Minnesota, Wisconsin, and Michigan, as well as the region’s numerous state forests, all have origins in this mass land abandonment of the Depression Era, as state and federal authorities pieced together a patchwork of adjacent lands purchased from counties eager to sell off their tax-forfeited property.

Today, state and federal authorities have no taste for a Detroit “bailout.” But history suggests that state and federal governments could help Detroit regain fiscal viability by purchasing patchworks of unwanted parcels, making payments in lieu of taxes, as is typical for other publicly owned lands, and then using the land for the benefit of the general public. Potential uses are mapped out in the aforementioned city master plan which the second installment of this series will explore. A federal, state, and local government partnership to reclaim these properties could help stabilize the land market and generate a revenue stream for the city and the other overlying taxing jurisdictions (including the state government via the state education tax). Property value recovery in combination with downtown reinvestment, continued efforts to improve Detroit’s tax-service package and remove blight, and long-run investment in Detroit’s human and social capital are essential elements of a sustainable Detroit recovery.

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Box 1: Targeting Nonresidents for Revenue

Detroit’s revenue streams have become increasingly dependent on external sources, including nonresidents, as its population and economic base have declined. This shift occurred in part because over time Michigan state legislatures empowered the City of Detroit to use tax-exporting strategies to help shore up weakening fiscal conditions and deal with massive structural changes to the regional economy. While there were periods during which it appeared that Detroit was on the cusp of recovery, various forces prevented “escape velocity.”

Today, the City of Detroit relies on the income tax, property tax, casino wagering tax, state revenue sharing, a utility user’s tax, federal grants, and various fees and licenses to fund public services. Of these, the casino wagering tax and the city income tax were adopted to bolster fading revenues from more traditional sources.

The casino wagering tax, based on gamers’ winning receipts, has become particularly important to the City of Detroit over the last decade, as shown in figure 2, which summarizes trends in the city’s major revenue sources from 1960 through 2012. The state legislature authorized casino gaming activity and the wagering tax in Detroit in 1996, to help the city address its fiscal challenges. By 2001, casino construction had been completed. The $180 million in additional annual revenues helped to stave off financial pressures even as other sources, such as income taxes and state shared revenues, were in decline. Up to 85 percent of gamers at the three major Detroit casinos are nonresidents, according to recent reports and interviews with gaming experts (Miklojcik 2014).

Since 1963, the city income tax has represented Detroit’s largest and, for a number of years, fastest-growing revenue source. At the time of adoption, the majority of the income tax was paid by city residents. As Detroit’s population has declined, however, the income tax on nonresidents who work in the city has become an increasing share of the city income tax base, composed of wages and salaries earned at a city-based job. The tax rate is 2.4 percent for city residents, whereas nonresidents pay 1.2 percent. While corporations and partnerships also pay an income tax, it is a very small portion of total revenues collected. According to Scorsone and Skidmore (2014), about half of the city income tax revenue in Detroit is paid by nonresidents.

State revenue sharing continues to play a critical role in Detroit’s finances, though population loss has diminished even this income source. In Michigan, state government collects a statewide sales tax and then shares a portion of the proceeds with municipal governments. Sales tax revenues are allocated to local governments based on constitutional provisions as well as state statute. The constitutional portion of revenue sharing is based on each jurisdiction’s share of the total state population. Given the dwindling number of Detroit residents, this portion of state revenue sharing has been falling for decades. The city experienced significant growth in total revenue sharing funds through the 1970s and 1980s, due to increases in statutory revenue sharing, which is distributed by formulae that have been changed by legislators many times in recent decades. But new changes to the statute combined with stagnation in the sales tax led to declining growth and eventual decline in revenue sharing for cities across the entire state in the 1990s. As Michigan entered a decade-long recession, this decline continued for most local jurisdictions, including Detroit, through the 2000s.

Some have pointed to revenue sharing reductions as a major source of stress for the City of Detroit, and a major catalyst for the bankruptcy. However, these declines affected all cities that received revenue sharing in Michigan; while cuts to revenue sharing likely influenced the timing of Detroit’s bankruptcy, they were not the ultimate cause. Further, it is important to note that revenue sharing for Detroit represents a net positive transfer of funds from the rest of the state to the city. According to the 2007 economic census, retail sales in the City of Detroit were $3.2 billion, or about 2.9 percent of the $109 billion in the State of Michigan.

In 2012, total state revenue sharing to all municipalities in Michigan was about $1 billion, and Detroit’s share of the total was $172 million, or 17.2 percent. Given that Detroit represents just 3 percent of total state retail sales in Michigan, one can conclude that the majority of state revenue sharing that flowed to Detroit originated from retail transactions that occurred outside the city.

As of 2014, the City of Detroit had approximately a $1 billion General Fund, considerably lower than in 2002 when revenue peaked at $1.4 billion. A 30 percent drop in revenues over time without a commensurate cut in expenditures led to the Detroit fiscal crisis and the eventual declaration of bankruptcy in 2013. By 2012, Detroit had borrowed more than $1 billion in an attempt to stave off default and a liquidity crisis (Michigan Department of Treasury 2013).

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About the Author

Mark Skidmore is professor of economics at Michigan State University, where he holds the Morris Chair in State and Local Government Finance and Policy, with joint appointments in the Department of Agricultural, Food and Resource Economics and the Department of Economics.

References

Alm, J., T. Hodge, G. Sands, and M. Skidmore. 2014. “Detroit Property Tax Delinquency—Social Contract in Crisis.” Lincoln Institute of Land Policy Working Paper.

Austen, B. 2014. “The Post-Apocalyptic Detroit.” New York Times, July 13. http://nyti.ms/1mFu3Jn

Center for Educational Performance and Information. Accessed in July 2014 from www.michigan.gov/cepi/0,4546,7-113-21423_30451—,00.html

City of Detroit. 2013. Comprehensive Annual Financial Report. www.detroitmi.gov/Portals/0/docs/finance/CAFR/Final%202012%20Detroit%20Financial%20Statements.pdf

Christie, Les. 2014. “I’ve Been Priced Out of Downtown Detroit.” CNN Money, May 27. http://money.cnn.com/2014/05/27/real_estate/downtown-detroit/index.html

Detroit Future City. 2010. Detroit Future City Strategic Framework Book. http://detroitfuturecity.com/framework

Forbes. 2014. “World’s Billionaires.” www.forbes.com/profile/daniel-gilbert

Hodge, T., D. McMillen, G. Sands, and M. Skidmore. 2014a. “Tax Base Erosion and Inequity from Michigan’s Assessment Growth Limit: The Case of Detroit.” Lincoln Institute of Land Policy Working Paper.

Hodge, T., G. Sands, and M. Skidmore. 2014b. “The Land Value Gradient in a (Nearly) Collapsed Urban Real Estate Market.” Lincoln Institute of Land Policy Working Paper.

Landsdorf, K. 1973. “Urban Decay, Property Tax Delinquency: A Solution in St. Louis.” The Urban Lawyer 5: 729–748.

MacDonald, C. 2013. “Half of Detroit Property Owners Don’t Pay Taxes.” The Detroit News, February 12.

Michigan Department of Treasury. 2013. Supplemental Documentation of the Detroit Financial Review Team. www.michigan.gov/documents/treasury/Review_Team_Report_Supplemental_2–19-13_411866_7.pdf

Michigan Department of Treasury. 2010. Real Property Tax Forfeiture and Foreclosure. www.michigan.gov/taxes/0,4676,7-238-43535_55601—,00.html

Miklojcik, J. 2014. President of Michigan Consultants. Information shared in personal interview with Eric Scorsone.

National Public Radio. 2014. “Chinese Investors Aren’t Snatching up Detroit Property Yet.” www.npr.org/2014/03/04/285711091/chinese-investors-arent-snatching-up-detroit-property-yet

Sands, G. and M. Skidmore. 2014. “Making Ends Meet: Options for Property Tax Reform in Detroit.” Forthcoming in Journal of Urban Affairs.

Scorsone, E. and M. Skidmore. 2014. “Blamed for Incompetence and Lack of Foresight and Left to Die.” Response to William Tabb’s “If Detroit Is Dead Some Things Need to Be Said at the Funeral.” Forthcoming in Journal of Urban Affairs.

Turbeville, W. 2013. “The Detroit Bankruptcy.” Demos, November 20. www.demos.org/publication/detroit-bankruptcy

Since first holding democratic elections at the national and provincial levels in 1994, South Africa has undertaken far-reaching constitutional changes. Arguably, the most fundamental transformation is taking place at the local government level, where the divisions created by apartheid were most severe. These changes were set in motion by the Local Government Transition Act of 1993, and during 1994-1995 the formerly racially segregated urban local authorities were amalgamated into a variety of non-racial transitional councils:

• in metropolitan areas, transitional metropolitan councils (TMCs) with constituent transitional metropolitan local councils (TMLCs);
• in secondary cities and towns, transitional local councils (TLCs); and
• in rural areas where no primary municipalities existed in the past, transitional representative councils (TRepCs) or transitional rural councils (TRCs).

