Symposium on developing a property tax expenditure budget.
Property taxes are the most important source of local revenues. In FY 2011, local governments raised $429 billion in property tax revenues, more than any other single source of state and local revenues. The property tax accounted for 29.4% of local general revenues nationally, 47.4% of local own-source revenues and 74.2% of local tax revenues. (1)
Most economists agree that the property tax is a good tax for local governments because it scores well on the basic criteria used to evaluate the strengths and weaknesses of individual revenue sources vis-a-vis other potential local revenue sources. The property tax is generally thought to be a productive revenue source, which is fair and efficient, simple to administer and promotes accountability by linking taxes paid with services provided.
In reality, however, the property tax is becoming further and further from these ideals because of its increasingly narrow focus, policies that create distortions to private decision making by favoring some land use types more than others and the administration of the tax is becoming less uniform and less fair. The property tax is becoming less accountable because of "the confusing and opaque jumble of special provisions that accumulate as the broad base of the property tax is destroyed" (Witte, 2009, p. 314).
Some factors undermining the role of the property tax are beyond the control of local decision makers. For example, the economy-wide shift from manufacturing to services, technology and information results in less commercial land, fewer plants, and less equipment subject to property taxation. These structural changes in the economy contribute to a shift in the composition of the property base, and resulting tax liabilities, from commercial to residential owners. As homeowners experience increases in property tax liabilities, they pressure politicians to provide property tax relief through a variety of mechanisms. State and local policy makers respond with a number of public policies that exacerbate problems with the property tax to the detriment of local governments.
In search of a solution for reducing the gap between ideal property tax systems and actual property tax systems, Witte (2009) suggests that strengthening transparency of the property tax system may help. For example, a tax expenditure budget identifies public policies that deprive local governments of property tax revenues and result in distortions that could ultimately undermine the legitimacy of the tax. This symposium addresses more directly the concept of tax expenditure budgets for property taxes and their potential role in informing the debate on various property tax policies that cost local governments significant own-source revenues.
Stanley Surrey, Assistant Secretary for Tax Policy in the U.S. Treasury Department, coined the term "tax expenditures" in 1967. The Treasury department first published a tax expenditure budget of federal personal and corporate income taxes in 1968. Six years later, the Congressional Budget and Impoundment Control Act of 1974 defined tax expenditures in the law and began requiring that the federal budget include a list of tax expenditures (Harris 1997, 385; Pomp 1988, 66).
By converting what appear to be problems with tax reform to problems of spending reform, the tax expenditure mind set involves asking a different set of questions associated with spending programs: what is the goal of the program, how cost effective is the approach, what are the distributional consequences of the program and should the program be replaced with a direct expenditure program? [Ladd, 1994, 50-51] Ladd supports the concept of tax expenditure budgets because
"Given the strong historical, institutional, and political pressures to continue using the tax system not just as a revenue-raising device, but also as a policy tool, it is essential that we have a way to account for and scrutinize the special provisions that provide incentives or subsidies to particular activities or groups of individuals." (Ladd, 1994, 55)
The next section discusses how this concept of a tax expenditure budget is implemented in the 50 states. The primary focus of this discussion is on how property tax expenditures are treated as a way of shining a light on what Witte described as "the confusing and opaque jumble of special provisions that accumulate as the broad base of the property tax is destroyed." (Witte, 2009, p. 314)
Tax expenditure budgets can play an important role in providing information for decision makers and the public regarding the revenue loss from preferential provisions in the tax structure. They have the potential of identifying the budgetary costs of using the tax system to achieve non-revenue raising objectives as suggested by Ladd. This increased transparency in state policy can facilitate a discussion regarding the benefits and costs of supporting preferred activities through direct spending or supporting them through tax preferences. [Mikesell, 2002]
Fourteen states include real property tax expenditures in their tax expenditure reports. Total property tax expenditures are over a billion dollars of foregone property tax revenues in five states, Wisconsin, Florida, Michigan, Texas and Minnesota. Two states list property tax expenditures of less than $100 million, Kansas and Montana.
Major property tax expenditures fall into six categories--Exempt Homestead Property, Exempt Other Property, Assessment Limits, Credits/Refunds, Agricultural and Forest Preferential Treatment, and Business Incentives. Florida has the most comprehensive property tax expenditure report including estimates of foregone revenue in each of these six categories. Three states list estimates of foregone revenues for five categories (Michigan, Minnesota and Oregon), while six states include estimates of foregone revenues for three categories (Kentucky, Maryland, Texas, Vermont, Washington, and West Virginia).
In the context of state and local tax expenditures, Mikesell (2001) argues that the most important requirement for defining tax expenditures is a clear distinction between what is considered a normal (benchmark or baseline) tax structure and deviations from that standard. Tax expenditures, then, reflect the revenue losses that result from policies that deviate from the standard, or baseline, tax structure. A review of the tax expenditure reports for the 14 states that include property tax expenditures documents that for property taxes the baseline tends to be all real property or all real property except property exempt in the State Constitution and/or by the federal government.
