Two cheers for the property tax: everyone hates it, but the property tax has some good attributes that make it indispensible.
Property tax rates are just as varied. In each community, homeowners, businesses, and non-homestead residences (like apartment buildings) vie to lighten their portion of the tax load. Often, regardless of actual property values, whichever group happens to have the most lobbying clout gets a break, while the losing parties are left to shoulder more than their fair share of the burden. In Minnesota, for instance, between 1977 and 1990 homeowners were able to cut their share of property taxes from 45 to 36 percent, even as their share of real estate values rose from 51 to 56 percent. All of this financial finagling, of course, only strengthens taxpayers' conviction that the system is inherently unjust and highly politicized.
It's not surprising then that the property tax has earned such a bad rep among voters -- and even less surprising that politicians have latched onto the issue. If you're looking to win votes, opposing the property tax is a no-brainer: It's like declaring that you're antidrugs. Already, states as politically diverse as Oregon and New York have moved to defang the property tax.
But before we pop open the champagne to toast these developments, we need to take a close look at the upside of the property tax. (And, yes, there is a considerable one) For although the list of the system's failures is long, people who advocate lowering or abolishing the tax outright are in many cases not considering the big picture.
For starters, contrary to popular belief, the property tax serves as a vital complement to other types of taxes. For instance, our income tax system may be geared to collect more from the affluent, but it also includes numerous loopholes that allow the rich to slip out of paying an amount of tax truly commensurate with their wealth. The property tax picks up where the income tax leaves off Even if they manage to downplay their annual income, chances are, rich folks are going to buy property. They can't resist owning that summer home in Nantucket, that weekend home in the Hamptons, or that colonial mansion in Georgetown. After all, what's the point of having all that dough if you're not going to spend it? Thus the amount of property you own is as important an indicator of how well-off you are as the income you're officially pulling in each year.
Similarly, property taxes improve the accuracy with which the wealth of senior citizens -- whose assets tend to dramatically outweigh their cash incomes -- can be taxed. Without property taxes, many seniors would only be taxed on their fixed incomes -- which often grossly underestimate how well-to-do they actually are. Now, we're not talking about the 70-year-old Brooklyn couple whose fixed income barely covers the taxes on the brownstone they bought 30 years ago. (An exemption can and should be made to ensure taxes don't force elderly people out of their homes.) But lots of seniors have invested in real estate other than their primary residences. Take the case of a retired speculator who bought property years ago and has watched gleefully as its value skyrocketed. He can enjoy the benefits of his good fortune long before he actually sells those investments. For instance, ownership of pricey real estate makes him eligible for large loans on which the interest is tax deductible. Furthermore, he can spend his fixed annual retirement income without a second thought -- knowing that if he's ever low on funds, he can simply cash in his property. The property tax ensures that his tax bill reflects his good fortune. It's not surprising then, that the powerful AARP seniors lobby is pressuring states for an overhaul of the property tax system. And as baby boomers slide into their golden years, we can expect this branch of the anti-property tax lobby to grow even stronger.
Who Will Pick Up the Slack?
No doubt the rich and the elderly recognize that abolishing or lowering property taxes would deal a crushing blow to the schools in their communities -- which is where the bulk of the tax's revenues go. But that's no skin off their noses: The rich can always send their kids to private school, and most old people's kids have already flown the nest. Of course, cashstrapped communities are unwilling to stand by as their schools are devastated and may raise other kinds of taxes -- like sales taxes -- to make up for lost revenue. But such taxes shift more of the burden onto the middle and lower classes, who must buy basic goods, even if they can't afford property.
If you have any doubts about the kind of fiscal havoc the elimination of the property tax can cause, you need only look at what's happened in the states that have "reformed" it. In Florida, the large and religiously anti-property tax seniors population has pushed lawmakers into reducing the property tax rates for some, and completely exempting others. The result is a maze of slimmed-down services and hidden "nontax" fees that end up unfairly shackling the middle class. Worst of all, these alternative methods simply can't raise the same amount of revenue as the property taxes did. Consequently, notes Kurt Wenner, an economist with Florida TaxWatch, "the schools don't have much of a chance" Small wonder that Florida kids consistently place near the bottom in national reading and math tests, alongside much poorer states such as Louisiana.
In Texas, voters overwhelmingly approved Proposition 1, a ballot measure providing $1 billion in property tax "relief." The law's supporters in the legislature said they had to act "before there was a taxpayer revolt." Of course, almost immediately after the bill passed, school districts across the state announced that they would have to raise other taxes to make ends meet.
Taxpayers in Maine are looking to reduce their property tax bills by expanding the homestead exemption by $20,000, a measure that would rob the state of $200 million in funds. To compensate for the reduction in real estate taxes, Maine will be forced to extend its 6 percent sales tax to a wide range of everyday sources that directly hit middle-class wallets, including movie theaters, bowling alleys, beauticians, and barbers.
