A Few Inconvenient Truths about the Property Tax

I'm pleased to share (with permission of the author) something that appeared on a mailing list I subscribe to. The conversation was along the lines of "how do we share the idea of land value taxation [a reform of the property tax] with people who are used to hating the property tax?"

Roy Langston wrote,

When I encounter the usual unreasoning hatred of property taxes, I just point out a few inconvenient truths, along these lines:

"All your life, you have been told that you have to hate the property tax.  You have been told that when you earn income by your own productive effort, contributing to the wealth of society, that is an activity that should be punished by taxation; but when wealthy property owners get the benefit of government spending YOUR tax dollars on services and infrastructure that create higher rents and higher land values, you have been told they should never be asked to repay, in the form of property taxes, any of the welfare subsidy giveaway the community gives them.

"The people who order you to hate property taxes (most of them paid propagandists for wealthy property owning interests) never mention the fact that the property tax is in fact two opposite taxes.  It is a tax on the value of improvements, which is the measure of what their owner contributes to the wealth of the community; and it is also a tax on land value, which is the measure of what the community contributes to the wealth of the landowner.  They don't want you to know that fact because if you knew it, you might start thinking about what it means, and why they are trying so hard to make you hate the property tax.  Can you figure it out?  Or are you happy just being told you have to think whatever they want you to think?

"The people who order you to hate the property tax also never tell you another inconvenient fact: the USA is effectively a scientific experiment in the economic and social effects of property taxes, which range from a high of 4% in New Hampshire to a low of 0.4% in Alabama.  They don't want you to know that the states that have the highest property tax rates, like New Hampshire, New Jersey, Texas, Wisconsin, Connecticut and Oregon, also tend to have the best economies, the highest personal incomes, the lowest unemployment and welfare rates, the best public schools, roads and other public services, the least crime, the lowest total tax burdens, the least government corruption, the most affordable housing, and the fewest homeless.  By contrast, the states with the lowest property tax rates, like Alabama, Arkansas, California, Massachusetts, Mississippi and Washington DC, tend to have the worst economies, the lowest personal incomes, the highest unemployment and welfare rates, the most expensive and corrupt governments, the least affordable housing, the most homeless, the highest crime rates, and the worst schools, roads and other public services.

"Likewise, around the world, the countries where governments get the most revenue from property taxes, including the USA, Britain, Japan, Canada, Australia and Switzerland, tend to be the best countries to live in, have the highest personal incomes, the best economies, the lowest unemployment and welfare rates, the best public services, the least government corruption, and so on compared to the countries where governments get little or no revenue from property taxes, like the Philippines, Bangladesh, Mexico, Zimbabwe and Pakistan.

"In fact, if you divided the USA into three countries for statistical purposes -- the 17 highest-property-tax states, the 17 lowest-property-tax states (including Washington DC), and the 17 states in the middle -- the first would be near the top among the most advanced countries in the world in economic health and overall quality of life, the second would be near the bottom of the list of industrialized countries, and the third would be near the middle of the list.

"Why don't the people who try to make you hate the property tax ever want you to know these facts?"

I would add to Roy's analysis the comment that the states -- and within them, the counties -- that have the highest property taxes are also the places with the most educated electorate and which send the most children to college.  And that the converse is also true.

With this in mind, does it make sense to cap the property tax?  Does it make sense to substitute sales taxes and wage taxes for the property tax?  I don't think so.   I do think it makes sense to reform the property tax -- to reduce or, better, eliminate the portion of the property tax that falls on buildings and other manmade improvements, and simply rely on taxing the value of the land itself.

Comments

[Logan]

Great blog and great post. I'd like to add a little data in support of this post. The Institute on Taxation and Economic Policy publishes a report called "Who Pays?" that analyzes state tax burdens and how it affects different income classes. I recorded the average income of the bottom quintile, the middle quintile, and the top 1% of each state and also the composition of revenue (i.e. the percentage of revenues coming from the property tax, income tax, sales taxes, non-tax revenues, and other). Here is what I found out:

-- Out of the top 11 property tax states, 4 were in the top 10 poor incomes, while 0 of the bottom 10 states had top 10 poor incomes.

-- Out of the top 11 property tax states, 5 had top 10 median incomes, while only 1 bottom 10 state (Alaska) had a top 10 median income (note that Alaska has a form of LVT with their oil dividend).

-- Out of the top 11 property tax states, 4 had top 10 rich incomes, while none of the bottom states had top 10 rich incomes.

On the other end of the scale...

-- Out of the bottom 10 property tax states, 6 had poor incomes in the bottom 10, with only one top 10 property tax state (Montana) was in the bottom 10 of poor incomes.

-- Out of the bottom 10 property tax states, 7 were in the bottom 10 of median incomes, with Montana being the only top 10 property tax state to be in the bottom 10 of median incomes.

-- Out of the bottom 10 property tax states, 6 were in the bottom 10 of rich incomes, while 2 (Maine and Montana) of the top 10 property tax states were in the bottom 10 of rich incomes.

-- The poor in the top 11 property tax have an average income 26% higher than the bottom 10 states. Median incomes are 26% higher and rich incomes are 85% higher.

-- The poor in the top 10 income tax group have an average income only 3% higher than the bottom 11 states. Median incomes are only 7% higher and rich incomes are 24% higher.

-- Meanwhile the poor in the top 10 sales tax group have an average income that is 8% less than the bottom sales tax group. Median incomes are 17% lower and rich incomes are 13% lower.

So it seems clear: tax property (land, of course, and not the buildings) more to get significantly higher incomes across the board, taxing incomes doesn't make a big difference, and relying more on sales taxes kills your income.

[Nicholas D. Rosen]

I linked to this on my blog, and a friend commented that the "They have told you" part seemed paranoid, and got her nose out of joint. I defnded it as having a basis in fact. She wrote, "if this fellow is a friend, you might want to suggest rephrasing to something like: "you've been told X, maybe in a newspaper article or on T.V.; did you know that it's probably not so? Claims for X are based on Y, but Y just isn't so: [insert proof here]."

Make of this what you will.