How to mend the Property Tax
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Incentive Taxation

How to mend the Property Tax

Assaults on the property tax have been commonplace in the US (and Australia,New Zealand, etc.) in the past few decades.  We think that the property has a lot wrong with it; but its a situation that calls for a scalpel not an atom bomb.  Here are some basic alternative solutions, including the land value tax as a way to abolish the tax on buildings.

Four Ameliorations for Assessment Increases or Tax Increases: an Analysis
William Batt, Ph.D., Joshua Vincent, ED
Center for the Study of Economics, Philadelphia, PA
With the introduction of new assessments or property tax increases, and the resulting disquiet amongst citizens and property owners, jurisdictions must explore tools to ameliorate property tax/valuation “sticker shock.” 

The following précis explores these alternatives to allow for the refund or forgiveness of real property tax liability of certain low income, disabled, infirm or senior citizens.  The measure would apply relief from tax burdens attributable to real property tax rate increases or increases in the assessed value of the low-income senior citizen's homestead (i.e., primary dwelling). 

What relief measures to employ is the focus of this synopsis.  Each state has a different system, and this guide to property taxes in the 50 states is an invaluable tool to research conditions where you are.
A.   Comparative National Use of Property Tax Relief Measures
Four property tax relief mechanisms have been instituted nationally for selected groups of homeowners.  These relief measures apply variously to elderly and to low income households, and less often to disabled and veterans.  Sometimes they are employed as a local option.
The Homestead exemption was adopted by legislative design in several states during the 1960s and 70s, and now exists in all states but Missouri and North Dakota in some form;
The Circuit Breaker is available in 34 states and provides reimbursement to localities by the states for revenue forgiven.
The Property Tax Freeze, has come out of property tax revolts in a few states largely due to public initiatives in the 1980s and 90s. 
The Deferral option again arises from legislative design in 25 states and has the highest employment as a local option. 

The 2002 NCSL (National Conference of State Legislatures) study, reports that Pennsylvania authorizes some localities to opt for Homestead Exemption or Credit, and for Property Tax Deferral.  The Circuit Breaker is available statewide.
As applied in Pennsylvania, the local option homestead exemption may be no larger than one-half of the median assessed value of homestead property.
B.    How sound are each of these measures from the standpoint of textbook tax principles? 
The commonly cited principles of sound tax theory:  Neutrality, Efficiency, Equity, Administrability, Simplicity, Stability.
The only tax that has no downside effects and comports perfectly with these principles is a  is a tax that is "inelastic" or has fixed supply.  That means commodities like land sites, air, water, and other natural resources.  Both Mark Twain and Will Rogers said "Buy land; they ain't makin' it anymore."

One should also consider land use configurations and environmental impacts, and this is particularly important with respect to the real property tax.

Recall also that the property tax is really two taxes with various different dynamics -- a tax on land values and a tax on improvements.  The former has no harmful effects and actually fosters constructive behavior.  The tax on improvements has many detrimental impacts.

Recall also that buildings depreciate in value, just like cars, computers or refrigerators.  Only land appreciates in value.  So the rise in market value of real estate (beyond inflation) is due to the increase in land values.

The productivity of a community's total enterprise is reflected in its land values by what is called economic rent.
Taxing land values stabilizes real estate prices (i.e., insulates them from bubbles), even as it encourages the efficient use of locations by maintaining commensurate carrying costs.
Why is a tax on land value good?  It is totally:
Neutral with respect to its influence upon behavioral choices,
Efficient insofar as there is no “excess burden” (a fancy word for productivity loss and economic drag). 
Equitably progressive insofar only individuals or households that own land pay any tax at all, and because middle class homeowners for the most part own only modest parcels under their houses or farms where land is cheap.
Administrable because it's totally transparent, not likely subject to challenge, and can't be take it to an off-shore tax haven.
Simple to understand, by all members of the community, and
Stable, so that it doesn't impact on budget designs very much.
C.        Tax Relief measures can violate these principles in varying degrees.
The productivity of a community's total enterprise is reflected in its land values by what is called economic rent.          
All taxes come out of economic rent.  If the rent is not recaptured in taxes, it is reflected instead in the market values of land sites. 

Giving property tax relief will result in more economic rent flowing through some sites more than others, raising their market prices.  This affects tax neutrality and tax efficiency.
Real property taxes are not on people; they are on locations (though people pay them).
Giving property tax relief to some locations and not to others distorts land use choices.  This happens either by altering either choices or times of use.  Ideally all sites should be taxed at the same rate and none should be exempted.
Property tax relief measures are instituted at the State level, and assessments and tax rates vary greatly by locality.  This creates inequities by regions of the state.
D.        How administrable are property tax relief measures? 

The neutrality, efficiency and fairness of the relief depend on accurate assessment of property parcels and upon maintaining the integrity of the formulas employed.  The factors of the formulas typically get out of date quickly and then distort the programs of relief.
Property tax relief formulas frequently need to be adjusted and updated, and this makes them subject to political influence.
E.        Comparing the four relief measures, which one is best?

Homestead and Circuit Breaker instruments quickly become out of date and distorted. 
Assessment freezes and tax rate freezes both corrupt the tax regime.
All three foregoing measures all cost the government in revenue forgone.
All three foregoing measures often rely on homeowner initiative to be eligible.
All three foregoing measures are difficult to understand and enforce.
The Deferral provision has the following advantages:
It does not alter the market value of the parcel, as the tax will ultimately be paid.
It does not affect the use of sites, because the titleholder has no incentive to alter use.
It is self-selecting for households desirous of employing the option, reflective of real income circumstances rather than arbitrary factors such as age.
Local governments are not deprived of revenue, even if it may be delayed.
It is fair to other homeowners in the community.
The program is simple to understand. The Deferral program assures what it is primarily intended for: security for elderly or low income households as long as they wish to reside at that site. 

8 Comments to How to mend the Property Tax:

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