What About Progressive Property Taxes?
Across the nation, and especially here in Massachusetts, property tax rates have been a major issue. The problem is that property prices (and therefore property taxes) are rising two to three times faster than incomes. (And that's at the median -- imagine how it works for the worst-off.) What was an affordable home when you bought it may actually become less affordable over time. Eventually the tax liens can lead all the way to foreclosure.
There is a gamut of fairly complex proposals for reform. For example, just today, Governor Patrick proposed to allow cities and towns to impose sales and other taxes, to release some of the pressure on property taxes. (Conservatives are right to worry that the result will just be more taxes overall.) New York is also looking at the problem, as is Indiana. The Feds are even starting to worry.
As far as I can tell, nobody is talking about what may be the simplest and fairest solution, which also encourages individual home ownership: a progressive property tax system.
The concept of a progressive property tax is simple, and just like income tax. The more income you make pushes you into a higher tax bracket. For property taxes, we could likewise set brackets in terms of the owner's income.
Alternatively, the brackets could be set in terms of the assessed valuation of your property or the total square footage of your property, both in comparison with the the median property in your state or town. By pegging it to the median, rather than an arbitrary number, we protect against the general increase in property values over time.
One advantage of making the brackets relative to property holdings, rather than income, is that this encourages a broad distribution of property and discourages consolidation. Progressive property taxation creates a slight market incentive that encourages big landlords to sell their properties to little ones, and it encourages big ones to sell to their renters, who will pay less tax on the same property than the landlords who holds many other properties. (By the way, this seems like a much more civilized way to do land reform than we have seen in developing countries, like South Africa and Zimbabwe, which have agonized over this problem.)
Whichever way we institute progressive property taxation, the bottom line is that we can get the same amount of revenue while reducing the burden on those who are least able to pay.
Comments please: have you seen such a system applied in the US or elsewhere in the world?
Chris
Here in Minnesota, there is a organization called Growth & Justice which is a "center for a prosperous, fair, & sustainable Minnesota economy". The Director is Joel Kramer, former editor and publisher of the Minneapolis Star/Tribune.
This organization has done work to show states that raise taxes are states have greater rates of income growth.
This organization is also interested in promoting not only progressive property taxes but also progressive sales (yes sales) taxes. They website is www.growthandjustice.org
Thought you might be interested
Stephen from Minneapolis
February 14, 2007 9:06 AM | Reply | Permalink
I think the idea is a great one on many levels.
My only question is about how this would affect current property valuation (aka the price of homes).
Of course I have always been largely against prices being set by tax values because of the lack of objectivity.
Anyway, I look forward to the discussion.
February 14, 2007 10:21 AM | Reply | Permalink
I think property taxes should pay for services like police and fire protection, street maintenance, trash collection and other services that have some physical connection to the property.
Property taxes should not pay for schools. Schools have very little to do with property but they do have a direct effect on income. Therefore, education should be funded with income tax. And make the income tax progressive, while you're at it.
Without schools, property taxes would be hundreds of dollars a year instead of thousands. More importantly, the tax code would no longer encourage income segregation by ensuring that the best schools are in the richest neighborhoods.
February 14, 2007 5:15 PM | Reply | Permalink
I think your idea of taxing only the equity is a mistake -- the big problem with the property tax is that it hits the elderly especially hard. Young people, after all, can include the tax in their calculations of what they can afford to buy, but someone who once had a $100/month mortgage might not have the retirement income to support what is now $500/month in property taxes.
February 14, 2007 6:00 PM | Reply | Permalink
Before the Georgists jump in on how land should be taxes and not improvements. I would note that you're missing the big picture. Property taxes should be broadened to include more kinds of property but should be imposed on only high net worth residents.
Real Estate is just one form of property, there is also personal property, of the tangible (jewelry, cars) and intangible (stocks, bonds, saving accounts) variety. The sum of these (minus your liabilities) is your net worth. Property taxes currently don't account for mortgages, perhaps its more fair to tax only the equity (the part you own free and clear of the mortgage).
Either way, why not set a minimum threshold (say a $1 million in property value or net worth) and tax all property-- both real and personal and impose a wealth tax?
The real property is already assessed locally and personal property (assessed by some states already) can be assessed by insurance and financial records. Even a 1 or 2 percent rate would raise a LOT of revenue.
For constitutional reasons, the federal government can't easily (or perhaps ever) collect a wealth tax, but individual states could. If Congress really wanted state wealth taxes , The Feds could strong arm the states into doing so the same way they did with state inheritance taxes-- mop up taxation, a federal tax imposed only if a state chooses not to tax something. If the IRS collected a 15% surtax on any resident of state that didn't impose a wealth tax... every state would impose one.
