Tanvi Misra is a staff writer for CityLab covering immigrant communities, housing, economic inequality, and culture. She also authors Navigator, a weekly newsletter for urban explorers (subscribe here). Her work also appears in The Atlantic, NPR, and BBC.
Tax delinquency rates rose with jumps in tax burdens, but relief programs for some owners helped mitigate the effect.
When a neighborhood gentrifies, and housing values go up, incumbent renters in that neighborhood are at risk of being priced out. We all know that story. But what’s the effect on homeowners?
That is the question a new study from the Federal Reserve Bank of Philadelphia seeks to answer. In it, authors Lei Ding and Jackelyn Hwang examine the effect of gentrification—defined here as “the influx of investment and higher-income households in previously low-income neighborhoods”—on the property tax burdens of homeowners, particularly low-income ones.
As housing prices rise, so could the tax burdens of these residents. The authors were curious about whether that resulted in a higher rate of tax delinquencies. If so, were vulnerable homeowners being forced to sell their homes or face foreclosure? And did protections for some populations that Philadelphia instituted with the tax increases make a difference?
Philadelphia is a unique case in which to study these questions. In 2013, the city made a sweeping overhaul of its property tax system after criticism that the previous system was based on assessments that were lower than many homes’ market value. The new taxes, through the Actual Value Initiative (AVI), went into effect in 2014 and were derived from what the property assessment office considered to be the actual market value of the properties. That meant that many homeowners who had been seeing only their housing values rise as their neighborhood gentrified, also saw a sharp rise in property taxes in 2014.
This created circumstances ripe for a natural experiment, the study authors say: By comparing delinquency rates and residential mobility of homeowners in gentrifying and non-gentrifying neighborhoods before and after 2014, the researchers could isolate the effects of these tax hikes.
Their top line finding: the more intense the gentrification, the higher the likelihood of delinquency. Generally, gentrifying neighborhoods in Philadelphia saw a 4.2 percentage point increase in their tax delinquency rate after the property tax overhaul. The ones undergoing the most intense gentrification saw up to a 5.4 percent point increase. Still, the researchers did not see elderly or low-income homeowners selling off their homes and leaving as a result. In fact, the elderly in gentrifying neighborhoods were actually less likely to move, per the study.
One reason, they found, was that the demand for homes in these areas had been dampened by the sharp increases in property taxes, so even if some people were willing to sell, not many were buying. The other reason—perhaps more pertinent to other cities hoping to safeguard homeowners in gentrifying areas—Philadelphia put into place safety nets to ease the tax burden for eligible homeowners in gentrifying areas. However, not all homeowners who qualified applied for these relief programs. That means while property assessments generally increased, not everyone paid the same amount of taxes.
This study found that the city’s Longtime Owner Occupants Program (LOOP) was pretty effective in providing relief. LOOP is a tax abatement initiative started post-AVI for those below a certain income threshold who have lived in their homes for 10 years or more, and experienced at least a three-fold increase in assessed home values within a year. It decreased delinquency rates for homeowners who ended up claiming it in gentrifying neighborhoods.
“By freezing or lowering tax amounts, programs that provide greater relief for long-term residents lower the delinquency risk for homeowners,” the authors of the Philly Fed study write. Philly seems to have realized the necessity of continuing measures like this: A recent amendment passed by the city council lifts the expiration date on this benefit—previously, 10 years—for eligible low-income applicants. The city also recently passed a tax foreclosure diversion bill, so that Philadelphians who are unable to pay their property taxes can defer or come to another arrangement with the city.
Yet the city is still fine-tuning its measuring of actual market value, and has been adjusting resident’s tax bills even after the initial 2014 increases. Not surprisingly, the city has received a record number of appeals, which means people are probably not paying while they contest their assessments. So the high jump in delinquency rates may be the by-product of that and thus a temporary distortion.
The study acknowledges that other factors might come into play and potentially worsen delinquency rates in the long term, eventually succeeding in squeezing homeowners out. But if that happens, tax abatement safety nets like the ones Philly has in place may still be the right answer.