A tax revolt is brewing, with homeowners and farmers in a half-dozen states and counting swinging behind sweeping proposals to eliminate local property taxes. A popular movement to repeal a major tax may sound like a conservative’s dream, but for free-market conservatives, this particular dream could easily turn out to be a nightmare.
Taxpayers tend to hate property taxes; economists and public-finance scholars tend to love them. This sort of thing is probably why economists don’t get invited to dinner very often. But here, we must grudgingly admit that they have a point.
It is axiomatic in taxation that whatever you tax, you get less of. If you tax income, you’ll get less of the things that produce income, namely labor and investment. If you tax capital assets, you’ll get fewer of them. If you tax “sin,” you’ll get — well, perhaps not less sin, but possibly different sins.
A good tax system should be economically efficient, meaning it raises the necessary revenue with the least economic impact. Policy-makers should avoid introducing unnecessary economic distortions, where the tax code picks winners and losers or induces individuals and businesses to make choices they would not have otherwise made absent the tax.
This is where the property tax shines, at least in comparison with most other ways to raise revenue. Because land and buildings are immobile assets, taxing real property has far less of an effect on economic decision-making than most alternative forms of taxation. Dollar-for-dollar, property taxes do considerably less harm to economic growth than most other taxes, especially income taxes and taxes on business investment.
They also hew closer than most major taxes to the “benefit test,” rooted in the idea that, where possible, taxes ought to correspond to services received. The gas tax is a good example of this, almost approximating a user fee if well-designed, with drivers paying in rough proportion to the cost of maintaining the roads they use. The property tax may not seem similar at first glance, but in fact, the value of one’s real property is a reasonably good proxy for the value of local services received, like roads, law enforcement, emergency services, and schools.
A good school district, for instance, increases your property’s value regardless of whether you have kids in that school. And if you privately contracted for insurance or security services, you’d pay more to secure a more valuable property. Local governments, unlike federal or state governments, do relatively little income redistribution. (A few major cities are exceptions. They tend not to be located in the states where property-tax abolition has a shot.) Most of their spending goes to public services that are proportionally more valuable based on the value of one’s property, and which, delivered well, increase a property’s value.
Is this correlation perfect? Of course not. But it’s way better than we find in most taxes. The services you receive from the government increase in value when you have more valuable property. Can you say the same about the services you receive as your income levels (and thus income-tax payments) rise?
Having praised the property tax, let’s acknowledge and address the aspects people tend to dislike.
First, that tax bill hits hard. Property taxes are unusually transparent: Most people know what they pay, and they don’t like it. You don’t have to like it; in fact, you shouldn’t. An engaged citizenry keeps the pressure on government officials to justify why they need as much revenue as they collect, and how they spend it. Transparency, therefore, is a good thing. You probably know your property-tax bill, and if you think it’s too high, you might attend a public meeting about it. Now, quick, tell me: How much did you pay in sales tax last year? How much did taxes on business reduce your salary or increase the prices you paid? Fiscal conservatives should want more taxes to be as transparent as the property tax, rather than focusing on getting rid of the tax that’s the most transparent.
Second, some people have an instinctive aversion to the idea that you can be taxed on something you own. For some, it’s hard to square ownership with the idea of a continuing tax obligation. This impulse isn’t unreasonable, but it’s a problem that bedevils almost every tax. You pay sales tax when you spend money you already possess, and on which you’ve already paid income tax. You pay income tax on the fruits of your own labor. You don’t have to like taxes — who does? — but short of deciding that taxes are theft and championing a stateless society, training fire on the property tax and forcing governments to raise more money from less pro-growth sources is a bit of an own goal for those who want to unleash the power of markets.
Third, homeowners are understandably alarmed by how sharply their property-tax bills have risen in recent years. Their anger is legitimate, and they’re right to seek solutions that rein in such increases, but replacing the property tax with something else — almost assuredly something worse — is misguided.
Assessed values have soared since the start of the pandemic, so if rates remain the same, homeowners pay substantially more than they used to on the same property, even though they’re probably not getting more or better government out of the deal. Fortunately, many jurisdictions have rolled back rates, but not always enough, and some localities have been happy to pocket the windfall. State lawmakers can provide meaningful relief by implementing levy limits, which restrict the amount that local collections can grow year over year (exempting new construction) by mandating rate rollbacks to keep tax burdens in check when valuations spike. Protecting homeowners against unlegislated and unjustified tax increases is prudent; shifting the tax burden to a more harmful tax is not.
Besides, for most homeowners, inflation is the real villain. National statistics can obscure local variations that matter a great deal to the property owner whose county commissioners are gleefully taking the windfall without budging tax rates one iota (and that’s what levy limits are for), but nationally, property-tax collections were 5.5 percent lower in real terms in 2022 than they were in 2019, despite housing values soaring 33.6 percent and additional properties being added to the mix. People are paying a lot more — the median tax bill skyrocketed from $2,546 to $2,912 — but, nationally, the entire increase (and then some) is inflation. That’s an indictment of federal fiscal policy far more than it is of local property taxes.
Should free-market conservatives love the property tax? Not really. A certain amount of tax skepticism is healthy. It encourages taxpayers to care about competitive tax rates and keep tabs on how their tax dollars are being spent.
But should they hate it to the point of seeking its abolition, as direct-democracy efforts in Nebraska, North Dakota, Florida, and elsewhere would do? Given the alternatives, property-tax abolition is a bad bargain, and it’s often propped up by unrealistic promises.
In Nebraska, for instance, proponents of a measure called the EPIC Option argue that all existing income, sales, and property taxes could be replaced with one broad-based consumption tax of 7.5 percent. The actual revenue-neutral rate would be closer to 22 percent. Such wishful thinking about the ease of replacing the property tax appears to be a hallmark of these citizen efforts.
Property taxes generate 72 percent of local tax revenue. If governments can afford to cut taxes that deeply, surely there are more pro-growth places to cut. And if, as is usually the case, the solution is to increase some other (typically state-level) tax, conservatives should be the ones asking the tough questions.
Questions such as: Will this tax do more economic damage than the tax it replaces? And what sort of incentives are we creating if state government becomes the primary financer of local-government spending?
Fiscal conservatism is, let’s face it, a bit boring by design. It’s the embodiment of the stodgy accountant crunching the numbers and asking whether governments really need to buy the latest shiny toy. Because, if you’re conservative, you want government to be boring, to leave room for private enterprise to be dynamic. And here too, fiscal conservatism calls for a dull steadiness: sticking with what works, not chasing after shiny objects; preferring reform to revolution; and not letting frustration with property taxes lead to the embrace of something far worse.