In non-metropolitan areas, the former regional services councils were transformed into district councils, thereby retaining a secondary tier of local government in rural areas.

In March 1998 the national government published the White Paper on Local Government, which set out its vision for the future of local government. The White Paper resulted in passage of the Local Government Demarcation Act and the Local Government: Municipal Structures Act. Under the Demarcation Act, the Municipal Demarcation Board was established to assign new boundaries for the different categories of municipal governments throughout the country. The present 843 transitional municipalities are to be severely reorganized after the local elections in November 2000 into 284 newly demarcated municipalities (see Table 1).

Within the six metropolitan areas to be established, single-tier metropolitan municipalities will replace the TMCs and TMLCs. In the non-metropolitan areas 47 district municipalities will replace the present 42 district councils. Each district municipality will consist of two or more (primary-tier) local municipalities to replace the present local and rural councils. A typical future local municipality will consist of a number of neighboring towns and their rural hinterland. In sparsely populated rural areas where the establishment of a local municipality is not viable (designated as district management areas), a district municipality will be the only form of local government.

Municipal Finance Reform

The structural reforms at the local government level also require reform of municipal finances. The government is currently preparing two important pieces of legislation in this regard, the Local Government: Property Rates Bill (dealing exclusively with property taxation) and the Municipal Finance Management Bill.

Section 229 of South Africa’s Constitution guarantees “rates on property” (i.e., the property tax) as an autonomous source of revenue for municipalities. It states that the “power of a municipality to impose rates on property…may be regulated by national legislation.” National framework legislation regarding the property tax is indeed needed for the following reasons:

• Property tax is currently levied in terms of four outdated provincial ordinances retained from the apartheid era (e.g., it is not presently possible to utilize computer-assisted mass appraisal (CAMA) because physical inspections of each rateable property is legally required).
• Property tax is presently levied only by urban municipalities.
• The future amalgamation of urban and rural councils (i.e., the structural changes to date and still to be effected) necessitates change.
• The amalgamation of racially segregated urban municipalities has resulted in a number of constitutional challenges.
• It is the most important own-tax instrument at the local government level, accounting for 19 percent of total local government operating income (Budget Review 2000).

Therefore, the Local Government: Property Rates Bill, currently in its 10th draft, is to be welcomed, at least in principle. It has not yet been published for public comment and may be further amended. However, when this bill is eventually passed into law, it will regulate the levying, assessing and collection of property taxes by municipalities.

Policy Issues in the Property Rates Bill

Diversity of Tax Bases

Urban municipalities generally have a choice between three tax bases, which are spread remarkably evenly throughout the country:

• Site rating (rating land values only) is prevalent in at least three of South Africa’s nine provinces (Gauteng, Northern Province and Mpumalanga);
• Flat rating (rating improved capital values) is dominant in the Western Cape; and
• Composite rating (rating land values and the value of improvements, but at different tax rates) is most commonly used in KwaZulu-Natal.

Earlier drafts of the Property Rates Bill retained this diversity as well as local choice. However, clause 5(1) of the 10th draft of the bill now states that a rate levied on property “must be…an amount in the Rand (South Africa’s currency) determined by the municipality on the improved value of the property.” Although it seems that government has opted for a single tax base (i.e., improved capital value), the bill goes on to provide that a rate levied on the “improved value of property may be composed of separate amounts on the site value of the property and the value of the improvements.” By implication, therefore, composite rating and site rating have been retained (if the amount in the Rand on improvements is set at zero).

Extension of the Tax Base and Possible Exclusions

In principle a municipality may tax “all property in its municipal area,” including areas where the property tax has not been levied before, such as agricultural and tribal land. However, the bill also allows a municipality to exclude a category or categories of property from rating. These excluded properties need not be reflected in the valuation roll.

McCluskey and Franzsen (2000) suggest several reasons why municipalities should include all properties in the valuation roll, and then allow specific exemptions rather than exclusions from the taxing process. First, it can be difficult to justify and defend exclusions constitutionally; second, it is politically easier to phase out an exemption than to introduce a tax on formerly excluded properties; and third, if properties are not valued and thus not reflected in the valuation roll, the extent of the tax base relinquished through exclusions is not known.

“Public infrastructure” is to be excluded from the tax base. This will have significant implications, particularly for municipalities with large tracts of land owned by public utility companies, and may need to be reconsidered in light of privatization. International practice suggests that public utilities should be rated at least on their operational land.

Differentiation and Phasing-in of Rates

Current legislation only provides for rate uniformity throughout a municipal area. However, municipalities sometimes achieve effective differentiation by granting arbitrary rebates to certain properties on the basis of zoning. For example, all improved residential properties in the Pretoria TMLC are presently granted a 35 percent rebate.

The bill provides that different rates may be levied for different categories of property according to use, status or location-a critical point in light of the extension of municipal boundaries into rural areas. For example, it would be possible for a future local municipality (comprising various small towns, commercial farmland and tribal land) to have the following different property categories (and therefore different tax rates):

• residential properties in a formal township in town A (consisting of generally low-value properties);
• residential properties in a formal township in town B (consisting of generally high-value properties);
• residential properties in an informal (squatter) settlement;
• commercial properties;
• industrial properties;
• commercial farmland;
• tribal land.

However, a municipality will have to justify its differential rate schedule in an annually revised rates policy document presented to all taxpayers. Although municipalities may be permitted to treat ratepayers differently, they must justify this action. The bill also allows for the phasing-in of rates over a three-year period with respect to property not subject to property taxation before 1 July 1999 (e.g., tribal land). In certain instances the period may be extended for a further three years.

Tax Rates

The bill (clause 5(2)) states that municipalities may set their own tax rates. However, the Minister for Local Government, in concurrence with the Minister of Finance, may set a limit or rate cap on the amount. Apart from reducing municipalities’ fiscal autonomy, rate caps set nationally may not reflect differences in taxing capacity that exist between municipalities (see Table 2).

An alternative, and more practical, “capping” measure that has been inserted in the 10th draft (clause 5(3)(a)(ii)) is to limit the annual tax rate increases, not unlike one part of Proposition 13 in California.

Extension of Property Tax to Tribal Land

Extending property taxation to tribal land is an area of major political concern and is fraught with practical problems. “Ownership” of tribal land is not uniform, and some tribal authorities are not prepared to accept any form of local government within their area of jurisdiction, let alone any form of taxation of “their” land. Identifying the taxpayer may be problematic. Furthermore, formal ownership of tribal land seldom reflects the complex system of tenure rights of the individuals entitled to the use of that land. Even if it were possible to identify a taxpayer and establish an assessed value for (tribal) “property,” the abject poverty and inability of residents in many tribal areas to pay any tax will have to be considered. In fact, few tribal areas presently receive municipal services that could justify the introduction of a property tax.

Rates Policy

Clause 13 of the bill requires municipalities to adopt a rates policy and then levy rates accordingly. This is a welcome change. The rates policy, which is to be reviewed annually, must explain and justify the provision of exemptions, rebates, reductions and relief for the poor. This policy should significantly enhance the transparency, efficiency and accountability of municipal councils, and perhaps encourage compliance.

Valuation Quality Control

Another welcome aspect in the bill concerns monitoring valuation quality for equity and consistency across the country. However, the bill (clause 64) confers this responsibility on the Minister responsible for local government. McCluskey and Franzsen (2000) suggest that an independent and professional valuation agency, preferably at the national level, should be established for this highly technical task. Such agencies exist in Australia, New Zealand and Canada. In South Africa, this type of agency should perform the following primary tasks:

• provide technical advice to government on valuation issues and the regulation of the valuation services sector;
• set minimum quality standards and specifications necessary to meet government outcomes;
• monitor and audit the valuations submitted by valuation providers (e.g., municipal valuers) against certain minimum standards; and
• certify to municipalities (and through them to ratepayers) that the resulting valuations meet the minimum standards for a fair and consistent property tax system.

The monitoring service could well be expanded to provide valuation advice, expertise and data to municipalities. Such an agency could also undertake valuations of property for other taxes levied at the national level, such as estate and gift taxes.

Conclusion

The Local Government: Property Rates Bill should provide a solid framework for property taxation as South Africa begins to implement its new local government structure. If municipalities adhere to the principles articulated in the bill, a more uniform, equitable and efficient property tax system will play an even more important role in the future.

Riël C.D. Franzsen is professor in the Department of Mercantile Law at the University of South Africa in Pretoria, South Africa. His research on property tax reform in South Africa has been supported in part by the Lincoln Institute.

References

Budget Review 2000: Chapter 7. South Africa Department of Finance. http://www.finance.gov.za/b/budget_00/default.htm

Franzsen, R.C.D. 1999. Property taxation in South Africa. In W.J. McCluskey (ed.) Property Tax: An International Comparative Review. Aldershot, UK: Ashgate, 337-357.

