The single greatest challenge to any type of land value taxation system is accurate valuation of land on a large scale. In urban areas where nearly all real estate sales data represent transfers of land with improvements, it is difficult to divide prices between land and building components. Although many jurisdictions require a separate listing of land and building values on their tax rolls, these allocations will not affect the final tax bill if the tax rate is the same on both.

Any special tax on land value alone would increase the need to assign more accurate land values to parcels that have been improved over many years. As a result, skepticism as to the feasibility of this process has proven a major stumbling block to serious consideration of two-rate property taxes and other forms of special land taxation. Many observers have concluded that the practical problems of land assessment prevent the realization of the many theoretical benefits it offers.

New advances in computerized approaches to property assessment have important implications for this debate. While land valuation presents special problems in the analysis of sales data for improved parcels, it also can benefit from location analysis and land value mapping techniques. Buildings can and will vary unpredictably in both type or value from lot to lot, but land values for adjoining or nearby parcels should have a more constant relationship to one another. More than 20 years ago, Oliver Oldman of Harvard Law School, considered the implications of this situation for an appeals process under a land value tax, recognizing that a successful challenge to one parcel’s valuation would have implications for many other assessments as well. He wrote, “The key to developing an accurate land-value assessment roll is the process of land-value mapping.” Now the technology is available to achieve this goal.

In a recent seminar at the Lincoln Institute, representatives of the Auditor’s Office in Lucas County, Ohio, which includes the city of Toledo, joined a group of economists, appraisers, lawyers and local officials to examine current methods of land valuation. Lucas County has one of the most sophisticated appraisal systems in the country, with almost 20 years of experience in using computerized methods of spatial data analysis for property taxation. The seminar provided a valuable opportunity to discuss the county’s innovative approaches to the integration of geographic information systems and computer-assisted land valuation to estimate the effect of location on real estate market value.

Traditional Methods of Land Valuation

There are several standard methods of deriving a value for unimproved land, all extremely problematic as the basis for jurisdiction-wide assessment.

Comparable Sales: The most straightforward method is an analysis of sales of comparable unimproved land, adjusting the prices to account for any differences in size, location, and features. Similarly, the capitalization of rental income for comparable vacant land can serve as a basis for estimating its sale price. However, these methods are difficult to apply in densely populated urban areas where sales or rentals of unimproved land are rare. The pool of sales data can be expanded if sales of improved land are followed soon after by demolition of the buildings. In that case, the unimproved land value can be estimated as the purchase price minus the costs of the demolition. Although such sales provide an important check for estimated values produced by other approaches, they do not exist in sufficient numbers over a varied enough geographic range to serve as the sole basis for assessment.

Income Analysis: The land residual method begins with an estimate of the income yielded by the developed property. The building value is then calculated, and from that the income attributable to the building is derived. Capitalizing the remaining income then provides a value for the land. However, even a cursory description of this method suggests the difficulties of its application. In particular, the existence of depreciation, or any deviation from highest and best use that would distort the income available to the unimproved land, can leave the independent value of the improvements extremely uncertain.

Cost Analysis: Similar problems confront a division of value according to the depreciated reproduction cost of the improvements. This method assumes that structures can be worth no more than their cost of construction, and assigns all remaining value in the improved parcel to the land itself. Physical, economic or functional depreciation greatly complicates the attempt to calculate building value, however, so this method requires fairly new construction whose price can be confidently estimated as a measure of value. The financial effect of various forms of obsolescence can only be measured accurately through examination of sales data, which will almost never be available for the building alone.

Cost of Development: A full-scale market appraisal of potential development alternatives provides another basis for estimating the sale price of unimproved land. This is the approach taken by developers considering new uses for land, land trusts seeking to acquire and preserve undeveloped open space, and taxpayers claiming deductions for charitable contributions of development rights. However, it is most suitable for valuing undeveloped land to be used for residential subdivisions. Even in these situations, it requires extensive study of the potential market for such properties, local restrictions on development, and the physical attributes of the land that would affect its building capacity, such as soil and drainage characteristics. This type of exhaustive individual appraisal is appropriate for purchasers or developers of individual parcels, but is not feasible for annual assessments for all parcels in a taxing jurisdiction.

Other valuation methods, such as derivation of typical ratios of site value to total improved property value, are even less useful in the case of densely developed urban property, where buildings of all sizes, ages and utility may be found in close proximity on fairly similar parcels of land.

New Approaches: CAMA and GIS

The greatest change in assessment practice over the past three decades has involved the use of computers and mathematical formulas to establish a relationship between property characteristics and sale prices, thereby permitting an estimate of the market value of other properties not subject to a recent sale. This approach is known as computer-assisted mass appraisal (CAMA). Site characteristics such as size and location are important elements of these mathematical models, raising the possibility of estimating the effect of location on parcel value.

At the same time, the development of computerized geographic information systems (GIS) has permitted assessors to develop location-based property records or cadastres, and to coordinate sales data with location. More sophisticated and less expensive GIS technology now offers the potential for full integration with CAMA for spatial analysis. Initial attempts to quantify location effects faced difficulties not only in defining and maintaining “economic neighborhoods” or zones, i.e., contiguous areas of relatively homogeneous land values, but also in understanding the dynamics of the interactive, elusive locational factor. Some efforts developed different mathematical models for each geographic region or “cluster” of properties with similar characteristics. However, these approaches could not capture the many complex, interrelated and significant micro-variations within any given neighborhood, and could not reduce the determination of location value to an objective process.

Lucas County pioneered a new approach to location value-the use of GIS tools to develop a response surface that represents the effect of location on land value. The response surface is a fitted three-dimensional surface that represents a percentage adjustment to land and/or land and improvements based on a parcel’s geocoded location. Included in the analysis are geographic coordinates and distances from important features, such as other recent sales, institutions, amenities or other “value influence centers.” This analysis results in a three-dimensional representation, with the height of the surface (z) at any specific x-y coordinate indicating the approximated location value of that parcel. This variable is then evaluated with others, such as land and building size, quality, condition and depreciation, to produce a total estimated value for the parcel.

In the Lucas County example, the response surface differs from a mathematical equation in that it is developed through a spatial analysis process available in GIS to estimate the effects of location on value and refine those estimates after comparing them with sales and appraisal data. This approach still relies on an element of appraisal and economic judgment in determining neighborhood boundaries for location effects, but it can be tested and refined by observing the effect of different neighborhood “breaklines” on the resulting three-dimensional value surface.

To be used successfully in mass appraisal, these sophisticated approaches must yield results that are reasonable, understandable and available to typical taxpayers. Lucas County has pioneered this aspect of the assessment process, as well. All real estate records, values and maps are available on a CD with GIS viewing software, priced at its production cost of $10, and online free at all public libraries in the county. Taxpayers can view property records or create customized maps showing the location of multiple parcels and the relationships among their taxable values.

Future Directions

Participants in the Lincoln Institute seminar found great promise in the Lucas County approach to location value, and identified many points for further development and investigation. All agreed that recent decades have seen a literal revolution in assessment practice, with great potential for increasing the feasibility of large-scale land valuation. Among the most important theoretical questions were the “functional form” of this spatial analysis, including the type of effect on value observed with changes in location and distance variables; the identification of omitted variables (those for which data is not available or which have been overlooked in the past); and the relationship between marginal value estimates and the total parcel value needed for assessment. Similarly, the effect of substandard buildings and less than “highest and best use” on values requires further exploration.

Development of these new approaches must be matched by educational efforts to explain their operation to taxpayers, local officials, and the lawyers and judges who will consider their consistency with legal standards for assessment practice. Through its innovative efforts in both of these areas, Lucas County has made an important contribution to the theory and practice of land valuation.

Jerome C. German is the chief assessor for Lucas County, Ohio. Dennis Robinson is vice president of programs and operations at the Lincoln Institute. Joan Youngman is senior fellow and director of the Institute’s Program on Taxation of Land and Buildings.

References

International Association of Assessing Officers. Property Appraisal and Assessment Administration (1990).

Oliver Oldman and Mary Miles Teachout. “Valuation and Appeals Under a Separate Tax on Land.” 15 Assessor’s Journal 43-57 (March 1980).

Richard D. Ward, James R. Weaver, and Jerome C. German. “Improving CAMA Models Using Geographic Information Systems/Response Surface Analysis Location Factors.” 6 Assessment Journal 30-38 (January/February 1999).

Lucas County website: www.co.lucas.oh.us

When a handful of judges and tax experts met around a table at the Lincoln Institute’s original Moley House headquarters in January 1980, they could hardly have foreseen that their one-day seminar would initiate the major educational program for the nation’s state tax judges. Over the past 30 years, the Lincoln Institute has sponsored the annual National Conference of State Tax Judges as a means of improving land-related tax policy as applied and interpreted by adjudication in tax courts and tax appeal tribunals.

Participants in the conference include members of administrative and judicial tax tribunals who hear appeals of tax assessments, denials of refund requests, or other property tax disputes on a jurisdiction-wide basis in all 50 states, the District of Columbia, and the cities of Chicago (Cook County) and New York.

