Economists and the ‘Fairness’ of Local Property Taxes

August 11, 2006

There has long been tension between economists and the general public about the merits of local property taxes.

Most economists argue that if property taxes are well designed—that is, they tax land but not buildings, assess property transparently and simply, etc.—they are among the least economically damaging taxes available.

However, most of the public disagrees. Opinion survey after opinion survey finds that the public views them as the most unfair type of tax, for three main reasons.

First, property taxes are more visible, making them more painful than many other taxes. Second, unlike income and sales taxes, property taxes are often unrelated to homeowners’ behavior—property taxes often rise because the value of neighborhoods change, which is beyond the control of any one homeowner. Third, when property taxes rise, those with fixed incomes may be forced to liquidate homes for tax reasons. And since homes can’t easily be divided up and sold piecemeal to pay rising tax bills, that means some home owners may be forced to relocate for tax reasons, which many view as unfair.

Whether economists—who mostly focus on economic efficiency—or the general public that seems more concerned with perceptions of equity are right about property taxes is an unsettled question.

But in the meantime, NPR’s “Marketplace” fuels the fire of debate with a provocative commentary titled, “Kill the Property Tax” from historian John Steele Gordon. Here’s the transcript:

KAI RYSSDAL: Tax reform has been kind of a hot topic in Washington for a while now. The estate tax, or tax cuts, capital gains taxes, all of that. But homeowners probably care about a different tax, the one they pay on their houses. Property taxes are going up almost everywhere, and business historian and commentator John Steele Gordon says there’s only one thing to do about that.

JOHN STEELE GORDON: Forget about reforming the property tax. It’s a relic of the colonial past and should be abolished. Instead, send it to the Smithsonian and display it along with other relics like chamber pots and clay pipes.

In the 18th century, real property was probably the best measure available of a person’s ability to pay taxes. That’s because it generated income from farming or things like water mills, ship yards and stores. Only the very rich had residences on town lots.

But in today’s suburban world, property is a terrible measure of a family’s ability to pay taxes. Almost all privately-owned property today is income-absorbing. And it’s also grossly unfair.

The typical middle class family has most of its wealth tied up in a house. The very rich, however, while their houses may be grand, with squash courts, wine cellars, indoor swimming pools, and heaven knows what else, have only a small portion of their assets tied up in real estate.

The result is that the middle class family pays a much higher proportion of its annual income in local taxes than does the zillionaire across town. David Letterman, for instance, lives a few miles away from my house. His property taxes are five times higher than mine, but his income is probably hundreds of times higher than what I earn.

And property values are always subjective. Towns hire assessors to guess what each place might fetch on the market and have grievance boards to adjudicate complaints. That’s where the well-lawyered usually win.

Still worse, the property tax makes suburban sprawl inevitable as owners of large lots are forced to break them up when the taxes go out of sight.

What to do? Simple, just let local jurisdictions piggyback on a state income tax, adding as many percentage points as needed to fund local government. It would be simple, cheap, and fair.

The property tax is none of those things. (Full piece here.)

For a different take on property taxes—from an economist’s perspective—check out our “Property Tax” research section.

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