Local Government: Property Rates Bill. 2000. 10th draft. South Africa Department of Provincial and Local Government.

McCluskey, W.J., and R.C.D. Franzsen. 2000. Some policy issues regarding the Local Government: Property Rates Bill. SA Mercantile Law Journal 12: 209-223.

In the context of entirely new fiscal policies and new approaches to property rights in central and eastern Europe over the past decade, taxes on land and buildings have taken on significant new roles—politically as adjuncts to privatization, restitution and decentralization, and fiscally as revenue-raising tools for local governments.

The Lincoln Institute is particularly interested in the complex debate over property-based taxes and in how different countries experience the transition from communism to democracy and from planned to market-driven economies. Over the past four years, the Institute has undertaken a series of educational programs to help public officials and business leaders in eastern Europe understand both underlying principles and practical examples of property taxation and valuation through offering varied perspectives and frameworks for decision making.

The Institute is also sponsoring a series of case studies to compare the implementation of ad valorem property tax systems in eastern European countries. These studies provide a unique perspective from which to review the initiation of land privatization, fiscal decentralization and land markets, as well as to compare the various legal and administrative features adopted for the respective tax systems.

Programs in Estonia

The Baltic country of Estonia was the first of the new independent states to recognize the benefits of land taxation and thus has been the focus of several Lincoln Institute programs. The Institute’s work in Estonia began in September 1993 when Fellow Jane Malme and Senior Fellow Joan Youngman participated in a conference with the Paris-based Organization for Economic Cooperation and Development (OECD) on the design of a property taxation system. Estonia had just instituted its land tax program, and since then the Institute has continued to support programs there relating to land reform and property taxation.

The most recent education program, on “Land and Tax Policies for Urban Markets in Estonia,” was presented in the capital of Tallinn in May to nearly 30 senior-level state and city officials interested in public finance, land reform and urban development. President H. James Brown, Jane Malme, Joan Youngman and a faculty of international experts explored current issues concerning land reform, valuation and taxation. They also discussed methods of urban planning, land management and taxation to both encourage development of urban land markets and finance local governments.

Estonia is also serving as the pilot case study for a survey instrument to gather and analyze information from countries adopting new fiscal instruments for market-based economies. Malme and Youngman are working closely with Tambet Tiits, director of a private real estate research and consulting firm in Tallinn, to draft the survey, research and collect data, and analyze the results.

Other Case Studies and Conferences

A second case study examines Poland, where an ad valorem property tax law is under legislative consideration. Dr. Jan Brzeski, director of the Cracow Real Estate Institute, serves as the country research director and liaison with the Institute. Subsequent studies will survey Latvia, Lithuania and Russia. In addition, Professors Gary Cornia and Phil Bryson of the Marriott School of Management at Brigham Young University in Utah are using the Lincoln Institute survey instrument to study property tax systems in the Czech and Slovak Republics.

The Lincoln Institute was a sponsor of the fourth international conference on local taxation and property valuation of the London-based Institute of Revenues, Rating and Valuation (IRRV) in Rome in early June. The conference attracts about 300 senior level officials from central as well as local governments throughout Europe. Dennis Robinson, Lincoln Institute vice president for programs and operations, was on the conference advisory committee and chaired a session on “Case Studies in Local Taxation in the New Democracies,” at which Jane Malme and Joan Youngman discussed the Institute’s case studies on land and building taxation in transitional economies. Other participants in that session were Institute associates Tambit Tiits of Estonia and Jan Brzeski of Poland. Board member Gary Cornia spoke about his research on property taxation in the Czech Republic. Martim Smolka, senior fellow for Latin America and the Caribbean, presented a paper on “Urban Land Management and Value Capture” at another session chaired by Joan Youngman. Jane Malme also was a discussion leader for a session on “Tax Collection and Administration.”

The Institute is planning another program with OECD in December 1997 for public officials and practitioners in the Baltic countries of Estonia, Latvia and Lithuania to examine policy aspects of land valuation and mass appraisal concepts for ad valorem taxation.

The Lincoln Institute has long been involved in international activities that deal with land policy and land taxation issues. In the 1970s those activities focused mainly on training and education. For example, Institute faculty have taught joint courses in land and tax policy issues with the International Center for Land Policy Studies and Training (formerly the Land Reform Training Institute) in Taiwan for nearly 30 years. Sponsorship of international congresses on land policy in the 1980s involved the Lincoln Institute in the dissemination of research and analysis by colleagues from both industrial and developing countries. This work heralded further international expansion in the 1990s involving both the Institute’s training programs and its support for research and analysis, particularly in developing countries.

Over the past ten years, the Institute has expanded its program of training and research in Latin America that deals with planning, property taxation, urban development, and land markets. Its program in China, begun in 2001, involves government officials, academics, and researchers with a focus on urban land markets, land taxation, and city expansion issues. The Institute has been active in many Eastern European countries, where it has been involved mainly in training on tax policy and administration. It also has contacts and modest levels of involvement in other countries, including Cuba and South Africa, which face particularly demanding or unique land and tax policy challenges.

The initial motivation for the Institute’s international work was to share its knowledge and expertise in land policy issues with others, as in transition economies seeking to establish land markets and property tax regimes. The Institute provided training in land market fundamentals and policy issues, and in the technical requirements of databases containing cadastral, ownership, and development information.

As the Institute expanded its activities abroad, academic and policy research on urban development and local public finance documented many commonalities across countries in the development patterns of large cities, in the behavior of households and firms, and in the tradeoffs households and firms face when making decisions about location, transport, space consumption, tenure choice, and local services. Predictions based on urban economic theory proved to be robust across both rich and poor countries.

The consequence of this commonality of problems and behavior is that the flow of knowledge is no longer in one direction. Solutions to problems in one city can help inform policy makers in other cities about new approaches that have worked elsewhere. For example, experience with new ways to use benefit charges to finance infrastructure, design exclusive bus lanes, structure new development, or reform housing in one country is of great interest to others. International experience also reinforces old lessons, such as the advantages of property taxation as a local revenue source or the impact of infrastructure on development.

In sum, the Institute’s international work has enriched its own knowledge and expertise as much as it has benefited those who have participated in our training and research programs.

The development of new land and tax systems in countries in political and economic transition in Central and Eastern Europe reflects a unique array of historical, social, political, and economic circumstances. While all transitional countries seeking admission to the European Union (EU) have initiated comprehensive reforms to encourage free markets and democratic governments, the three Baltic nations—Estonia, Latvia, and Lithuania—made privatization and restitution of property rights a prime objective immediately after their independence in the early 1990s. These actions, together with a desire to stimulate real estate markets and capture tax revenues for improved public services, made them the first of the transitional countries to introduce value-based taxation of real property.

Sally Powers has been a visiting fellow in the Department of Valuation and Taxation at the Lincoln Institute of Land Policy since 2009. She was director of assessment for the City of Cambridge for thirteen years until 2001, when she became an international consultant. That work has taken her to Kosovo, Montenegro, South Africa, the Kyrgyz Republic, and Turkmenistan, among other countries, where she has participated in projects on property taxation, market value revaluations, and establishment of a valuation profession for a transition economy.

Her career as an assessment administrator and consultant has involved all aspects of property taxation: legal framework, property appraisal, value defense, local government finance, tax policy, project planning and execution, public information, software specification and testing, cadastral/GIS (geographic information systems) mapping and analysis platforms, and tax collection and enforcement. Her research interests focus on mass appraisal, specifically the application of econometric techniques to analyze market activity and develop models to estimate the market value of properties that have not sold. She has written on topics as diverse as appraisal modeling, implementation of the local property tax in Kosovo, and property tax collection strategies.

Powers received her bachelor’s degree in anthropology from the University of Chicago, and she holds a Master of Science degree from the Boston College Carroll School of Management.

LAND LINES: How does your work fit within the research and education program of the Lincoln Institute?

SALLY POWERS: The Lincoln Institute is a leader in property tax policy, and its work influences the local government officials responsible for the property tax in thousands of jurisdictions across the United States and internationally. The Department of Valuation and Taxation presents a variety of conferences, seminars, and courses for property tax professionals, and I have served as faculty for a number of these programs since the 1990s. I’m also involved in working directly with local tax practitioners and in research projects that will continue to challenge the conventional wisdom about the property tax.

LAND LINES: What are some of your current projects?

SALLY POWERS: One major project deals with a joint venture between the Lincoln Institute and the George Washington Institute of Public Policy to create a free, downloadable property tax database for all 50 U.S. states and the District of Columbia. The Significant Features of the Property Tax Web site was launched in June 2009, and the information is updated every year to keep current with changes in the legislation that regulates the property tax in each state.

We regularly expand the subject matter to be included, and have made the site a central access point for information about the property tax from a variety of federal, state, and scholarly sources. For example, the only nationwide study of effective tax rates is published by the Minnesota Taxpayers Association, and this publication is now available for downloading from the Significant Features site. The next topic we plan to organize for presentation on the Web site is the various forms of property classification for tax purposes.

