Has the Property Tax Outlived its Usefulness?

In the March 6, 2010 the Weekend edition of the Wall Street Journal had an article with the headline: “Homeowners Hold Ground Against Rising Property Taxes.”  California’s  Proposition 13 from the late 1970s is now working its way across the US.  People are beginning to vote with their feet to escape the impact of high and rising property taxes.  The property tax has evolved from an efficient means of generating the required revenues to provide necessary community services to a means of generating enormous sums of revenue to spend with little thoughtfulness and care, compared to how the taxpayer would spend the monies, on an ever expanding and well-heeled bureaucracy.

Approaches to taxation over the centuries developed based on the ease of collection and the broadness of the base.  For instance, at the founding of the U.S. most taxation was on imports or exports.  This was due to a number of reasons.  It was easy to determine the value at the point of embarkation.  Most people, if they were paid at all and didn’t engage in some form of barter, were paid in cash for goods or services rendered.  This made it difficult to track incomes.  It wasn’t until the twentieth century when the Progressives (Socialists, by another name) convinced enough people that it was somehow inherently unfair that a subset of Americans were rather well-to-do and should be made to pay “their fair share.”  At its inception the income tax was applied to less than 1% of the population and wasn’t used to fund utopian schemes.  How times have changed.

The property tax had much the same evolution.  When governments were small, people fended for themselves, and the tax rates were low and reflected, however imperfectly, the services rendered to the homeowner or business.  That has all changed.  Property taxes and their abatements are used shamelessly by local governments to hand out largess, in one form or another, to favored constituencies.  Typically, the largess has gone to commercial and industrial firms that threaten to leave town.  The politicians are to blame for causing this state of affairs because of the discriminatory rate of taxation they impose on businesses.

In my home town  the busybodies at the economic development board want to encourage more commercial enterprises to locate here.  Why, you ask?  This is their stated reason, I couldn’t make this up if I tried: commercial enterprises receive $.52 in services for every $1.oo in property taxes they pay.  Homeowners get $1.07 for every $1.00.  Therefore, if we get more commercial businesses here we can subsidize the homeowners even more. Would anyone pay $50K for a Toyota Camry that could be purchased in another town for $26K?  Of course not, but this is the type of behavior that this board thinks exists.  And they wonder why it is difficult to get firms to locate here unless they are given tax abatements galore.

The important point, though, is that property taxes no longer bear any relation to the services rendered to a piece of property.  As a simple example, take two homes that are being built on adjacent lots.  Both homes are of the exact same size and layout.  The first owner decides that he wants to put in the best appliances, heating system and water heating system possible.  He still has one kitchen, one furnace, and one water heater just like the guy next door.  To make the differences in value even sharper, the first owner has gold faucets placed in the master bathroom.  Clearly, the cost of this house will be greater than the second one.  Its property taxes will be higher, possibly much higher.  Just as clearly, the first house receives no greater or better services for this increased taxation.

The property tax is a fixed cost to the property owner.  It must be paid regardless of the owner’s fiscal situation.  Because of this municipal employees have no reason to moderate any wage or benefit demands.  Only in those locales where one very large industrial plant, although these are becoming few and far between since the golden goose of steel mills and auto plants has been killed, pays a preponderance of the property taxes and can move operations elsewhere, is there any moderation in demands by the municipality.

In economics, a decrease in income would cause an individual to reduce consumption of every good, some more, some less severely.  However, the property tax compels one to consume the same amount of government provided services, making all of the reductions in privately provided ones.  This sends distorted signals to the marketplace, and in particular, to the politicians.  In the short-term this game is assumed to be played successfully by municipalities but over time as fewer firms set up shop in the area, the more talented young people leave before they become too committed to the locale, it is clear that the politicians won the battle but lost the war.  Over time, then, the community slowly deteriorates.   Once this starts it takes a very long time to reverse the cycle.

It is high time that the property tax be completely rethought and reduced in significance as a source of tax revenue.

Posted by Jim

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2 comments on “Has the Property Tax Outlived its Usefulness?

  1. ZAREMA says:

    Thanks the author for article. The main thing do not forget about users, and continue in the same spirit.

  2. gualetar says:

    The subject is fully clear but why does the text lack clarity? But in general your blog is great.

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