Real estate tax assessment of affordable housing properties
Last week, Governor Schwarzenegger signed into law AB 2846 , which specifically excludes the economic value of Low Income Housing Tax Credits when valuing property for ad valorem real estate tax assessment. The statute’s key language couldn’t be plainer:
SECTION 1. Section 402.95 is added to the Revenue and Taxation Code, to read:
In valuing property under the income method of appraisal, the assessor shall exclude from income the benefit from federal and state low-income housing tax credits allocated by the California Tax Credit Allocation Committee pursuant to Section 42 of the Internal Revenue Code and Sections 12206, 17058, and 23610.5.
This is the right answer, because as we have shown some months ago ( Web Update 33 ), the problem of affordable housing valuation is insoluble except definitionally, because:
[T]he traditional methods of valuing affordable housing [for real estate tax assessment] lead almost inevitably to a paradox, one that can be resolved only by a definition or instruction that must be encased in legislation - preferably at the state level.
Indeed, California grappled with the paradox before concluding it had to enact this legislation. Previously, the California State Board of Equalization attempted to issue valuation guidelines requiring tax credits to be included in assessed values. The Board ultimately abandoned the proposed guidelines, with State Controller Steve Westley suggesting legislation should be enacted to protect tax credits from property tax valuation.
The LIHTC is effective as a tool and it is more than counterintuitive to have one branch of government (Federal) confer a benefit (LIHTCs) only to give another branch (the locality) a windfall ‘profit’ (the increased real estate taxes) when the purpose of building the housing is to benefit the locality.
What’s instructive as well is that some housing practitioners cautioned against moving for state-level legislation, fearing it would eliminate their ability to ‘work the system’ at the local level. I call this the Reign in Hell approach (recalling Paradise Lost , ‘it is better to reign in hell than serve in heaven’). Any time there is a highly inefficient and clumsy system, some people are relative winners, and they don’t want the playing field leveled, because they fear loss of competitive advantage. Whereas if it is leveled, volume increases exponentially, so the ecosystem benefits. Policy makers and policy advocates must see past the status quo’s winners to the larger ecosystemic benefits.