Finally, the greatest land reformer of them all (he also gave women voting rights, reorganized the economy, legalized trade unions and introduced universal health care) was Douglas MacArthur. Its astonishing how decent a ruler he was of Japan.
February 14, 2007 11:45 PM | Reply | Permalink
A reasonable point (that a retiree on a fixed income might be priced out of their home by high property or net worth taxes). Besides giving a generous minimum threshold (if not a $1 million, you could raise it higher), you could also let retirees accrue property taxes as a lien on the property. That is, as long as they lived in the house (likely until their death), they don't pay any taxes but once they sell their house (or their heirs inherit) then the tax will be due.
That will likely mean the heirs (or if there's a will, devisees) will be forced to sell to pay the property tax. But better that adult children sell for tax reasons than the elderly parents.
February 14, 2007 11:51 PM | Reply | Permalink
I asked about this idea at Blue Jersey, since our posters there have a lot of experience with property tax problems. They foresee a lot of difficulties...
February 15, 2007 7:43 AM | Reply | Permalink
We are working on the wrong part of the tax issue to make the system fair.
Every City, County, State has their own classification system of account categories for property taxes.
God know only when, why, how it was achieved, all we can know is that a politician drove it. That is to say their needs to be a look at the commercial properties and see how they are classified and then the mileage that is applied to all categorys, utility, commercial and personal.
At a time that personal property –read homes- are being priced up and states, cities are looking to change formulas or limit growth for fairness Commercial property tax classifications and what results need to be exammined.
I am a small businessman; I want the big box stores to not game the system. I want commercial, utility, personal and who know what divisions contained there in to be just and fair to the group. If we do not put the whole of the system on the budget table there is no hope of public interest, or fair and equal treatment in classes to be had.
I came to this when after new zoning laws covering special properties was passed. The law stated that their construction and locations were to be tracked. The logical place to achieve this was the building permit process by assigning a special code for the type use. This was not done and as I continued to point this out it became apparent it was not going to happen.
Today I realize that a special code would have meant a separate account and that would lead to a different amount of property tax paid, something that truly should have happened for fairness to others, especially the small local owner of a business with property tax to pay.
It is unbelievable that every entity has a self-generated list of categories, I do believe each entity should apply their own rates, but with knowledge of the public. Supports for personal property change say people are losing houses over this, I say people are dying for lack of services over this!
Please, if someone knows more about this subject could you post information and links?
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Today, are we searching for I deals or Ideals?
-Thinking
February 15, 2007 9:17 AM | Reply | Permalink
My folks live in Maricopa County, Arizona,
They have a program that the elderly can freeze property values.
The Phoenix market, was so hot that in 2003 an acre of land sold for $100,000.00, in 2006 it was worth $350,000.00
Now with the real estate market, nationwide being depressed, What equity ? The taxes are not based on reality, but speculation.
The Taxman is counting the chickens before the eggs have hatched.
It would be better, that the tax be collected, on the realized gain, when the house is sold.
It should be the purpose for someone young to invest in a home, for shelter, maybe for the entire life through retirement.
If the home is refinanced, that should be considered a new sale. A new basis for establishing the property tax of that individual property.
Why should the frugal be penalized, or forced to move out of town, to find affordable shelter. Especially at a time of retirement when the income stream is diminished.
Taxing at the time of sale
With this approach, we might be able to encourage people to save, rather then let people take the equity gain and spend.
February 15, 2007 4:06 PM | Reply | Permalink
As jalmari suggested, the effect of this proposal on school funding is murky. It seems that a progressive property tax would only increase the class segregation most schools already experience.
And from my experience with property tax in Massachusetts... In Cambridge, the property tax year runs from July 1 - June 30. Weird. Also, there's a substantial exemption for residents (as opposed to landlords). However, eligibility for that exemption in the coming year is determined by the property owner's status as of January 1. So a resident owner who purchases from a non-resident owner is liable for about a year and a half of unabated property tax. It all seems so complicated.
February 15, 2007 6:11 PM | Reply | Permalink
"have you seen such a system applied in the US or elsewhere in the world?"
Yes, Vermont has adopted "income sensitivity" for property taxes. The system is fairly complicated. To simplify, property taxes for homesteads are capped at 1.8% of income for people who earn less than $88,000. You pay less than 1.8% of income if your property taxes would be lower than that.
To solve the problem of poor areas having bad schools, Vermont has adopted a statewide property tax. Now poor towns actually want families with children to move in so that they will get more funding from the state (funds are distributed on a per-student basis). Wealthy towns can spend more money if they want, but then they must share more money with the rest of the state -- something they hate.
February 16, 2007 1:31 PM | Reply | Permalink