In Praise of the Property Tax

...Taxes average about 1 to 1.5 per cent of the property's resale value...

...Naturally, it concluded that the rich pay far less property tax than, in fact, they do...

...Despite these taxpayer revolts, it can be argued that the property tax is basically a popular tax...

...Wealth implies the ability to liquidate, and even more importantly, the ability to borrow...

...One McGovern television commercial focused on the plight of an elderly widow with an income of about $1,700 who told the camera that she had to pay one third of it in property taxes...

...Mason Gaffney works for Resources for the Future...

...The implications of this are illustrated by a phenomenon known as the Reagan Effect...

...Local examples are even more extreme...

...The income tax provided a model progressive system to which all other taxes could be compared...

...Taken in its ideal form, the property tax is more progressive than the income tax for one simple reason-property is less equally shared in this country than income...

...Balkanization is inherent in all forms of local taxation...

...A large share of the property tax-recent estimates say 40 to 50 per cent-is based on the value of the land alone, rather than the buildings on it...

...First-Home Syndrome Other economists are misled by the more simple-minded First-Home Syndrome...

...Unfortunately, large holdings and corporate property tend to be assessed at a much lower percentage of real value than one family homes...

...Although it is only traditional for interest groups to hide behind selected widows, let's examine the plight of that elderly woman who pays $600 of her $1,700 yearly income in property taxes...

...Ronald Reagan knows that income tax shelters are not exempt from property taxes...

...The second abuse, dealt with in the Serrano case, can be nicknamed "Balkanization...

...This phenomenon which economists call "forward shifting"means that the property tax is spread over the whole population, like regressive taxes such as the sales tax...

...But in the long run, evidence shows that the property tax is far less important in setting rents than the normal forces of supply and demand...

...This means that a home on which taxes are $600 a year could be sold for $40,000 or more...

...If one wants to escape the property tax, there is no simpler route than being too poor to buy real estate...

...It can be administered more equitably than the income tax, if given the same level of professional attention...

...This money, invested at five per cent in a savings account, would produce at least $2,000 in interest per year-or enough money for the widow to move into a $1 67-a-month apartment without touching her $1,700 yearly income or asking for any help from her children...

...It is a tax which differentiates between the ease with which a speculator can make $10,000 on the real estate market and the sweat it takes a coal miner to earn the same amount, working long hours in unsafe mines...

...Apart from their bearing on the tax system, these errors are a disturbing comment on the state of economic literacy in this country...

...In many ways wealth is even more important than income in determining who in our society has the greatest ability to pay...

...We are dealing here with long-term economic equilibria, the sort of slippery calculations that often daunt programs to stop inflation or control unemployment...

...If it's true that the wealthy pay a disproportionately high share of the property tax, what sort of creative accounting is responsible for studies showing that property taxes weigh heavily on the poor...

...But such petty-trader vignettes are notorious distortions of economic trends...

...The Survey Research Center, for example, used "imputed" income rather than taxable income, and found the property tax to be progressive...

...On closer examination, however, this is simply implausible...

...Yet many of these subtleties have been obscured by the national crusade to modify the property tax...

...But in this case the taxpayer was Governor Ronald Reagan...

...Words lose their normal meaning when shifted into the world of economics or tax law...

...Was it any wonder that McGovern declared on the hustings that "there is no more regressive form of tax" and called for "federal incentives to states to adopt more progressive taxes...

...The economic equivalent of political gerrymandering, Balkanization is the maintenance of tax-rich enclaves like Shaker Heights and Grosse Pointe...

...Property stands there for the world to see, wearing a price tag provided by the market place...

...Designed to aid the poor, this plan will presumably benefit wealthy academics as well...

...The basic fallacy here is the reasoning that taxes paid on the owner's "first" home are the only property taxes that matter...

...There is a certain gut appeal to this theory, mainly because it's easy to imagine the thoughts running through any landlord's head: Taxes up $2,000 next year...

...A 1970 study for the District of Columbia local government was based solely on first-home taxes...

...The anti-property tax movement has even taken on an aura of radical chic...