Tax Tribunals and Effective Tax Policy

Taxation is a highly complex and emotionally charged reality in countries throughout the world. Patrick Doherty, the past president of the United Kingdom’s Institute of Revenues, Rating, and Valuation, has observed that to be acceptable, it is not sufficient or sometimes even necessary for a tax to meet an abstract standard of fairness. The essential element is that the levy “feel fair” to the taxpayer. An open, accessible, timely, and unbiased forum for appeals is crucial to this sense of fairness.

Tax tribunals play a vital role in affording aggrieved taxpayers a fair opportunity for consideration of their claims. Legislation and regulation enunciate policy at general and sometimes abstract levels. The actual application of the law to specific factual situations and disputes effectuates that policy. Tax tribunal interpretations can carry the force of law and precedent. Judicial education is an investment in sound tax policy that, by reaching a targeted and highly influential audience, can reap public benefits long into the future.

Although consideration of appeals is central to any tax system, the special nature of the property tax increases the importance of access to a fair and equitable tribunal. Unlike income taxes withheld from one’s salary or sales taxes collected as part of numerous transactions and never totaled for the taxpayer, property taxes generally require significant and highly visible periodic payments. Furthermore, the intricacies of the income tax leave most taxpayers without any intuitive sense of potential errors in its calculation. The property tax, on the other hand, is usually based on fair market value, a dollar figure that a homeowner may be able to estimate with some precision.

The property tax is primarily a local tax that engenders a greater sense of personal involvement than levies that support more distant levels of government. Not incidentally, the property tax is also the primary focus of much taxpayer discontent. It is easier to mobilize opposition to a visible local taxing body than to state or federal revenue departments. State legislators are also far more receptive to pressure to constrain local revenues than to efforts to reduce their own budgets.

At the same time, property tax disputes may involve large business enterprises owning complex structures whose valuation may raise highly theoretical or technical questions. Courts may need to determine the value of manufacturing plants that can constitute the major portion of a locality’s tax base, or of property that is part of a going concern whose sale price represents intangibles such as business good will.

The Special Challenges of Judicial Education

The importance of judicial education is matched by the challenge of presenting ongoing, impartial, and up to date instruction, especially with regard to specialized subject matter. Judges grappling with complex factual and legal issues often face a lonely task, and specialized tribunals such as tax courts can be particularly isolated. Some state tax courts have only one member.

Before the establishment of the National Conference of State Tax Judges, no national association or other formal means existed for judges in one state to confer with colleagues facing similar issues in another jurisdiction. Training in highly technical tax issues requires faculty with specialized expertise and a sophisticated understanding of sometimes arcane provisions.

At the same time, judges must be far more cautious than lawyers in private practice when they seek advice and instruction. They must avoid even the appearance of special access or private influence, particularly when dealing with specialists who may at some point serve as expert witnesses or litigants in their courtrooms. Outside the judicial realm, many educational conferences are supported by commercial sponsors with special ties to the subject matter, but in the tax area these organizations and corporations would be the most likely to have a stake in future litigation. Public funding for judicial education is rarely a legislative priority, even when budgets are relatively generous, and is among the first items to be curtailed in economic downturns.

All of these factors present special hurdles to the development of effective, ongoing educational programs for members of tax tribunals. The success of the National Conference of State Tax Judges speaks to both the effectiveness of the Lincoln Institute’s support and the enthusiastic work of judges across the country who have found it a professionally and personally rewarding means of creating ties with colleagues in other states.

The judges who volunteer to produce each year’s program are the cornerstone of the organization. The planning committee members begin monthly telephone meetings soon after the close of the previous conference so they can evaluate participant suggestions and consider topics of particular current importance. Individual judges then contact scholars and professionals who can address these issues. Faculty members include academic experts in law and economics as well as legislators, policy analysts, appraisers, journalists, and specialists in fields such as housing and commercial property markets.

The central role of the judges themselves is highlighted by a session on case law updates. One of the most lively and interactive parts of the program, this forum offers the participants an opportunity to describe and comment on recent decisions of special interest in their own states. Judges submit these cases in the months preceding the conference to the session moderators, who have responsibility for choosing the cases to be examined and guiding the discussion. Moderating a conference of judges carries special challenges of its own.

Wide Scope within a Specialized Area

The range of topics covered by the conference reflects underlying property valuation problems confronted in changing economic, social, and technological conditions. In the early years, discussions included utility properties, office complexes, and rental apartments, whereas now the focus is likely to be subsidized housing, golf courses, or nonprofit landowners. More complex methods of valuation, made possible by the introduction of computer-based techniques, have also entered the agenda. What approach to value is best suited to a specific type of property? What properties are exempt from property taxation? How does one value properties that are partially taxable and partially exempt, such as a structure that includes a hospital (exempt) and doctors’ offices (taxable).

Tax exemptions for charitable institutions are often expressed in legislative language reflecting an earlier and far starker division between commercial and nonprofit enterprises, such as hospitals. Retirement communities that require significant initial and continuing payments may not fit the pattern of a “home for the aged,” just as a traditionally exempt YMCA may seem a commercial competitor to a neighboring health club. The continuing challenge of distinguishing exempt and taxable property takes on new forms over time.

Many similar issues of statutory interpretation and the application of legal analysis to new factual situations have been the subject of ongoing examination at the annual conference.

• An income-based approach to value, often useful in the assessment of commercial property, may require adjustment in the case of shopping malls that rely on the presence of prestigious department stores to draw traffic. These anchor tenants may be allowed to occupy space rent-free or receive concessions and special treatment as an incentive for them to locate in the mall. Should a normal rent per square foot be imputed to the space occupied by such tenants? Is the value of the anchor property reflected in the higher rents that can be charged to other stores as a result of the increased business because of the presence of the anchor tenant?
• Property contaminated by hazardous waste can be unsalable if a new purchaser is responsible for its remediation. Does this situation relieve the current owner of tax liability? Does it matter whether the owner bears responsibility for the contamination? What kind of expert testimony is required to establish the likely costs of and a reasonable schedule for this clean-up?
• The specialized features of a sophisticated manufacturing plant built to the current owner’s specifications may have little value to potential purchasers. Does this mean that the current owner’s investment has no effect on the property’s valuation for tax purposes? Should the result be influenced by the utility of the property, and whether the owner would replace it in the event of damage or loss? Can value to the owner be a factor in determining fair market value?
• The federal income tax code offers various incentives for private parties to invest in housing for low- and middle-income tenants. Should the limited rents that can be charged for these units form the basis of the property valuation, or is it legitimate to consider as well the income tax benefits that led the owners to make this investment?
• The value of a hotel as a business enterprise includes many intangible elements, from the existence of an assembled work force to the prestige and name recognition of a hotel chain to the use of computerized reservation systems. What are appropriate methods for valuing the real property component of the business?

In addition to valuation questions of this sort, the conference agenda includes a session on developments concerning state income and sales taxes, and presentations on such topics as judicial writing, ethical issues, and the effect of business cycles on property markets. Judges serving on appellate courts and state supreme courts have also contributed their perspectives on tax decisions that reach them on appeal.

Times of economic stress also require special attention to case management, as property tax appeals increase when market values fall. Courts require flexibility and excellent procedures to offer taxpayers accessible, timely determinations under these circumstances, particularly since economic downturns usually bring reductions in state budgets, and the need to do more with less.

In times of rapidly rising prices, taxpayers are often pleased to see an assessment figure that has not kept pace with market values. In downturns, taxpayers are more likely to be disturbed if bills reflect an earlier assessment date when prices were higher. The Minnesota Tax Court, for example, saw a 50 percent rise in appeals from 2,954 in 2008 to 4,760 in 2009 (through November). The state’s Chief Judge George Perez, the current chair of the National Conference of State Tax Judges, explained, “There’s a direct inverse relationship between Tax Court filings and the economy. When the economy is down, numbers are up. When the economy is up and healthy, the numbers begin to drop.”

Evidence of Impact

Strong ties have been formed among the members of tax courts and tribunals from over 30 states and the cities of New York and Chicago who have participated in the judges’ conference. These connections, as much as the technical material covered at the conference, have provided a means of improving the judicial process. Many participants have observed that the conference has produced a positive impact on the quality of tax decisions.

Glenn Newman, president of the New York City Tax Commission and Tax Appeals Tribunal, says, “It is remarkable how many issues cut across state lines. The issues we all face can be discussed and analyzed, helping all participants focus and come to a clearer understanding.”

Michelle Robert, counsel to the Maine State Board of Property Tax Review, states, “This is a wonderful conference that offers attendees a forum for exchange of ideas and viewpoints in this are of the law that is truly not otherwise available.”

Chief Judge George Perez of the Minnesota Tax Court, the current conference chair, sums up these perspectives: “It’s the best seminar given for tax judges and tax officials.”

The conference’s contribution to improved tax policy is a tribute to the foresight of those who gathered at Moley House 30 years ago, and the current participants who are eager to carry that benefit to future tax judges as well.

