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Americans have been paying property taxes since the colonial era—and complaining about them for just as long. It’s about as American as you can get. (The paying and the complaining.)
These days, the complaints are getting louder, with calls for abolition. The objections are understandable: far too often, local government officials have failed to reduce rates as assessed values have skyrocketed, yielding large unlegislated tax increases. Reforms are warranted. But repeal?
It may be asking too much for most people to like property taxes, but all policy choices involve trade-offs, and for those who care about economic efficiency, neutrality, decentralization, and government accountability, the property tax deserves to be rated highly, if not in absolute terms, at least relative to the alternatives.
Spending restraint can reduce property tax burdens. But with property taxes accounting for 70 percent of local tax collections nationwide and upwards of 90 percent in some states, any discussion of property tax elimination must grapple with revenue alternatives.
Economic research consistently finds that property taxes are less economically harmful than other major taxes. A study of taxes across 21 OECD countries found that a 1 percentage point shift from income taxes to consumption taxes (like sales taxes) improves GDP by 0.74 percent, while shifting to property taxes increases GDP by 1.45 percent. An International Monetary Fund paper concluded that a 1 percentage point shift from income to consumption taxes drove a 0.92 percent GDP increase, while shifting to taxes on real property grew GDP by a full 2.47 percent. When it comes to economic growth, consumption taxes are better than income taxes, but property taxes are better still.
This is true, at least in part, because property taxes are more economically neutral than most alternatives. They have less of an effect on decision-making. It is axiomatic that whatever you tax, you get less of. Taxing income means less income-producing labor and investment, for instance. But because land is an immobile asset, taxing property does less to distort market decisions than taxing income or even sales. Even where improvements are concerned, research suggests that property taxes do relatively little to distort economic decision-making, since (unlike income or sales taxes) the tax does not penalize productivity or consumption.
Of the major taxes, moreover, property taxes hew closest to the “benefit test,” under which taxes correspond—if imperfectly—to services received. No one would mistake property taxes for a pure user fee, but the value of one’s property is a reasonable proxy for the benefits received from local services, like roads, law enforcement, emergency services, and schools. Just as insurance premiums are higher for more valuable properties, property taxes are proportionally higher for more expensive parcels.
Because property taxes are local and closely tied to the public services that shape property values, they allow residents to better judge whether tax levels match the value they place on local spending and to hold officials accountable when they do not. It’s also highly transparent: people know their property tax bill but have no idea what they pay in sales tax. Transparency contributes to the property tax’s unpopularity, but it’s a feature, not a bug: people should know and be able to act upon their tax burden!
In Florida, where Gov. Ron DeSantis is championing property tax elimination, replacing the property tax would require a 15.3 percent statewide sales tax. Alternatively, if counties replaced the revenue themselves, sales tax rates would range from 9.8 to 32.5 percent. Other states would see similarly eye-popping replacement tax rates.
Replacing the property tax with newly granted local taxing authority is exceedingly difficult, because local sales and income tax bases vary widely across jurisdictions. There may be no feasible sales tax rate by which an agricultural county or bedroom community could replace its property tax revenue. State-level backfilling, however, isn’t much better.
If the state assumes responsibility for replacing local revenue, lawmakers must decide whether to replace revenues at existing levels—permanently rewarding jurisdictions that previously imposed higher rates—or to use some other formula for revenue distribution, thereby inducing dramatic revenue swings that local governments would have no authority to offset. Even if the state undertakes full revenue replacement, moreover, lawmakers must figure out how to adjust in future years, since there will not be new assessments on which to base the transfers.
Under state-level replacement, localities lose any incentive to economize below their guaranteed level of funding. The loss of local autonomy hurts taxpayers. Currently, high-tax jurisdictions must justify those higher taxes, but under a system of full state backfill, they would receive the same amount regardless of what services they deliver or how well they deliver them. Furthermore, while lawmakers can build population adjustments into allocation formulas, these cannot fully account for increased investment into a community, which creates new expenditures. A new business or housing development brings more costs (schools, roads, public services) but little or no new tax revenue to cover them. Consequently, the smart strategy for a local official with a guaranteed revenue stream trying to stay within budget could be to avoid growth altogether, to block new construction, discourage business expansion, or make it harder for new residents to move in.
Property tax critics advance numerous arguments against the tax—and some of them are compelling. All taxes have their own set of downsides. One common objection is to the notion of perpetual payments on something one owns. But income taxes fall on the exercise of our ownership of our own labor, and at a philosophical level, one might equally ask why we’d be taxed on what we consume. If looking for a tiebreaker, one could do worse than the fact that property taxes are so much more conducive to economic growth. Functionally, moreover, the tax is for ongoing services to property—services that don’t cease to be provided once a mortgage is paid off.
Is the property tax perfect? Far from it. But compared with any realistic alternative, it’s better for economic growth, it better aligns with benefits received, and it avoids the perverse incentives and principal-agent problems raised by any state offset. Lawmakers should consider responsible mechanisms to arrest the rapid growth of property tax burdens, but they should stop well short of abolition. Against the notion of the property tax as the worst tax, let us add an important coda: except for all the others.
Jared Walczak is Vice President of State Projects at the Tax Foundation.
This piece was originally published on Adam Michel's Liberty Taxed.
This is the second installment in a two-part series on property taxes. The first was Vance Ginn's The Case Against Property Taxes.
