By Common Ground OR/WA, May 2020
A Bank of Oregon Will Provide Cost-burdened Homeowners Assistance to Construct Accessory Dwelling Units
THE PROBLEM OF UNEQUAL FINANCIAL BURDEN
In early 2019 Common Ground OR/WA engaged the Northwest Economic Research Center (NERC) at Portland State University to conduct a study of the effects of land value taxation in two contrasting Portland communities. The NERC study clearly reveals inequities caused by the tax assessment limitation mandated by Measure 50 that have compounded over the past 22 years. Among the parcels analyzed in the Inner Northeast (INE), the maximum assessed value (MAV) is only 29 percent of real market value (RMV); in Outer Southeast (OSE), the MAV/RMV ratio is a higher 55 percent – closer to true market value. This means OSE properties that have grown in real value at a slower rate are subject to a higher effective tax rate ($12.17 per 1,000 MAV) under the current tax system than INE properties ($7.29 per 1,000 MAV). For example, a $500,000 home at maximum assessed value located in INE is subject to a property tax of about $4,700; an equivalent property located in OSE would experience a tax of about $6,000. Property owners in OSE are making up the difference for the below market-based tax levies owed by INE owners.
This inequity is particularly burdensome to OSE households for the following two reasons. First, a large proportion of the residents are lower-income households formerly displaced by rising housing costs in neighborhoods closer to the city center. Furthermore, much of this community was originally developed as semi-rural when lots were platted for septic sewer systems. OSE is characterized by modest houses on large lots, where the average lot size exceeds 9,000 square feet. Typical inner-city lots are platted at less than 5,000 square feet. Mean floor area ratios (FAR) are .16 on OSE single-family parcels compared to .36 on INE parcels, indicative of low land utilization.
Reverting to RMV assessments will help shift tax burdens away from low-value communities like OSE, but this alone does not solve the universal problem caused by the equal rate tax system. Taxing land and improvements at the same rate produces perverse incentives – to withhold capital investments in buildings and to hold land for speculative gain. The land value tax (LVT), on the other hand, is conceived to produce desirable incentives – to invest in substantial property improvements rather than speculate on sites and raise the costs for later occupants. In the U.S., the model for LVT is found in Pennsylvania cities that place a high tax rate on land and a low rate on improvement values. The NERC study concluded that RMV assessments coupled with separate rates on land and improvement values result in a significantly more balanced rate distribution than the present Oregon tax system. Furthermore, an LVT system would be slightly income progressive.