“Through informal as well as formal discussions at the annual meetings, and frequent phone calls during the rest of the year, judges have been able to tap the knowledge, experience, and intelligence of their colleagues all over the nation. The National Conference has provided an introduction and a phone number that have helped many of its members make a better decision concerning issues that at an earlier point seemed intractable. These personal connections may be one of the Lincoln Institute’s greatest contributions to the improvement of tax policy through the improvement of state and local tax adjudication.”
—Joseph C. Small

About the Authors

Joseph C. Small is the retired presiding judge of the Tax Court of New Jersey and a former chair of the National Conference of State Tax Judges.

Joan Youngman is an attorney and senior fellow and director of the Department of Valuation and Taxation at the Lincoln Institute of Land Policy.

Most jurisdictions require residential assessments to be proportional to market value, but in practice assessment ratios—assessed value divided by sale price—are often lower for high-priced than low-priced properties. This tendency for assessment ratios to fall as sales prices rise is termed regressivity, because it means that property taxes are a higher percentage of property value for lower-priced properties. Regressive assessments have been identified in many jurisdictions and times (such as Cornia and Slade 2005; McMillen and Weber 2008; and Plummer 2010).

Assessment regressivity is an important issue because it has the potential to undermine support for a property tax system. Consider a simple system in which taxes are 1 percent of a home’s assessed value, with no exemptions or deductions. For example, a $100,000 home should have a $1,000 tax bill, and a $1 million home a $10,000 tax bill. However, it is not uncommon to find that a $1 million home is actually assessed at $800,000 or $900,000, resulting in effective tax rates of 0.8 or 0.9 percent rather than the statutory 1 percent.

Having lower-than-prescribed assessment rates for some high-priced properties may result in greater variability in assessments within price groups. One owner of a high-priced home may accept a $1 million assessment as an accurate measure of market value, while another owner may appeal and win a lower assessment. Different tax bills for identical properties can cause taxpayer resistance and resentment.

The Assessment Process in Illinois

I have analyzed data from two counties in the Chicago metropolitan area that provide quite different perspectives on assessment regressivity. In suburban DuPage County, assessment ratios decline uniformly with sales prices and there is no marked difference in the degree of variability in assessments across the range of sales prices. In the City of Chicago, which is part of Cook County, the degree of variability in assessment ratios is greater than the degree of regressivity. Notably, assessment ratios in Chicago are highly variable at low and very high sales prices, while not varying greatly with mid-range sales prices.

Illinois has a simple flat-rate property tax, but the homestead exemption produces a degree of progressivity. This exemption is generally a flat amount that does not vary by price, although Cook County has an “alternative general homestead exemption” that can make the exemption higher in areas with rapid price appreciation. The basic homestead exemption is designed to produce much lower effective tax rates for low-priced properties—where the exemption is often high relative to market value.

Assessment practices in DuPage County are similar to those in all but one of the 102 counties in Illinois, where properties are assessed on a four-year cycle at 33 percent of market value. In DuPage County, properties were most recently assessed in 2007 and new assessments will be established in 2011. Cook County alone has a classified system with varying statutory assessment rates. Prior to 2009, the statutory rates were 16 percent for residential properties, 38 percent for commercial, and 36 percent for industrial, although actual assessment rates were much lower. In 2009, the statutory rates were “recalibrated” to 10 percent for residential and 25 percent for commercial and industrial properties. Cook County assesses its properties on a rotating, three-year cycle. The City of Chicago was last reassessed in 2009, and all city properties will be reassessed again in 2012. Properties in the north suburban part of Cook County were reassessed in 2010, and south suburban properties will be reassessed in 2011.

Traditional Measures of Regressivity

The importance of assessment regressivity has led the International Association of Assessment Officers (IAAO 2007) to recommend that an analysis of regressivity be included as part of any study of assessment accuracy. One common procedure recommended by the IAAO to evaluate assessment regressivity is a descriptive statistic, the price-related differential (PRD), which is the ratio of the simple mean assessment ratio to a comparable statistic that places more weight on higher-priced properties. Typically this ratio is greater than one, which implies that higher-priced properties have lower average assessment ratios than lower-priced homes.

Table 1 presents traditional IAAO measures of residential assessment performance for the most recent reassessment year for which I have data—2006 in Chicago and 1999 in DuPage County. The data on sales prices and assessed values come from the Illinois Department of Revenue, which is responsible for monitoring assessment performance for all counties in the state. I focus on Chicago rather than all of Cook County to keep the sample size more manageable, to focus on a single assessment year, and to avoid combining the county’s three assessment districts.

Chicago’s average assessment rate (mean) of 9.4 percent differs significantly from the statutory value of 16 percent. In DuPage County, the average assessment rate of 29.8 percent is much closer to the statutory 33 percent rate, and it would likely be even closer if the timing of the sales prices and assessment origination dates were closer. The value-weighted mean is calculated by weighting each observation by its sale price. The finding that the value-weighted mean is less than the arithmetic mean implies that higher-priced properties tend to have lower than average assessment ratios in both counties.

The price-related differential (PRD), which is the ratio of the value-weighted mean to the arithmetic mean, formalizes this measure. IAAO standards call for the PRD to be no higher than 1.03; by this standard, DuPage County’s degree of regressivity is acceptable while Chicago’s is not. The coefficient of dispersion (COD) is the traditional measure of assessment variability. By IAAO standards for residential properties, the COD should not exceed 15. Again, Chicago’s COD indicates excessive variability while DuPage County’s degree of variability is within IAAO’s acceptable range.

Statistical Analysis of Regressivity

A second IAAO-recommended procedure to measure regressivity is a statistical regression of a sample of assessment ratios on sales prices, which typically produces a negative coefficient for the price variable, i.e., a downward sloping line. This type of analysis provides estimates of the conditional expectation of the assessment ratio for any given sale price. Although several approaches exist in the literature, the basic idea is to estimate a function that produces a simple relationship between sales prices and assessment ratios. If the function implies that assessment ratios decline with sales prices, the assessment pattern is said to be regressive.

Figure 1 shows the estimated functions when assessment ratios are regressed on sales prices using data from Chicago and DuPage County. The straight lines are simple linear regressions. The curved lines are a nonlinear estimation procedure—a locally weighted regression technique that estimates a series of models at various target values, placing more weight on values closer to the target points. For example, to estimate a regression with a target point of $100,000, one might use only observations with sales prices between $75,000 and $125,000, with more weight placed on sales prices closer to $100,000.

The linear and locally weighted regression estimates are much more discrepant for Chicago’s data set than for DuPage County’s. While both approaches indicate that assessment ratios fall with sales prices, the nonlinear procedure indicates that expected assessment ratios are extremely high in Chicago at very low sales prices—but still below the statutory rate of 16 percent.

The regression lines imply precise relationships, but they do not address differences in the degree of variability at different sales prices. It may be that both unusually high and unusually low prices are simply hard to assess accurately. If so, assessment ratios could have high variances at both low and high sales prices while being tightly centered on statutory rates near the mean sale price. Neither the traditional PRD statistic nor standard regression procedures are well-suited for analyzing a situation where the accuracy of the assessment process varies with sales prices.

Quantile Regressions Using Simulated Data

Another statistical procedure, quantile regression, provides much more information on the relationship between assessment ratios and sales prices by showing how the full distribution of ratios varies by price. The easiest way to understand quantile regression is to imagine two data sets, A and B, where both have 10,000 observations. Each observation represents a sale price and assessment ratio pair, but sales prices are constrained to integers between 1 and 10 (figure 2).

In constructing data set A, a sale price is assigned, and then an assessment ratio is drawn from a normal distribution with a mean (and median) of 0.33 (the statutory rate in DuPage County). Data set A then matches the assumptions of a classical regression model, where the variance of the assessment ratios is constant across all values of sales prices. In constructing data set B, however, the variance of the assigned assessment ratio is higher for lower sale price levels, but the mean is constant and equals 0.33 at each price.

In both data sets the mean is equivalent to the estimated linear regressions in this case, indicating no relationship between sale price and assessment ratio. If these regressions were estimated using real data, they would be interpreted as indicating that assessment ratios are proportional to sales prices, i.e., assessments are neither regressive nor progressive. Despite this finding, figure 2 clearly shows that in data set B assessments converge on the statutory 33 percent rate at high sales prices, whereas homes with low sales prices run the risk of having extremely high assessment rates.

Quantile regression estimates reveal the differences between data sets A and B in the degree of assessment ratio variability, and this approach can be estimated at any target value of the assessment ratio distribution. For example, since the 10 percent and 90 percent quantile lines are converging as sales prices increase, the quantile regression reveals what standard regression procedures do not—low sales prices have highly variable assessments and high sales prices have more precise assessments.

Quantile Regressions for the City of Chicago and DuPage County

In practice, linear regression, locally weighted regression, and a linear version of quantile regression all proved too restrictive to represent accurately the relationship between assessment ratios and sales prices in Chicago and DuPage County, especially for extremely low and extremely high sales prices. Instead, a nonlinear version of quantile regression provides the most accurate representation of the underlying relationship.

