OVERNMENT FINANCE BRIEF NO . 13 Property Taxation: Economic Aspects TAX F O U N D A T I O N, I N C . This pamphlet is 2dapted hors a paper by C. Lowell Harries on Economic Evaluation of Real Property Taxation : Municipal Income Tares, Pro- credin s. the Academy of Political Science, Colum- bia University. Ed. by Robert H_ Connect. Vol. XXVIII. No. 4. January 1965 7r. Harries is the Tax Foutsdationis Economic Consultant and Professo r of Economics at Columbia L-nh-ersit -The views ex - pressed are Dr. Harris ow t- . Tax Foundation is a private, non-profit organiza- tion founded in 19-7 to engage hi nonpartisan re - f search and public education on focal and manage- ment aspects of government. It serves as a national information agency for individuals and organiza- tions concerned with government fiscal problems. Covvnunmt Finance Brief No. 1.3 + August 1988 _ i Copyright Im - I TAx For%vAm.N, 1%-c- 50 RMWeller Pbra - hew Yak, . Y. 10030 - I' Property Taxation: Economic Aspects By C- Lowell ;4acriss TIu property tax pL-trs :t role in tool.cs of takiiiz d+-)ILtr. €iam the t-; xpay r and '. o etuntent finance Lame eitmigh to aur- aiug tliltii to :i ~government trcaiurv- prise Iiialli- tihsrrvers. The tax takes 1he- julrerse. rituircre nue• ctFeru "in be snore• trip.-i taxl;ta c ps ,!rill eves Ixfere ul In+ire than wimr significance- Iitost Ik r •'diili'CF, iI- CiC~fl:t'i eii CtttLYfeiitf flltt;tii. vvrnffila- when the t. x rites :ire at the ?N!Irert — sand hringis niorr Into localtzov- hitz-h levels found in numerous coiiununi- erntnetit treamirico . u"tria- t:1 billion ties to day. this fi-ssul ymm about S1.10 per ripita- or S7,11t1 fora family of five oil the aver-ag of hxal governments tile piroperty iup f nn VSi and -S-415 rt.--%pt,-,tively ill um tun conilxare favorably with aitermt- 1965 dollars in 195£ . The outflow of tive revenue sources within limits . It expenditures- how-ever. lists risen more shous tip 1o;tdly- however- when used as rtpicih•.t Such will continue to he the intrusively as in a relative fea. (but itn- case- Ina tuasiv localities. property-t:tx portant I counininities today. Poor ad- vielels will not _row so rapidly as Iex:11 Ministration pla-111cs the tax more geri- r_overnntent spending, allowing for c•ralla- than is nect-mtra•. Achievements in grants-in-aid_ etc-- unless effective prop- iiiinte•rous places have denioustrated tha t erty-t:cx rates keep risin~. Iiut even if adininistration ran lx• improved- And th e '.1de•+luate- rite increases were passibl e atnrrirare• of the t;tx could also Ix- inuch constitutiomilty. poli:;callv.;utd eeonoin- iniproved. This Impe•r % ill not deal with would irtlla•. they are not :assured. Nor oiie• structural problem the taxation of incre=ases he de--irable cohere rites are personal property. Another structura l alrcadv :s hi-di as in some localities. el!-latent. tice relative reliance on laud Every t=ax has effects oth--r than those and buildings, will get :attention later. What the Property Tax IsAnd Is No t The property tax falls on IWO111c . exclusively a source of revenue for foca l "Things" tlo not, in a meaningful sense, government. in four states only real bear tax. The property tax must lie property is taxed . Most states, hou•- thougfit etf as a device to tax people ac- ever, lx-rntit localities to tax tangibl e cording to their ou-inurship. use, and personal property — inachiner% . inven- other tics to praperty. The tax is almost ton•, furniture•, etc. In fact, however. is i . n .+s t;ia. :t .a>- .,, tta,.+ .:a t .,s y; ., .i~ ! cx :~ls,-~ .ct ( L .,alit 1{atttaa, !(ar.JG.>n~ ut S:att and lws:.tt l;ua~ er,rtrt Ftsartt INce Yoti. : Yaa Fautndattat. Lnc.. 1964) . 1 a rule only the m.-AM-:1 prole:ty of lmsi- property which fields s wr vent to the nesaes and atitonnilbilcs are taxed- lit a acct:ICS_ An Increwmvtit 46 l)t•rLviat will il d fvw states there ix still more tlLui liit-or- rc-duct• the a motint renuinin- after tax nliss L ration of isitaia ible persomil h! such "Ise- ht- about S per cent.11 - property — securities and Ixlnk lxilatices. property tax differs in essenti :al_[ from ::It iliconic tax- E ad, should lx judged 11W tax is shat a Ie,.v till isidilidual net zc7,xtrdisl-_- to criteria applicable to it, not wealth. Tfte justification for they tax does to the other- not refit u_ on :. l)rtsz2nilYf adrt?d.Iilnt of h;Aen to a Ixrsorl s net ;rortlt_ Tlae ixast• 11-t- tax in inost le.. :alitics is Lir_cly a of tl:e IXX is :en a stillLite of the worth of hunlcst on lui.rsin_. tint substantia l c.ch particularpicceof property-chiefly ainounts : re collected from Isaisincsst .