August 7, 2006
Property Taxes II Posted by John Steele Gordon at 05:40 PM EST Fred Smoler writes that, “Some of John Steele Gordon’s objections to the property tax are not objections in principle. Valuations could in theory be made less arbitrary . . .” Perhaps they could in theory, but not in fact. A raised ranch on half an acre is likely to be worth almost exactly what the identical house on half an acre across the street is worth, unless, say, a murder has taken place in it. The Times had a story the other day on how such things affect value in real estate, sometimes markedly. (Would you want to live in Jeffrey Dahmer’s house? I thought not.) But I bet such a factor is not taken into account in setting the taxable value. And such valuations are always going to be subjective, because they must be made by human beings. In New York, and I’m sure in other states, it is actually against the law to reassess a house at sale, as frequently sold houses would then pay much higher taxes.
Also, more unique properties are much harder to value, especially if they are only seldom on the market. My small 1750 house has been owned by only two families in its entire existence. Its antiquity would be a huge plus for some people and an equally huge minus for others, who would rather have central air conditioning than seven-foot ceilings and hand-hewn beams (and last week, so would I have).
I will get into the whole subject of taxation in general another time and confine myself now to the question of what to substitute for the property tax so that it can be sent to the Smithsonian, to be exhibited alongside other relics of our colonial past, such as chamber pots and clay pipes.
Since all taxes are, in the last analysis, paid out of income, why not tax income at the local level? By that I do not mean set up a whole new local version of the IRS. God forbid. Instead, in those states that have state income taxes, the state would simply tell each local jurisdiction what the total taxable income of its residents was that year (not the individual taxable incomes, which in a small town would be leaked in about a nanosecond). The local jurisdiction would then decide how much income it needed, do the simple math, and tell the state how many percentage points to tack on to the state income-tax bill. The state would send each jurisdiction the money and take over the often expensive task of dunning deadbeats.
This would be equitable, simple, and cheap, not violating any of Adam Smith’s principles of taxation. To be sure, property values would rise sharply as the tax burden was lifted, but that wouldn’t upset anyone except those looking to buy real estate. They would have to pay more in mortgage payments when they bought, but would have no fear of rising property taxes. Those with large incomes would be hit hard. But they’ve been avoiding paying their fair share of the costs of local government for years, so tough.
There are only two real problems that I can see. First, landlords would have to be required to rebate the property-tax portion of their rents to tenants (who would be now paying income taxes to the local jurisdiction).
Second, in times of prosperity, jurisdictions would get more and more money as the net taxable income of residents went up without their raising rates, and the politicians would, of course, find ample ways to spend it. But then, when recession hit, tax receipts would fall, perhaps sharply. The jurisdictions would then either have to do some very painful belt tightening or raise rates, which would be very unpopular during a recession.
What to do? Do what Colorado did a few years ago with state spending (and has now partially undone): require that town tax receipts not rise except to reflect increases in population and inflation (i.e., remain level in real dollars per person). To put that another way, the town would have to cut tax rates in prosperous times. This, of course, would put the towns, school districts, etc., on a short spending lease, which is exactly what government should always be on. It would force them to make choices, terminate outdated programs quickly, look for ways to increase efficiency, innovate, etc. (In other words politicians would have to do what corporate managers have to do every day of their working lives and which politicians try very hard never to have to do at all). If a jurisdiction wanted to institute a new program that required more tax revenue, it would have to get the people to agree to it in a referendum.
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