Tax Analysts Blog

Learn to Love the Property Tax -- It’s Not So Bad

Posted on May 6, 2015

States are generally protective of their revenue sources and will go to great lengths to ensure that revenue remains as stable as possible. For that reason, states rarely get rid of a major tax. In fact, in the past 32 years, no state has done so. In the past 50 years, only Alaska has successfully eliminated a major tax -- ridding itself of the individual income tax in 1980. Although a number of contributing factors led voters to end the tax, completion of the Trans-Alaska Pipeline System was undoubtedly a major one. The pipeline resulted in a significant stream of new revenue, which at least partially enabled the state to eliminate another major source of funding.

Alaska's situation -- and its wealth of natural resources -- is unique in the United States. Other states have considered eliminating a variety of taxes, but none have succeeded. Most states find that the gaping hole left by the abolition of a major tax can’t be easily filled.

Hoping to join Alaska as the exception to that rule, North Dakota considered eliminating its property tax in 2012. Though that measure ultimately failed, the state has been slowly reducing its reliance on the property tax. This legislative session, North Dakota approved $400 million in property and income tax relief for the 2015 – 2017 biennium. Gov. Jack Dalrymple praised the legislature, saying, “It’s been another great legislative session, really our fourth in a row, in which we have provided very, very significant property tax relief.”

North Dakota's tax system includes an individual and corporate income tax, sales and use tax, and a variety of excise taxes. While the legislature provided both property and income tax relief, the property tax has repeatedly been on the chopping block. Why? The simple answer may be that the property tax is among the most hated of all taxes. Several reasons for that are frequently cited, including that it is often seen as a regressive form of taxation. Property taxes can become a heavy burden on low-income taxpayers and those on a fixed income, especially in areas experiencing rapid population growth that triggers increased property values. People also dislike property taxes because many perceive property tax administration as unfair since different burdens can be placed on similarly situated properties.

Despite its bad reputation, the property tax has numerous benefits. For local governments, the tax provides a relatively stable source of revenue. Local governments also have a fairly high collection success rate. Many property owners have escrow accounts through their mortgage companies, which collect tax monthly and remit it at the appropriate time. Because of that, and the fact that the property tax is attached to something physical, it is hard to avoid or evade.

For taxpayers, revenue from property taxes pays for such things as local protection and maintenance services, as well as education. Those are benefits that property owners and the community can directly see. The property tax is also relatively transparent in that property records are publicly accessible. Property owners see their assessments and may appeal them if they believe the value of their property has been improperly determined.

Even if the state has enough revenue from other sources to make up for the loss of revenue from providing more property tax relief, at some point it could become problematic for local budgets. Local governments in North Dakota receive more than half of their revenue from the property tax.

Historically, local governments across the nation have struggled to raise enough money to pay for the public services demanded by citizens. And although supplementing local budgets with a state source of revenue could alleviate immediate budget concerns, it also has a number of downsides. Giving up some of their financial control to the state necessarily removes some of the autonomy and flexibility localities need to determine the services that are provided and the level at which those services must be provided. Without an adequate local source of revenue, localities (including school districts) may be unable to provide the type or quality of services demanded by citizens.

Local governments could turn to alternative sources, such as the local sales tax, to replace lost revenue. That would keep revenue at the local level, and although it could shift some of the burden to nonresidents, most of the burden of a local sales tax is on residents. If a local government raised the local sales tax rate too high, or even just significantly higher than a neighboring locality, residents might move to avoid the higher rate of tax. Also, property tax revenue is generally more stable than sales tax revenue, which could mean that localities would have to adjust their budgeting to account for fluctuations in year-to-year revenue.

North Dakota, like Alaska, is in a unique position because it is rich in natural resources. It arguably has the ability to continue to reduce its reliance on the property tax, but states should be hesitant when significantly reducing property tax revenue. The property tax is a relatively stable source of revenue that provides localities with needed funds to serve residents.

Read Comments (4)

david brunoriMay 6, 2015

Cara, Great post! I have long thought the property tax was wrongly scorned by
the public and political leaders.

It is the only viable source of revenue for local governments. Neither the
sales nor income tax can fund localities. State aid is not dependable and
weakens local autonomy.

Thank you for reminding everyone that the property tax, while not perfect, is
the only good source of revenue for local governments in our system.

edmund dantesMay 6, 2015

Wrong, wrong, wrong. The property tax is by far the worst that there is.

A good tax is one that is imposed when money is voluntarily changing hands, so
it is considered by all parties as a cost of the transaction itself. That would
include income taxes, capital gains taxes, employment taxes, and sales taxes.
A good tax is one where the amount of the tax is predictable in advance, given
the parameters of taxation. A good tax is one that, to some extent, can be
controlled by the taxpayer's own behavior—one can avoid a sales tax by not
buying, or a capital gains tax by not selling. A good tax is one that treats
similarly situated taxpayers the same.

The property tax flunks all of these tests.

I'm going to predict that Cara has never personally tried to appeal a property
tax assessment. It is not nearly so simple as she makes it sound, and it is
very rarely successful.

David has persistently suggested that the virtue of a property tax is that it
is locally controlled. That is not quite correct either. Local politicians
routinely raise the property tax rate, and local assessors routinely raise the
valuations. Other that California's Prop 13, I have never seen these actions
successfully challenged. I have never seen any restraint whatsoever in local
spending.

Finally, the property tax seriously fails the horizontal equity test. I live
in CT. The mill rate for Hartford is 74.29, for Bridgeport 42.198, for New
Haven (stuffed with tax-exemptions for Yale) 41.55. My rate, in a middle class
small town is 33.22. Greenwich, the richest town in the state, is just 10.9.

Do the math. On my $300,000 home I owe roughly $10,000 every year, just to
live there. A Greenwich resident won't pay that much until his home is worth
more than $1 million! How is that fair? Compounding the problem, the
Greenwich home experiences above-market appreciation over the years, partly due
to the low tax rate! And so the rich get richer.

Property taxes have seriously distorted housing patterns around the country and
have directly promoted the sprawl into the suburbs. They are such an
impediment to the economic health of central cities that a maze of credits,
exemptions and other kinds of potential for graft have sprung up to mitigate
their impact. I wonder if anyone really pays that 75 mill rate in Hartford.

I would only support a property tax if the rate were capped at 20 mills,
assessment increases capped at 2% per year until a property changes hands, and
the rate applied uniformly throughout the state. Otherwise, it is a corrosive
that is destroying our central cities and promoting unrestrained government
spending.

edward gateMay 7, 2015

According to www.telegraph.co.uk : A new property tax, known as Land and
Buildings Transaction Tax, will replace Stamp Duty in the country. Savills said
“endless” numbers of its clients were considering selling up and moving south
of the Border before the introduction of the new tax.

And also according to www.offshorenewsflash.com : If government wants to be in
a position to be able to “safely” project its revenues from tax on property,
then the Malta Chamber proposes it should simply reduce the rate at which
provisional tax is payable.

Great post :)

David Cay JohnstonMay 7, 2015

Appealing a property tax assessment is not at all difficult.

I have done it -- successfully.

The actual appeal took an hour, most of it waiting for my turn to be heard.
Preparation for the appeal took about 30 minutes -- gathering data online on
comparables and putting them in a spreadsheet.

My home is in one of the very highest property tax rate jurisdictions in
America. My annual rate of about 4.2% of assessed value.

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