Tax Analysts Blog

Repealing the Property Tax Is an Asinine Idea

Posted on May 14, 2014

There is a lot of buzz about a proposal in Pennsylvania to repeal most of the property tax. SB 76, which Sen. David Argall (R) introduced last year, would eliminate all school district property taxes in the state and replace the revenue with increased income and sales taxes. He would raise income tax rates to 4.34 percent from 3.07 percent and the sales tax rate from 6 percent to 7 percent.

Argall's bill represents horrendously bad policy. Yes, people dislike the tax, which makes repeal an easy political target. But states should be strengthening the tax, not trying to diminish it.

Public finance experts are almost unanimous in their belief that the property tax is the ideal way to fund local government services. Pennsylvania's local property tax raises more than $5 billion a year. And like in most states, the tax primarily funds K-12 education (the state contributes only 34 percent of total funding).

We all want well-staffed police and fire departments, paved roads, regular trash collection, and, above all, good schools. We want someone to answer the phone when we dial 911. The property tax is the one tax that provides a stable, continuous stream of revenue to localities to ensure that those services are adequately funded.

The property tax is capitalized into housing values -- that is, property value goes up because of the services being provided as a result of the taxes paid on the property. The correlation between good public services and high property values is no coincidence. Just ask any real estate agent.

Moreover, unlike most levies, the property tax is easy to administer and even easier to comply with. You can't cheat on your property taxes. You can't hide your land. The government knows where it is. From a compliance standpoint, things couldn't be easier. You get your bill and pay the tax. Except for paying the money, compliance is hassle free. With little effort, compliance (or foreclosure) could be 100 percent. With few exceptions, the property tax gap is small. That has to make honest taxpayers happy.

Most importantly, the property tax ensures local political control. State funding of local services comes with strings -- all centralization does. That may seem like a benign problem. But when the states pay for services like education, those services are almost always underfunded -- that is, local citizens don't get as many services as they want or are willing to pay for. That is both inefficient and undemocratic. And local services are too important. When the state pays for local services, the local governments become just another special interest seeking money.

Read Comments (13)

emsig beobachterMay 13, 2014

Assessing commercial, industrial, utility, and similar types of property is not
a simple matter. Administering all types of property taxes is not simple.

Also, public finance experts agree that state and local tax structures should
have three major components: 1)consumption (sales) taxes; 2) income taxes; an
(3) property taxes. Without sales and property taxes in the mix, state and
local revenues would be extremely volatile. This is a significant problem
because most state governments and local governments must balance their budgets
over their budget cycle.

GOOD POST!

david brunoriMay 13, 2014

Emsig, Thanks! The main issue with administration is valuation. Modern
valuation techniques (lots of computer models) are very accurate for
residential property. And even for commercial and rental property the processes
work very well. The big dilemma tends to be big office buildings in cities
where the owners and government often are way too chummy. Nonetheless, there is
no viable alternative to funding local government.

edmund dantesMay 13, 2014

I could not disagree with you more.

Property taxes are very bad because there has been no transaction between
disinterested parties to determine the proper tax. We rely on transactions to
measure the correct sales tax and the correct tax on wages. Both of those are
easy to measure and enforce. We could make the broader income tax easier to
enforce also, if we simplified it drastically. What's more, when there is a
transaction we have money on the table. It's easy for government to poke its
nose in to take a piece, because there's still money left for everyone else.

In contrast, there's no transaction for real estate taxes, so we guess at the
correct value every year. No money has changed hands, so the property owner has
to liquidate some other asset to pay the tax. No two properties are alike, so
assessment involves guesswork. Over time property values change unpredictably,
so the property owner can get crushed by tax burdens he cannot plan for.

If property taxes were assessed at 1%, this might not be a problem. My
property tax rate now exceeds 3% every year, and its going up again this year.
Plus the value of my property has gone up markedly, putting a double whammy on
my tax bill.

