August 7, 2006
Property Taxes Posted by John Steele Gordon at 12:30 PM EST If a front-page article in The New York Times is any indication, the issue of property taxes is, finally, heating up. As the Times reports, in this decade they have been rising far faster than income, and the political pressure to do something is mounting quickly. In New Jersey, which has the highest property taxes in the country, the legislature is in a rare August session trying to find a way to lower them, and many other state governments are also trying to reform the property tax and make it more equitable.
Good luck to them, but the property tax cannot be reformed, for it cannot be made equitable. It is inherently unfair, arbitrary, immoral, and economically damaging. It is to taxation what slavery was to labor markets.
Like slavery, the property tax is a relic of the colonial era. Today, in a completely different economic universe, it makes no sense whatever. In the eighteenth century, real property was the best means available by which to judge the ability to pay taxes. Nearly all property at that time was income producing, either farms or commercial structures, such as lumber mills, shipyards, and urban retail establishments. Only the very rich had houses on town lots where no business was done. Today, there are any number of ways to precisely judge income, starting with federal and state income taxes. And the suburbs, undreamed of in Benjamin Franklin’s day, are where the majority of the American population lives. In the suburbs, nearly all property is income absorbing.
In The Wealth of Nations, Adam Smith listed four principles of fair and equitable taxation. The property tax violates them all.
1) “The subjects of every state ought to contribute towards the support of the government . . . in proportion to the revenue which they respectively enjoy under the protection of the state.” Property taxes today have nothing to do with income. Families are often forced to sell a much-loved home they can afford to maintain, only because the home has soared in value and property taxes are based on real value, not income. People of equal incomes can pay wildly unequal property taxes, because some choose to live in less valuable houses or on smaller lots than do others.
2) “The tax which each individual is bound to pay ought to be certain, and not arbitrary.” Property taxes are highly subjective, with a town assessor guessing what a property is worth. The opportunities for good-ole-boy corruption (not to mention the usual greased-palm variety) are endless. Grievance committees, just as subjectively, rule on whether assessments are correct. Property owners with good lawyers fare far better than others in these proceedings. There are actually companies that specialize in getting property-tax reductions, taking a percentage of the reduction they obtain as their fee.
3) “Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.” In the eighteenth century, property taxes were usually due in the autumn, when farmers took their crops to market and had the cash to pay the taxes. Today, at least in New York State, town taxes are due in April (just when federal and state incomes taxes are due), and school taxes are due in September (when many families are meeting fall college tuition bills) and January (just as the Christmas bills and spring college tuition bills are coming in). I imagine those dates are an accident of history, but they could not be more inconveniently timed if they were deliberate.
4) “Every tax ought to be contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the state.” In other words, taxes should be easy—and therefore cheap—to calculate and collect. Property taxes are difficult to calculate, and every town, no matter how small, has to maintain a considerable staff to determine what they should be.
In our modern, highly mobile cash economy, which Adam Smith never knew, we should add a fifth principle. Taxes should distort the underlying economy—which generates the wealth to pay for them—as little as possible. The property tax is a prime culprit behind suburban sprawl, by forcing the break-up of large holdings, as towns, ever seeking more income, raise the taxes on undeveloped land. New suburban lots then bring in more school kids, which sends school taxes soaring and adds to the costs of maintaining roads and other infrastructure, which sends town taxes up, and the spiral ends in a political crisis.
As I said, there is no fixing the property tax. It should be abolished, like slavery, tar-and-feathering, and witch hunts. As for how to fund local government and schools, I’ll give my suggestions in a second post.
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