Nearly a decade ago my wife and I were outbid on a condominium on the 8th floor of a high rise in Pittsburgh. The condo sold for \$419,000 in 2016 and currently has an assessed value of \$243,100. Two years later, we had discussions with the owner of the 7th floor unit directly underneath which had the same floor area and floor plan. This unit would sell for \$495,000 in 2019 and currently has an assessed value of \$322,000.1The assessed values just listed were from the county website in 2023, but my memory is that there was an even larger discrepancy around the time that these units last sold. Extreme differences in the assessed values of similar units are a common problem in Allegheny County. More examples are provided in this Public Source article which provides images of similar houses on the same street with vastly different assessment valuations.
A second problem with Allegheny County Assessments is that lower price properties are systemically overvalued in their assessments than higher priced properties. For properties within the Pittsburgh city limits, this is shown in the following figure, where the assessment ratio is the home’s assessed value divided by its transaction (sale) value.2This figure is from pghpropertytax.org, used with permission.
One reason for this is that property tax assessments typically exclude properties that sell for a very low price (for example, sales less than \$10,000). In most places, sales in this price range are between friends or family and don’t reflect the true market value. However, Allegheny County has a lot of neighborhoods with vacant and blighted properties where these sales do reflect the true market value. Excluding these sales therefore results in low-valued homes being systematically overvalued.
A third problem is that properties that have not sold for a long time are systematically given lower assessment valuations than properties that have sold more recently.
All of these problems are exacerbated by the fact that Allegheny County hasn’t had a countywide property reassessment since 2012. Pennsylvania is one of only two states3Delaware is the other. that do not require local governments to perform regular tax assessments.
Doing property tax assessments well is genuinely hard,4For those interested in more details, Chris Briem, a regional economist at the University of Pittsburgh, has written an excellent overview of the history of Allegheny County property tax assessments. and the problems described here are not unique to Allegheny County.5This study compares property tax assessment practices across a number of metro areas (unfortunately Pittsburgh is not included). Systematically giving recently sold properties and low-value properties higher assessments than they deserve is a problem common to many other metro areas. Before the next countywide assessment, the next County Executive should ensure that the Office of Property Assessments is adequately funded and competently staffed.
Sarah Innamorato, the Democratic nominee to be the next County Executive, is right to call for regular countywide reassessments. Her Republican opponent, Joe Rockey, opposes a county-wide reassessment.6This Public Source Article does a good job of describing where both candidates stand on property tax assessments. This Post-Gazette Article also provides a good overview.
Pennsylvania state law requires that countywide property tax reassessments be revenue neutral. As a result, if the total assessed value of properties in a municipality increases, the millage rates decrease correspondingly following a reassessment so the overall tax revenue stays the same. Property owners whose properties have appreciated more than the average will see a tax increase, and owners whose properties have not appreciated by more than the average will see a decrease.
As an example, Pittsburgh’s millage rate is currently 8.06 mils. Let’s say property values have doubled on average since the last assessment in 2012. The millage rate would be reduced following the assessment to 4.03 mils. A property owner whose property had been assessed at \$100,000 in 2012 would have been paying the city \$806 a year. After the reassessment, the property owner would pay less in taxes if the new assessed value was less than \$200,000, and would pay more if the new assessed value was more than \$200,000.
Many voters are still concerned that a countywide reassessment will result in higher property taxes for them, and in some cases there is concern it will displace homeowners who can no longer afford their property taxes.
To address this concern, State Senator Costa, Sara Innamorato, and Pittsburgh Mayor Ed Gainy have proposed the Longtime Owner Occupant Tax Exemption Program (LOOP).7Senator Costa describes the press conference he gave on the topic on his website. A version of LOOP was established in Philadelphia in 2014.The program limits how much assessed property values can increase for long time homeowners. State legislation that Senator Costa has introduced is needed for Allegheny County to implement a similar program.
How LOOP works in Philadelphia
If Allegheny County implements LOOP, it may choose different implementation details than the Philadelphia program, but Philadelphia’s program provides a possible implementation.
In Philadelphia, a homeowner is eligible for LOOP if:
- They have owned and lived in their home for at least 10 years
- Their assessed property value has increased by more than 50% in the past year or 75% in the past five years.
- Their household income is below a limit set by family size. The limit is \$96,100 for a household of one and \$137,250 for a household of four8In this paper which evaluates LOOP, it states that when the program was established in 2014 the income thresholds were set to be 150% of area median income (AMI) for a given household size. As of 2022, 150% of AMI for a household of one would be \$99,600 in Allegheny County and \$110,700 in Philadelphia.
If eligible, the assessed property value is capped at the 50% or 75% increase, as applicable. As long as their household remains below the income limit thereafter, their property’s assessed value no longer increases as long as they hold the property9When LOOP was established in 2014, the freeze in assessed value was limited to 10 years. In 2018 the program was changed for the assessment to be capped indefinitely. See here..
LOOP was created in 2014 in conjunction with Philadelphia’s first county-wide reassessment in several decades. For this initial reassessment, households were only eligible for LOOP if their assessed value increased by more than 300%. The thresholds were lowered to their current values in 2018 for subsequent reassessments. As of 2015, 18,000 Philadelphia households received a tax reduction through LOOP, representing about 3% of Philadelphia properties10Source here..