...If the property has value to her heirs, it is likely they would help with the taxes...

...The Reagan Effect makes the rich seem poorer than they are, and the First-Home Syndrome overlooks large portions of the property taxes the wealthy pay...

...In Praise of the Property Tax by Mason Gaffney These days the property tax is about as popular as a return to Prohibition...

...Historically, the property tax was feared by the wealthy...

...In America today, to own any property at all is to be better off than most...

...Each of the property tax's flaws has its analogue in the progressive Answers to January puzzle: tax assessor there is a tax lawyer helping the rich hide large portions of income in tax shelters...

...With these rich tax sources cut away, those still living in the inner city or in blue-collar suburbs must pay exorbitant rates for inferior local services...

...Income is an imprecise concept, and cash lends itself to concealment...

...Nixon, like McGovern, borrowing the property tax issue from George Wallace's ideological baggage, defended both revenue sharing and the ill-fated value-added tax as ways of raising enough revenue to allow local governments to cut property taxes...

...To begin with, half the adults in America own no taxable property at all...

...It is a way of compensating the general public for such government projects as roads, which tend to raise real estate values...

...Increasingly arcane economic analyses have made it possible to "prove" virtually anything through the adroit choice of variables and definitions...

...For various technical reasons, economists agree that land taxes cannot be shifted forward...

...Although both rents and property taxes have been going up steadily, a cause-and-effect relationship is difficult to establish...

...Besides being even more progressive than the income tax-if correctly administered-the property tax has several attractive features uniquely its own: .It is the only major tax which is levied on wealth as well as income...

...None of this makes sense if the property tax is really regressive...

...The current drive against the property tax was accelerated by a 197 1 California Supreme Court ruling...

...Carried away by political rhetoric and economic analyses, many are now convinced that property tax relief is part of liberal orthodoxy...

...Throughout the country, tax assessors tend to appraise property at less than its full market value...

...For most of us, this is a fair assumption, since our homes are more accurately described as "only" rather than "first...

...Several official studies analyzing the property tax have ignored this additional taxable property and have come up with predictably skewed results...

...Put simply, the property tax is a levy at uniform rates on the current market value of property...

...While a tenth of the adult population receives about 30 per cent of the total income, the top tenth of the property owners hold between 50 and 60 per cent of the real estate...

...In early America, one of the reasons for a property qualification for voting was to exclude those who had nothing to lose by drastic hikes in the property tax...

...There were few issues on which George McGovern and Richard Nixon agreed in the recent campaign, but the need to reduce-if not abolish-the property tax was one of them...

...The tax also compensates renters for the special exemptions homeowners receive under income tax law...

...A well-administered property tax could be our most progressive tax, not public enemy number one...

...When the vagaries of local boundaries enclose an area with a low taxable base, the homeowners living there must pay a much higher tax than if they owned a home of similar value in the wealthy suburbs...

...In 1970, a certain California resident reported no "adjusted gross income" on his federal tax form, but still had to pay heavy state and local property taxes...

...This confusion is a relatively new development...

...The radical majority on the Berkeley, California, city council has proposed a local payroll tax to replace the property tax...

...But, compared to property distribution, the income charts seem to describe a society in advanced stages of socialism...

...Balkanizing Grosse Pointe Like most other taxes, the property tax is often badly administered...

...N. W., Washington, D. C. 20036...

...The property tax is also a way of reimbursing those who were excluded when this continent was transformed from virgin land into private property...

...The revisionist view of the property tax can probably be explained by two factors-the development of the income tax and the increasing sophistication of economic studies...

...Wisconsin's Department of Revenue made the same mistake in 197 1, releasing a similar first-home only study "in defense of Governor Lucey's use of the income tax to provide property tax relief...

...Many economists, however, persist in using "taxable," rather than gross, income to show how the property tax overburdens the poor...

...Prominent liberal economists such as Joseph Pechman of the Brookings Institution have suggested that even the sales tax might be fairer than the property tax...

...In some areas with high tax rates, like Newark and Youngstown, voters were clearly saying that they could not afford another rate hike...