LAND LINES: Can you clarify what an effective tax rate and classification mean, and why they are important aspects of this database?

SALLY POWERS: The property tax rate by itself does not explain much about the property tax burden in a particular community or provide any basis for comparison across jurisdictions. A high tax rate may simply reflect low property values, and a low tax rate may reflect very high values. Effective tax rates are calculated by comparing the amount of the property tax bill for a property to its market value, which may or may not be the same or even close to its assessed value. Effective tax rates, where they are available, thus make it possible to understand the impact of a tax bill intuitively and to make better informed cross-jurisdictional comparisons.

Classification of property is undertaken by many states, either legislatively or in the state’s constitution, to identify property categories based on use, the most common uses being residential, commercial, and industrial. In some states the classifications are applied for identification and reporting purposes only. However, it is employed more frequently to tax favored classes at lower rates than other classes. The most favored classes are generally residential and agricultural uses.

LAND LINES: Based on your research, how well is the property tax holding up as a primary local revenue source during the current recession?

SALLY POWERS: There are two major components to a property tax bill: the property value and the tax rate, as discussed above. In states where local tax jurisdictions are not encumbered with extreme limits on tax rates, the property tax can be quite resilient, because when values decrease the tax rate may be increased. In addition, the value always represents an assessment as of a specific date prior to the issuance of the tax bill. It is not unusual for this assessment date to be a year and a half or more before the date of issuance of tax bills. This “assessment lag” gives local jurisdictions a cushion in times of rapidly changing markets, with time to plan for the eventual change in the level of assessed values and to investigate other local revenue sources. To date, research on property tax revenues during the current down-turn has borne out these features of the property tax.

LAND LINES: It’s clear that the American property tax is a complex affair. How does this compare to your experience in other countries?

SALLY POWERS: International experience with the property tax varies greatly, depending on the maturity of the property tax system, the culture, and the legal underpinnings for the tax. The projects I worked on in Eastern Europe were introducing a market value based property tax. Political leaders and central and local public officials had no difficulty with the concept of market value. Valuation methods were uncomplicated and directly related to sales. A common theme in the U.S. and many other countries, however, is the desire to make the burden of the property tax smaller for residences than for businesses. Some of the proposed formulas to provide tax relief are extremely complicated, such as relating property value to household size and ages of household members.

LAND LINES: How widespread is the property tax?

SALLY POWERS: It is quite surprising how many countries assess some form of tax or fee on property or property rights. Another Lincoln Institute project I am working on is the African Tax Institute (ATI), a joint venture with the University of South Africa at Pretoria. More than ten research fellows at ATI have visited one or more of 38 countries to develop in-depth reports on the various forms of tax on property (Franzsen and Youngman 2009). Most of those reports and supplemental appendices are posted on the Lincoln Institute Web site as working papers. In every country studied the researchers found some sort of tax or fee on ownership or use of property. In many countries all land is owned by the government, but the rights to use the land are owned by individuals and companies that pay fees and taxes on their use rights.

In countries of the former Yugoslavia, for example, the property tax is a familiar concept. In the early 1990s, the Federal Republic of Yugoslavia established a privatization program that transferred ownership of government-owned apartment flats to individual owners. An annual tax was assessed on the owners, based on the characteristics of the property.

LAND LINES: Can you describe more about your interest and experience in econometrics applied to property market data.

SALLY POWERS: I was plunged into multiple regression analysis on my very first property tax job for the City of Boston in 1982. I was part of the team hired to use statistical analysis to develop models (formulas) that could be applied to property data to estimate market value. I was fortunate because the city hired some of the top experts in this emerging field to train us in these methods. Since then, both as an assessor and later as a consultant, I have continued to use econometric tools to estimate market value for property tax application.

It has been fascinating to participate in the increasing sophistication and effectiveness of CAMA (computer assisted mass appraisal) to generate AVMs (automated valuation models). The biggest leap in this technology takes advantage of GIS capabilities to analyze location and property value. I am looking into an econometric tool for CAMA application that analyzes data around median values rather than the mean. This is interesting because the current statistical standards for value accuracy and uniformity are calculated around the median because, compared to the mean, it measures average value with less bias from extremely high or low values.

LAND LINES: Do you have any other observations about the Institute’s work in the current volatile realm of property taxation?

SALLY POWERS: As a visiting fellow at the Lincoln Institute, I have found it especially gratifying to see the increasing public interest in the Significant Features of the Property Tax database. The Web site has been cited by many scholars in the field of local public finance, and the authors of two papers presented at recent Institute seminars used data from the site for their analyses.

Adding to its Web-based resources, the Lincoln Institute has produced more than 10 online courses on such diverse topics as property tax policy, modern valuation technologies, property tax reform in Massachusetts, and introduction of the property tax in transition economies. The IAAO (International Association of Assessing Officers), the leading membership organization for tax assessors and other property tax professionals, has recognized the value of these courses, and now its members can receive continuing education credit for taking them.

Finally, the Institute has inspired more economists to become interested in property tax valuation and equity issues. For example, economists from the University of Illinois and Florida State University are conducting studies of assessment equity that introduce contemporary econometric tools to both display and analyze patterns of overvaluation and undervaluation of property in assessing jurisdictions.

Visiting fellow Dan McMillen (2011), working with a rich data-set that includes the City of Chicago, will present his analysis and conclusions at the next annual conference of the IAAO. I will be on hand to help make his innovative findings accessible not only to the statistical analysts in the audience, but also to property tax assessors who are interested in improving values in their own jurisdictions.

References

Franzsen, Riel C. D., and Joan M. Youngman. 2009. Mapping property taxes in Africa. Land Lines 21(3): 8-13.

McMillen, Daniel P. 2011. Assessment regressivity: A tale of two Illinois counties. Land Lines 23(1): 9-15.

Significant Features of the Property Tax. www.lincolninst.edu/subcenters/significant-features-property-tax

Una caricatura de Jack Ziegler en la revista New Yorker refleja la ironía esencial de participar en condominios, cooperativas y otros tipos de asociaciones de propietarios. Un automóvil está ingresando en un camino que conduce hasta un grupo de casas adosadas a lo lejos, con un cartel en la entrada que proclama “Bienvenido a Condoville y la ilusión de ser propietario de su propia vivienda” (Ziegler 1984).

A pesar de esta ambigüedad, aproximadamente un cuarto de la población estadounidense vive ahora en viviendas gestionadas por asociaciones, conocidas en su conjunto como comunidades de interés común (CIC). La figura 1 muestra el impresionante aumento de las CIC en las últimas décadas. Entre 1970 y 2013, la cantidad de unidades de vivienda en este tipo de comunidades pasó de alrededor de 700.000 a 26,3 millones, mientras que la cantidad de residentes se multiplicó por más de 30, de 2,1 millones a 65,7 millones.

Con su creciente popularidad, las comunidades de interés común han generado desafíos políticos y problemas legales que exigen constante resolución. Estos conflictos en general tienen que ver con preocupaciones externas de que las CIC segregan a los ricos del resto de la sociedad, o desacuerdos internos entre los propietarios individuales y los órganos de gobierno de sus asociaciones. Este artículo examina algunas de las controversias asociadas al modelo de CIC y su sistema de gobierno, y sugiere medidas para aumentar los beneficios de las comunidades de interés común, tanto para los propietarios como para la sociedad en general.

El aumento de las comunidades de interés común

La creciente industrialización que se produjo en el siglo XIX, causó contaminación, tráfico, ruido y enfermedades, lo que llevó a muchos planificadores y ciudadanos a favorecer la separación de usos residenciales, comerciales e industriales. (La zonificación como herramienta de planificación no había surgido todavía, y no sería legitimada por la Corte Suprema de Justicia de los Estados Unidos hasta 1926). Algunos emprendedores residenciales impusieron por lo tanto “servidumbres” (convenios, restricciones y derechos de acceso en predios ajenos) sobre sus proyectos de subdivisión. Las servidumbres generalmente restringían las propiedades a usos residenciales y frecuentemente creaban derechos compartidos para el uso de instalaciones y servicios comunales, a cambio de aranceles. Los compradores de lotes aceptaban estas servidumbres y, una vez que las restricciones se habían registrado, los compradores subsiguientes estaban legalmente obligados a respetarlas. El derecho consuetudinario resultó ser un vehículo efectivo para crear áreas residenciales de alto nivel, como Gramercy Park en Nueva York (1831) y Louisburg Square en Boston (1844).

