TESD: Low Millage Rate … Does that Make it a Bargain?

Keith Knauss, a school board member in the Unionville-Chaddsford School District, and a frequent contributor on Community Matters has written an interesting article comparing the tax rates between UCFSD and TESD.  As Keith points out, T/E residents are paying a substantially less millage rate for school taxes than UCFSD — 24.53 versus 18.65.

The academics between the two districts are very similar; always appearing together at the top of any state test results.  So does this mean that for this community, we are getting a bargain when it comes to value of the school district.  Our students come in at the highest testing levels but yet we are not paying at the same taxing rate as an equivalent district.

Thanks Keith for this article … your analysis forces us to see the situation in a different light. He concludes that the milleage rate does not indicate tax fairness nor it have anything to do with the school district management … and therefore meaningless as a predictor.

The Low Millage Rate Myth

Tax Capitalization, Tax Rates and School District Management

Common wisdom has it that a school district with a low millage rate is doing a better job of managing their finances than a district with a high millage rate.  In fact, sometimes the low millage rate myth is used by school directors to justify large tax increases – “We’ve kept tax rates well below other comparable districts for years so a large increase this year shouldn’t bother you.”  Sometimes the low millage rate myth is used by union leaders to justify large salary increases – “The district has one of the lowest tax rates in the state, so there is plenty of room to raise tax rates to pay for our salary demands.”  A corollary to this myth is that residents in a high millage rate district are unfairly burdened with higher taxes relative to residents in a low millage rate district.  Sometimes common wisdom is unwise.

Let’s compare two districts – Tredyffrin Easttown and Unionville Chadds Ford.  I’ve chosen UCF and TE because they are very similar demographically and very similar academically.  Both have excellent schools and similar academic results.  The only striking difference is the millage rate.  TE’s rate is 18.65; UCF’s is 24.53.  Is TE doing a better job?  Are TE residents getting an educational “bargain”?  Is there room to raise TE’s rates to pay for teacher increases?  Are UCF residents saddled with an unfair tax burden?

Let’s do a mental exercise.  Let’s suppose there is a street that runs along the border of UCF and TE.  A developer builds 20 new houses that are exactly the same. Ten are on the UCF side of the street; ten are on the TE side of the street. The builder prices them all exactly the same at $750K. The builder quickly sells five of the houses at the asking price of $750K and notices all five are on the same side of the street – the TE side. Why? It’s not the schools – they’re the same. It’s the taxes, of course. People are wise consumers and take into consideration not only the purchase price, but also the tax burden.  The owner of the house on the TE side pays $2,425 less each year in taxes.  (see calculation details below)

How much does the developer have to reduce the selling price on the UCF side to make the houses equally attractive? That requires the builder to capitalize the tax difference into the selling price. The present value of 25 years of $2,425 dollar payments is about $40,000. Thus, the developer has to reduce the selling price of the UCF homes by $40,000 to $710,000 so all the houses are equally attractive.

A year later, all 20 owners are at a block party. One of the TE residents says to a UCF resident, “Our school district is managed better because our millage rate is lower and we pay $2,425 less in RE taxes.” The UCF resident replies, “Not true; I’m getting the same great education for my kids and paying the exact same monthly amount to live here; you may pay $2,425 less in RE taxes, but I pay $2,425 less in mortgage (P&I) payments because of the lower purchase price”. Thus, taxes are capitalized into the selling price of homes and millage rates are a meaningless indicator of school district management and tax fairness.

Market Value:               $750,000
Assessed value:           $412,500 (based on the7/1/10CLR of 0.55)
TE School Tax:             $7,695
UCFSchoolTax:           $10,119

Notes:
1. The builder has another way to make houses on both sides of the street equally attractive.  Instead of reducing the selling price by $40,000, the builder could keep the selling price the same at $750K, but add $40,000 worth of upgrades (kitchen, patio, landscaping, etc.)  to the UCF houses.  Thus, you’ll find that the buyer, for the same selling price, can get “more” house in a high tax rate district.  (yes, I know this seems counter intuitive)

2. For an interesting study of the effect of taxation and school quality on home prices see:
Homes, Taxes, and Schools: The Effects of School District Rankings and Property Tax Rates on Property Valuations in Richmond Heights,Missouri
http://showmeinstitute.org/document-repository/doc_download/299-full-case-study-pdf.html

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13 Comments

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  1. It is true that TESD is functioning at a low mileage rate compared to other school ditricts but also remember they are functioning without an EIT which alot of school districts are relying on. I believe the TESD should be applauded for lasting this long financially while still keeping up such high scores.