Another important issue in estimating property tax expenditures is whether to include the loss of revenue to the government, the shift of tax burden to other taxpayers, or both in tax expenditure estimates. Typically tax expenditure reports focus on estimating revenues foregone by local governments because of preferential treatment given to some property owners or types of property. In addition, however, the property tax burden can shift to non-beneficiary taxpayers when an exemption is granted if local governments are allowed to raise mills to offset a reduction in the tax base. Raising mills results in higher taxes for non-beneficiaries, a shift of the property tax burden from beneficiaries to non-beneficiaries without affecting the total revenue (Levitis et al 2009, 6). The combined total of shift and loss is the total impact of the tax exemption.
A number of conceptual issues emerge regarding how the costs, or consequences, of tax expenditures should be estimated. One major concern about how tax expenditures are reported focuses on the feasibility of estimation and its utility for fiscal control mechanisms such as disclosure and review. Harris (1997) argues that the concept of a normative tax structure is "at the heart of the debate" about how to estimate tax expenditures (page 392). Defining the baseline is less controversial for property tax expenditures than income taxes because in practice, states tend to use all real property as the baseline.
A different issue remains pertinent to property tax expenditures. Tax expenditure estimates do not reliably predict the revenue gained upon repeal of the tax expenditure because they do not account for secondary or interactive effects. Such a prediction would take into account change in accompanying policies such as the tax rate, change in revenue collected from other provisions, and change in taxpayer behavior, which could result in change in economic growth incentivized by the tax expenditure (Harris 1997). State reports typically treat tax expenditures as isolated events ignoring secondary and interactive effects. For example, tax expenditure reports for Kentucky, Michigan, Minnesota, Oregon, and Washington state explicitly that they assume eliminating a tax expenditure does not alter taxpayer behavior and economic activities; even though they recognize that realistically it would alter behavior because tax expenditures are generally designed to incentivize certain behavior.
Another caveat of estimating foregone revenue is that the estimate is only as reliable as the data available. Reliability varies by estimate and by report. Some reports indicate the level of reliability. For example, Washington's report cautions that estimates should be understood as indicative of the order of magnitude rather than the specific dollar amount.
Surrey and McDaniel (1985) counter that some of the same limitations associated with estimating tax expenditures apply to estimates of direct expenditures, and those estimates are relied upon for budgeting purposes: "If the interaction effect does not prevent the computation of direct budget totals, it should not prevent the computation of tax expenditure totals" (page 231). Summation of tax expenditures can provide meaningful comparisons of relative growth and distribution of tax expenditures among functional categories (Harris 1997, 394). Granted, even though there is less consensus on what comprises a tax expenditure and less precision in cost measurement, Surrey and McDaniel (1985) argue that the concept of a tax expenditure is not "fundamentally flawed" just because the classification of an item as a tax expenditure can be debated. Tax expenditures require continuous rethinking; a "continuing improvement of a country's tax and spending structures" (page 196). The purpose of this symposium is to provide new insights into how tax expenditures associated with some of the most popular property tax relief mechanisms should be thought about and treated.
Creating property tax expenditure budgets would advance the cause of good government. Such budgets will inevitably create a fairer, more efficient, and more transparent local public finance system. That is, property tax expenditure budgets are normative goods warranting widespread adoption.
The creation of property tax expenditure budgets is more important in the post Great Recession environment as local governments face recurring budgetary challenges. Analysts have repeatedly warned that even under optimistic scenarios, local government revenues are likely to remain stagnant (Thompson, 2011). Property tax expenditure budgets provide a mechanism for state and local governments to evaluate the effectiveness and costs of property tax relief programs.
The symposium includes papers discussing the preparation of various aspects of tax expenditure reports for a number of popular tax relief mechanisms including preferential assessment for agriculture properties; preferential assessment with a focus on green space, open space, conservation easements; assessments limits; circuit breakers; classification; and economic development abatements/incentives. For example, the papers by Coogan et al and Connolly and Bell employ different analytic tools to estimate the distributional consequences of use value assessment programs for taxing farmland and programs providing assessment limits on the growth of assessed values used for tax purposes. Coogan et al use a case study to illustrate the impact of use value assessment programs which cause the county to forego significant property tax revenues, which undermine the uniformity of the property tax, and which distort the distribution of property tax liabilities across both agricultural and other property types. Similarly, Connolly and Bell undertake a case study which estimates the impact of New Mexico's assessment limit on the tax base, revenue, equity, and distribution of the tax burden in Los Alamos County and San Juan County.
The paper by Wassmer explores issues associated with developing tax expenditure estimates for abatement programs providing tax relief to businesses. Property tax abatement is a full or partial reduction in the normal property tax liability owed to a state or local jurisdiction. Accordingly, a calculation of annual tax expenditures for a state or locality should include some accounting for annual property tax abatement. The traditional manner of doing this is to sum the annual value of property tax revenue foregone through abatement. The intent of this paper is to question this simple approach. Offered here are specific characteristics to look for in property tax abatement programs that make it more reasonable to count all abatement as tax expenditure. Included also are examples of how to do this for three states. A refinement of how abatement translates into tax expenditure is a positive step forward in developing the tools needed to evaluate the desirability of property tax abatement.