Después de una desaceleración durante la Gran Depresión y la Segunda Guerra Mundial, la construcción de CIC comenzó a crecer a fines de la década de 1960, y la Administración Federal de Viviendas (FHA) reconoció el condominio como un vehículo de propiedad asegurable, seguido de leyes legislativas estatales en el mismo sentido. Los seguros hipotecarios de la FHA animaron a los emprendedores a construir condominios para la clase media, que ganaron aceptación en el mercado como consecuencia del movimiento llamado “new town” (nuevos pueblos), ejemplificado por las primeras comunidades planificadas, como Reston, Virginia (1964) y Columbia, Maryland (1967). La aprobación de la Propuesta 13 en California, una iniciativa que limitó la tributación a la propiedad en 1978, y de medidas similares en otros estados, también impulsó el crecimiento de las CIC, ya que los gobiernos locales, necesitados de fondos y bajo creciente presión para suministrar más servicios, ya no estaban dispuestos a absorber los costos de infraestructura y servicios de nuevos emprendimientos. Por esta razón, tendieron a aprobar solamente nuevos emprendimientos en forma de CIC, donde los costos estaban cubiertos por el emprendedor (y en última instancia por los propietarios).

Hoy en día, los propietarios de CIC están sujetos generalmente a una variedad de restricciones sobre sus unidades privadas, desde limitaciones sobre la diagramación y el diseño de los edificios y el tipo de materiales de construcción utilizados, hasta restricciones en las decoraciones visibles, estructuras auxiliares y el paisajismo. Frecuentemente existen controles sobre la conducta de los propietarios y el uso de la propiedad, que está normalmente limitado a ocupación residencial. También se pueden imponer reglamentos sobre ruido, estacionamiento y tráfico, junto con restricciones vehiculares. En algunos casos también se prohíben carteles políticos, distribución de volantes y actividades asociadas.

A cambio de las cuotas de asociación, los propietarios tienen acceso a infraestructura común, como calles y áreas recreativas, y a servicios privados, como seguridad, recolección de basura, limpieza de calles y remoción de nieve. En general, la CIC es administrada por un gobierno residencial privado y varios comités, que son elegidos por los propietarios y están sujetos a las leyes que rigen contratos civiles, no al derecho público administrativo y constitucional (ver recuadro 1).

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Recuadro 1: Modelos de comunidades de interés común

Las CIC normalmente tienen un gobierno privado elegido por los propietarios para administrar y hacer cumplir los contratos, y para promulgar reglas que beneficien los intereses de la comunidad. Aunque la forma exacta de la estructura de gobierno puede variar, los conceptos básicos son similares.

Asociaciones de propietarios
Los propietarios de cada unidad –en general una vivienda unifamiliar o adosada– poseen el título de propiedad de la misma. La asociación posee el título de las áreas comunes y otorga a los propietarios derechos de servidumbre para poder usarlas. Éstas se pueden crear por derecho común o, en algunos estados, bajo derecho legislado. Las asociaciones de propietarios constituyen más de la mitad de las asociaciones comunitarias del país.

Condominios
Los propietarios de cada unidad poseen el título de propiedad de la misma, más un porcentaje de las áreas comunes. La asociación administra las áreas comunes, pero no posee el título de las mismas. Los condominios pueden ser verticales (edificios de apartamentos) u horizontales (viviendas unifamiliares o adosadas) y se crean exclusivamente bajo leyes estatales. Los condominios representan entre el 45 y 48 por ciento de las asociaciones comunitarias.

Cooperativas
Una corporación cooperativa es dueña del edificio, y los propietarios reciben acciones en la corporación y un contrato de alquiler de largo plazo, automáticamente renovable, sobre sus unidades individuales. A diferencia de los condominios y las asociaciones de propietarios, la corporación puede transferir el control de los contratos de alquiler y las acciones de los propietarios de la cooperativa. Sólo entre el 3 y 4 por ciento de las asociaciones comunitarias está organizado en cooperativas.

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Beneficios económicos de las CIC

Las CIC aportan beneficios económicos sustanciales a sus propietarios y a la sociedad en general. Los residentes que compran propiedades en estas comunidades han llegado a la conclusión de que las instalaciones compartidas, como las áreas recreativas, son, un mejor valor que, por ejemplo, las piscinas personales y otras instalaciones privadas. De manera similar, aquellos que se han unido a las CIC han llegado a la conclusión de que ciertas restricciones (como la prohibición de estacionar casas rodantes en las entradas de vehículos) aumentan el valor de su propiedad.

Estas comunidades también ayudan a lograr un uso eficiente del suelo. Los costos de organizar y administrar una comunidad residencial privada son menores que los de un sistema público (Nelson 2009). Los costos de transacción y captación de rentas por medio del sistema político también se reducen. Finalmente, como está libre de restricciones legislativas y constitucionales, una comunidad privada tiene mayor flexibilidad para crear sus propias reglas y operaciones, liberándola de la necesidad de cumplir con pautas públicas cuando firma contratos con proveedores de servicios y abastecedores.

Los tribunales estadounidenses han validado estos beneficios en eficiencia al reconocer los contratos de CIC y la participación de sus propietarios en los mismos. En opinión de un tribunal: “Es un hecho reconocido que [los convenios] aumentan el valor de la propiedad subdividida y crean un incentivo para que los compradores adquieran lotes dentro de la subdivisión” (Gunnels vs. No. Woodland Community Ass’n, Tex. Ct. App, 17013 [1978]).

Preocupaciones externas: Secesión de la comunidad general

A pesar de estos beneficios, varios comentaristas han argumentado a que los servicios e instalaciones privadas de las CIC están solamente disponibles para aquellos que tienen el dinero suficiente, y que sirven para separar a los ricos del resto de la sociedad. El resto de la municipalidad donde se encuentra la CIC se ve obligado a vivir sin estos privilegios, creando un sistema permanente de dos niveles de vivienda. Los críticos también argumentan que la privatización de infraestructura y servicios aísla a los residentes de las CIC y reduce su interés en temas comunales generales.

De acuerdo a esta lógica, los residentes de las CIC están menos dispuestos a participar con el gobierno público en asuntos cívicos, y son mucho más propensos a oponerse a los aumentos de impuestos, ya que los servicios son proporcionados por la CIC y no por el gobierno municipal. Cuando las asociaciones comunitarias forman parte de los emprendimientos suburbanos, el aislamiento del centro urbano puede agudizarse. Estas preocupaciones se centran frecuentemente en el miedo a sufrir segregación económica y de clase. El ex Secretario de Trabajo Robert Reich escribió en un artículo para el New York Times, titulado “Secesión de los exitosos”: En muchas ciudades y pueblos, los ricos han retirado de hecho su dinero del mantenimiento de los espacios e instituciones públicas compartidas por todos y han dedicado sus ahorros a sus propios servicios privados… Los condominios y las omnipresentes comunidades residenciales presionan a sus miembros a realizar trabajos que los gobiernos locales con fondos escasos ya no están en condiciones de hacer bien (Reich 1991).

Libertad de elección

Esta caracterización de las asociaciones comunitarias, sin embargo, contradice los valores estadounidenses fundamentales de libertad de contrato y libertad de asociación. Es un valor compartido por todos que la gente puede gastar su dinero y firmar contratos de la manera que quiera, siempre que sus fines sean lícitos. La ley sólo interfiere con la libertad de contrato ocasionalmente, cuando se ponen en juego consideraciones políticas importantes. Los tribunales han reconocido que la libertad de contrato es un elemento importante para sostener los acuerdos de servidumbre privados: Comenzamos con el supuesto de que las personas privadas, en el ejercicio de su derecho constitucional de libertad de contrato, pueden imponer las restricciones que quieran sobre el uso del suelo transferido a otro (Grubel vs. McLaughlin, D. Va. [1968]).

Las CIC también son un reflejo de la creencia estadounidense en la libertad de asociación, ejemplificada por una larga tradición de comunidades utópicas y otras redes basadas en creencias. Los residentes de las CIC modernas podrían compartir intereses comunes, como los propietarios que viven en comunidades ecuestres o de clubes de golf. Otros residentes pueden simplemente compartir el deseo de vivir con tranquilidad o de gozar del carácter del barrio. En Behind the Gates (Detrás de las puertas), Setha Low sugiere que las CIC permiten a las “familias de clase media establecer sus paisajes residenciales con “amabilidad”, de manera que puedan reflejar su propia estética de orden, constancia y control” (Low 2004). Cualquiera que sea la razón, las asociaciones comunitarias son congruentes con la observación de Tocqueville sobre las interacciones entre estadounidenses: Los estadounidenses de toda edad, condición y disposición están constantemente formando asociaciones.No sólo tienen compañías comerciales y de manufactura, de las cuales todos forman parte, sino también asociaciones de miles de otros tipos: religiosas, morales, serias, fútiles, amplias o restringidas, enormes o diminutas (de Tocqueville 1835).

Más aún, las pruebas disponibles demuestran que los residentes de CIC están generalmente contentos con su elección. En 2014, en una encuesta realizada por Public Opinion Strategies para el Instituto de Asociaciones Comunitarias, el 64 por ciento de los propietarios dieron una opinión positiva sobre su experiencia general, y el 26 por ciento dieron una opinión neutra. Si bien el 86 por ciento de los encuestados indicaron que preferiría menor regulación gubernamental o, por lo menos, que no quería ninguna regulación adicional, el 70 por ciento opinó que las reglas y restricciones de la asociación protegen y aumentan el valor de su propiedad.

