To find out, let’s compare some real estate listings from Cleveland Heights, a “taxes are high” place and Solon, a “taxes are low” place. Zillow.com makes this easy by listing the asking price of the house, its square footage, the year it was built, a mortgage payment estimate, and the annual tax bill. And it usually includes a picture so you can get a sense of how attractive the property is, and a map and satellite view so you know its neighborhood setting. Trulia.com and other “data-cruncher” sites do the same kind of thing, but we’ll stick with Zillow for this purpose.
To compare the two, visit these Zillow links:
Listings change all the time; the examples below are from November 2015.
Mortgage and property tax
Toward the high end we have a new home in Solon, 3,092 square feet, listing for $598,000 ($194/square foot), with an estimated monthly mortgage of $2,225. Assuming it eventually sells for full price, the annual taxes would be $14,232. That, added to the annual mortgage cost of $26,700, would come to an annual cost of $40,932.
A comparable house in Cleveland Heights is a 3,081-square foot 1930 Tudor on Coventry Road listing for $324,900 ($105/sf). The annual tax bill on that house would be $12,329 and the estimated mortgage if it sells for full price would be $14,520, for a yearly total of $26,849.
Cleveland Heights also has some considerably bigger homes in that same ballpark as the Solon house of annual mortgage-plus-taxes cost of around $35,000 to $40,000: a 4,568 square foot brick home on Fairmount Boulevard, a 5,440 sf house on Guilford, and a 7,075 sf house on East Overlook, all for sale in the $500,000–$600,000 range, all around $85 to $100/sf. (And you can safely assume the heating costs on a big old house like that will be pretty frightening.)
The winner in Cleveland Heights for square footage is an 8,445 sf stone mansion on Coventry for $825,000, and for price, a 5,004 sf home on North Park for $999,000. Solon has three properties for sale over $1 million, topping out with a 102-acre estate built in 1995 listing at $3.1 million.
In homes of more moderate scale we have good range of prices for 2,000-square-foot houses in Cleveland Heights: Edgehill Road (2,050 sf; monthly mortgage estimate of $1,107 plus taxes of $6,699=$19,983 in annual cost), Hampshire Road (2,052 sf; annual cost $14,621), Ormond Road (1,918 sf; $12,463).
In Solon there’s also quite a range: Clearwater Court (1,980 sf new construction, $22,848), Longview Drive (2,038 sf; $15,782), Liberty Road (2,050 sf; $11,019).
Wait a minute. How come the high-tax place and the low-tax place cost about the same? Simple: because they cost about the same.
Perhaps a more useful way to think about this, rather than being fixated on the amount you pay as a percentage of what your house is worth, is that the city and schools provide services that cost a certain amount per year and the cost of providing those services is divided among the taxpayers of that city.
That cost per household is pretty similar in Cleveland Heights and Solon. Cities could deal with that by just sending a bill for $6,000 to each household every year to pay for schools and city services (and abolishing all property and income taxes), but a $6,000 bill could mean malnutrition for someone who makes $20,000, while it’s loose change in the couch cushions for someone who makes $250,000.
In the United States we have generally tried to be more progressive so that those with less means pay a bit less and those who are wealthier pay more. Generating those funds as a percentage of property value or of income achieves some of that progressiveness.
But simple ideas are never that simple. Mostly because housing in Solon is generally quite a bit newer; the average valuation per square foot is $116, there according to Zillow, while in Cleveland Heights it is $73. Both of these numbers have changed in the past year as the regional real-estate market has continued to rebound, but the proportional difference has been similar.
The tax rate in Solon is 2.38%, while in Cleveland Heights it is 3.8%. 116 x 2.38 = 276 and 73 x 3.8 = 277. In other words, in Solon according to the most recent Zillow data you’ll pay on average about $2.76 per square foot of house in annual property tax, while in Cleveland Heights you’ll pay $2.77 per square foot. There are a couple of reasons one would expect it to be a bit higher in Cleveland Heights: one, the CH-UH schools spend more per pupil, probably because they have more special-needs students, who are more expensive to educate; and two, Solon has more commercial and industrial property kicking into the funding pool.
