Tuesday, January 26, 2010


An argument in favor of the property tax

One of the oldest taxes we've had is the tax on real estate. In the early days, before rapid transmission of information was possible, it was the one basis for taxation that nearly everyone agreed was fair, if not popular. Land equaled wealth. If you owned a large tract of land, it meant that you were rich and could afford to pay. If you were a public official, such as the mayor of a city or the governor of a state, the property tax brought in a steady and predictable income, in good times and bad times. The city and the state could, at least, ride out the storm of joblessness and misery during a depression and continue providing such services as police and fire protection.

Nowadays we have a lot of new taxes: sales tax, income tax, inheritance tax, excise taxes, various taxes on businesses and professions, and so on. Most of these taxes are more popular than the property tax. That is, people hate them less than the annual levy on the land occupied by their homes or businesses. In fact, the property tax is so unpopular that in most places in California the income from the property tax does not pay for all the services that a city or county has to provide to property. Such services include police and fire protection, establishment and enforcement of building codes in earthquake zones (pretty much all of California), establishing and maintaining systems to provide water and power to property sites, drainage and sewer systems, and others. We pay separate taxes or fees for the power and water provided and for the sewage drained away, but these are not intended to pay for the initial building and installation of water pipes, sewer pipes, electric utility lines, and the like.

Many years ago Howard Jarvis and others took advantage of the fear produced by the rapid increase in housing prices and the associated increase in the real estate tax to persuade or frighten the public into adopting Proposition 13, which froze the real estate tax at the value it had on a certain year, regardless of the increase in the value of the property. The tax could be increased by no more than two percent each year. The basis of the tax would not change until the property was sold. The new owner would then pay a property tax based on the purchase price of the property just bought, but the tax would then be frozen against any further increase in the value of the property.

The public regarded Proposition 13 as the salvation of people living in retirement in their homes. They would not be in danger of losing their homes through non-payment of taxes. However, the real beneficiaries of Proposition 13 were people who owned business property, such as landlords who owned an interest in apartment buildings. These business properties never change owners; they are owned by corporations and the landlords merely buy and sell shares in the corporations or lease portions of the apartment complexes for rerental to residents. Most businesses do not own the land where their offices and factories are located. They lease the land.

The effect of Proposition 13 has been to distort the tax system of the state. Cities and counties could no longer depend on the property tax to fund their services. The state had a surplus at the time Proposition 13 passed and offered this surplus to the local governments to replace the reduced property tax revenue. The result is that, since the state no longer has a surplus, cities and counties can not plan far in advance because they do not know what revenue is going to be available from the state. Many cities have adopted increases in the sales tax to obtain the needed revenue. However, the sales tax suffers from the same disadvantage to budget planners as income and business taxes. The income rises and falls according to the economic activity in the state.

Howard Jarvis's intentions are not known to me. It may be that he was simply trying to create a cushy deal for his friends and clients in the home rental business. It may be that he was a sincere believer in small, weak governments and low taxes. His successors argue today that the problem with the state and local governments is not that they have insufficient revenue to provide services. Rather, these people argue that governments try to do too much. For example, libraries could be sold and operated by private entrepreneurs. The same could be done for public hospitals and clinics. In the good old days (think of Daniel Boone) government didn't do squat for sick people, old people, etc. In fact, government didn't put out fires. Perhaps we should try this conservative, small government approach for a while. Eliminate the fire department; sell the libraries and hospitals; default on pension agreements. All of these changes should greatly reduce the cost of government. The public would then have time to decide whether this was the kind of government that we want. If not, we would have to agree to changes in the tax structure to provide funding for the kind of government we do want.

There remains the problem of old Dad or old Mom living in the family house on a limited income. How do we avoid putting such persons out of their homes because of the taxes? There is an alternative to freezing the tax rates. The retiree on fixed or limited income would arrange something similar to a reverse mortgage with the state. If the retiree couldn't pay the property tax, the state would pay. Eventually the retiree would die or move to a retirement home and the property would be sold. The state would recover the taxes from the sale of the property. Any money left over would remain with the retiree or the heirs.

I remember in the election campaign for President in 1936. Republican opponents of Franklin Roosevelt and his New Deal were talking about "rugged individualism." One wag noted that perhaps the President should give these complainers six months or so to "get rugged."


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