The paper by Sundberg explores issues associated with developing tax expenditure estimates for open space land with little or no development. This paper provides a review of existing programs providing preferential property tax treatment for open spaces and discusses the different approaches used. It presents a case study of tax expenditures for open space protection in Georgia, demonstrating the technique used to calculate the expenditure and the wide variation in costs across counties. The methods used to determine the tax expenditure amount and the nature of the benefits received lead to concerns about the efficiency of the programs.
The final two papers explore issues for developing tax expenditure estimates for two popular tax relief programs that are not typically included in property tax expenditure reports. First, Sexton addresses tax expenditures arising from property tax policies that apply different (non-zero) assessment ratios or tax rates to real property with the primary objective of redistributing the tax burden by taxing different classes of real property at different effective rates. In addition to reducing the property tax burden on favored classes of property, such classified property tax systems can result in reduced tax revenues. In a case study of local governments in Tennessee the paper provides estimates of two different measures of tax expenditures: The revenue lost to counties and municipalities resulting from a switch from a uniform to a classified property tax, and the shift in tax burden that results from a revenue-neutral switch from uniform to classified assessment.
Finally, Anderson provides an overview of the mechanisms used by states to provide income-based property tax relief, commonly called circuit-breakers. The paper initially reviews the various types of circuit breaker features, including single threshold, multiple threshold, sliding scale and hybrid or quasicircuit breakers being analyzed. The benefits, costs, and distributional consequences of circuit breaker programs are reviewed with an eye toward program evaluation. Several design features are recommended based on this review and analysis of circuit breakers. Finally a case study of the Idaho quasi circuit breaker program analyzed in this article is an example of how a state can evaluate its property tax relief program.
The guest editors would like to thank the contributors to this Symposium and the Editor of Public Finance and Management, Professor dr. M. Peter van der Hoek, for his guidance in compiling and preparing the manuscripts. We would also like to thank Rob Wassmer, a member of the editorial board of Public Finance and Management, for his support throughout this process. Finally, we would like to thank the Lincoln Institute of Land Policy, especially Joan Youngman and Semida Munteanu, for providing financial and moral support for this project.
Harris, Jean (1997) "Tax expenditures: Concept and oversight" in R.T. Golembiewski and J. Rabin (eds). Public budgeting and finance (4th ed. pp 385). New York, NY: Marcel Dekker, Inc.
Ladd, Helen (1994) "The Tax Expenditure Concept After 25 Years," Presidential address to the National Tax Association 86th Annual Conference on Taxation, Charleston, SC, Washington DC: National Tax Association, pp. 50-57.
Levitis, Jason, Nicholas Johnson, and Jeremy Koulish (2009) "Promoting State Budget Accountability Through Tax Expenditure Reporting," Center on Budget and Policy Priorities (April), (http://www.cbpp.org/cms/index.cfm?fa=view&id=2772).
Mikesell, John L. (2002) "Tax Expenditure Budgets, Budget Policy, and Tax Policy, Confusion in the States," Public Budgeting and Finance, winter, pp. 34-51.
Mikesell, John L. (2001) "The Tax Expenditure Concept at the State Level: Conflict Between Fiscal Control and Sound Tax Policy," National Tax Association Proceedings of the Ninety-Fourth Annual Conference on Taxation, Washington DC: National Tax Association, pp. 265-72.
Pomp, R.D. (1988) State tax expenditure budgets and beyond. In SD Gold (Ed) The unfinished agenda for state tax reform (p65-82) Denver, CO, Washington DC: National Conference of State Legislatures.
Surrey, Stanley S. and Paul R. McDaniel (1985) Tax Expenditures, Harvard University Press: Cambridge Mass
Surrey, Stanley (1973) Pathways to Tax Reform, Harvard University Press: Cambridge, MA.
Thompson, Geordie (2011) "Sector Outlook for U.S. Local Governments Remains Negative," Moody's (Sept. 19)
Witte, John F. (2009) "The Politics of the Property Tax Base," in Nancy Y. Augustine, Michael E. Bell, David Brunori and Joan M. Youngman (editors), Erosion of the Property Tax Base: Trends, Causes, and Consequences, Cambridge, MA: Lincoln Institute of Land Policy, pp. 307-334.
Guest Editors: Michael E. Bell and David Brunori
George Washington Institute of Public Policy
George Washington University
(1.) U.S. Census Bureau, 2011 Annual Surveys of State and Local Government Finances, http://www.census.gov/govs/local/
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|Author:||Bell, Michael E.; Brunori, David|
|Publication:||Public Finance and Management|
|Date:||Mar 22, 2014|
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