  2. Interesting so far as it goes. But limited in scope. First, one would need a broad study of actual real estate sales vs. Taxes in both districts over time in order to validate (or not) the hypothetical. Secondly, Keith compares two equally affluent communities with similar (very high) academic performance. Comparing apples to apples does not tell the whole story. Perhaps what it dies tell us is that the two districts are relatively equally well managed. How do they compare to other districts which may not quite be “apples to apples?”
    Here millage rates do give us a basis for comparison. Te is a great deal relative to most other districts in the state, including some in the same geographic area – most adjacent districts have significantly lower academic performance and significantly higher taxes. So I would agree with Keith that the difference in millage rates does not tell us much about ucf vs. Te, except that both districts are well managed relative to most other districts in the area.

    Having said that, it must be acknowledged that the affluence (desirabilty of community, property values, tax base) in districts like te and ucf make it easier for a board to produce good outcomes. In other districts with less resources, you could have good management too, but it is more difficult to produce the same outcomes because of less resources to work with.

    There are too many factors that need to be accounted for in order to make these comparisons precise, but as a general guide, millage rates and academic performance do tell us something about a districts management. Finally, te has one of the lowest millage rates and does it without an earned income tax. That does say something about quality of management.

  3. Logic is kind of flawed in this example in many ways. First of all, living on either side of the same street is vastly different than living further and further away. Of course if the distance between the houses is nil then the argument is fine, but distance does matter. TE is going to have the benefit of being closer to a lot more businesses and a lot more things that a Unionville will, as well as other districts. People don’t just make their decision on where to own a home based on the millage rate and the asking price.
    The other area where this analysis is flawed is in assuming that the houses are all purchased at the same time. Although some people move frequently, there are many more people who stay in their homes for decades. How about those people who bought into TE when it was cheap two or three decades ago, had a low purchase price, and now also benefit from the low tax rate?
    The example is great if everyone purchase a house at the same time and has no other consideration other than tax rate and purchase price. However, those are two pretty big assumptions that pretty much negate the ability to draw any conclusions from it.
    We are very fortunate to be one of the lowest taxed school districts in the state and most of us are not paying the difference in some other way (still no EIT) – there’s no getting around that.

    1. Te observer-
      I think you have articulated the problems with keith’s argument better than I did. One thing I forgot to mention is that presumably in adjacent districts with lower academics and higher taxes, the price of housing is lower too – but that does not make it a good deal. For one thing, at some point you are paying too much for an inferior education. For another, I strongly suspect that the difference in housing prices is not enough to offset the higher taxes. But to evaluate that you would need actual data spanning a long time period.

      1. OK, for those who are unconvinced by a simple example (and I purposefully made it simple to get the point across without having to read through multiple pages of research papers) please search on the term “tax capitalization” and read the papers. And did these people bother to read the cited article, Homes, Taxes, and Schools: The Effects of School District Rankings and Property Tax Rates on Property Valuations in Richmond Heights,Missouri?
        .
        Tax capitalization is a well accepted phenomena supported by numerous studies. If you’d like to read one study that uses data from all Montgomery County school districts, try this one from the Phila Fed.
        Capitalization of the Quality of Local Public Schools:
        What Do Home Buyers Value?

        http://www.philadelphiafed.org/research-and-data/publications/working-papers/2006/wp06-15.pdf.
        For those who are uncomfortable with regression analysis, there is a significant negative correlation between house prices and school tax rates on page 29 after accounting for differences in district test scores, home structural characteristics, and neighborhood characteristics.

        1. Easy Keith.
          People pay their bills with real dollars, not graphs.

          Your house if assessed at $710,000 to account for the raw difference is valued at $396,180 while the $750 TE house is valued at $418,500. (CLR 1.79 ). Let’s just use this year’s taxes:
          TE 19.628 UCF 25.180
          TE taxes: $8,214.32 UCF 9.975.81

          But who cares…..because the analysis is factually correct, but people still buy the house they want in the community they want. In UCF itself, ou have 5 townships and the total millage for your townships ranges from a low in Newlin of 29.8950 mills (county, school, township) to Pocopson at 31.3450.
          In TE the Tredyffrin rate is 25.5358 and the Easttown rate is 27.2068.

          It’s the demographic mix. People do get a bigger “discount” on their taxes when they share it with fewer farms (and less undeveloped land) and higher density commercial space. Or they pay more for their homes that are “walk to train” and things like that. If schools were all that mattered, then the greatest demand for homes would be in West Chester, where the school millage is 18.70. i think the fact that the last CC reassessment was court-ordered in 1998, and the recommendation at that time was to reassess every 4 years….the study shows a hugh disparity in tax equalization if properties are not uniformly reassessed (as opposed to by appeals….where the individual reduces their own taxes but the comunity cannot make up for the difference by equalizing the value of a mill).

