Center for the Study of Economics - Company Message
RSS Follow Become a Fan

Recent Posts

Land Value Tax featured in the Financial Times
More evidence confirms the error of stopping land value tax in Pittsburgh
Urban Taxation: Deadweight Loss for the Weakest
Property tax caps for user fees; what could be better? Almost anything
Land Value Taxation in Connecticut: UrbanTools' televised interview

Most Popular Posts

Noted UK Think Tank: Tax Land Values
Eliminating the property tax? It must not happen, but we’ll see what happens.
Altoona, PA: City tax wholly on land values = normality
Dr. Herbert Barry's Proposal to Really Reassess Allegheny County
How to mend the Property Tax

Categories

Act 47
Africa
Agricultural Policy
Allegheny County
ALTER
Altoona
Australia
Australian Capital Territory
Baltimore
Berkshire
Canberra
Clairton
Connecticut
Current News Item
de Blasio
Economic Development
Economic Policy
Economic Rent
Economist
Education
Federal Tax Policy
Fiscal Policy and Taxes
Gentrification
George Osborne
Global Taxation
Harrisburg
Hartford
Healthy Communities
Housing
Housing Policy
Hurricane Sandy
India
Ireland
Jimmy Tayoun
Kenyatta Johnson
Land Policy
Land Value Tax
Lanesborough
Larry Deutsch
Law and the Constitution
Legislation
Liberal Democrats
Maria Quinones-Sanchez
Martin Looney
Maryland
Massachusetts
Michael Kinsley
Michigan
Model Legislation
Monroe County
Montreal
Moonachie
Namibia
National Tax Policy
New Jersey
New London
New York City
NY
Oregon
Parking and Transportation
Patricia Dillon
Pennsylvania
Philadelphia
Pittsburgh
Portland
Property Assessment
Property Tax Reform
Public Opinion
Public Resources
Public Works
Regional Tax Base Sharing
Regionalism
Rhode Island
Rochester
Sales Taxes
Scranton
Senator Jan Malik
Smart Growth
Taiwan
Tax Exemption and Abatment
Thomas Piketty
Titusville
Transportation Funding
Transportation Policy
Uncategorized
United Kingdom
Urban Rejuvenation
Urban Tax Policy
Vince Cable
Wage and Income Taxes
Wales
Wealth
Wilson Goode Jr.
powered by

Incentive Taxation

Eliminating the property tax? It must not happen, but we’ll see what happens.








Independence? From what exactly?



Recently, an active and conservative member of the Republican Party in central Pennsylvania sent UrbanTools a copy of something called the "Property Tax Independence Act"  (PTIA) with the interesting subtitle of "Liberty Equality and Prosperity".  The legislation – more accurately a proposal for a constitutional amendment in the state of Pennsylvania – Is given a seemingly official sobriquet of “House Bill 1776.” 

As yet, this is not an actual bill however. Moves to eliminate the property tax have been common in recent decades in Pennsylvania and elsewhere.  As a rule, actual elimination has almost never been accomplished.  Some putative tax relief bills and constitutional amendments (such as Proposition 13) have been passed with often mixed – to – disastrous results.  In fact, passionate defenders of Proposition 13 are taking on the tone of bitter-enders who see the writing on the wall

Yet, UrbanTools has always researched and helped implement programs that reduce the pressures of taxation on all strata of society from poor to prosperous.  We also believe that a functioning market system augmented by a stable revenue system to fund government in the end is the best option for government, particularly state and local governments, as federal aid dries up never to return. 

The Commonwealth of Pennsylvania is indeed a relatively high-tax state:  the nonpartisan Tax Foundation has consistently placed Pennsylvania in the top 10 of state and local tax burden from 2003 to 2009 (last year available). However, blaming the property tax, while popular and certainly reflexive, does not stand up to scrutiny.  Again, using Tax Foundation figures the property tax is a source of state and local revenue is 29.9%. That places Pennsylvania right in the middle of the pack at 22nd-highest, and significantly below the national median of 32.4%.    