- real estaty. itbout re- and f )roily debts \t, hell a rpresst-d in the rune ternils as a a-g aillst it- III ::hnost all "LSes aswun.esif retail saic-s txc. the propertv t-: c cctuabr rild colle.-Vorr are local functions. Many :ill per cent of pure occ-ulunc: cyst of state coustittstious. local charters- and hatishiLz in sonic• localities_ Ina r=te:l ec a- state statutes %oreniitrI local affairs pre- tust:sic 4vivic. the pre3perty Lim oil real scrip- in axinitatn txK rates. Their practi- e-Mate is itc)t one t:-r but two of cntcialh- cal effettiveneys differs widely_ - _ different natures — :a levy on land an d one oat intFl•orenienfs. The condetnna- Although property-tax rates when ex- tort comments which inake up nicist o f pressed its a percentage are snrall. they what follows apply chiefly to tile secont . cpp rt to capital cattier and are often aspect. Ciat is. the burden on improye- -high_ Comparison of property-t:u rates inents-Be tax on pure land values. ac- with inconi or stiles-tax rates can be cordin-, to a long and respected —and deceicin-_-_ A 3 per cent property- twc correct — tradition of economic analhais equals 33 per cent of the pre-tac income stands as one of the ]lest possible means —and half of that after tax—front a of getting torsi reyenue- A Powerful Argument Favoring Property Taxatio n Property taxation deserves support for frderd finances generally? Conclusions a n:isoll soli)etinies slighted by critics' inav differ. "spiflovers- can Ili- cited to the tax pays for benefits -;Oita" to those rc efuire inodifieation of tht- central point. who bear most of the ba.rden. True, we Yet the basic validity_ stands. Canpot relate the tax paid by aily partic- hefmty is not the only I0evant crite- ular renter or howcowner to the benefit s - ion. Efficiency in resource allocation is of local-government spending which h e ant.th,-•r. The :allocation of resott-,-es will receives. For the group. however, th e tend to conform more closely to publi c case is clearer. The tax which is collected preferences when both tax and spendin g loe:dk :aid Spent loo all• goes to bem-fi t are hxal than when one is decided at a the people of the area. Thus, paynn•nt o f diFtance front the other Tltc argunien t the• cost of governnu•nt conforms closel y here :applies with less complete validity to i ene•fit on an area hasis . in this respect to verb- large cities than to smaller con) - is not the property tax result fairer, more niunitics. Yet its basic nierit extends "Mitable, than in the ease of state; and broadly indeed over the country. 2 Who Really Bears the Ultimate Burden Of the Property Tax? To judge a. tax %viwly. there is need t o 1-le property tax uns coulter to one kno v who re allc lw:irs it. he may be a concept of fairness by burdenin-, lou•- Iverson vet s• different from the one who inctinle groups chore heavily iI! relation writes the cluck. Sometimes when taxes to incJtnc than those with larter in- are 5.1ifted—froth building- oxvner to cotnes. A reeremiee clement exists. And tenant—the process wods rather clearly. rt~,re ieih is generally believed to b e Often. however. the process is both ob- inequitable. conflictin g, with vc tical scure and slow. The sunituary here must _t•(t;tity." _\felt of goMwill (7111 disagree somewhat dogmatic_ in the degree of their condemnation o f re-,re~sivity as such . But all wid proh- A challt.e. in tax tvill fall on the owne r ahly he distressed to le am how heavv or user. depending upon calatract and are the property- tax burdens oil persons market conditions- With the passage of with Imir and inodest incomes. where tine. the incidence can clianze- Of the property ta.; rates :are :s high as in some potion of the tax rate which will h:(ve cities. In this case. however. the benefits been in effect for some year--that is. paid for by the tax Iaive a very large most e:f the rate—the burden on struc- `pro :oW-1111.0111_ bias. Moreover. the turev is borne by the user. great hulk of the ree enue conics fro m The tax on land %-.lines reduces the taxpayers in the income range in xnich worth of land. In effect. the ownerat the the burden is not so mach regressive as time; of each jump in tax rate will have roughly proportional- suffered a loss of capital .value.