Property Taxes: Something the Left and Right Can Agree On

Is it time for a left-right alliance for property tax reform?

It looks like there is on the Tea Party right for replacing property taxes, and I contend that there are also many good reasons for liberals to be excited about the opportunity to jettison this uniquely heinous tax.

Shifting the tax burden away from property and development toward consumption and land value would align incentives in ways that support core progressive goals.

For example, untying the distribution of education funding from where people live would help struggling urban school districts and reduce inequality. The property-based system ensures that per-pupil spending will be lower in urban schools, where property values are lower.

As I've written before, I think this is . When you layer this on top of Pennsylvania's 2,562 municipal governments and 500 school districts, each empowered to collect the taxes and write their own zoning rules, the result is a well-oiled segregation machine.

So liberals have a reason to cheer any change that reduces the importance of residence in education funding. Relying more on consumption taxes would make the tax code more progressive, since the core cities and urban school districts would collect a greater percentage of their revenue from tourists and wealthier residents shopping in their downtown areas, and a smaller percentage from property taxes.  

A consumption tax can be made progressive by exempting the first $30,000 of income, and taxing luxury consumption at a higher rate.

Another reason to abandon the property tax is that in addition to the general unpopularity of taxes, the process of collecting the property tax is unpopular. This adds an additional layer of anti-tax politics for progressives to contend with. Having to cut a check instead of paying alongside your purchases makes paying taxes more psychologically painful than it needs to be.

The property assessment process is also broken. Reassessments are  in Pennsylvania because they are politically unpopular and they're not automatic--politicians have to vote to conduct a reassessment. To get a sense of how toxic the politics of this process can be, check out what's happening in Allegheny County, where Rich Fitzgerald, the Democratic candidate for County Executive is saying he'll go to jail before sending out tax reassessments.

Reassessments are also inexact, lots of people end up challenging them, and municipal governments are always having to  to collect delinquent taxes. This is too messy. Even if the property tax is more progressive than the sales tax, I think it's clear that in practice the administration is too much of a headache. It would be better to switch to a tax that is easier to administer and harder to dodge.

The other main way that property taxes undermine progressive goals is by penalizing people for improving their properties. It makes it more difficult to improve older core cities if you're taxing people for adding value to their homes and commercial buildings.  

If we want to see more redevelopment and investment in urban areas, the tax code should reward people who are improving their properties, and shift the burden to vacant lots,  and surface parking lots--uses that subtract value from neighboring properties and act as a drain on public resources. Replacing property taxes with land value taxes in and around central business districts would be the best way to harmonize incentives and promote development. 

While it is unlikely that the left and right will ever find much agreement on tax rates, or the size and role of government, I think there is plenty of room for bipartisan compromise on what kinds of taxes should be used to fund local government. The taxes I've listed--consumption taxes and land value taxes--incentivize behavior that I think people on the right want to encourage. Because savings are not taxed, consumption taxes promote saving and investment. Land value taxes penalize speculation and promote growth and development.

These are among the most pro-growth, business-friendly taxes you are likely to find. And there is also nothing about them that should offend liberal concerns about fairness and economic justice, since the programs they fund are most useful to economically disadvantaged people. While we continue to debate the big questions about the role of government, I hope that the bipartisan distaste for taxing property will put this issue on the agenda in Harrisburg.