 Property taxes are a manifestation of local control 

One of the great unrevealed facts about property taxes are they are a local tax, and if people vote, they can raise or lower them. This April, 2012, the town of Medford voted a higher local levy above the set tax cap.  That’s called democracy, and it couldn’t happen in most places. A  Pennsylvania state legislator or County Commissioner from an area close to a state border like Maryland's is seeing growth from inflow, and greatly increased spending that is contrary to decades of tradition.  We shouldn't be surprised. Yet, most Pennsylvanians live in rural areas with one big town usually serving as the county seat.  It might surprise a citizen of Blair County for example, that the property tax burden in that county comes in at 1,089 out of the nation’s 1,823 counties.  Yes the property tax is a bargain in Blair, Elk, Cameron and many other counties in Pennsylvania. 

Eliminating the property tax will launch these affordable places into uncertainty with a statewide system that will surely not be one-size-fits-all. Looking at every tax is key to understanding the relative lack of competitiveness that Pennsylvania has.  The Pennsylvania income tax is flat and wage-based , it captures revenue even the poorest Pennsylvanians, boosting the state’s ranking to number 16 in the US. The figures also take into account ubiquitous presence of the local earned income tax – again a wage tax – that that is paid in addition to the state levy. 

 The Spirit of 76?

The PTIA puts the blame squarely on Pennsylvania's troubles on the property tax. Other far more harmful taxes are essentially ignored. In fact, the solution proffered to the property tax as it exists is to increase sales taxes first and foremost. The accompanying documentation offered to support the PTIA claims that among other things that cross-border sales jumping will not occur because neighboring sales taxes are higher than Pennsylvania which is 6% statewide. The document does not count local levies, as it does for localities in New York State, thus excluding taxes like Philadelphia’s extra 2% sales tax.  As it stands, Pennsylvania 6% rate is higher than Ohio's 5.5%, the same as Maryland's 6%, New York's state rate of 4%, and who can forget Delaware's sales tax of zero (certainly not shoppers in the six County Southeast Pennsylvania area). The PTIA bill would have to raise about $24 billion a year to replace the school property tax.  

The plan would have to increase the sales tax rate by a least several percentage points. Pennsylvania would become less competitive and certainly would be hardest on small businesses, which have to do their commerce inside Pennsylvania cities, towns, and boroughs.  Among the goods taxed under this program would be food, textbooks, flags, courses and services like trucking, funeral parlors, TV cable veterinarians etc. You get the picture. 

Other States’ Property Taxes 

 An underpinning of the argument to eliminate the property tax is that people are leaving Pennsylvania as we speak because of property taxes. There are a lot of reasons people are leaving Pennsylvania, but it's not likely the property taxes are one of them.  Again, let's go back to the assumption that regional tax competition is a reality.  It is absolutely true that New Jersey has very high property taxes that cause real distress, especially in the face of very high income tax, sales, and corporate taxes. New Jersey is almost an outlier when it comes to all kinds of taxes on investment and work.     

Yet, when one looks nationally at states that rely on one tax more than others, differences begin to appear.  For example, several states that dodged the Great Recession - like Texas, New Hampshire, Nebraska, etc -have historically high property taxes coupled with minimal to no income tax. States that have been historically poor such as New Mexico, Louisiana, and Mississippi have relied to a far greater degree on local and state sales taxes.  Long story short, they have lousy schools, lousy health and are not great places to live.  

Income taxes 

The proposal also proposes swapping out locally controlled/collected taxes which citizens can affect municipal level to a brand-new statewide personal income tax.  The rate is not indicated, yet even a modest one or two point increase on income tax - a keystone of socialist philosophy for over 100 years – will put Pennsylvania, already top-heavy with retirees who pay no income tax, into Connecticut, California and Ohio territory when it comes to high income tax rates. Another view The PTIA offers a 10 point rationale for changing the Pennsylvania Constitution.  Let's look at them one by one.