Figure 3 shows the results of nonlinear versions of the quantile regressions, which can be estimated at a series of target points, with more weight given to observations that are near the targets. From bottom to top, the graphs show the estimated 10, 25, 50, 75, and 90 percent quantile regression lines.

Chicago’s results suggest that assessment ratios are relatively high at all quantiles for quite low prices, but the high variability is evident in the large spread between the 10 and 90 percent quantile lines. However, as the sale price increases from about $250,000 to nearly $800,000, the regression lines are close to horizontal. The variability is also low in this range. The quantile lines begin to have a downward slope again for prices above $800,000, with a moderate increase in the variance. Thus, the Chicago results suggest that the standard analysis of regressivity is misleading in that most of the regressivity is concentrated at low sales prices where the variance is also quite high.

In contrast, DuPage County has relatively high assessment ratios and lower variances in the $100,000–$200,000 range of prices where most sales took place in 1999. Assessment ratios decline with sale price for all prices beyond about $100,000, while the variance is increasing. The pattern of results for DuPage County is closer to what is implicitly assumed in a standard regression analysis of assessment regressivity.

Assessment Ratios Distributions at Alternative Sales Prices

An alternative to quantile regression is to examine the actual distribution of assessment ratios at a variety of different target values for sales prices to see how assessment ratios vary at given sales prices. Since most of the interesting patterns occur at low sales prices, figure 4 shows estimated conditional density functions for sales prices ranging from $50,000 to $200,000. The density function for Chicago has a huge variance at a sale price of $50,000. As the price increases to $100,000, $150,000, and finally $200,000, the density function moves to the left, meaning that lower assessment ratios become more common—an indication of regressivity. The distribution is also much more tightly clustered around the mean value of 9–10 percent, which indicates that the variance is reduced substantially.

In the contrasting case of DuPage County, the conditional density functions simply shift to the left as the target sale price increases with no pronounced change in variance. This parallel leftward shift of the conditional density function shows what would be predicted by a classic regression analysis of a regressive assessment system.

Implications for Property Taxes

Assessment regressivity has important implications for individual tax bills, as exemplified in a simplified analysis of residential taxes in Cook County. Though not a literal representation of the county’s tax system, the analysis is a close approximation. The starting point for table 2 is the estimated market value, which we assume to be accurate. Although the statutory assessment rate in Cook County was 16 percent prior to 2009, I use an assessment rate of 10 percent because it is closer to the actual rate and it matches the recent recalibration. Thus, the proposed assessed valuation for the property is $10,000.

However, Illinois also requires that assessments across the state must average 33 percent of market value. If assessments average less than 33 percent—as is mathematically a near certainty under Cook County’s classification system—the Department of Revenue calculates an equalization factor by which all assessments are multiplied. Using a representative value of 2.7 for the multiplier in table 2, the $10,000 assessment turns into an adjusted equalized assessment value of $27,000. Finally, the standard homestead exemption of $5,500 (again, a representative value) is subtracted to produce the base for the homeowner’s property tax bill. Thus, the sample tax rate of 10 percent and the adjusted equalized assessed value of $21,500 produce a tax bill of $2,150.

Table 3 compares house values and property tax rates under the assumption that assessments are regressive and are more variable for $100,000 houses than for $500,000 houses. Due to the homestead exemption, the property tax is somewhat progressive even when assessments are proportional to market value. Thus, a $100,000 house that is accurately assessed at 10 percent of market value ($10,000) ends up with a tax bill of $2,150 or an effective tax rate of 2.15 percent, while a $500,000 house that is assessed correctly at $50,000 has a tax bill of $12,950, or 2.59 percent of market value.

But, suppose that assessment rates for $100,000 homes actually range from 9 to 14 percent, while the range for $500,000 homes is only 8 to 12 percent. In this case, the progressivity of the homestead exemption can be reversed completely. Owners of low-priced homes who are “unfortunate” in receiving high assessments end up with effective tax rates of 3.23 percent, which is much higher than the average 10 percent value for owners of $500,000 homes, and is even higher than the 3.13 percent tax rate paid by owners of high-priced homes assessed at 12 percent.

Moreover, actual tax payments vary significantly for otherwise identical homes—from $1,800 to $3,230 for $100,000 houses and from $10,250 to $15,650 for $500,000 homes. In other words, a homeowner may receive a tax bill that is nearly 80 percent higher than the neighboring house even if both have a market value of $100,000.

Conclusion

Because assessment accuracy is the key to an equitable property tax, statistical measures of regressivity are essential tools for evaluating property valuation systems. Standard measures of regressivity can present an incomplete or even misleading picture of the range of assessment ratios in a jurisdiction. Newer analytic tools such as quantile regression can improve our understanding of the distribution of tax burdens and in this way help improve assessment equity.

Note: The statistical tools used in this article are included in a contributed extension package for the statistical program R. The package (aratio) is designed to be accessible to people who have limited knowledge of the R program but are familiar with other statistical software packages. Both R and aratio can be downloaded at no charge from www.r-project.org.

About the Author

Daniel P. McMillen is a professor at the Institute of Government and Public Affairs and in the Department of Economics at the University of Illinois. He is also a visiting fellow of the Lincoln Institute’s Department of Valuation and Taxation in 2010–2011.

References

Cleveland, William S., and Susan J. Devlin. 1988. Locally weighted regression: An approach to regression analysis by local fitting. Journal of the American Statistical Association 83(403, September): 596–610.

Cornia, Gary C., and Barrett A. Slade. 2005. Property taxation of multifamily housing: An empirical analysis of vertical and horizontal equity. Journal of Real Estate Research 27(1, (January/March): 17–46.

International Association of Assessing Officers (IAAO). 2007. Standard on ratio studies. Kansas City, MO: IAAO.

McMillen, Daniel P., and Rachel Weber. 2008. Thin markets and property tax inequities: A multinomial logit approach. National Tax Journal 61(4, December): 653–671.

Plummer, Elizabeth. 2010. The effect of land value ratio on property tax protests and the effects of protests on assessment uniformity. Working Paper. Cambridge, MA: Lincoln Institute of Land Policy.

Históricamente, las comunidades con alta concentración de instituciones sin fines de lucro, como hospitales, universidades y museos, han tenido que enfrentar problemas fiscales debido a la menor base gravable por la presencia de estas propiedades exentas de impuestos.

Para Boston, Massachusetts, este impacto ha sido particularmente severo, dada la preponderancia de propiedades exentas de impuestos combinada con una gran dependencia del impuesto sobre la propiedad para sus ingresos municipales. A partir de la década de 1970, Boston comenzó a solicitar pagos de sus organizaciones sin fines de lucro como una manera de compensar la pérdida de ingresos y la creciente demanda de servicios públicos asociadas con las instituciones que alberga en su seno.

Si bien estos pagos en lugar de impuestos (Payments in Lieu of Taxes, o PILOT) se han ido ampliando a lo argo del tiempo, la ciudad de Boston permanecía insatisfecha con su programa PILOT. Los ingresos del programa PILOT representaban una pequeña parte del presupuesto general de la ciudad, y el tamaño de las contribuciones de las instituciones sin fines de lucro ha sido muy variable. Desde 2008, Boston ha desarrollado e implementado una nueva estrategia para su programa PILOT que ha recibido considerable atención a nivel nacional. Este artículo examina las condiciones que condujeron al desarrollo de un nuevo programa PILOT en Boston, describe su estrategia e informa sobre la experiencia de la ciudad en su primer año 1completo de implementación.

Restricciones sobre la base imponible de Boston

Tradicionalmente Boston ha estado en el centro de todos los debates acerca de los programas PILOT. La confluencia de varias fuerzas políticas, fiscales y demográficas ha creado una mezcla volátil para la ciudad y sus instituciones sin fines de lucro. Boston es el centro económico y cultural de Nueva Inglaterra y alberga algunos de los hospitales y universidades más renombrados del mundo. Como capital del estado de Massachusetts, Boston también cuenta con una gran cantidad de edificios y establecimientos gubernamentales. Uno de sus desafíos más inusuales es su pequeño tamaño geográfico en comparación con su área metropolitana. Boston es la vigesimo-segunda ciudad más grande por población, pero representa la décima más grande por área metropolitana. En consecuencia, las instituciones exentas del pago de impuestos que prestan servicio a toda el área metropolitana están concentradas dentro de los límites relativamente pequeños de la ciudad. De hecho, más del 50 por ciento de la superficie de Boston está exento del pago de impuestos (figura 1).

Boston también tiene una estructura de ingresos que es única entre las demás ciudades de su envergadura, principalmente porque no cobra impuestos sobre los ingresos, nóminas, ventas ni ninguna otra fuente de ingresos significativa. En lugar de ello, Boston depende en gran medida del impuesto sobre la propiedad, que representa dos tercios de todos los ingresos de la ciudad (figura 2). Si bien Nueva York y Chicago también cuentan con una gran cantidad de propiedades institucionales exentas del impuesto sobre la propiedad, estas ciudades sí aplican tributos sobre los ingresos, las ventas y otras actividades económicas generadas por las universidades, los hospitales y otras instituciones de gran envergadura sin fines de lucro. En contraste, Boston no recibe ningún ingreso directo de la actividad económica generada por este vibrante sector sin fines de lucro.

