The Cost of Doing Municipal Business

It began, as many good stories do, with a conversation over a beer.

During a recent trip to Pittsburgh, a friend, who a short time before had returned to the Steel City after a number of years in the North Bay, offered to give me a tour of his hometown.  (This was the same evening that included a visit to a downtown plaza that I likened to a scene from “The Lord of the Rings.”)

The friend began the evening with a walk about Sewickley, a village near his current home.  He thought that I would find the village charming, an expectation in which he was largely correct.  Tidy streets, interesting storefronts, even a few well-swept alleys for less mainstream businesses.  It was a quite comfortable place.  (All of the photos are of Sewickley.)

Of course, I could still make the criticisms that I would make of most suburban villages in the U.S.  The rail line that had allowed Sewickley to begin life as a summer retreat from the coal and steel fumes of Pittsburgh was long gone, replaced by a reliance on private autos.  Most of the downtown stores were single story, so there were few opportunities for walkable downtown living.  And, with a couple of apartment house exceptions, large lot single-family homes seemed to jarringly abut the downtown.  Middle housing was a largely missing element.

But Sewickley was still a charming, if imperfect place.  (To tie it back to the North Bay, I’d say it’s like Healdsburg without the recent growth spurt or Sonoma without the weekend throngs of tourists.   Looking at the entire Bay Area, Orinda seems a reasonable comparison.)

Our initial amble complete, my friend steered us to a small restaurant a short block from the main street.  We sat at the bar, ordered beverages, and began to chat with the owner and bartender about Sewickley.

The conversation eventually turned to property taxes.  The barkeep told a story of friends who had recently moved from Sewickley because of the tax burden.  As he told the story, the family had retired the mortgage on a home assessed at $800,000, but were still facing a monthly property tax bill of $1,300.  With college expenses for their children nearing, they decided that they couldn’t afford to stay in town, so sold the house and relocated outside of the city limits.

As my friend and I walked back to his car, it dawned on me that the facts added up to an interesting data point.  Long-time readers know that I have a theory about California’s 1978 Proposition 13.  I’ve argued that the “tax revolt”, although generally described as a campaign against government waste, was more accurately a rejection of the costs of maintaining the sprawling land-use pattern that we had adopted.

I’ve argued that, had Howard Jarvis been less judgmental, this reality could have been obvious and we could have begun remediation.  Instead, we capped property taxes, continued sprawling, and moved onward to a world of potholes and failing waterlines, with no municipal funds to address the problems.

So the bar chat gave me a data point to see what it costs to run a small city where there was no arbitrary cap on property taxes, where the only cost constraint was what the citizens were willing to tax themselves annually, as expressed through their elected representatives.  

Luckily, the numbers were easy to calculate while walking.  $1,300 per month times 12 months equals $15,600 per year.  For an $800,000 assessment, that would be a tax rate of 1.95 percent, a startling difference from the 1 percent cap under Proposition 13.

I could stop here, having made what many might find a sound point.  But I trust that the more discerning readers would have been capable of poking several holes in my simple analysis.

I’m not going to try to plug every hole.  After all, this is a blog post, not a master’s thesis.  But I can plug a few.

Who trusts a barkeep?:  To be a successful bartender requires a number of skills, but storytelling veracity isn’t one of them.  A story may have already have already been enhanced before it reaches the barkeep’s ears and then edging the facts up even further makes for better bar conversation, which leads to better tips.

Luckily, Sewickley property tax rates can be confirmed on-line.  (Rather than the percentages usually noted in California, Pennsylvania uses millage, or tenths of cents per dollars of assessed value.  But millage can be converted to a percentage by moving a decimal point.)

The most recently updated Sewickley tax rates are 4.73 mills for Allegheny County (2015), 6.5 mills for the Borough of Sewickley (2015), and 17.1548 mills for the Quaker Valley School District (2014).  Adding these gives 28.3848 mills, or 2.8348 percent.  Unexpectedly, the story told by the bartender actually understated the tax rate.

Don’t property values also matter?: Vendors and public employees don’t get paid in millage rates; they get paid in dollars, which are millage rates times assessed value.  So home values matter just as much as millage.

To avoid the bias of a single realty firm which might focus on a particular segment of the market, I checked the Zillow webpage for Sewickley.  The median home value for Sewickley seems to be about $250,000, which is perhaps half of the North Bay median value of close to $500,000.  (It seems the barkeep’s friends, with their $800,000 home, were in the upper echelon of the Sewickley’s demographics.)

So the combined Sewickley tax rate, which is applied to homes of half the value, would be equivalent to a tax rate of perhaps 1.4 percent on the more expensive North Bay homes, closer to the 1 percent cap in Propostion 13, but still a significant difference.