The other factor evident in the square-foot valuation is the cost of the house in the first place: in Solon, on average, you’ll pay $43 more for every square foot of house, which is to say an additional $86,000 for a 2,000-square foot home (and you would expect eventually to end up with more equity after paying more). Even those averages are deceptive, though. Cleveland Heights currently has quite a few foreclosed homes and extremely low-priced properties that drag that average per-square-foot value down considerably (some are below $30/sf). Solon has foreclosed homes as well, but it also has numerous new-construction properties that are well over $200/sf, distorting the average in the other direction.
Even without going to the bargain-basement or a foreclosure, one could buy a charming and well-built home in Cleveland Heights for around $60,000, while in Solon there are no listings at all under $100,000 except for vacant lots. Cleveland Heights also has a lot of relatively inexpensive rental options.
Income tax and the wealth effect
This affordability opens up Cleveland Heights to lower-income residents for whom Solon would be out of reach. And no surprise, just as Cleveland Heights has a somewhat higher percentage property tax rate to balance its somewhat lower property assessments, it also has a slightly higher income tax rate (as of November 2015) to go along with its lower-earning residents (though in this case it doesn’t nearly make up the difference).
Solon’s median income is $96,965; in Cleveland Heights it’s $51,142. Multiplying out by those cities’ income tax rates, the annual yield for the median household is $1,939 for Solon (at 2%) and $1,279 for Cleveland Heights (after the recently voted increase to 2.25% kicks in).
It seems as if sustainable equilibrium could be achieved at more than one balance point, but the different balance points come with different challenges. For one thing, there are some obvious bottom-line advantages for cities and school districts if the property assessments are higher.
Not only can you collect the needed dollars from a smaller percentage tax, but that same higher property cost effectively excludes low-income residents, which means that incomes are higher. That not only bolsters income tax collection, it also fuels the local retail and restaurant economy, and it means the schools have an easier time getting high ratings because there are fewer poor kids (it has been widely documented nationwide that the income of the student’s family is closely correlated with student performance). Higher school ratings make communities more attractive to young families, which pushes up demand, which pushes up prices, which pushes up tax yields.
For anyone who’s interested in how the Cleveland area might or might not exemplify that phenomenon, just go to Wikipedia and look up the wealthiest cities in Ohio. Pick out the top 20 wealthiest places in the greater Cleveland area:
- Hunting Valley
- Kirtland Hills
- Gates Mills
- Moreland Hills
- Pepper Pike
- Waite Hill
- Chagrin Falls
- Shaker Heights
- South Russell
- Bay Village
- Rocky River
Now look up the 10 highest-scoring Cleveland-area school districts according to the state report cards:
- Rocky River
- Chagrin Falls
- Bay Village
- Brecksville-Broadview Heights
Those ten school districts represent all but two of the 20 wealthiest places. The other two are Bratenahl, which has virtually no school children, and Shaker Heights, a wealthy place with a relatively high population of disadvantaged students.
Because the greater Cleveland area is made up of these independent municipalities that for the most part don’t share in any costs or revenues, it’s common that adjacent or nearby towns have dramatically different finances. In this case, the citizens of Cleveland Heights are doing a lot more heavy lifting than Solon residents when it comes to supporting lower-income folks in city services and education.
The people doing this heavy lifting aren’t just the white families who didn’t take off for the outer ‘burbs. It’s also African-Americans who moved into the Heights in recent decades and continue to pull mightily to make this place better. And it’s people of many backgrounds — often employed by universities, hospitals, museums, and other organizations in University Circle or by small local businesses — who choose to live in Cleveland Heights for a variety of reasons.
Less an issue of cost than personal preference
This kind of fits with the egalitarian, progressive image of Cleveland Heights — many people are proud of the role their commitment to living in Cleveland Heights might play in helping provide opportunity to a broad community. But it’s not all altruism: the fact is, living in Cleveland Heights is overall a good deal if you value things like short commute times, proximity to the incredible richness of University Circle, the informal leafy graciousness of the neighborhoods, and the irreproducible craftsmanship of homes built before WWII.
And thus we get to the real issue: What do you want? If your family makes enough income to comfortably afford a 2,000-square-foot house, your annual taxes in Cleveland Heights and Solon are likely to be pretty similar and your mortgage in Cleveland Heights probably lower. So what else goes into the decision?