Más aún, el crecimiento del impuesto sobre la propiedad en Boston está restringido por las cláusulas de la Propuesta 2½, que impone un límite legal sobre el nivel de los impuestos sobre la propiedad. La limitación más significativa es que el valor de dicho impuesto en las propiedades existentes sólo puede aumentar un 2,5 por ciento por año. El otro límite importante de la Propuesta 2½ es que la tasa global efectiva del impuesto no puede superar el 2,5 por ciento de la valuación fiscal de la propiedad. La tasa de Boston, 1,8 por ciento, está muy por debajo de este límite, de manera que esta cláusula no influye tanto como en otras comunidades de Massachusetts en lo que se refiere a las propiedades exentas del pago de impuestos. El impacto combinado de la concentración de propiedades exentas de impuestos, el alto grado de dependencia del impuesto sobre la propiedad, y los límites al crecimiento de este tributo debido a la Propuesta 2½ ha dado como resultado un impacto fiscal más profundo en Boston que en la mayoría de las otras ciudades.

Conciliación de los beneficios y costos de las instituciones sin fines de lucro

A pesar de estos impactos fiscales, Boston tiene afortunadamente un vibrante sector sin fines de lucro. La ciudad alberga a algunos de los hospitales y universidades más prestigiosos del mundo, que brindan atención sanitaria, investigación y educación excepcionales a sus clientes. Además de cumplir con sus misiones caritativas, estas instituciones de gran envergadura generan un nivel significativo de actividad económica, que constituye la espina dorsal de la economía de Boston, basada en el conocimiento. La industria de atención a la salud por sí sola genera 125.000 puestos de empleo en Boston.

Hay una desconexión económica, sin embargo, entre los beneficios brindados por las instituciones sin fines de lucro y el costo de eximir sus propiedades del pago de impuestos. Los beneficios de las instituciones sin fines de lucro de Boston no se circunscriben a los límites de la ciudad; los beneficios educativos, científicos y culturales se extienden a la región, al estado, al país y, en muchos casos, al mundo entero. No obstante, el costo de proporcionar servicios públicos a estas instituciones y la pérdida de ingresos debido a las exenciones del pago de impuestos recaen exclusivamente sobre los contribuyentes de Boston.

Este punto es crítico para comprender la importancia del programa PILOT para una ciudad como Boston. Muchos observadores creen que el interés actual en PILOT se debe a los problemas fiscales de corto plazo asociados con la reciente recesión. De acuerdo a esta corriente de opinión, una vez que la economía se recupere y las perspectivas municipales se aclaren, la presión por implementar programas PILOT disminuirá. La experiencia de Boston contradice esta aseveración. La ciudad ha lidiado con el impacto fiscal causado por su sector sin fines de lucro durante un largo período de tiempo, tanto en situaciones fiscales buenas como malas. Hay una desconexión fundamental entre los beneficios institucionales y los costos fiscales y, en última instancia, es aquí donde reside el origen de este debate. Hasta que estos beneficios y costos se concilien, la tensión financiera entre la ciudad y sus instituciones sin fines de lucro continuará.

Cómo medir el impacto fiscal de las propiedades exentas del pago de impuestos

El impacto de las propiedades exentas del pago de impuestos sobre la ciudad en su conjunto, ha sido desde hace tiempo el centro de un acalorado debate en Boston. Una pregunta frecuentemente planteada es la de cuánto pagarían las instituciones sin fines de lucro en caso de que sus propiedades fueran plenamente gravables. Durante mucho tiempo esta pregunta no pudo responderse. Como las propiedades exentas no pagaban impuestos sobre la propiedad, la ciudad tenía muy poco incentivo para mantener datos y valuaciones exactas y al día de las propiedades institucionales. No obstante, el interés constante del impacto fiscal de las propiedades exentas exigió que se diera respuesta a esta pregunta.

Dada la escasez de recursos disponibles para iniciar un proyecto de valuación de las propiedades exentas, Boston tuvo que recurrir a métodos creativos para generar valuaciones confiables, minimizando al mismo tiempo el costo de recopilación de datos. La ciudad contaba con un tipo particular de declaración de impuestos que las instituciones sin fines de lucro tienen que presentar todos los años, como también amplia autoridad legal para solicitar a los dueños de estas propiedades los datos necesarios para valuar sus propiedades.

Boston pudo utilizar estas herramientas para recopilar información detallada sobre las propiedades de las instituciones sin fines de lucro, en particular sus características físicas (superficie, edad, condición) y el uso dado a las mismas. La mayoría de las instituciones principales cuenta con datos exactos sobre sus propiedades. Una vez que los tasadores tuvieron acceso a estos datos, pudieron introducir la información en el sistema de valuación masiva asistida por computadora (computer-assisted mass appraisal, o CAMA) de la ciudad para determinar su valuación. Se realizaron después inspecciones de los predios para verificar la información proporcionada por las instituciones y comprobar la exactitud y fiabilidad de las valuaciones generadas por el sistema CAMA.

Las valuaciones resultantes se compartieron luego con las instituciones. Se entregó a cada una de ellas los detalles de las estimaciones de valuación de sus bienes inmuebles, y se les dio la oportunidad de reunirse con los tasadores para revisar los resultados y exponer cualquier duda al respecto. La ciudad incorporó los comentarios de las instituciones para completar la valuación final de las propiedades. Dado que este fue el primer intento que hizo la ciudad para generar valuaciones de las propiedades sin fines de lucro, esta revisión conjunta resultó valiosa para verificar la calidad de los datos, y también permitió compartir los resultados preliminares del impacto sobre los ingresos municipales de las propiedades exentas de cada institución.

El análisis, completado en 2009, reveló que las propiedades de instituciones educativas y médicas exentas del pago del impuesto hubieran generado US$347,9 millones en ingresos si fueran gravables (Ciudad de Boston, 2010). Para poner este monto en perspectiva, hubiera sido el equivalente a aproximadamente un cuarto de todos los gravámenes tributarios de la ciudad en el año fiscal 2009, que ascendieron a US$1.400 millones, y a aproximadamente la mitad de los ingresos generados por las propiedades de oficina, comercios minoristas y hoteles que pagan tributos comerciales (figura 3).

Comité de trabajo del programa PILOT

Una vez que se utilizó la información de las valuaciones para determinar la cantidad de impuestos que cada institución pagaría si no estuviera exenta, se descubrieron varias deficiencias del programa PILOT actual. Si bien el programa anterior fue considerado uno de los más exitosos programas PILOT del país, la cantidad de ingresos recaudados fue pequeña comparada con los ingresos que las propiedades exentas hubieran generado si fueran gravables. Los pagos PILOT de instituciones educativas y médicas en 2009 ascendieron a US$14,5 millones, o sea un 4,2 por ciento de lo que las instituciones hubieran pagado si las propiedades fueran gravables, y solo un 1 por ciento de los gravámenes tributarios totales de la ciudad. Además, el nivel de participación varió mucho entre las distintas instituciones. Algunas instituciones realizaron contribuciones sustanciales bajo el programa, mientras que otras realizaron pagos limitados o decidieron no participar en absoluto.

Para resolver estos problemas, el alcalde de Boston, Thomas M. Menino, nombró un comité de trabajo que revisara el programa PILOT con la petición de:

• establecer un nivel estándar de contribuciones para todas las instituciones principales exentas del pago de impuestos que contaban con bienes inmuebles;
• desarrollar una metodología para valuar los beneficios comunitarios;
• proponer una estructura programática que creara alianzas permanentes de largo plazo entre la ciudad y sus instituciones sin fines de lucro;
• clarificar los costos asociados con la provisión de servicios municipales a las instituciones sin fines de lucro; y
• si hacía falta, hacer recomendaciones sobre cambios legislativos necesarios a nivel local o estatal.

El comité de trabajo del programa PILOT estuvo compuesto por una amplia gama de participantes: dos líderes de universidades locales, dos de hospitales sin fines de lucro, y dos de la comunidad empresarial de Boston además de un representante del concejo municipal, uno de los sindicatos del sector público y otro de las organizaciones comunitarias. El comité de trabajo se reunió a lo largo dos años para explorar tanto los beneficios como los costos para Boston de albergar a sus instituciones sin fines de lucro, y cómo se deberían considerarse estos factores en el proceso del programa PILOT. Uno de los puntos clave del debate fue cómo asegurar que las instituciones contribuyeran al programa sobre una base consistente. En diciembre de 2010, el comité de trabajo recomendó al alcalde Menino las siguientes pautas para el programa PILOT.

