Chip Taylor

Effects of local tax structure

Otis White (no permalinks; scroll to "Hammering New Homeowners: Don’t Mess With Taxes") note why property taxes are actually a good tax for many local services:

It links what cities have the greatest power over (land use) to their own financing base. Do a good job of land use and property values rise. If property values rise, government revenues increase. If revenues increase enough, governments can offer more services and even cut the tax rate. Everybody wins.

Sound familiar? It does to me.

White goes on to note that the unpopularity of property taxes have led to various efforts to "reform" them, many of which have had what he calls "disasterous effects."

Good example: Michigan’s Proposal A, passed in the early 1990s, which forbade governments from increasing homeowner assessments by more than the rate of inflation or 5 percent a year, whichever was less. What about places where property values were skyrocketing? Local tax assessors could track those valuations, but as long as the homeowner stayed put, it wasn’t reflected in his tax bill. Sell the house, though, and the new homeowner would be assessed on the full value, which could result in a tax bill thousands of dollars greater than the previous owner was paying.

Over time, you end up with a system where you pay higher taxes if you've moved recently than if you've stayed in one location in an identical house. Personally, I don't see why that should have any effect on the level at which you are taxed. It also provides a disincentive for senior citizens to sell the large house in which they raised a family in order to move into a smaller one.

Most property tax "reforms" suffer from these sorts of problems.

My take? The main problem with the property tax is that it is mainly used to fund something that, unlike police or fire protection services, has no intrinsic connection to property values: elementary and secondary education. This not only screws up the property tax for things that it would actually be good for, but also creates a pernicious education system in which the quality of your kid's school depends on the neighborhood you can afford to live in.

If we changed the way we pay for education, I think a lot of the problems with the property tax would go away.