El problema de doble tributación

Si bien el auge de las CIC se debe a una variedad de factores, uno especialmente clave fue la constricción financiera de las municipalidades después de las revueltas tributarias de la década de 1970. De hecho, una narrativa distinta sobre el tema de “la secesión” es que algunos de los propietarios en comunidades de interés común creen que el gobierno municipal los abandonó a ellos.

Los propietarios de CIC pagan impuestos sobre la propiedad a la misma tasa que otros ciudadanos, aunque a título privado servicios como recolección de basura, limpieza de calles y seguridad, como parte de las cuotas de asociación comunitaria. Esto equivale a una doble tributación, porque los propietarios de asociaciones pagan por un servicio que no reciben.

Si hubiera una política de no proveer de servicios efectivamente antes de que el propietario comprara una unidad en una CIC, teóricamente el comprador podría ofrecer un precio de compra más bajo que reflejase la falta de servicios municipales y el efecto de la doble tributación. El propietario de la unidad estaría protegido, y el emprendedor absorbería la pérdida. Pero si una municipalidad reduce los servicios pero no los impuestos después de la compra de la unidad, el propietario sufre una pérdida no compensada. Este resultado sería una mala política, pues supondría posibilitar la captación de rentas al permitir que una mayoría los ciudadanos de un pueblo seleccionara a un grupo de residentes para que soporte una carga tributaria adicional sin crear costos adicionales. Esto pervierte la noción de ecuanimidad y eficiencia, y es antitética a la construcción de comunidad y confianza cívica.

Es especialmente importante que las legislaturas eviten el uso de la doble tributación como política, dado que las acciones judiciales al respecto tienen poca probabilidad de tener éxito. Los pocos tribunales que han examinado ataques contra la doble tributación han sido indiferentes a los argumentos de que viola el proceso de derecho debido, viola la cláusula de protección igualitaria de la Constitución, o que equivale a la toma de una propiedad sin compensación. Si bien la doble tributación puede ser una mala política, no es inconstitucional. Los tribunales no deberían revocar estas decisiones legislativas, porque son esencialmente decisiones políticas que el público debería rechazar en las urnas.

La cuestión de desigualdad

El argumento de “secesión de los ricos” parece estar basado en la noción de que sólo los propietarios de mayores ingresos con viviendas de mayor valor son los que viven en comunidades de interés común. Los datos disponibles, sin embargo, no apoyan este supuesto con claridad. Como se indica en la figura 2, los precios de condominios y cooperativas –que suman la mitad de las unidades en CIC del país– son inferiores a los de todas las viviendas existentes (que incluyen condominios, cooperativas y viviendas unifamiliares dentro y fuera de asociaciones comunitarias). Si bien estas estimaciones no están segmentadas en profundidad (por ejemplo, no desglosan las viviendas unifamiliares dentro y fuera de las CIC), demuestran que los valores de condominios y cooperativas concuerdan con los valores de las viviendas en general.

El acceso a viviendas a un precio asequible es un desafío importante en los Estados Unidos, pero las asociaciones comunitarias no son necesariamente la causa de estos problemas arraigados y complejos. Antes de que las CIC se hicieran populares, los gobiernos locales ya habían impuesto la zonificación en forma de requerimientos de lotes de una gran superficie mínima, lo que frenaba a los emprendedores a construir viviendas de interés social. De hecho, se ha demostrado que las CIC han reducido los costos de la compra de vivienda. Las viviendas multifamiliares, como los condominios y las casas adosadas, son más económicas que las viviendas unifamiliares, porque recortan el costo del suelo, la infraestructura y la construcción (Ellickson & Been 2005). Las cooperativas de viviendas de interés social permiten restricciones a los precios de reventa y el nivel de ingresos del propietario, asegurando que las familias de bajos ingresos tengan la oportunidad de acceder a la vivienda. Con este propósito, los emprendedores que operan bajo requisitos o incentivos municipales frecuentemente designan como de interés social ciertas unidades de condominio dentro del proyecto.

Por lo tanto, es simplista y contraproducente considerar que las asociaciones comunitarias son un campo de batalla entre ricos y pobres.También el uso peyorativo del término “comunidades enrejadas” para describir las CIC con acceso público limitado no contribuye a comprender el problema. De hecho, una cooperativa de ingresos moderados con su puerta principal bajo llave por razones básicas de seguridad caería en la definición de “comunidad enrejada”.

Principios rectores

¿De qué manera debería la crítica de la “secesión de los exitosos” afectar nuestra comprensión, aceptación y autorización de las comunidades de interés común? El tema es complejo y no se presta a elecciones binarias. Por el contrario, es cuestión de acomodar intereses contrapuestos de acuerdo a los siguientes principios:

• La aceptación del modelo de CIC ha aumentado con el tiempo. Estos tipos de modalidad de vivienda representan la libre elección de muchas personas, y la ley hace cumplir sus contratos en la mayoría de los casos.
• Los propietarios que viven en CIC deberían relacionarse con el gobierno municipal y la estructura de la CIC bajo lo que se podría denominarse como “federalismo aumentado”. Bajo esta óptica, los residentes tienen deberes contractuales adicionales hacia la CIC, pero estas obligaciones no los excusan de sus deberes y su participación en los gobiernos federal, estatal y local. Como contraparte, los legisladores deberían basar sus decisiones políticas relativas a los propietarios de CIC sobre consideraciones de ecuanimidad, eficiencia y construcción de comunidad.
• El acceso asequible a la vivienda requiere soluciones integrales. Estos temas se tienen que discutir y debatir en forma directa, y el proceso político debería determinar el curso de acción. La consideración de estos asuntos como un problema de las CIC no se justifica y no llevará a resultados efectivos.

Conflictos internos: Propietarios individuales vs. la comunidad

En su libro pionero Privatopia: Las asociaciones de propietarios y el ascenso de los gobiernos residenciales privados (1996), Evan McKenzie advirtió: Las CIC tienen una forma de gobierno privado que expresa una preferencia norteamericana por la propiedad de viviendas privadas y, con demasiada frecuencia, se convierte en una ideología de privativismo hostil. El objetivo social más importante es la preservación de los valores de la propiedad, y todos los demás aspectos de la vida comunitaria están subordinados a él. El cumplimiento rígido, intrusivo y frecuentemente mezquino de las reglas es una caricatura de… la gestión benigna, y la creencia en la planificación racional se distorsiona al poner el énfasis en la conformidad por la conformidad misma.

Los conflictos entre los residentes y las asociaciones o juntas de las CIC frecuentemente se centran en torno a dos temas: el sentido de las restricciones y los procedimientos para hacerlas cumplir (ver el recuadro 2). La disputa puede enfocarse en una gama de temas que va desde restricciones de paisajismo a la cobranza de cuotas. En efecto, el 24 por ciento de los residentes de CIC que respondió a la encuesta de Public Opinion Strategies de 2014 había experimentado un problema o desacuerdo personal importante con su asociación. De este grupo, el 52 por ciento quedó satisfecho con las resoluciones y el 36 por ciento no; en el 12 por ciento de los casos, el problema todavía no se había resuelto.

Existe sin duda el riesgo de que las asociaciones comunitarias se excedan en el contenido y cumplimiento de las restricciones, pero estas preocupaciones políticas sustanciales y de procedimiento se pueden resolver por medio de legislación y supervisión judicial.

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Recuadro 2: Los conflictos son buenos para los medios

Mientras que los siguientes titulares omiten las múltiples interacciones positivas entre los propietarios individuales y las asociaciones, sí señalan algunas de las interacciones difíciles que se pueden producir.

• “Padres de infante de marina demandados por un cartel de apoyo en su jardín de Bossier City [La.]”. El cartel de 90 x 180 centímetros mostraba una foto de su hijo en uniforme, antes de ser destinado a Afganistán, con una leyenda que decía: “Nuestro hijo defiende nuestra libertad” (Associated Press, 25 de julio de 2011).
• “Mujer del condado de Bucks multada por la asociación de propietarios por luces de Navidad de colores”. Los miembros de la asociación habían votado previamente permitir sólo luces blancas (CBS Philly, 2 de diciembre de 2011).
• “Ciudadano de Dallas demanda a un vecino rabino que usa su casa como sinagoga”. El demandante argumentó que el uso de su casa para una congregación de 25 personas violaba la restricción residencial (KDFW Fox4 Online, 4 de febrero de 2014).
• “Un abuelo está encarcelado por ignorar la orden de un juez en una disputa sobre la siembra de césped en su jardín”. La asociación obtuvo un fallo de US$795 contra el propietario, quien argumentó que no tenía dinero suficiente para volver a sembrar el césped que se había secado. Cuando el propietario no pagó lo que le correspondía, el tribunal lo encarceló por desacato (St. Petersburg Times, 10 de octubre de 2008).
• “Residente de la Plantación de Hilton Head disputa el arancel de puerta por cuotas impagadas”. Un propietario demandó a una asociación que impuso un arancel de US$10 para entrar en el barrio a los propietarios que estaban en mora con su cuota anual de asociación (Island Packet, 29 de agosto de 2014).