...There are wide variations within the same metropolitan area as well...

...The longer article from which this was adapted is available from Resources for the Future, 1755 Massachusetts Ave...

...It is important to cut through this thicket of misconceptions and realize that in turning their backs on the property tax, liberals are abandoning one of their most potent weapons against the abuses of wealth in this country...

...In the Serrano case, the court held that the current system of financing schools through local property taxes was unconstitutional because it discriminated against children living in communities too poor to raise adequate educational funds through real estate taxes...

...The variation in rates can be extreme, ranging from nearly zero in parts of the southwest to six or eight per cent of the property's value in the northeast...

...Even after acknowledging that there are significantly fewer property taxpayers than those with taxable income, wealth is still more concentrated than income...

...Throughout the West, settlers imposed these taxes as a way of deriving some public benefits from the large holdings of ranchers and speculators...

...The few times that these biases have been corrected in studies, the results have been startling...

...point to academic studies "proving" that the property tax is regressive...

...Wisconsin, for example, allows local income taxes, and the suburbs generally have lower rates than urban areas...

...Yet it is these abuses which critics emphasize in the mistaken belief that they are inherent in the property tax system itself...

...The property tax revolt is also partially box in these local tax elections to express their discontent with the whole network of inequitable taxation in America-from loophole-ridden income taxes to notoriously regressive sales taxes to ever-escalating social security levies...

...The Onus of Ownership The motivation behind all these schemes to replace the property tax rests on the belief that such taxes are a far greater burden on the poor than I on the rich...

...These adjustments in the housing supply caused by a rise in property taxes don't happen overnight, of course...

...This point may seem obvious, but somewhere along the way it has gotten lost...

...We don't need property tax relief...

...But the real catalyst to the movement wasn't court decisions, it was well-publicized "taxpayer revolts" where voters repeatedly defeated property tax hikes necessary for the continued operation of schools and other local services...

...It's no wonder that politicians can...

...Even today, most of northern Maine is unincorporated, largely because the giant paper companies are afraid of property taxes on their timber holdings...

...It helps plug loopholes in the income tax, which is turning increasingly into a regressive payroll tax...

...A 1971 study by a Nader task force, Power and Land in California, disclosed that the state's 25 largest landowners held 13.5 per cent of the private land in the state...

...In order to resurrect the property tax's reputation, it is important to define exactly what sort of system we are talking about...

...Waxing rhetorical in his acceptance speech to the Republican convention, Nixon pledged to reduce the property tax, which he said is "an unfair and heavy burden for the poor, the elderly, the wage earner, the farmer, and those on fixed incomes...

...Then just raise each of my 200 tenants' rent by $10...

...The answer centers mainly on a point of language...

...One explanation is that higher taxes will eventually force some owners of idle land to build new housing, increasing the supply and thereby holding rents down...

...At first glance this might seem a perfect illustration of how the property tax victimizes the poor...

...At about this point, critics of the property tax usually retort that it is deceptive to argue that only property owners pay real estate taxes because in the end everyone pays...

...The reasoning is that since apartment managers, office-building tycoons, and anyone else who rents out property must pay taxes on it, landlords will recover the tax from their tenants by raising rents...

...The Merry Widow Even the plight of widows living on fixed incomes and trying to hold on to the family homestead in the face of ever-higher property taxes doesn't undermine this argument...

...This is easily forgotten, especially after staring at income-distribution charts that show half the population making much less than $10,000 a year and a handful making millions...

...But, among the wealthy, other forms of property appear-vacation homes, tax-loss farms, and speculative real estate investments...

...Nothing in this definition includes either unfair administration or the problems raised in the Serrano case...

...How many other taxes would exist at all if they had to be approved directly by the voters instead of funneled through their elected representatives...

...But here the underlying problem was not the property tax itself, but its unfair application...

...But most of them do earn enough to pay income taxes...

...What we do need is reform to get rid of the unfair practices of local assessors and to correct the inequities of differing local tax bases...

...The horror stories abound...