El programa PILOT debería seguir siendo voluntario

Los miembros del comité de trabajo se persuadieron de que una exigencia legal o legislativa de participar en el programa PILOT iría en contra del espíritu de alianza entre la ciudad y sus instituciones sin fines de lucro. Esta alianza es crítica para alentar una participación amplia y uniforme.

Todas las instituciones sin fines de lucro deberían participar

Gran parte del debate sobre PILOT se había concentrado anteriormente en los hospitales y las universidades. El comité de trabajo, sin embargo, propuso que todas las instituciones sin fines de lucro que poseían bienes inmuebles exentos del pago de impuestos en Boston deberían contribuir al programa PILOT. Para proteger a las instituciones más pequeñas con menos recursos, el programa PILOT se limitó a aquellas cuyas propiedades se habían valuado en más de US$15 millones.

Cómo deter minar los pagos del programa PILOT

Se consideraron muchas alternativas para establecer las bases de contribución del programa PILOT, incluida la consideración de una cuota por estudiante o cama de hospital, o de un cargo proporcional a la superficie de suelo o superficie edificada. El comité de trabajo determinó que la manera más equitativa sería la de un cargo proporcional al valor de las instituciones en su totalidad, lo cual reflejaría su tamaño y de la calidad de sus propiedades inmuebles. Hubo un consenso general en que las instituciones sin fines de lucro deberían contribuir con el monto necesario para compensar su consumo de servicios esenciales, como protección policial y servicio de bomberos, y de servicios públicos, como limpieza de calles y remoción de nieve. Estos servicios consumen aproximadamente un 25 por ciento del presupuesto de Boston, y el comité de trabajo determinó entonces que una contribución al programa PILOT del 25 por ciento del monto tributable total de la institución sería razonable.

Crédito por beneficios a la comunidad

El beneficio público proporcionado por las instituciones sin fines de lucro fue un punto central del comité de trabajo, el cual recomendó que estas instituciones recibieran un crédito de hasta el 50 por ciento en sus contribuciones al programa PILOT por los beneficios brindados a la comunidad. Este crédito reconocía las contribuciones significativas en servicios efectuadas por las instituciones sin fines de lucro, los cuales benefician directamente a los residentes de Boston. El monto del crédito se limitó al 50 por ciento de las contribuciones al programa PILOT para asegurar que las instituciones pagaran un monto significativo en dinero. No obstante, el comité de trabajo expresó que, en caso de presentarse una oportunidad excepcional para un cierto programa o servicio, este límite del 50 por ciento podría excederse a discreción de la ciudad.

Si bien el comité de trabajo no ofreció detalles específicos sobre los servicios que podrían hacerse acreedores a un crédito en el programa PILOT, proporcionó pautas generales sobre los tipos de servicios que serían elegibles. Para ello, los servicios comunitarios deben beneficiar directamente a los residentes de la ciudad de Boston, respaldar la misión y las prioridades de la ciudad, ofrecer maneras de colaboración entre la ciudad y las instituciones sin fines de lucro para alcanzar metas comunes, y ser cuantificables.

Período de introducción

Finalmente, el comité de trabajo recomendó que la nueva fórmula del programa PILOT se introdujera a lo largo de un período no menor de cinco años. Dado el cambio en el alcance del programa PILOT de la ciudad, el comité de trabajo entendió que las instituciones iban a requerir tiempo para realizar todos los ajustes necesarios en sus presupuestos y planes financieros para adaptarse a las mayores contribuciones del programa PILOT.

Implementación del nuevo programa PILOT

Cuando el alcalde Menino aceptó las recomendaciones del comité de trabajo en diciembre de 2010, la ciudad tuvo que elaborar un plan para implementar el nuevo programa PILOT. Primero se enviaron cartas a todas las instituciones que cumplían con los criterios del programa. Cada carta incluyó una copia de las nuevas pautas del programa PILOT y un análisis detallado del cálculo del monto que la ciudad iba a solicitar con la nueva fórmula. La carta también indicó que la ciudad iba a solicitar una reunión con cada institución en los meses siguientes para intercambiar ideas sobre el nuevo programa.

Estas reuniones fueron un paso fundamental en la implementación del programa, al brindar un foro para que cada institución pudiera hacer preguntas sobre el programa y expresar sus preocupaciones. Si bien estas sesiones fueron diseñadas originalmente para proporcionar información a las instituciones sobre el nuevo programa, también sirvieron para que la ciudad recogiera las opiniones de las instituciones, lo cual a su vez sirvió de guía para la puesta en marcha del programa.

El anterior programa PILOT de la ciudad incluía contratos que fijaban los términos del compromiso de cada institución con el programa PILOT. Si bien los contratos eran útiles como referencia, su valor como instrumento legal era cuestionable, ya que los pagos del programa PILOT seguían siendo voluntarios. Por ejemplo, la ciudad nunca intentó forzar pagos bajo los términos de un contrato PILOT. Cuando la ciudad tuvo que decidir usar o no contratos en el programa nuevo, la perspectiva de negociar, escribir y ejecutar más de 40 contratos con las distintas instituciones resultó abrumadora. Dado que las pautas ya proporcionaban los detalles de la participación solicitada a cada institución, la ciudad decidió usar estos documentos como referencia en su relación con las instituciones y obvió la necesidad de elaborar contratos individuales.

Experiencia del primer año del programa

En octubre de 2011 se enviaron las solicitudes de pago de las primeras cuotas para el año fiscal 2012 a todas las instituciones participantes, y los resultados fueron sorprendentes. La ciudad recaudó un total de US$19,5 millones en pagos en efectivo, un aumento del 28,4 por ciento sobre la recaudación del año fiscal 2011, realizada según el programa PILOT anterior. Esto monto superó el 90 por ciento de lo solicitado por la ciudad, reflejando un nivel de participación extraordinario en este primer año de un programa nuevo y voluntario (figura 4). Boston también recibió un nivel equivalente de contribuciones en servicios comunitarios provistos por las instituciones sin fines de lucro, en línea con las pautas del programa PILOT.

Un componente clave del éxito inicial del programa fue el énfasis en promover un espíritu de alianza entre la ciudad y sus instituciones. Debido a su experiencia previa, la ciudad comprendió que una actitud de confrontamiento no sería efectiva en el corto o largo plazo. Al mismo tiempo, las instituciones tuvieron que reconocer que, en su calidad de organizaciones caritativas, debían rendir cuentas a las comunidades que las albergaban. Esta rendición de cuentas fue facilitada en parte por el alto grado de transparencia del proceso. Las reuniones del comité de trabajo fueron abiertas al público, y los materiales utilizados en las deliberaciones fueron publicados en el sitio web de la ciudad.

Este tema de transparencia continuó en la fase de implementación del programa. La información con el detalle de la participación de cada institución en el programa, los pagos en efectivo y los servicios comunitarios provistos también se publicaron en el sitio web de la ciudad. Las instituciones que no participaron plenamente del programa también tuvieron la oportunidad de comunicar sus razones. También se divulgaron detalles específicos sobre los servicios comunitarios proporcionados por las instituciones, lo que les ofreció una oportunidad para destacar y promover sus valiosas contribuciones de servicio.

La importancia de los servicios comunitarios

En sus intercambios con los líderes de las instituciones sin fines de lucro durante la implementación del nuevo programa, la ciudad descubrió que las instituciones tenían una clara preferencia por brindar servicios comunitarios en vez de hacer pagos en efectivo. Dado que los servicios son parte esencial de las misiones caritativas de la mayoría de las instituciones sin fines de lucro, esto no fue una sorpresa. Por otro lado, la ciudad generalmente prefiere los pagos en efectivo, ya que le otorgan flexibilidad para asignar recursos para satisfacer las necesidades más prioritarias de la comunidad.

Para conciliar estas dos preferencias divergentes, la ciudad ha reconocido que tiene que seguir desarrollando su capacidad para alinear la porción de servicios del programa PILOT con sus propias demandas de servicio. En la actualidad, las instituciones ofrecen sus beneficios comunitarios por iniciativa propia. Si bien estos servicios tienen valor para la ciudad y sus residentes, quizás no estén entre las prioridades actuales de servicios de la ciudad. Aun en casos en que las solicitudes específicas de servicios surgieron de un funcionario municipal para satisfacer una necesidad de corto plazo, tales solicitudes ad hoc carecen del proceso de priorización y revisión propio de un presupuesto disciplinado.

Se deberían planificar y priorizar las solicitudes de servicios para el programa PILOT para maximizar su valor para la ciudad. Bajo una estructura de servicios de este tipo, la ciudad podría quizá reducir o reemplazar el costo de ofrecer un servicio, o quizá podría brindar un servicio nuevo para cumplir con una necesidad que no había podido satisfacer previamente. Por medio de una planificación cuidadosa, el direccionamiento de recursos institucionales hacia áreas de prioridad reduce el compromiso financiero de la ciudad y permite que la ciudad obvie los pagos en efectivo a cambio de servicios institucionales, que dichas entidades prefieren. Este proceso de planificación también beneficia a las instituciones, ya que pueden planificar mejor sus compromisos de servicio al programa PILOT. Mientras el programa continúa en su fase de introducción, será fundamental que la ciudad y las instituciones puedan trabajar en forma cooperativa en una estrategia estructurada de servicios comunitarios para que continúe con éxito.