The situation is no different in New York; Governor Pataki, along with a slew of legislators, has vowed to cut property taxes. But as property taxes go down, local taxes, user fees, and college education prices continue to surge to make up the difference. The New York proposals are so unbalanced they prompted Patricia Woodworth, director of the budget for the State of New York, to complain to Newsday last April, "the benefits are going to go to those who have the greater monetary and financial interest in property holdings, which is not the average person. This plan is not truly tax relief."
But it is Oregon that gives us the most vivid example of what happens when property taxes are slashed. The northwestern state passed Measure 5 in 1990, putting a cap on all property tax increases. This, in turn, forced a massive transfer of state funds to support schools, which left the state with no choice but to cut spending on child welfare, prisons, and state police.
The bottom line: When property taxes are cut, other taxes must be raised to make up for lost revenues. And, as Chris Herbert, an economist at the Harvard-MIT Joint Center for Housing Studies, points out, the property tax is far more progressive than the alternatives. "Cutbacks in property tax have got to be made up and they're not going to be done by a more progressive tax," he says. "Localities can't get states to pick up the tab, so there's a big shift to user charges. You start getting taxes on trash collection and recreation facilities. With user fees things are becoming less progressive because you're paying as much as the next guy" -- regardless of whether he happens to be a millionaire.
Mend it, Don't End it
But if we want to get the property tax off the political hit list, we need to address the legitimate problems with the current system. A handful of governments around the country have already started the ball rolling, instituting models that correct some of the more egregious flaws.
Washington state has perhaps the best system, having tackled the issue of favoritism head-on and passed a constitutional amendment declaring that statewide property tax rates must be uniform. For example, all real estate property is currently taxed at approximately 1.2 percent. In addition, all property tax revenues are split between the state and localities. This allows states to tap a deep vein of revenue and distribute it equitably. Under such a system, localities ultimately get to administer their portion of the pot, but the disparity between rich and poor districts is not so wide. "The real key is that the system is administered fairly," says Kriss Sjoblon, an economist at the Washington Research Council. "We have a good system of assessment that eliminates inequities, and the uniformity is vital. People should be treated fairly and folks shouldn't get deals."
Even jurisdictions with special needs can establish systems that are less arbitrary and that make sense to the average taxpayer. Pittsburgh, for instance, has initiated a "split-rate" system in an attempt to foster urban renewal. Property tax is really two separate taxes, one 6n land and one on building values; Pittsburgh simply separated these two values. The city then lowered the tax on buildings, giving property owners an incentive to maintain, build, and improve their properties, while at the same time increasing the levy on land values, thus discouraging land speculation and stemming urban sprawl. In Pittsburgh and other Pennsylvania cities where the "split-rate" is employed, 85 percent of homeowners pay less than they would with a flat rate, according to analysis by the American Journal of Economics and Sociology. The analysis also found that those who do pay more tend to be wealthier homeowners.
Most importantly, the system achieves its goal of encouraging economic growth in urban centers. A study conducted by University of Maryland economists Wallace Oates and Robert Schwab, comparing Pittsburgh to 14 other eastern cities during the decade before and the decade after Pittsburgh expanded its two-rate system, found that: "Pittsburgh had a 704 percent increase in the value of building permits, while the 14-city average decreased by 14.4 percent. These findings are especially remarkable when it is recalled that the city's basic industry -- steel -- was undergoing a severe crisis throughout the latter decade."
Aside from these more comprehensive systems, there are a number of basic steps localities could take to alter the perception of unfairness and ease the burden of property taxes:
* Use the property tax to pay for more than just schools. If seniors and the wealthy feel that the taxes support services they need, they will have reason to pause before directing their lobbying muscle against it.
* Raise the level of exemptions for people over 65. Property taxes do blindside some senior citizens, and there's no reason why they should have to move out of their lifelong homes because the market value of the house has gone up. A moderate raise in the exemption level would prevent poorer seniors from losing their homes, while still raising revenue from the wealthy.
* Stagger payments. A major reason property tax is so unpopular is that it's administered in huge chunks and people aren't allowed much time before hefty late fees kick in. Distributing the burden over four or more payments a year, with more advanced notice, would take some of the sting out of the bill.
* Upgrade technology. Set it up so people can pay electronically. It's a small thing, but it will make a difference. Most cities allow offenders to pay parking tickets with credit cards, there's no reason they can't do the same with property tax.
Rooting out favoritism and slipshod assessment methods will help make the tax palatable to the majority of citizens. They will no longer see the property tax as a mindless ogre coming to swallow up their hard-earned money. Instead, they will see it as the soundest way to make sure that everyone, especially the wealthy, contributes his share to ensure a high level of public services. In short, they will see it for what it is.
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|Date:||Oct 1, 1997|
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