LOOP does have a provision where if the total amount of savings for participating households in Philadelphia exceeds \$35 million, the associated discounts will be reduced so that the cost of the program does not exceed this sum.
Why LOOP is a Bad Policy
If Philadelphia’s eligibility criteria is used, homeowners in LOOP will get a large property tax cut. Since the last countywide reassessment in 2012, house prices in Pittsburgh have increased by 81% on average,11This is based on data from the Federal Reserve for the Pittsburgh metro area as a whole and includes home prices outside of Allegheny County. The data is the house price index, which is defined here. It is based on single family home sale prices and excludes multi-family homes. It represents average rather than median transaction prices. The 81% figure is from 1st quarter 2012 to 2nd quarter 2023. so in a county-wide reassessment homeowners whose homes have appreciated by more than 81% since 2012 will see a property tax increase and those whose homes have appreciated less will see a property tax cut.
A property that appreciates 50% will have its taxes cut by 17%.12$\frac{1.5}{1.81}=0.83$[\mfn] Since LOOP limits appreciation to 50% for those who have owned their home for more than 10 years, this would be their outcome.
A majority of Pittsburgh homeowners who have owned their homes more than 10 years would likely meet Philadelphia’s eligibility criteria for LOOP. 80% of Pittsburgh households earn less than \$93,100.12Source here. It is likely that homeowners have higher household incomes on average than for city residents as a whole, reducing the percentage of households that would be eligible somewhat.
I had the opportunity to ask Sara Innamorato about LOOP at a candidate forum. She stated that the eligibility criteria that would be used for LOOP in Allegheny County had not been established and could be different than what is used in Philadelphia. However, even if Allegheny County’s LOOP program were more narrowly targeted than Philadelphia’s, it is still a very harmful program.
Philadelphia’s experience also shows that eligibility criteria can expand over time, increasing the distortions and inequities that this program has the potential to cause.
The remainder of this post will assume Philadelphia’s eligibility criteria, but the basic points will remain valid even if eligibility is restricted.
LOOP is a Bad Way to Address Displacement
People are forced to move from their homes for all kinds of tragic reasons. Their landlord may raise the rent beyond what they can afford. They may lose their job or have unaffordable medical expenses. They may have a health situation that requires a different housing type. They may be victims of a disaster they are not insured for. They bought a house beyond their means and initially managed by deferring the maintenance, but their house is no longer safe to live in. Local government does not have the resources to prevent every one of these situations.13And even if it did it wouldn’t necessarily be the best use of the funds.
People who have the ‘misfortune’ of owning a property whose value has appreciated by more than the municipal average are less in need of public assistance. If they really want to stay in their homes, they can borrow against the collateral of their more valuable home. If not, they can pocket a windfall when they move to another home in the same municipality with a lower assessment. This citylab article describes a recent study which finds that there is no evidence “property tax policy has any effect on homeowners being displaced.” This study of LOOP’s initial implementation in Philadelphia finds a small impact, estimating that LOOP reduced new tax delinquencies by participants by 0.8 percentage points.14This result comes with some major caveats. A footnote in the paper says that confidentiality considerations prevented them from having property specific data on LOOP participation, so a ‘proxy of LOOP’ was used in the empirical analysis. The paper also explains that the delinquency data doesn’t distinguish between people who are tax delinquent because they are unable to pay and those who are delinquent because they are appealing their new home assessment. The paper’s conclusion states that LOOP is effective at reducing displacement. However, the study doesn’t evaluate displacement directly but extrapolates its conclusion from the delinquency data stating “we believe tax delinquency still serves as an early indicator of potential displacement”.
LOOP also provides a huge tax windfall for people who aren’t in need of assistance at all. Many people with low incomes are retirees with substantial savings. Someone could own their home with no mortgage, have \$2 million in stock assets yielding 2% for a dividend income of \$40,000 per year. This household would be well below the income threshold for LOOP, but not be at risk of displacement at all.
While LOOP gives tax breaks to millionaires who don’t need it, it offers no relief to the renters who are most at risk of displacement. Even if they have lived in their homes for more than 10 years they still need to pay their full property taxes through their rents.15Whether landlords are able to pass their property tax bills on to their tenants is complicated and depends on the situation. In general, when properties owned by landlords are taxed at a higher rate than homeowners, most of this difference gets passed on to the tenants through their rent. Municipalities will have to make up the lost revenue from LOOP through other taxes, many of which will fall on renters and other low-income people.
LOOP causes Large Unfair Differences in Tax Payments
Imagine two households with similar homes and financial situations. One family home’s assessed value increases 49% while their neighbor’s increases 50% and is therefore eligible for LOOP. The household lucky enough to own a more valuable home now has their assessed value locked in, while the neighbor with the less valuable home has to pay a rising tax burden as their property’s appreciation is reflected in regular assessments.
Now imagine the case of a retired person who moves to Pittsburgh to live near their adult children already in the area. This person will have to pay substantially higher property taxes than a person of the same age, income and home value who happens to have owned a home in Pittsburgh for over 10 years.