The obvious reasons to choose Cleveland Heights are proximity to University Circle, great arts and culture, the particular variety of skin colors, mature trees, lovely parks, early 20th-century homes of architectural distinction at a very wide range of price and size, walkability and bikeability, and plenty of good dining and entertainment options.
A less obvious plus would be the school system, which is loudly disparaged in some circles. Be a little bit skeptical, both of hearsay and of the scientific validity of the state report cards, and take the time to talk to some actual CH-UH parents. You’ll find Cleveland Orchestra members, art museum staff, university professors, and Cleveland Clinic physicians who send and have sent their kids to the CH-UH schools, and they would never do so if the academics and extracurriculars didn’t excel.
It’s not so much a question of academics, but who else is in the school building – lots of other kids who are demographically identical to your own, or kids from a wider variety of incomes and skin hues. Again, that same question: What do you want? Exclusivity has its advantages, and so does inclusivity.
One difference is that in Solon you would probably end up with more equity in your house because you paid more for it. However, one would expect the gap in per-square-foot values to tighten up (and Solon tax rates to go up) over the decades as Solon homes age — and indeed such a trend is apparent right now on Zillow.com: many of the homes built before 1980 in Solon are now worth below $100/sf. Basically, once a house gets to be a certain age, the maintenance costs are pretty similar whether it’s 40 years old or 60 or 100: repaint every 10 years, new water heater every 15 years, new roof every 25, new furnace every 30, new sewer lines if you’re unlucky.
The difference in value at that point is defined by issues of personal preference rather than dollars and cents. Cleveland Heights pulls ahead for people who value architectural distinction, quality of craftsmanship, neighborhood charm, and location near enough to the city to be able to get places by public transport, bike lanes, and so on.
Lots in Solon are typically half an acre or more, so the land itself is a higher portion of the property value and the structure is worth less. The larger lots in Solon are both a plus and a minus: the bigger investment costs more but it’s also worth more; it feels more spacious and offers more room to garden, add a pool, or restore antique powerboats, but the lot size also means the space between houses is greater and you give up neighborhood walkability and have only one decent way to get around: by car. This inefficient use of space not only eats up a lot of free time by making travel distances longer, it could also end up spelling big trouble for outer suburbs if fuel and transportation costs ever rise significantly.
The trends in Solon offer lessons for Cleveland Heights and vice-versa. Cleveland Heights was the outskirts 100 years ago and all the factors of newness and distance from poverty that fuel development in Solon now drove the development of the Heights area back then. But things don’t stay new forever, so Solon should be planning for what to do when those sprawled-out residential areas become more of a liability than the cash cow they are now.
They aren’t going to age as gracefully as those old Solon farmhouses or the Cleveland Heights homes of the 1920s; sheetrock and particleboard and vinyl siding just aren’t the same as hardwood and plaster and structural brick. It’s not hard to imagine in the not-too-distant future a scenario where a lot of unexceptional homes built between the 1950s and 1990s are torn down and their lots rezoned and subdivided for more units per acre so they can make “new urbanist” villages out there.
Cleveland Heights, meanwhile, is the authentic model for new urbanism, and it should count itself lucky that much of its housing stock has significant inherent value in terms of design, craftsmanship, and convenience to the city. Cleveland Heights also represents an unusual kind of town nationally — a place where people of wide-ranging incomes live in the same neighborhood. This kind of mix is a key element in the recipe for social and economic mobility, and it’s increasingly rare as more and more people in our nation live in geographically isolated enclaves (gated communities on one extreme, slums on the other).
So we have an important job to do in places like Cleveland Heights.
This is where the American Dream can actually happen. But to be able to pull that off, we need to sustain a stable mix of incomes — neither going too much to the low end, nor pricing too many people out.
Let’s postulate that a property tax rate in the 3% to 4% range and income tax between 2% and 2.5% are sustainable in the long run for a mature, built-out community with a lot of high-quality housing stock and a wide range of incomes.
What do we need to do to put ourselves on a trajectory for steady, predictable property appreciation and a moderate increase in average income that will keep Cleveland Heights attractive to the kinds of people whose values align with what Cleveland Heights can offer?