October 27, 2006

Merry Property Tax Holiday for Taxpayers?

With Halloween and Thanksgiving just around the corner it's no surprise that state lawmakers are in the holiday spirit. However, Wyoming policymakers have taken the holiday mood one step too far with a "property tax holiday" proposal.

The plan put forward by Wyoming Governor Freudenthal is simply a gimmick that does little to address the real failings of the property tax. He is proposing a one year property tax holiday that would reduce property tax rates by 12 mils. Apparently the state doesn't need to generate property tax revenue next year because surpluses are expected. Policymakers in Wyoming would be better off to go back to the drawing board and develop real reforms that would address the shortcomings of the property tax.

What exactly compels politicians to put forth such gimmicky and overly simplistic ideas to address property taxes? To answer that question, it’s helpful to know more about the property tax and just why it’s so unpopular (and why some feel that a holiday is in order).

When polled, Americans say they hate property taxes more than any other tax. This article from the Arizona Republic shows that if given the choice Mesa, Arizona residents would rather vote for a sales tax increase than a property tax increase.

State and local property taxes across the nation are on the chopping block for reform in about ten states according to USA Today. There are several reasons for this nationwide property tax revolt. First, property taxes are paid in lump sums and therefore payments are quite visible to a taxpayer’s checkbook. They are also incredibly complicated so that the average homeowner can’t even read her own property tax bill.

There is also a view, which is quite true in some states, that property taxes simply aren’t fair. For example, in California because of Proposition 13 property taxes are generally lower if homeowners have lived in the same house for a several years; while new homeowners can face truly burdensome property tax bills.

It would be helpful if property tax rates depended partially on income, but they don’t. If a homeowner loses her job her property tax will remain the same even though her income is drastically reduced. Property taxes are regressive, meaning that poor and middle income taxpayers pay a higher share of their income in property taxes compared to the wealthy.

Despite property taxes being so unpopular and sometimes flawed they remain a major source of revenue for public schools. Funding education is obviously a priority and in most states a constitutional requirement. Simply not supporting schools isn’t a practical alternative. Academics, analysts, policymakers, and others are considering a broad array of alternatives that could reform the property tax to correct some of the flaws outlined above.


At 5:36 PM, Blogger LVT Fan said...

The property tax is two very different taxes rolled into one. They need to be divorced. One is a very good tax; the other is a very poor one -- and most places have yoked them together and use both at the same millage rate.

The undesirable portion of the property tax is the part that falls on buildings. It discourages redevelopment, encourages poor maintenance, creates firetraps, penalizes the industrious. This portion of the property tax should be abolished, or at least reduced.

The good portion of the property tax is the portion that falls on land value. The owner of a property doesn't contribute at all to the value of his land. Rather, it is the growth of population, public investment in services and infrastructure (including PORK, bridges to nowhere and other transportation systems), and improvements in technology (e.g., elevators in cities, air conditioning in warm climates, fiberglass boats for waterfront land). The landholder didn't create any of that value! So it is not theft to tax it, even to tax it heavily -- while it IS theft to tax buildings, or sales, or wages.

Even better, if we tax land value, we can expect the PRICE of land to come down somewhat, leading to improvements in housing affordability.

Taxing land value also nudges the landholder to put his well-located land to better use. No more would the downtown look unchanged from 40 or 60 years ago. No longer would landholders near the centers of transportation systems and other infrastructure (sanitary and storm sewers, schools, roads, hospitals, libraries, shopping, etc.) be content to sit and wait for someone else to make their land valuable. No longer would they keep underused prime sites as a legacy for their grandchildren. They would either get to work developing the site themselves in order to pay the land value tax, or they would lower their asking price so that some other enterprising person could put that land to good use. Either way, the community will benefit.

Certainly special programs can be provided for elderly people who live on valuable sites downtown, so that they can afford to stay in their homes. But their heirs should not inherit the property without paying the deferred land taxes, and their heirs should not be able to afford to keep that land underused for another generation.

Increasing the tax on land value would allow us to lower or eliminate the tax on buildings, and reduce or eliminate sales taxes and wage taxes. This would give the economy a shot in the arm which would benefit all of us.

Kelly is right: California's Proposition 13, and other programs like it, are really perverse. They have driven California's housing prices sky-high, and kept California's homeownership rate among the lowest in the country -- except among one group: the people who were of prime homeownership age in 1978, who are now elderly and have a higher rate of homeownership than their counterparts in the rest of America. Young Californians pay higher property taxes, and sales taxes and income taxes. And the heirs of those lucky oldsters can inherit their parents' privileges! Dumb! (Warren Buffett tried to call attention to this a couple of years ago, but was slapped down.) THe US Supreme Court okayed Prop 13 in the early 90s, but I cannot imagine that they could have reached the same conclusion if they had another 10 or 12 years' worth of data on its awful effects.

All taxes are regressive, some more than others. But in general, a tax on land value will tend to be less regressive than most others. And the other desirable qualities of taxing land values make it among the very best options available to us.

For more information, see http://www.wealthandwant.com/.


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