          Reality for me is that all economic indicators are trailing ones. CLR of July 1 2011 is 1.79 for Chester County…ALL of Chester County. (.558) and for Delaware (Radnor) is 1.48 (.676) and Lower Merion (Montgomery County) is 1.72 (.581) But unless you use an appraisal and equalize every home to the same number, assessment values are almost useless. Only those who have done an assessment appeal are appraised correctly.

          I will say that all districts are well managed. Some pay more for labor peace, but regardless, under Act 1, UCF can raise your taxes more than TE because of a larger base, so the apples are oranges anyway.

  4. Another take on the “bargain”.

    Taxes on house assessed at $250,000 are $4,815 per year. The present value of those taxes for 30 years discounted at the current 30 year mortgage rate (3.5%) less the rate of inflation of those taxes (3%) is $133,828.

    The market value of that house is theoretically equal to the assessed value times the county CLR – 1.70 for Chester County for 2012/13. That makes it worth $425,000.

    When you buy a house you therefore assume a liability equal to 31.5% of the value of the house. Put another way, over the life of the mortgage the school tax payment is equivalent to one third of your mortgage payment. Yet another way, after 30 years those $4,815 annual school tax payments have risen to $11,687 – over half the mortgage payment.

    Only when the magic fairy dust of credit expansion creates a housing bubble and house prices increase at a rate faster than inflation might this in any way represent a bargain.

    In support of Keith’s point, there are many forces that drive the millage rate, and to compare across districts is meaningless. Here’s a partial list (do I remember that TR gave us one like this recently, too?):

    – Market value per residence
    – County CLR
    – County assessment date
    – Residential assessed value as a % of commercial and industrial
    – Students per residence
    – Expenditure per student, driven by, eg:
    — Special education expenses as a % of total
    — Transportation cost per student
    — Employee salary levels
    — Students per employee
    – State funding per student
    – Federal funding per student
    – and so on

    Market value per residence is a function of things like lot size, proximity to employment and types of that employment, township service levels, crime rates, open space, etc. etc.

    Since millage rate = expenditures less non-local income divided by assessed value, good luck deciding what is a bargain and what is not. Even total expenditure per student that many here like has its problems. It does not allow for district demographics, and does not measures expenses against results.

    At the end of the day, taxpayers will look at options in the light of their own and the district’s experience. What can they afford? What seems fair?

  5. Let me distill my argument.
    .
    I was trying to respond to the idea that TE’s taxes were comparatively low as evidenced by the millage rate and, therefore, the district should consider raising those taxes to satisfy the union contract demands. This sentiment was voiced by TE Observer with this statement – “I’d argue that it’s the other taxpayers, those enjoying one of the lowest tax rates in the state and not directly involved in the schools are the ones who are not sacrificing”.
    .
    If one believes in the validated concept of tax capitalization, then the expected value of those future RE taxes are capitalized into the purchase price of the home and millage rates are a rather meaningless measure of tax fairness.
    .
    Are taxes perfectly capitalized into the purchase price? No. As with any future projection, the capitalization rate relies on estimated future tax hikes, estimated future rates of return and the valuation placed by individuals on house, neighborhood and school characteristics.

  6. But Act 1 changed it all…because it negates the market being able to use expected values. I’m not sure that any kind of analysis is okay with the government influencing how to fund the programs without giving schools the tools to meet the market demands/expectations.

    Your point is well made and useful. And TE Observer’s point is moot because the ability to increase the “relatively low tax rate” is next to impossible.

  7. We’ll have to have a chat sometime about the positives and negatives of Act 1 of 2006. I think Act 1 is an excellent piece of legislation. Some think otherwise.

    1. Act 1 is fine if accompanied by some tools to manage the costs of the district without putting it in the labor negotiation realm. It also presumes that someone like you is a typical board member, when in fact typical board members are community activists or school leaders or pro bono billing lawyers….

      Our state government does not understand school boards or the implications of labor contracts. Otherwise, our esteemed Governor would not have said it’s time to use the rainy day funds to deal with the poor economy. After all, it was using stimulus funds at the state level that created the state budget problems.

  8. The author overlooks the fact that the future value of the houses are not equal. When it comes time to sell, the homeowner in TE will get more money back because the next buyer will also pay a premium for the lower tax rate. Extra money paid up front for the higher priced, low tax house is an investment. Extra money paid into annual taxes in UCF is gone forever.

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