Does a cap rate equal an average rate?: That’s the last hole to patch.  Proposition calls for a 1 percent cap on the total property bills, except for a few incremental taxes that are allowed to exceed the cap, but it also sets a maximum rate at which taxes can increase year to year.  With the rapid run-ups in California real estate values, many homes are taxed well below the 1 percent cap.

(The variance from the cap is specifically true of businesses, where a business that owns a building can be sold without triggering a Proposition 13 adjustment because the building continues to be owned by the business.  If the political will is ever built to change Proposition 13, the drafting error in how businesses are treated is likely where the revisions would begin.)

In addition to businesses, it’s likely that any home that has been held since 2003 or before is taxed below the 1 percent cap.  I don’t know of any analysis that computes the average California property tax rate, but I’ll guess something around 0.8 percent.

And that’s where I’ll call a halt.  I haven’t fully rectified all the apples versus oranges possibilities, but I’ve moved in that direction.  A place that continues to fund the actual municipal costs required for a tidy, well-maintained community needs the California equivalent of a 1.4 percent tax rate, while California taxes itself at about 0.8 percent.  If you want to measure that depth of the pothole in front of your house, that’s one good measuring stick.

And where does urbanism fit into this story?  Very simply, a walkable urban community is less expensive to service per dollar of assessed value.  An urban community wouldn’t solve the property tax shortfall, but it’d be a step in the right direction.

It’s fun to see where a casual conversation over a beer can lead.

I have one more insight to share from my evening tour of Pittsburgh.  It’s about how some neighborhoods age differently from others.  I’ll share in my next post.

As always, your questions or comments will be appreciated.  Please comment below or email me.  And thanks for reading. - Dave Alden (davealden53@comcast.net)

If Howard Jarvis Had Been Less Judgmental, We Might Be Better Off, but Probably Not

In a recent post, I suggested that the underlying issue behind the taxpayer revolt of the late 1970s and 1980s, headlined by California’s passage of Proposition 13 in 1978, might have been incorrectly ascribed.  It’s interesting to question what might have happened had one of the generals of the revolt possessed a more open mind to alternative explanations.

Contemporary observers and most voters believed that Proposition 13 was a reaction to an inefficient and excessively expanding government.   But looking back from the 21st century, the concerns that led to Proposition 13 may have instead been a warning that we were rapidly building a world we couldn’t afford to maintain.

StrongTowns argues that our experiment with drivable suburbia, which began in earnest after World War II, was funded for its first 35 years with accumulated capital.  The next 35 years, up until today, were funded with debt.  The bill on the debt is now coming due, which explains the increasing problems with infrastructure maintenance and looming municipal bankruptcies.  Major dislocations may be in our near future.

But dislocations would have also occurred 35 years ago at the transition between capital-financed and debt-financed growth.  Which was just about the time of the taxpayer revolt.

The concurrence is reasonable.  In the late 1970s, taxes would have been increasing as government was looking for ways to maintain all the new stuff that we’d built and to provide services to our newly far-flung and still growing cities.  At the time, there would have been two options.  We could have reached the conclusion that we’d built too much stuff.  Or we could have decided that government was inept.

Into the moment of history stepped Howard Jarvis.  (For those who weren’t alive during 1978, which to my chagrin may include a great many readers, Jarvis was a key instigator behind Proposition 13, which is also known as the Jarvis-Gann Initiative.)  By all accounts, Howard Jarvis was a decent, clean-living individual.  He also came pre-wired with the assumption that government was grasping and fundamentally flawed.

Had Jarvis been a more thoughtful, curious person and one less likely to automatically put the cloak of evil on all government workers, he might have looked deeper in the tax issues of his time and realized that the problem was actually how we were building our world.  But that wasn’t in the nature of Howard Jarvis.  He assumed that government must be flawed and the taxpayer revolt was on.

One result of the revolt was the proliferation of financial measures, such as impact fees, by which government gets near-term revenues in exchange for long-term unfunded obligations.  It is one of the debt mechanisms to which StrongTowns refers.

It’s interesting to speculate what might have happened had Jarvis been slower to jump to his conclusion and had instead let the facts guide him to a different conclusion.  Perhaps new urbanism would have been given an earlier kick start, much to the betterment of our world.  But what is more likely is that Jarvis would have been deposed from his role in the taxpayers’ organization and someone else with less intellectual curiosity would have taken up the reins.

In the era of the taxpayer revolt, the general public wasn’t ready to believe that our pattern of land use was deeply flawed.  Today, there are hints that more people are willing to be educated, but there’s still much ground to cover.  At the same time, we need to stifle the new Howard Jarvis’s offering simple but wrong and ultimately harmful solutions.

As always, your questions or comments will be appreciated.  Please comment below or email me.  And thanks for reading. - Dave Alden (davealden53@comcast.net)