RALEIGH – At the risk of fomenting dissension in the ranks, I’ve got to defend some local officials in North Carolina against their conservative critics. Their criticism – the latter’s criticism – has to do with property revaluations. Unless local politicians respond to rising property values by reducing the tax rate to yield a “revenue-neutral” result, it is suggested, they have raised taxes.
This argument doesn’t stand up to scrutiny.
If property taxation is ever justified, the justification lies in apportioning the cost of government according to the value of real property a taxpayer owns in the community. The more valuable the property, the more valuable (in theory) certain public services such as police and fire protection are to the taxpayer.
As the value of property goes up, the amount of money paid into local tax coffers should also rise. There are at least two different mechanisms at work here. First, think about property taxes as akin to an insurance premium. It makes sense that the price should rise according to the value of what is being protected. Second, think about property taxes as paying for services that enhance the value of property – street access, for example. As more or better services are provided, taxpayers derive the benefit in part by rising property values. Shouldn’t (again in theory) local governments prosper to the extent they deliver valuable services? And shouldn’t they be able to collect revenue sufficient at least to offset inflation without being accused of raising taxes?
Perhaps the best way to see that a failure to enact a revenue-neutral property tax tax rate is not a tax increase is to apply the principle to other forms of taxation. When North Carolina’s average personal income rises, its income-tax collections also rise. When retail sales shoot upwards, so do sales-tax revenues. But no one argues that the failure to cut income or sales tax to offset the higher revenue take constitutes a tax increase. Only when the state legislators raise the effective tax rate – either by hiking the marginal itself or expanding the tax base – do they get branded with the tax-raising sobriquet.
Of course, to say that a property revaluation does not constitute a tax increase is far from excusing the fiscal decisions of local governments. In most cases, they start out with tax rates are are too high – they raise far more revenue than a limited, efficient government would spend. Second, property taxation is abused to the extent it is used to pay for services, such as Medicaid or other forms of public assistance, that confer benefits without any relationship to property ownership (or, indeed, confer more benefit on those with less).
There’s also the sticky problem of how to keep property taxes from outstripping the income growth of taxpayers, particularly retirees whose pensions and investments don’t keep up with sizzling real-estate markets. Ultimately all taxes are income taxes. If property values are surging much faster than incomes over time, the real tax burden most certainly is going up – even if a post-reval budget doesn’t properly earn the label “tax increase.”
The best solution for fiscal conservatives is to insist on a revenue or spending cap that limits the annual growth of local government, much as the proposed Taxpayer Bill of Rights would do at the state level. Then the labels wouldn’t matter as much.
Hood is president of the John Locke Foundation.