The best tax--and the worst.

Local Tax Policy: A Federalist Perspective

Published by The Urban Institute Press [phone] www.uipress.org 2003; 162 pages; $26.50

Last year marked the 25th anniversary of Proposition 13, the landmark initiative that capped local property tax rates in California and led to similar limitations in many other states. Since the property tax revolt, local governments have not only lost flexibility over this critical revenue source, but they have also lost fiscal and political autonomy as they have become increasingly dependent on higher levels of government. Without the discretion to raise (or lower) taxes as needed to provide needed public services, the ongoing viability of local government is in doubt.

This is the primary conclusion of David Brunori in his latest book, Local Tax Policy." A Federalist Perspective. Throughout the book, Brunori affirms the ability of localities to provide certain services more efficiently than either the state or federal governments, and thus the importance of ensuring sustainable local revenue systems. The only way to do so, he contends, is by revitalizing the property tax.

Like most public finance experts, Brunori believes the property tax is ideally suited to financing local government. The property tax is a reliable and stable source of revenue that grows as real property values appreciate, is easy to administer and enforce, provides the strongest connection between the source of the revenue (the property) and the benefits (public services), and promotes local fiscal autonomy. Quoting Joan Youngman, however, Brunori concedes that "economists have long held the property tax in higher regard than does the public at large."

Indeed, in spite of its economic virtues, Americans consistently rank the property tax as either the worst or the second worst tax (behind only the federal income tax). This animosity is primarily attributable to two factors: the sticker shock from large annual or semi-annual lump-sum payments and the perceived inequity of valuation practices. Public disdain for the property tax culminated in the revolts of the 1970s and 1980s, which crippled the tax in many locations and led to a strong political bias against the tax. Exemptions for charitable organizations and economic development, relief measures for low- and moderate-income homeowners, and the centralization of school finance have further weakened the property tax.

Brunori closes Local Tax Policy with a prescription for revitalizing the property tax. His recommendations include educating the public about the virtues of the tax, easing the excesses of the tax revolts, expanding the property tax base, addressing the problems of school finance equalization, and adopting a split-rate property tax system. Brunori recognizes the Herculean challenge of actually implementing his recommendations, going so far as to call them "utopian." Still, he insists that the vitality of local government depends on significant reforms.

Conceding the seemingly insurmountable obstacles standing in the way of his first four recommendations, Brunori emphasizes that the best way to strengthen the property tax is to explore an alternative way of taxing property--split-rate taxation. Simply put, split-rate taxation refers to the idea of taxing land at a higher rate than improvements. Brunori argues that such a system could provide a reliable source of revenue without adversely affecting economic development. Reducing the tax burden on improvements, he says, would discourage businesses from seeking tax incentives and encourage them to develop underused spaces. And since land is immobile, businesses could not lower their tax burden by relocating.

While the book focuses on the property tax, Brunori does discuss other major sources of local revenue, including sales and excise taxes, income and business taxes, and nontax revenues such as intergovernmental aid, user fees and charges, and utilities. He discusses the pros and cons of each of these sources, explaining why none is an adequate replacement for the property tax. The sales tax, for example, is limited by an ever-growing list of exemptions and the remote sales conundrum, while the income tax is politically unpopular and is perceived as stunting economic growth. While nontax revenues have grown in response to shrinking property tax revenues, they simply cannot generate enough money to fund local government services.

Just like Brunori's other books on tax policy, Local Tax Policy is a concise, well-organized, thought-provoking treatment of an otherwise intractable subject. The book is well-suited to students, public administrators, and elected officials looking for an accessible primer on local taxation. It will be an invaluable resource to local governments that are reconfiguring their revenue systems and need to explain to stakeholders why particular changes are necessary. In short, this commentary belongs on the bookshelf of anyone who regularly confronts the trying realities of local government finance.

PETER CHRISTENSEN is managing editor of Government Finance Review and a senior policy analyst in GFOA's Research and Consulting Center.