Conclusiones

El proceso seguido por Boston para construir su nueva estrategia para el programa PILOT ha sido tanto cuidadoso como inclusivo. Los conocimientos y las perspectivas de los miembros del comité de trabajo, junto con las décadas de experiencia de la ciudad sobre el tema de propiedades exentas del pago de impuestos, han podido generar pautas reconocidamente equitativas y razonables. El proceso también demostró que para que un programa PILOT sea exitoso, la ciudad y las instituciones tienen que ser socios, no combatientes.

Esta filosofía ha sido la base de la implementación del nuevo programa PILOT en Boston. Sin embargo, a pesar de su éxito inicial, queda mucho por realizar. La ciudad tiene que equilibrar su necesidad de ingresos con la preferencia de las instituciones por brindar servicios. Si los funcionarios municipales y las instituciones locales pueden seguir colaborando en el programa PILOT, se podrá alcanzar un equilibrio que beneficiará tanto a las instituciones como a sus clientes y los residentes de Boston.

Sobre el autor

Ronald W. Rakow ha sido comisionador del Departamento de Valuación de la Ciudad de Boston desde 1992, y en 2011 asumió también el cargo de Subgerente de Finanzas. Fue nombrado en 2010 miembro de la Junta Directiva de la Autoridad del Centro de Convenciones de Massachusetts y en la actualidad es presidente del Comité de Investigación de la Asociación Internacional de Tasadores (International Association of Assessing Officers, o IAAO).

Referencias

Ciudad de Boston. 2010. Informe final y recomendaciones del comité de trabajo del alcalde sobre el programa PILOT, diciembre.

Departamento de Valuación de la Ciudad de Boston. 2009. Análisis de propiedades exentas del pago de impuestos. Instituciones educativas y médicas. Año fiscal 2009.

Departamento de Valuación de la Ciudad de Boston. 2012. Reseña del programa PILOT, año fiscal 2012. http://www.cityofboston.gov/Images_Documents/FY12_Second_Half_PILOT_Status_Report_for_Web_tcm3-33007.pdf

Oficina de Gestión de Presupuesto de la Ciudad de Boston. 2012. Presupuesto adoptado para el año fiscal 2013. http://www.cityofboston.gov/budget/default.asp

Correction: Under the heading “Experience from the First Year,” the percent increase in FY2012 over what was collected in FY2011 under the previous PILOT program was incorrectly reported. The correct percentage is 28.4. Both the PDF and text version below list the correct amount.

Historically communities with high concentrations of nonprofit institutions such as hospitals, colleges, and museums have struggled with the reduced tax base associated with these tax-exempt properties. For Boston, Massachusetts, the preponderance of tax-exempt property, combined with a high reliance on the property tax for local revenue, has made this impact particularly acute. Beginning in the early 1970s, Boston began seeking payments from its nonprofit organizations as a way of offsetting the loss of revenue and the increase in public service demands associated with the institutions it hosts.

Although these payments in lieu of taxes (PILOTs) expanded over time, the City of Boston remained dissatisfied with its PILOT program. The revenue from PILOTs represented a small fraction of the city’s overall budget, and the size of contributions from nonprofit institutions varied widely. Since 2008 Boston has developed and implemented a new approach to PILOTs that has received considerable national attention. This article examines the conditions that led to the development of Boston’s new PILOT program, describes its approach, and reports on the city’s experience in its first full year.

Constraints on Boston’s Tax Base

Boston traditionally has been at the center of any discussion regarding PILOTs. The confluence of several political, fiscal, and demographic forces has created a volatile mix for the city and its nonprofit institutions. Boston is the economic and cultural center of New England and is home to some of the world’s most renowned hospitals and universities. As the state capital of Massachusetts, Boston also hosts a large number of government office buildings and facilities. Among its more unusual challenges is the city’s small geographic size in relation to its metropolitan area. Boston is the 22nd largest city by population, but it represents the 10th largest metropolitan area. As a result, exempt institutions that service the entire metropolitan area are concentrated within the city’s relatively small boundaries. In fact, over 50 percent of Boston’s land area is exempt from taxation (figure 1).

Boston also has a revenue structure that is unique among its large-city peers, primarily because it has no income, payroll, sales, or other significant source of tax revenue. Instead, Boston relies heavily on the property tax, which represents two-thirds of all city revenue (figure 2). While New York or Chicago also have large amounts of institutional property exempt from the property tax, those cities are able to tax the incomes, sales, and other economic activity which the universities, hospitals, and other large nonprofit institutions generate. In contrast, Boston receives no direct compensating revenue associated with the economic activity that is generated by its vibrant nonprofit sector.

Further, the growth of the property tax in Boston is constrained by Proposition 2½, a statutory limit on the level of property taxes. The most significant limitation is that the property tax levy for existing properties can increase by only 2.5 percent per year. Proposition 2½’s other primary limitation is a cap on the overall effective tax rate of 2.5 percent. As Boston is well below this limit at 1.8 percent, the impact of exempt property is not a factor for this provision as it is in other Massachusetts communities. The combined impact of the concentration of exempt property, the high reliance on the property tax, and the limits placed on property tax growth by Proposition 2½ result in a more profound fiscal impact of exempt property in Boston than in most major cities.

Reconciling the Benefits and Costs of Nonprofit Institutions

Despite these fiscal impacts, Boston is fortunate to have a vibrant nonprofit sector. The city hosts some of the world’s most prestigious hospitals and universities that provide exceptional health care, research, and education to their clients. In addition to fulfilling their charitable missions, these large institutions are significant economic generators that form the backbone of Boston’s knowledge-based economy. The health care industry alone accounts for 125,000 jobs in Boston.

There is an economic disconnect, however, between the benefits of nonprofit institutions and the costs of providing their properties with tax exemptions. The benefits of Boston’s nonprofits do not stop at the city’s borders; the educational, scientific, and cultural benefits of Boston’s institutions accrue to the region, state, country and, in many cases, the entire world. Yet the cost of providing public services to these institutions and the loss in revenue from removing their properties from the tax base fall squarely on Boston’s taxpayers.

This point is critical to understanding the importance of PILOTs to a city like Boston. Many observers believe that the current interest in PILOTs is driven by the short-term fiscal stress associated with the recent recession. According to this school of thought, once the economy recovers and the municipal outlook brightens, the pressure for PILOTs will ebb. Boston’s experience contradicts this assertion. The city has struggled with the fiscal impact caused by its nonprofit sector over a long period, through good fiscal times and bad. It is this fundamental disconnect between institutional benefits and fiscal costs that is the ultimate source of this debate. Until these benefits and costs are better reconciled, financial tension between the city and its nonprofits will continue.

Measuring the Fiscal Impact of Tax-Exempt Property

The impact of tax-exempt property on the city as a whole has long been the focus of spirited public discussion in Boston. One question that has often been asked is how much nonprofit institutions would pay if their properties were fully taxable. For a long time this question could not be answered. Since tax-exempt property paid no property taxes, the city had little incentive to maintain accurate data and up-to-date assessments for institutional property. However, the continuing focus on the fiscal impact of exempt property clearly required an answer to this question.

Given the scarce resources available for a project to value exempt property, Boston needed to be creative in coming up with a method to generate reliable assessments while minimizing the costs of collecting data. At the city’s disposal was a particular type of tax return that nonprofit institutions are required to file annually, as well as broad statutory authority to request from property owners the information necessary to value their properties. Boston was able to leverage these tools to collect detailed information on the property owned by nonprofit institutions—specifically, the physical characteristics (size, age, condition) and uses. Most major institutions maintain accurate data on their property holdings. Once the assessors had access to these data, they were able to plug the information into the city’s computer-assisted mass appraisal system (CAMA) to generate assessments for the properties. Site inspections were performed to verify the information provided by the institutions and to ensure the accuracy and reliability of the CAMA-generated assessments.

The resulting assessments were then shared with the institutions. Each was given the details on the valuation estimates for their real estate holdings and provided with an opportunity to meet with assessors to review the results and raise any concerns. The city incorporated this feedback to complete the final value for the properties. Given that this was the city’s first effort to generate assessments for nonprofit property, this review step provided a valuable check of valuation data quality as well as an opportunity to share the preliminary results of the revenue impact of their property tax-exemptions with each institution.

The analysis, which was completed in 2009, revealed that educational and medical tax-exempt property would have generated $347.9 million in revenue if it were taxable (City of Boston 2010). To put this amount in perspective, it would equate to approximately one-quarter of the city’s total tax levy of $1.4 billion in Fiscal Year 2009, and would be equivalent to roughly half the revenue generated by the office, retail, and hotel properties that make up the commercial tax levy (figure 3).