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Libertad de elección

Como se dijo anteriormente, los individuos ejercen su libertad de elección al comprar viviendas en CIC y aceptar sus reglas. La vida en una asociación puede no ser para todos, pero en general se deben respetar las expectativas de la gente que elige vivir en una CIC, y no deben verse frustradas por alguien que después trata de violar el contrato. Los tribunales generalmente coinciden con esta opinión, como indica esta sentencia de 1981:

Las restricciones [originales] están revestidas de una presunción muy fuerte de validez, que deriva del hecho de que cada propietario individual de una unidad la compra sabiendo y aceptando las restricciones que se imponen sobre las mismas… [Una] restricción de uso en una declaración de condominio puede tener un cierto grado de irracionalidad, pero a pesar de ello resistir un ataque en los tribunales. De no ser así, el propietario de una unidad no podría confiar en las restricciones estipuladas en la declaración… ya que dichas restricciones podrían estar potencialmente en un estado de cambio continuo (Hidden Harbour Estates vs. Basso, Fla. Ct. App. [1981]).

Hay varias situaciones, sin embargo, en las que los propietarios no tendrían ninguna libertad de elección. Primero, es posible que las únicas viviendas nuevas disponibles para los compradores estuvieran en CIC, es decir, que los emprendedores ya no construyan viviendas fuera de asociaciones. Efectivamente, un informe reciente concluyó que en 2003 el 80 por ciento de todas las viviendas en construcción en ese momento eran en asociación (Fundación para la Investigación de Asociaciones Comunitarias, 2014). Además, un gobierno municipal podría requerir que los emprendedores crearan asociaciones como condición para la aprobación de una subdivisión. (La reciente legislación promulgada en Arizona que prohíbe esta práctica es señal de que todavía ocurre.) Finalmente, algunos tribunales han sugerido que, si bien las reglas en vigor al momento de la compra se deben hacer cumplir, una regla promulgada posteriormente por la asociación o junta bajo una competencia reservada no se tiene que hacer cumplir si un propietario puede demostrar que “no es razonable”. Otros tribunales no están de acuerdo: No se debe considerar la reclamación de un propietario cuando la asociación de propietarios enmienda la declaración conforme a una cláusula registrada en la declaración de convenio inicial. Cuando un comprador adquiere una unidad en dicha comunidad, la compra se efectúa no sólo sujeta a los convenios expresos en la declaración, sino también sujeta a las disposiciones de enmienda… Y, por supuesto, un comprador potencial que esté preocupado por el gobierno de la asociación comunitaria tiene la opción de comprar una vivienda que no esté sujeta al gobierno de una asociación… Por esta razón, declinamos someter dichas enmiendas… a la prueba de “racionalidad” (Hughes vs. New Life Development Corp., Tenn.Sup.Ct. [2012]).

Directrices para la protección de la autonomía personal

Las restricciones impuestas por las asociaciones de propietarios generan una preocupación cuando amenazan la autonomía personal y los derechos individuales fundamentales de sus miembros. Las restricciones de este tipo podrían incluir la prohibición de carteles o mensajes políticos, y la restricción de ocupación a familias “tradicionales”.

Los tribunales deberían hacer cumplir las restricciones si limitan los efectos colaterales (también llamados “secuelas” o “externalidades”) de un propietario hacia el resto de la comunidad. Sin embargo, no deberían dejar cumplir las restricciones que limitan la naturaleza o el estado de los ocupantes o el comportamiento dentro de una unidad que no cree externalidades. Esta metodología se basa en la teoría de que el propósito fundamental de los regímenes de las CIC es aumentar el valor económico y fomentar los intercambios eficientes. Por lo tanto, si el propietario no genera externalidades, los tribunales no deberían hacer cumplir prohibiciones de ciertos comportamientos. Más aún, algunos valores de autonomía personal son demasiado importantes y tienen prioridad sobre las reglas usuales de contrato. Por ejemplo, no permitimos contratos de esclavitud o la venta de órganos humanos.

Según este norma, una regla que limite el ruido o prohíba fumar (debido a la propagación de olores) en unidades multifamiliares sería legítima, pero las restricciones basadas en el estado civil de los residentes no. Algunas situaciones son más complicadas: por ejemplo, las restricciones sobre mascotas. Según las directrices sugeridas, en general sería legítimo prohibir las mascotas debido al ruido potencial y la renuencia de algunos residentes a compartir áreas comunes con ellas. No obstante, en el caso de animales de servicio, la salud del propietario de la unidad puede tener prioridad sobre las preocupaciones comunitarias.

Los temas relacionados con la Primera Enmienda presentan desafíos especiales. La libre expresión –por ejemplo, los carteles políticos o sobre un tema conflictivo, la distribución de volantes, demostraciones u otro tipo de manifestación– puede causar efectos colaterales, como ruido, interferencia estética y perturbación del ambiente general de la comunidad. Al mismo tiempo, sin embargo, la libre expresión es fundamental para nuestra forma republicana de gobierno, ya sea en el ámbito mayor del gobierno público o del gobierno privado. En casos de expresión, los tribunales podrían tener en cuenta la doctrina de larga tradición que prohíbe convenios que violen políticas públicas, y rechazar las prohibiciones totales de libertad de expresión a favor de restricciones razonables de horario, lugar y modo. De esa manera, se podría permitir la expresión pero limitar, pero no eliminar, sus efectos colaterales sobre la comunidad.

Otro valor fundamental para los estadounidenses es la libertad de culto. Las restricciones a la colocación de una mezuzá en el marco de la puerta o la exposición de pesebres, figuras de santos y luces de Navidad limitan la libre expresión del culto. Ponerse a hacer equilibrios para determinar la importancia religiosa de las luces de Navidad de colores frente a las blancas, en contra de las normas de la CIC, abriría una caja de Pandora, y sería apropiado que los tribunales impusieran una norma general de adecuación razonable sobre los reglamentos de la CIC que afecten a prácticas religiosas.

Finalmente, en el desarrollo y cumplimiento de los reglamentos de asociaciones, los propietarios de las CIC tienen el derecho a esperar cierto comportamiento por parte de las asociaciones y juntas. Esta expectativa deriva de la obligación de que todas las partes de un contrato actúen de buena fe y de forma ecuánime. Por lo tanto, un propietario debería tener el derecho a procedimientos imparciales, con las notificaciones pertinentes y la oportunidad de ser escuchado; de ser tratado de la misma manera que otros propietarios en circunstancias similares; y a no sufrir prejuicios, animadversión y decisiones de mala fe por parte de la junta y sus miembros.

Conclusión

Las comunidades de interés común cubren una gran parte de la superficie residencial de los Estados Unidos, y actualmente alojan a un cuarto de la población del país. Aunque las CIC ofrecen grandes ventajas económicas a sus residentes y a la sociedad en general, estos tipos de modalidad de vivienda requieren interacciones cuidadosas entre la asociación comunitaria y el gobierno municipal, y el reglamento de la asociación puede afectar la autonomía personal de sus miembros. No obstante, hay estrategias disponibles para mitigar, si no superar, estos problemas. Estas estrategias pueden hacer que la propiedad de una vivienda en una CIC sea menos ilusoria y más real.

Sobre el autor

Gerald Korngold es profesor de derecho en la Facultad de Derecho de Nueva York y visiting fellow del Instituto Lincoln de Políticas de Suelo. Enseña y escribe sobre temas de propiedad y derecho inmobiliario.

Referencias

De Tocqueville, Alexis. 1835. Democracy in America. London: Saunders and Otley.

Ellickson, Robert C. y Vicki L. Been. 2005. Land Use Controls. New York, NY: Aspen Publishers, 3rd edition.

Foundation for Community Association Research. 2014. “Best Practices. Report #7: Transition.” www.cairf.org/research/bptransition.pdf.

Foundation for Community Association Research. 2013. “National and State Statistical Review for 2013.” www.cairf.org/research/factbook/2013_statistical_review.pdf.

Grubel v. McLaughlin Gunnels v. No. Woodland Community Ass’n, 17013, Texas Court of Appeals (1978).

Hidden Harbour Estates v. Basso, Florida Court of Appeals (1981).

Hughes v. New Life Development Corp., Tennessee Superior Court (2012).

Low, Setha. 2004. Behind the Gates: Life, Security, and the Pursuit of Happiness in Fortress America. London: Routledge.

McKenzie, E. 1996. Privatopia: Homeowner Associations and the Rise of Private Residential Governments. New Haven, Connecticut: Yale University Press.

Nelson, R. H. 2009. “The Puzzle of Local Double Taxation: Why Do Private Communities Exist?” The Independent Review. 13 (3) (Invierno) 345–365.