Finally, imagine a retired person who has been living in Pittsburgh their whole life but needs to downsize because they can no longer navigate the stairs in their home. Such a person would need to pay higher taxes than a neighbor in otherwise the same financial situation who has lived in a home without stairs for more than 10 years.
LOOP Creates an Incentive for People to Reduce their Income to be Eligible
My wife and I both work full time and we both earn enough together but not individually to be above the LOOP income limit. However, if either of us were to stop working to become a stay-at-home parent we would be able to save a substantial amount in childcare expenses. If this made the difference between whether we were eligible for LOOP, it would make it hard to justify both of us continuing to work full time.
A more common problem will be the incentive LOOP creates for older people to retire early. Since becoming eligible for LOOP following a reassessment has the potential to reduce a household’s property tax bill for the rest of their lives, the cumulative benefit will often be large compared to a household’s annual income. Imagine a 65 year old homeowner that would save \$1,000 a year initially from LOOP and expects to live to 85 in their home. The LOOP savings will grow over time as the eligible homes assessment value won’t increase at future assessments, so the homeowner could reasonably expect over \$20,000 in lifetime savings if they are able to get their income below the \$96,100 eligibility threshold. This will create a strong incentive for some people to retire early or reduce their work hours.
LOOP Reduces the Efficiency of Property Taxes
Property taxes are one of the most economically efficient taxes because they encourage property owners to use their property productively. An economically efficient tax is one that influences people’s behavior in beneficial ways. An inefficient tax discourages beneficial behavior or encourages harmful behavior.
To see how this works for property taxes, and in order to put some of the emotions associated with home ownership aside, let’s start with an example for commercial property. Suppose a business district becomes more successful. Most businesses there are able to increase their sales, and the appraised value of the real estate property therefore increases and the property taxes go up correspondingly. The increased property taxes would put pressure to sell on any businesses who were not able to increase their sales in the general upturn. This causes business real estate to get sold to owners who on average are better able to manage their businesses, and whose business models are better suited to the location.
Property taxes have a similar effect for residential real estate.
One way they do this is by discouraging people from using more housing than they need. When my wife and I first married we bought a small 2 bedroom apartment. My parents and realtor tried to encourage us to buy a larger home at the outset so we could avoid the expense of moving when we had kids. However, we were happier not having to maintain a large house at that age. Our owning a smaller home had societal benefits because it freed up housing space for people who needed it more. Similarly, when older people downsize after their kids move out, it frees up space for families or people who want to live with housemates who have a greater need for the space. Property taxes incentivize these types of moves. If a person is enrolled in LOOP, they would face a property tax increase if they downsized!
This public source article provides another example. It describes a homeowner who owned an adjacent vacant lot which she used for gardening. About 20 years after the purchase the neighborhood became significantly more desirable and the vacant lot appreciated from \$59,800 to \$408,000. This higher price reflected the fact that the plot could be used the build a home for somebody in a desirable location. If the property owner isn’t willing to pay property taxes on the garden, that means it would be more productively used to provide a home for somebody who wants to live in that neighborhood.
Another situation where property taxes encourage efficient moves is in the case where employers add more jobs to an area than developers are able to add housing for them. (To be clear, the best solution for this problem is to remove the barriers that prevent developers from building housing for these people, such as zoning, regulations, taxes and fees. Unfortunately this isn’t always politically feasible). This situation results in some employees having long commutes and potentially valuing homes near the employer more than existing residents. The price of homes near the employers rise as more people want to live there for the short commute. Increasing property taxes encourages people who don’t value the location as highly to move.16This could be someone who is retired so proximity to jobs is no longer a priority. It could be someone who bought a home there when it was previously cheap even though it is not close to their job.
This last example is probably the most controversial for me to frame as a ‘good’ thing. People have emotional attachment to their homes and don’t like the idea of people being encouraged to move. It is an example some would consider ‘gentrification’. It is important to recognize though that there are trade-offs and there are people who would benefit from the housing that are harmed when long-time residents are overly prioritized. When a neighborhood becomes more desirable, there are renters who are genuinely harmed by the rising rents. However, the large majority of homeowners benefit because the benefits of owning an appreciating home vastly outweigh the drawbacks of higher property taxes.
What We Should Do Instead
It is important to recognize the political reality that homeowners vote at higher rates in local elections and therefore have disproportionate political power. We need to improve things within the context of that reality. If LOOP is the only politically feasible way to get regular reassessments, then a narrowly targeted program would be part of an overall improvement.
If it is politically possible to have regular reassessments without LOOP, this would be best.
Many states and municipalities have programs that allow eligible homeowners to defer some or all of their property taxes, with interest, until the sale of their property. This prevents displacement without a loss of tax revenue or any of the economic distortions that result from LOOP.
If LOOP is pursued, it should be as narrowly targeted as politically possible. Allegheny County should limit the duration of reduced property taxes and ensure only a small percentage of homeowners are eligible.
At the state level, Pennsylvania should provide counties with funding for the purpose of performing assessments and should also require that assessments be performed regularly.
