The voices of Tax Policy Center's researchers and staff
Last month, an Idaho lawmaker called the property tax “inherently evil” and suggested the state repeal it and replace the foregone revenue with a higher sales tax. He described the property tax in feudal terms, saying it “dates back to the dark ages or the middle ages when the lords of the manor had to pay taxes to the Kings and the Queens otherwise they didn't get to keep their land.”
This caught my attention because I’m a nerdy tax economist and we are known for loving property taxes while the general public, well, doesn’t. So my first, pedantic reaction was to tweet that, actually, the property tax dates to 6,000 B.C. And it performs very well on criteria of sound taxation like efficiency, equity, and reliability.
But, because proposals to eliminate (or substantially reduce) the property tax resurface every few years (similar plans have been floated in Nebraska, Pennsylvania, and Texas and enacted in South Carolina), I decided to revisit some of the property tax haters' best arguments through the prism of some of my favorite more nuanced resources.
The takeaway: although a good tax, the property tax has some troublesome features. These flaws are hardly deal breakers but they do knock the property tax off its pedestal. Politicians, commissions, property owners, and advocates should keep them in mind when embarking on reforms.
Is the tax regressive or progressive?
The first goal of the property tax is to generate revenue for local governments to do stuff--like providing schools, roads, parks, and police protection. It does that very well, generating about three-quarters of local taxes and half of all local government revenue excluding state and federal aid.
But that’s only one goal of tax policy. Another is equity, and this is where the property tax gets tricky. The fairness of the property tax depends on what kind of tax you think it is.
Is it a tax on consumption (your cost of living in a house)? If so, the tax is regressive, because housing costs take a bigger bite out of low-income household budgets. Especially if the property tax gets passed on to renters as well as burdening homeowners, we also need to consider what counts as income. Are students or seniors with low current earnings but higher lifetime incomes really “poor”?
Or is the property tax a tax on capital (your return to owning a house)? This kind of tax would be progressive on average (because capital owners tend to be wealthier), but places with higher-than-average property tax rates may see these higher taxes reflected in lower land prices or reduced wages, and that would dampen progressivity.
What about the entry fee theory that says the property tax is the price of admission for living in a community and consuming all those services, like K-12 education and police protection, the local government provides?
Progressivity is complicated here too. Low-income families with lots of kids consume more in government services (such as K-12 education) than they pay in taxes. Yet a high-quality K-12 education system benefits many others besides students, including employers and, by increasing property values, higher-income homeowners.
(Note: analysts don’t typically talk about the progressivity or regressivity of taxes based on the services those tax dollars buy, but maybe we should.)
Importance of uncertainty and transparency
The property tax may also expose homeowners to too much uncertainty. If a big box retail establishment closes in their area (or opens in a neighboring one), homeowners may see tax bills rise as the local government tries to make up lost revenue caused by a reduction in the commercial tax base.
To alleviate this concern (and avoid more drastic property tax limitations), Tulane’s Steve Sheffrin has suggested taxing owners based on ranges or “bands” rather than specific levels of property value, an approach used by the UK.
Greater transparency, including explanations of how property tax bills are calculated and how homeowners can apply for property tax relief, may also help improve the tax and increase its acceptability.
Speaking of transparency, journalists at Syracuse.com and Propublica have found significant inequities in property taxes due to delayed reappraisals and the greater chances of assessments being successfully appealed in fast appreciating, middle- and high-income neighborhoods compared to low-income ones. Against a backdrop of persistent racial wealth gaps, these results are extremely troubling.
A flawed, not evil tax
In sum, the property tax is a stable, adequate, and reliable revenue source, but it also raises equity and transparency concerns.
Unfortunately, Idaho’s Rep. Monks’ proposal to ban the property tax and hike the state sales tax rate to 11 percent (by far the highest in the nation) to offset revenue losses would double down on regressivity: sales taxes are regressive because low-income households spend a greater proportion of their budgets on consumption and on goods, which are taxed, rather than services, which are not.
Monks describes his proposal as a discussion starter and I appreciate the food for thought. Now, we need to think realistically about how to pay for the government we want.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.