RALEIGH – Folks love to hate the property tax. That is perhaps most of the most compelling reasons not to get rid of it just yet.
While the federal tax burden has been going down in recent years, the state and local tax burden has been trending upward. These tax increases have come in virtually every possible form, from hikes in tax rates on income and sales to special excises, impact fees, and, yes, property tax increases. According to a report in USA Today, total property-tax collections in the U.S. are expected to approach $205 billion in 2004, up 8 percent from the previous year and 30 percent since 2000.
What makes property taxation interesting, or weird, is that this trend represents a combination of actions to raise rates and natural growth in property values. While values are generally related to changes in income, there is obviously no direct tether between the two for any particular household. Your home price could well rise slower than, faster than, or at roughly the same rate as your income over a revaluation period (be it a year, four years, or eight years).
Remember that all taxes, including property taxes, are really income taxes. You make the property-tax collector go away not by chiseling off bricks from your house equal to the tax rate (though chucking them at the tax collector might work, too) but by surrendering a bit of the income you would have spent on something else.
Thus property taxes are really a means of collecting taxes on income. Are they a good means of doing so? This is a controversial issue. My own view is that property taxes are appropriate only to the extent that they fund services that are reasonably associated with the ownership of real property. If you own more and more valuable stuff in a community, the provision of law enforcement, street access, and the like would seem to be more valuable to you, and thus it is equitable for you to pay more.
If we followed this “benefit principle” with property taxes, it would mean big changes in county finance. Counties use property taxes for a host of functions, such as public education and Medicaid, that don’t meet the test. Admittedly, applying the benefit principle to such services requires conceptual thinking; the notion is not that direct beneficiaries should pay tax proportionate to the schooling or welfare they receive (that would be privatization, not a bad idea in many cases) but instead that, given the existence of entitlement spending, the benefit comes in the indirect form of a better-educated citizenry (in theory) or the social and political order generated by providing a basic safety net (again, in theory). Your benefit arguably correlates with your income or standard of living, not just the extent of your physical property.
Given a choice of flawed alternatives, I guess my preference would be to take the funding responsibility off counties for services that aren’t really local and should be funded, if at all, by a reformed state income tax (e.g. Medicaid). Should the rest by funded by taxes on property or sales? One virtue of the property option is that taxpayers get a bill at the end of the year, and it often angers them.
That’s a good kind of angry.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.