Public Opinion Strategies. 2014. “Verdict: Americans Grade Their Associations, Board Members and Community Managers.” Falls Church, Virginia: Community Associations Institute.

Reich, Robert. 1991. “Secession of the Successful.” The New York Times Magazine. 20 de enero.

Treese, C. J. 2013. Association Information Services, Inc., compiled from National Association of Realtors data. https://docs.google.com/document/d/1I_2LgTIYSqR4nLPRxN-HtCV-oOFK_QqN1AcO5JJTw-g/edit.

Ziegler, J. 1984. The New Yorker. 3 de septiembre.

Conventional wisdom and basic economic principles would suggest that an area subject to higher commercial and industrial property taxes than its nearby neighbors will suffer reduced economic development in comparison to those neighbors. On the other hand, any effort to reduce such unequal or “classified” property tax rates will produce a revenue shortfall. Raising taxes on homeowners to equalize rates and recover this lost revenue will encounter enormous and obvious political resistance.

This is the situation currently facing Cook County and the city of Chicago, and was the subject of a conference led by Therese McGuire of the Institute of Government and Public Affairs (IGPA) at the University of Illinois at Chicago. Held last September and cosponsored by the Lincoln Institute, the IGPA, and the Civic Federation of Chicago, the program brought together more than a hundred business and civic leaders, academics and practitioners to consider alternative methods of addressing the problems presented by the Cook County classification system.

In Illinois, the use of a property tax classification system by Cook County has been blamed for the economic decline of Chicago and the inner suburbs. The classification system is also seen as a barrier to reforming school funding and the state’s tax system. Are these charges valid? Does the classification system put Cook County at an economic disadvantage compared to its rapidly growing adjacent “collar counties”? If classification has so many shortcomings, why was it instituted in the first place? If we are only now recognizing those shortcomings, what steps can be taken that are both economically and politically feasible to overcome the problems?

Overview of Tax Classification

Illinois has long operated under the twin principles of uniformity and universality for both real and personal property, and both principles were incorporated into the Illinois Constitution of 1870. However, de facto or administrative classification of real property developed in Cook County as a response to the difficulty in taxing personal property in the same manner as real property. By the 1920s, the Cook County assessor publicly acknowledged assessing residential property at 25 percent of real value and business property at 60 percent.

A 1966 Illinois Department of Revenue report noted that Cook County was using 15 different classification groups. Despite the fact that classification was clearly in violation of the 1870 Constitution, the Illinois Supreme Court had refused to confront the issue. By the late 1960s, however, the court was prepared to overturn the existing system, and the 1970 constitutional convention faced the potential threat of court intervention.

The convention was the product of numerous reform efforts in Illinois during the previous decade. The state had failed to find a compromise redistricting plan after the 1960 census, causing the entire Illinois House to be elected as at-large members in 1964. That election brought many reformers to office, and a House-created commission charged with recommending constitutional reforms subsequently called for the 1970 convention.

Several delegates on the convention’s revenue committee were passionately in favor of uniformity, and they had considerable support from experts who opposed classification as a matter of economic policy. On the other hand, the Chicago delegation was adamant in demanding that the new constitution legalize classification. It was generally believed that without legalization, the new constitution would not have the support of Chicago Mayor Richard J. Daley and his delegation, in which case it would fail to pass.

As a result, the 1970 Illinois Constitution allowed counties with a population greater than 200,000 to classify property for taxation. The extension of classification to these large counties was also allowed for the collar counties because many taxing districts crossed those county boundaries. Cook County’s system was thus guaranteed, but the Constitution gave the General Assembly the power to apply limitations because of concerns there would be a crazy quilt of classifications should the collar counties adopt that system. Nevertheless, no collar county has done so.

Today, Cook County’s classification system is considered by many to be an impediment to Illinois’ attempts to deal with a variety of social and economic issues. Politically, classification is believed to be partly to blame for the failure to reform education funding in Illinois. In 1997, then Governor James Edgar led an unsuccessful attempt to convince the General Assembly to gradually shift the burden of education funding from property taxes to income taxes. One of the strongest arguments against the effort was that it would be a windfall for businesses and corporations, whose property taxes would be shifted to individual taxpayers. That shift would have even been greater in Cook County, which has more than 47 percent of the state’s entire assessed value and where businesses pay property taxes at a rate double that of homeowners.

Impacts on Economic Development

In terms of economic development, some observers believe that classification puts Cook County at a disadvantage in the eyes of business people who might consider locating in Illinois or expanding their operations in the state. While there are obviously other factors involved, the concern is that classification would cause these companies to look more favorably at locations in the collar counties or other states.

Recent research has shown that high property taxes do have a negative effect on the market value of property and do deter businesses from locating in the affected areas. Studies of property tax differences in the Boston, Phoenix and Chicago areas have shown that, because higher property taxes mean higher rents and lower market values, real estate development shifts from the high-tax area to the low-tax area over time. Other studies have shown that manufacturers seeking to relocate are very sensitive to local property tax rates. New construction and retail trade are also affected negatively, although the service sector is not as influenced by high property taxes.

Is this the case in Cook County? A recent study by Richard Dye, Therese McGuire and David Merriman, all affiliated with the IGPA, found that the effective tax rate of Cook County (5.52 percent for commercial and 5.78 percent for industrial property) is higher than in the collar counties, which have an average rate of 2.54 percent on all property. Furthermore, they found that four measures of economic activity-growth in the value of commercial property, the value of industrial property, the number of establishments and the employment rate-were measurably lower in Cook County than in the collar counties. But is that the end of the story?

No, according to the study’s authors. A multifaceted national trend is dispersing population, employment and business activity away from metropolitan centers to outlying counties. To determine if it is this national trend or specific property tax differences that is causing slower economic growth in Cook County, the study examined the characteristics of 260 municipalities in the Chicago metropolitan area. The researchers used two samples of municipalities-one metro-wide and the other limited to those near the Cook County border, where the effects of higher tax rates should be most potent.

The researchers presented their results, at the conference finding, “weak evidence at best that taxes matter.” Once other influences on business activity were factored out, the researchers determined that, for the entire six-county region, employment was the only economic activity that seemed to be adversely affected by property taxes, although in the border region the market value of industrial property was also affected. “The bottom line is that the evidence is mixed and inconclusive,” said McGuire. “There is no smoking gun.”

Another participant in the conference challenged this interpretation of the results. Michael Wasylenko of Syracuse University, who had been asked to review the study in advance and discuss it at the conference, said he was convinced that the researchers did find significant effects because the employment measure is a better measure of economic activity than the others. “I think the weight of the evidence suggests that these results are consistent with previous findings that property tax differentials will have a substantial effect on employment growth within a metropolitan area.”

If the employment factor, then, is the one to be given the most weight and Cook County’s property tax classification system is economically disadvantageous, in addition to being a political roadblock to reform, what is to be done? “It comes down to whether the economic gains that might be realized if you went to a non-classified tax are worth the political battles. Are the economic development advantages enough to want to do this,” said Wasylenko.

The economic and political stakes in this decision are high, since Cook County currently levies more than 50 percent of all property taxes in the state. The county cannot rapidly shift a large part of the tax burden among classes of property, but neither can it ignore concerns that the tax burden on businesses located there place it at an economic disadvantage with regard to its nearby neighbors. Any solution must be approached as a component of the overall tax system, be grounded in verifiable data, and have significant support from the public, the media and business interests. The September conference sought to contribute to that process of informed public debate on a crucial fiscal topic.

In early December, the Cook County assessor proposed reducing the assessment ratio (the ratio of assessed value to market value) for certain types of business property: from 36 to 33 percent for industrial properties such as factories and distribution facilities; from 33 to 26 percent for large investor-owned residential property; and from 33 to 16 percent for multiuse storefront businesses with apartments on upper floors. The assessor’s hope is that more favorable treatment of business will lead to even more rapid growth of the tax base over time. While these recommendations came out of several different tax studies, any changes in assessment rates must by approved by the Cook County Board before they can be implemented.

Scott Koeneman is communications manager at the Institute of Government and Public Affairs (IGPA) of the University of Illinois in Urbana, Illinois.

References

Dye, R., T. McGuire and D. Merriam. 1999. “The Impact of Property Taxes and the Property Tax Classification on Business Activity in the Chicago Metropolitan Area.” Lincoln Institute of Land Policy Working Paper.

Giertz, J.F., and T. McGuire, “Cook County, Ill., Assessor Proposese Changes in Assessment Levels,” State Tax Today. Dec. 7, 1999.

Man, J. 1995. “The Incidence of Differential Commercial Property Taxes: Empirical Evidence,” National Tax Journal, 48: 479-496.

McDonald, J. 1993. “Incidence of the Property Tax on Commercial Real Estate: The Case of Downtown Chicago,” National Tax Journal, 46: 109-120.

Wheaton, W. 1984. “The Incidence of Inter-jurisdictional Differences in Commercial Property Taxes,” National Tax Journal, 37: 515-527.

Source: Illinois Department of Revenue