The only reason property taxes seem easy to collect is that most people have
mortgages, and as a condition of their mortgage the bank requires them to
escrow the tax due monthly. It gets folded into the monthly mortgage payment to
the bank, so for many it is hidden.

Property values do not, in my experience, correlate to high tax rates. On the
contrary, in my state, CT, the city with the highest property values,
Greenwich, has the lowest tax rates, just over 1%. With the high values and
low rates, they still get more than enough tax revenue each year. The big
cities here have tax rates over 5% annually--I can find you some very cheap
real estate there. So there is negative capitalization of property taxes, not
positive.

Nor do property values correlate with public services, though they do tend to
follow the perceived quality of the local public schools. But that only works
so long as the school-age population is growing--in my town the number of
children is shrinking. Yet notwithstanding your argument for local control, we
just voted to increase taxes to bring per pupil expenditures to nearly $20,000
each.

I applaud the PA initiative to eliminate property taxes, the most unfair tax of
all.

AMT buffMay 13, 2014

Valuation was an under-appreciated strength of California's Proposition 13. The
property tax base is set by the purchase price and increasing by formula after
that. That leaves little room for arguing about assessed valuation.

A property tax of this sort is the most fair tax we have. It taxes lifestyle,
meaning what you are taking from the economy rather than what you are giving.

david brunoriMay 13, 2014

Edmund. I do disagree with you, although you identify one of the reasons why
the tax is politically unpopular. Your tax burden goes up without any trigger
(working, buying, dying, etc.). Still, at core, my argument is that the
property tax is the only source of revenue that local governments can rely on.
Sales, income, and business taxes don't work at the local level. And, local
autonomy (if you accept it as a normative good) requires its own source of revenue.
Don't get me wrong, I think there are lots of problems with the tax. But I
think wholesale repeal is a bad idea.

AMT buffMay 14, 2014

David it's no longer correct that local governments control the use of property
tax revenue. That began to change in 1971 with Serrano v. Priest. States
responded by redistributing property tax revenue statewide. This was explained
in NTJ long ago.

Property tax is now a state tax masquerading as a local tax. Local governments
are no longer autonomous because they control no major source of revenue. State
mandates plus strings attached to funding are killing them. Just ask any mayor.

david brunoriMay 14, 2014

AMT, Unfortunately, the tax limits, school finance (to which you refer), and
just general centralization as a result of unhappiness with the pt, are proving
you right. Yet it need not be that way.

AMT buffMay 14, 2014

David, according to the courts it's unconstitutional for a rich area to raise
and spend more tax money per pupil than a poor area, even if that is
accomplished at the same or lower ad valorem tax rate. Property tax revenue
MUST be spread evenly per student statewide. So yes, this centralization needs
to be that way.

If a local government tried to enact an additional property tax to be spent
locally under local control, the courts would confiscate it for redistribution
statewide under the rationale outlined in the NTJ paper I linked. Local control
of property tax is dead, dead, dead, and there is no locally controlled revenue
source to replace it. Local governments are mendicants now and forevermore.

bob kammanMay 15, 2014

My friend from Lancaster claims that the schools in Pennsylvania are so
well-funded from property-tax revenue that the only people who can afford nice
homes are the teachers. I have to admit, many parts of Pennsylvania have
excellent schools. But as with other states in the Rust Belt, the 47% can't
afford to raise their children there. So they move here to Arizona, and pay in
property tax about 20% of what they would pay back "home" on a house of the
same value.

Before turning off the lights, would the last person leaving Pennsylvania check
to make sure all the property taxes have been collected?

The real issue: What is the best mix of property, sales and income taxes?
Take a look at per capita spending, which doesn't vary much from state to
state, and then decide how much should come from each source. My clients who
move to Texas find themselves paying $2,000 less income tax, and $2,000 more
property tax. My clients who move here from "Back East" are amazed that
property taxes run about 1% of home value, rather than 3% or more.

