An article from the Austin (Texas) American-Statesman has been making the rounds lately, discussing how property values in Austin have risen precipitously, and thus taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es have risen too. Property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es form the lion’s share of taxes for Texan local governments, so it tends to be a very high-profile issue in the Lone Star State. One particular series of comments by a local homeowner has been criticized:
“I’m at the breaking point,” said Gretchen Gardner, an Austin artist who bought a 1930s bungalow in the Bouldin neighborhood just south of downtown in 1991 and has watched her property tax bill soar to $8,500 this year.
“It’s not because I don’t like paying taxes,” said Gardner, who attended both meetings. “I have voted for every park, every library, all the school improvements, for light rail, for anything that will make this city better. But now I can’t afford to live here anymore. I’ll protest my appraisal notice, but that’s not enough. Someone needs to step in and address the big picture.”
This homeowner has been held up as an example of someone who just doesn’t understand that, when you vote to increase spending, taxes go up too. However, Ms. Gardner has a point. Many (though not all) of those initiatives didn’t come with paired tax increases, and could be paid for with preexisting tax revenues: rising property tax bills aren’t just a phenomenon of the usual tax-and-spend cycle. Austin’s city government is not an extremely high-spending government, compared to various peer cities (though it does have fairly high debt).
Parks, libraries, school improvements, and light rail all probably do improve quality of life. But better quality of life means more people want to live in a given area. This demand will create inward migration, which will drive land prices up no matter what. Housing prices (for, say, a fixed amount of square footage) will go up or not depending on if landowners respond by building more multi-unit housing or not. In other words, better public services (especially “free” public services like parks or schools) drive up property values.
This means that, in a city funded by property taxes, desirable public expenditures that are fully funded even without a tax increase can still drive taxes higher, unless some kind of effective property tax cap exists (easier said than done). This is the classic story of gentrification. Neighborhood services and quality of life start to improve, so more people want to move in, and the old residents (often lower-income than new migrants) have to sell their properties and move.
This phenomena points to a basic issue in the economic model often espoused by advocates of higher government spending. Location-tied services may indeed improve quality of life, but new induced migration will tend to drive changes in cost of living, which means that the people who voted for those improvements are often priced out by other people who want and can pay more for those services. Publicly-provided services, then, are a two-edged sword: they may indeed make a place more desirable to live and work by providing benefits to anyone who lives in the area, but that very desirability can make the area more expensive, making it, ultimately, harder to make a living.
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