PILOT Task Force

Once the assessment information was used to determine the amount of tax each institution would pay in a nonexempt scenario, a number of shortcomings of the current PILOT program became apparent. While the former program was considered one of the more successful PILOT programs in the country, the amount of realized revenue appeared small when compared with the revenue that exempt properties would generate if they were taxable. PILOT payments from educational and medical institutions in 2009 totaled $14.5 million, or 4.2 percent of what institutions would pay if their properties were taxed, and equivalent to just 1 percent of the city’s property tax levy. In addition, the level of participation varied widely among institutions. Some institutions made substantial contributions under the program, while others made limited payments or chose not to participate at all.

To address these concerns, Boston Mayor Thomas M. Menino appointed a task force to review the PILOT program and asked it to:

• set a standard level of contributions to be met by all major tax-exempt landowning institutions;
• develop a methodology for valuing community benefits;
• propose a program structure that creates longer-term, sustainable partnerships between the city and its nonprofits;
• clarify the costs associated with providing city services to nonprofits; and<
• if necessary, provide recommendations on legislative changes needed at the local or state level.

The PILOT Task Force membership drew from a wide spectrum of participants: two leaders each from local colleges, nonprofit hospitals, and Boston’s business community; and one each from the city council, public sector unions, and community-based organizations. The Task Force met over a two-year period to explore both the benefits and costs to Boston of hosting its nonprofit institutions and how these factors should be considered in the PILOT process. Also key was the discussion on how to ensure that institutions contribute to the program on a consistent basis. In December 2010, the Task Force recommended the following PILOT guidelines to Mayor Menino.

PILOT Program Should Remain Voluntary

The Task Force members believed a legal or statutory requirement for PILOTs runs counter to the spirit of partnership between the city and its nonprofit institutions. That partnership is critical to encouraging broad and uniform participation.

All Nonprofits Should Participate

Much of the PILOT discussion previously focused on hospitals and universities. The Task Force, however, felt all nonprofits that own tax-exempt real estate within the city should contribute to the PILOT program. To protect smaller institutions with fewer resources, the PILOT program was limited to those nonprofits with property valued at more than $15 million.

Determining PILOT Payments

Many alternatives were considered for the basis of PILOT contributions, including a per-student or per-hospital-bed fee, or a charge based on the amount of land or building area. The Task Force determined that a charge driven by the assessed value of the institutions—reflecting size and quality of real estate holdings—would result in the most equity. There was a general consensus that nonprofits should contribute some amount toward their consumption of essential services such as police and fire protection, as well as public works such as street cleaning and snow removal. These services consume approximately 25 percent of Boston’s budget, and the Task Force found that a PILOT equal to 25 percent of an institution’s fully taxable amount was reasonable.

Credit for Community Benefits

The public benefit provided by nonprofit institutions was a major focus of the Task Force, which recommended that institutions receive up to a 50 percent credit on their PILOT in exchange for community benefits. This credit recognized the significant inkind contributions made by nonprofit institutions that directly benefit Boston residents. The credit was limited to 50 percent of the PILOT amount to ensure significant cash contributions from each institution. However, the Task Force felt that if an exceptional opportunity for a program or service were available, the 50 percent cap could be exceeded at the city’s discretion.

While the Task Force did not offer detailed specifics on the services that were eligible for PILOT credit, it did provide general guidance on the types of services that should qualify. To be eligible, community services must directly benefit City of Boston residents, support the city’s mission and priorities, offer ways for the city and nonprofit to collaborate to meet shared goals, and be quantifiable.

Phase-in Period

Finally, the Task Force recommended that the new PILOT formula be phased in over a period of not less than five years. Given the change in scope of the city’s PILOT program, the Task Force understood that institutions would require time to make the necessary adjustments in their budget and financial plans to accommodate increased PILOT amounts.

Implementing the New PILOT Program

When Mayor Menino accepted the Task Force recommendations in December 2010, the city needed a plan to implement the new PILOT program. First, letters were sent to all institutions that fell within the criteria of the program. Each letter included a copy of the new PILOT guidelines and an analysis detailing the calculation of the PILOT that the city would request under the new formula. Each letter also indicated that the city would seek a meeting with each institution in the coming months to discuss the new program.

The subsequent meetings were a critical step in the implementation, providing a forum for each institution to ask questions about the program and to voice concerns. While these sessions were designed originally to provide information to the institutions on the new program, they also provided significant, valuable feedback for the city that in turn offered further guidance on the rollout.

The city’s previous PILOT program included contracts that laid out the terms of each institution’s PILOT commitment. While the contracts were useful as a reference, their value as a legal instrument was questionable since PILOT payments remained voluntary. For example, the city had never sought to enforce payment under a PILOT contract. As the city faced the question of whether contracts would be employed in the new program, the notion of negotiating, drafting, and executing over 40 contracts with institutions was daunting. Given that the guidelines already provided the details of each institution’s requested participation, the city felt those documents should form the basis of the relationship with the institutions and decided to forgo the use of PILOT contracts.

Experience from the First Year

In October 2011, requests for payment of the first installments for FY2012 were sent to all participating institutions, and the results were impressive. The city collected a total of $19.5 million in cash payments, a 28.4 percent increase over what was collected in FY2011 under the previous PILOT program. This represented over 90 percent of what the city requested—an extraordinary level of participation given the first year of a new, voluntary program (figure 4). Boston also received an equivalent level of contributions in the form of community services provided by the nonprofit institutions, consistent with the PILOT guidelines.

A key component of the program’s initial success was the emphasis on promoting a sense of partnership between the city and its institutions. Based on its prior experience, the city understood that a more confrontational approach would not be effective in the short or long term. At the same time, the institutions needed to recognize that as charities they have a level of accountability to their host communities. This accountability was encouraged in part by providing a high degree of transparency in the process. Task Force meetings were open to the public, and materials used during the deliberations were posted on the city’s website.

This theme of transparency continued in the implementation phase of the program. Information detailing each institution’s participation in the program, from cash payments to the community services provided, was also posted on the city’s website. Institutions that had less than full participation in the program were given the opportunity to communicate their reasons. Specific details on the community services delivered by the institutions were also disclosed, providing an opportunity for institutions to highlight and promote their valuable service contributions.

The Importance of Community Services

In its discussions with nonprofit leaders during the implementation of the new program, the city discovered that institutions have a decided preference for providing community services over making cash payments. Given that service delivery is at the core of most nonprofits’ charitable missions, this was not surprising. Conversely the city generally places a higher value on cash payments, which provide flexibility in applying resources to meet the highest-priority service needs of the community.

To reconcile these two divergent preferences, the city has recognized that it must further develop its ability to harness the community-service portion of the PILOT program to meet its service demands. Currently community benefits often are offered by the institutions based on their own initiative. While these services have value to the city and its residents, they may not be among the city’s current service priorities. Even in cases where specific requests for services came directly from a city official to fill a near-term service gap, such ad hoc requests lack the prioritization and review that is associated with a more disciplined budgeting process.

Requests for PILOT services should be planned and prioritized to maximize their value to the city. Under such a structure services are more likely to either reduce or replace the cost to the city of providing a service, or to provide a new service to meet a priority that the city had been unable to deliver previously. Through careful planning, directing institutional resources to priority areas reduces the city’s financial commitment and makes it is easier for the city to forgo cash in favor of institutionally preferred services. This planning process is also beneficial to the institutions, as they are better able to budget for their PILOT service commitments. As the program continues through its phase-in period, the ability of the city and institutions to work cooperatively on a structured approach to community services will be critical to the continued success of the PILOT program.

Closing Thoughts

The process Boston has followed to construct its new approach to PILOTs was both thoughtful and inclusive. The expertise and perspectives of the Task Force members, combined with the city’s decades of experience on the issue of exempt property, led to program guidelines that were recognized as fair and reasonable. The process also demonstrated that for a PILOT program to be successful the city and its institutions must be partners, not combatants.

This philosophy has formed the basis of Boston’s approach to the implementation of its new PILOT program. And, despite its early success, there is still much work to be done. The city needs to balance its need for revenue with the institutions’ preference for services. If city officials and local institutions can continue to work cooperatively on the PILOT program, a balance can be struck that will work to the mutual benefit of the institutions, their constituents, and the residents of Boston.

About the Author

Ronald W. Rakow has been commissioner of the City of Boston Assessing Department since 1992, and he took on the additional role of deputy chief financial officer in 2011. He was appointed in 2010 to the Board of the Massachusetts Convention Center Authority, and is currently serving as the chair of the Research Committee of the International Association of Assessing Officers (IAAO).

References

City of Boston. 2010. Mayor’s PILOT task force final report and recommendations, December.

City of Boston Assessing Department. 2009. Exempt property analysis: Educational and medical institutions, Fiscal Year 2009.

City of Boston Assessing Department. 2012. FY 2012 PILOT recap. http://www.cityofboston.gov/Images_Documents/FY12_Second_Half_PILOT_Status_Report_for_Web_tcm3-33007.pdf

City of Boston Office of Budget Management. 2012. Fiscal year 2013 adopted budget. http://www.cityofboston.gov/budget/default.asp