"Achieve true homeownership" The idea here is that you really don't own your own home because if you don't pay your property taxes you lose it.  Very true, but a non sequitur. If I do not pay my income tax, which would increase under the PTIA plan, I bet I go to jail.  That's true of all taxes not just the property tax.  It also applies to the real world of free markets: if I decide I don't want to pay my mortgage or the loan on my car, those are confiscated by the lenders who have taken a risk on me.  Are the proponents of this bill going to start suggesting that you really don't own your house or car unless we can eliminate the debt you assumed?  This could go to some very strange places.

"Stabilize school funding” The two taxes chosen for PTIA, the income tax and the sales tax are the first revenue sources to disappear during  recessionary times.  It's true in Pennsylvania and elsewhere. The property tax (p.6) is without question stable. As this salient quote from the state Department of taxation in Minnesota indicates: “The three major sources of revenue are the state income tax, sales tax and property tax. The income tax is the most unstable and unpredictable. The sales tax is relatively unstable because it exempts several major categories of personal spending, such as clothing and most services. The property tax is the most stable.” 

 "Help prevent foreclosures" We agree with the authors that residential property taxes during times of financial stress may exacerbate foreclosure numbers, as they are a portion of the big fat true cause of foreclosures: mortgages to banks.; our constructive ideas will show how the specter of foreclosure can be reduced with a simple shift to the land value tax. 

However, taxes as a component of the mortgage are usually 20-30% . Of course, a higher income tax reduces the amount of mortgage one can make to the bank, so the property tax per se was not a direct factor in the foreclosure crisis: unemployment was. 

"Restore plummeting real estate values" Ask a Pennsylvanian in a town like Sharon if the reason real estate values have dropped is because of property taxes, or because the town has lost about half of its population.  The decline of Pennsylvania's manufacturing base has pushed our youth and families to states like Texas and Florida, not taxes. Replacing the property tax would likely produce a capitalization effect for investment properties, which would pay more to convert single-family homes and rental properties. Most Pennsylvanians would not say that's a good thing.   We also suggest that increases in state income tax rates will have a more direct effect on reducing property values

"Boost the sagging housing market" Yes, a straight reduction in property taxes in a vacuum would likely make an area like a neighborhood or block cheaper.  This proposal does not exist in a vacuum; its tax swap from fixed immobile assets to very mobile assets such as sales and wages and other forms of tax on work and investment. 

"Attract businesses to Pennsylvania" low taxation on investment capital indeed would attract business, particularly from high tax states like New York and New Jersey.  Yet the tax penalty on increasing sales and use taxes as well as a tax penalty of a higher state income tax will contribute more drag than lift to the economy. 

"Generate jobs for Pennsylvanians" if the property tax is the second-largest fixed cost for Pennsylvania business owners, as asserted in the piece, then it would have to be explained why job creation throughout the Great Recession (and before) has occurred in Texas more than any other state.  Again, Texas is number one in property taxes as a percentage of property value.  Higher income taxes in geographically defined area have been demonstrated time and again to reduce the amount of employment in that area. In other words, Pennsylvania may run the risk of job loss like Philadelphia over the past five decades. 

 "Create a massive stimulus for Pennsylvania" It is unclear how a stimulus can be created by swapping out one tax for another tax (or taxes) without addressing the expenditure side. The literature on the PTIA produced thus far indicates a revenue swap, with savings going to a very small subset of property owner: the vacant lot or speculative landowner.  All others will simply be paying the hidden tax of the sales and use tax, or alternatively state income tax.  The money NOT in the pockets of property owners cannot create a stimulus much less help small to medium businesses who will  to be groaning under a higher sales and use tax. The numbers don't work.