The federal government has survived for a couple centuries without a national
property tax, because of some obscure Constitutional provision that should be
repealed. A handful of states survive without an income tax. Another handful
survive without a sales tax. (My neighbor drives her new Volvo with Oregon
plates, to avoid paying the state $3,000 to register it here.) So Pennsylvania
wants to try life without property tax? Let a thousand flowers blossom, and by
the way, how much property, sales and income tax do they collect in China?

david brunoriMay 16, 2014

Dear Readers, I must clarify. The bill proposal I reference would repeal only
the school portion of the Pennsylvania property tax. I was using it as an
example of attempts to limit or diminish the tax. What I should have said is
that Argall's bill would repeal all school district property taxes.

I should have been much more precise in my argument. And, I apologize for my
sloppiness. David Brunori

AMT buffMay 19, 2014

David, that narrower proposal actually makes some sense. Given that judges have
converted the school district property taxes to a statewide common fund, why
shouldn't that revenue be collected by a tax imposed at the state level? The
latter would almost certainly treat taxpayers more fairly.

California's property tax was essentially leveled statewide by Proposition 13,
which set a uniform tax rate with minor adjustments. This was an apt response
to court-ordered redistribution of the revenue. By setting a uniform rate
statewide, any state can convert its property tax to a state tax.

Mr. GJun 5, 2014

This post has prompted a remarkable volume of response, mostly to disagree (in
my own estimation).

I believe this response is justified. You assert that property taxes are almost
unanimously acknowledged by anonymous "public finance experts" as an ideal way
to fund local government services. This transparent appeal to authority and
majority fails to provide any basis in theory for WHY this might be.

Most of the value of a property tax falls on improvements, not land - this
makes it distortionary and inefficient. The value of real porperty is difficult
to determine, since real estate changes hands infrequently and identical
properties are difficult (impossible) to observe in the marketplace.

Imagine if there were only one can of coke in the marketplace, and the last
time it was sold was in 1986. How would you go about valuing an ounce of cola?

Because property taxes are not levied on a flow (transaction) but on a stock
(asset), held assets must be liquidated to pay the levy (in the absence of
income flows sufficient to cover the charge). This forces agents to engage in
market behavior they wouldn't otherwise - the worst market imposition possible
for a legislative scheme, from the perspective of efficiency.

I could go on, but it should be clear that any potential public good provision
advantages inherent in the linking of property values and the public good
funding mechanism are quickly drowned out by the negative effects.

To the extent that property taxes employed, they should be very local, and very
small.

Joshua VincentJul 3, 2014

I'm late to this one, but the people who are rallying against the school
property tax consist of a surprising number of emigres from Maryland in the
Southern tier of counties.

Their solutions are in a word, calamitous:

Increase the sales tax and broaden the base (next to no-tax Delaware)? We're a
state with poor rural areas and very poor cities. Regressivity anyone?

Raise the wage/income tax? That's shifting a flat rate onto a smaller base of
working people (Pennsylvania has the 2nd highest percentage of seniors, after
Florida). That would compound the misery for larger cities who already are
locked into their own disastrous wage tax rates.

And let's hope they don't find out about Pennsylvania's already high corporate
tax.

Fixing the property tax is imperative, and the relatively few "poor widows" may
be addressed with expanding existing protections as well as adding tax deferral
until death or sale.

This is a solution in search of a problem too. Our research in Altoona, Blair
County demonstrates that for owner-occupied homestead properties the median
combined city, school and county tax is $663 annually. The annual median SCHOOL
tax is $367.

The current median state income tax bill per household in Altoona is $1,074.
Local income taxes are another 1.45% for city and school, adding $500 a year.
That is pretty much how it plays out across the center of the state, away from
Pittsburgh and Philadelphia/Montgomery County,and it literally goes after the
future of an aging and fading state: young working families. they seem more
comfortable in Texas with no income tax.

In closing I'd add that not taxing building really changes the tax outcomes in
Pennsylvania towns that use a land value tax, and that the US government taxed
real property at the beginning of the Republic.

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