"Increase personal wealth" See above for most of the answer, but Americans traditionally have not considered a home purchase to be an investment. Only recently, did free and easy credit, skilled marketing by mortgage lenders and the federal government’s quasi-official agencies feed a delusion that one's home is also one's casino.  Home purchase ought to be what Americans traditionally thought it was: a somewhat expensive goal to shelter one's family.

"Stop costly reassessments” This supposed benefit of the PTIA is irrelevant and confusing for several reasons: most counties in Pennsylvania have resisted revaluation for decades. When revaluation does occur, it is with years- long lags, thereby increasing the expense.  Most states and counties across the United States revalue on a fairly consistent basis, with little ongoing cost.  A free market solution to assessments is of course to use Realtors and property insurance databases, which will continue valuing land and buildings, as no logical market can operate without this information.  

An experiment: North Dakota 

The sponsors of HB 1776 point to the one state that is considering eliminating its property tax.  North Dakota is one of the most sparsely populated and agricultural states in the USA.  That state is indeed considering a change to its constitution to eliminate the property tax.  Many in that state are cautioning against a simple (or simplistic) solution. The obvious buffer to eliminate the property tax now is the fact that North Dakota's coffers are now swollen with revenues from gas, oil and other natural resources.  That won't last forever.   Once that party is over, North Dakota will then have to find revenue streams to pay for the basics.  In all the euphoria in Fargo, no one mentions that once property taxes outlawed/proscribed by the constitution then the citizens will become subject to other statewide income taxes, sales taxes, just like HB 1776.  It is hard to imagine the free-thinking North Dakotans would really want more centralized and remote control of their live and business.  It seems hard to imagine that in most of Pennsylvania. the In a sense, perhaps North Dakota should go ahead and do this, so that other states and see what happens. In our federal system, the states are indeed the laboratories of future policy.  Holding up North Dakota has several difficulties in any case.  The differences between North Dakota and Pennsylvania are extreme.  There is no natural – or Commonwealth – resource tax in Pennsylvania, not even the commonly accepted severance tax. The population of Pennsylvania and the infrastructure that exists within is many magnitudes larger and expensive than North Dakota's.  This is apples and kumquats. 
UPDATE: NORTH DAKOTA REJECTED PROPERTY TAX ELIMINATION IN JULY 2012.

It is absolutely correct that the property tax as constructed is a lousy tax. In Pennsylvania, the property tax falls disproportionately on what people do with their own dimes and their own time. The property tax is actually two taxes as it is a tax on land values and a tax on building values.  The tax on land values is the only tax that collects what a community creates.  What do we mean by that?  It means that with every police department, fire department and yes good schools, land values increase. No individual and no company increases land values on the ground. 

Where we can all Agree

This is the one case where all of us create land value.  The original meaning of Commonwealth essentially said that this place is here for you to make a living, to be a success, to be happy, and to be legally secure in what you have earned with your labor and capital. The other part of the property tax, the tax on buildings and structures is as corrosive to prosperity and freedom is the worst income tax, business tax or sales tax.  As we all know, when you buy a house or fix it up, or build one from scratch your tax liability increases significantly.  On that we can all agree.  

That's why Pennsylvania has the Keystone Opportunity Zone, which is a confused, privileged and preferential way to get out from under a bad tax system. What Pennsylvania needs is to chart a careful yet daring course to a place that encourages economic growth, maintains a reasonable level of government at the most local level possible, and leaves people alone. 

We'd suggest that instead of trading one bad tax for a basket of bad taxes, that Pennsylvania expand on its use of the land value tax, so that we are more like nations that encourage freedom and prosperity like Australia, Singapore and Hong Kong. The land value tax is already used in 20 cities and school districts in the state of Pennsylvania.  In some cities annual property taxes have been reduced for some homeowners by up to 80%, without resorting to other, higher taxes. Instead revenue is provided by land value, an immobile source of revenue which is created by local effort, services and community.