Property tax reform: A proposal

A modest proposal

Capping the burden

Last June, I argued that “North Dakota should break the link between property valuations and property tax burdens.” The essential point, I wrote, “is that the burden of the property tax — how much someone is required to pay — should not be driven by the valuation of the property.”

Why not? Because, as I wrote last month, we have to bear in mind what these payments are actually for: “they are payments for services rendered,” “like schools, parks, police and fire departments, roads, etc:”

In that respect, it is highly unfortunate that the payments are called a “property tax” as that gives rise to the notion that you are being charged for living in your house. You are not. You are being charged for the cost of providing the schools, parks, police and fire departments, roads etc.

But it also follows from this that changes in the burden of the property tax should not be driven by changes in the notional market value of the property but by changes in the cost of providing those services “like schools, parks, police and fire departments, roads, etc.” which the tax is intended to pay for.

For this reason, last June, we proposed “capping all local government spending growth at the annual rate of inflation.”

I noted that “This isn’t as straightforward as one might think:”

Government budgets have to be planned in advance over one or two years and we do not know for certain what the inflation rate will be over that period. So, we may want to use a forecast of inflation, although this might turn out to be off the mark. Alternatively, we might decide to use the Federal Reserve’s target of 2% growth, banking on the Fed to do their job. Again, they have failed at this in recent years, and a government which budgeted for a 2% increase in spending in 2020 might have been stumped. However, in many cases, the contracts that local governments sign with provider — staff and contractors, for example — are signed some time in advance.

We could use the Consumer Price Index (CPI), which is the most commonly understood measure of inflation, or some other measure, such as the Federal Reserve’s preferred one, the Personal Consumption Expenditures (PCE) price index:

In practical terms, a local taxing authority with a budget of, say, $100 million this year would see a budget of $102 million next year, $104 million the year after…

“Crucially,” I explained:

…our proposal makes an allowance for an increase in the local taxing authority’s budget above the rate of inflation if the voters approve it by referendum.

If a flood, say, requires increased government outlays, the government can make the case for higher taxes to its residents for them to decide. If we treat voters as grown ups we might be pleasantly surprised by the results.

Sharing the burden

Having fixed the growth of the burden, I explained last June that the local taxing authority:

…would then apportion this budget by its tax base however it wished.

One possibility would be to apportion this burden according to relative property values. So, for example, a jurisdiction with two houses, one valued at $700,000 and another at $300,000, would split the burden 70/30. Assuming that the notional market value of a person’s home is somewhat connected to their capacity to pay taxes, this would retain an element of redistribution and some semblance of the current property tax, if one so wished.

Another option would be to apportion this burden according to the number of people in each household. Here, a jurisdiction with two households, one containing seven residents and another three, would split the burden 70/30. If a household’s consumption of services “like schools, parks, police and fire departments, roads, etc.” is related to the number of people it contains, which is not unreasonable as such assumptions go, then this is perhaps the closest we can get to making this tax a fee paid for the services provided. There is no redistribution here. Indeed, the tax ought to be renamed since the property no longer plays any meaningful role in it.

Conclusion

This policy – the “cap” in our “Crush and Cap” proposal – breaks the link between the valuation of the property and the burden of the property tax. Changes in the cost of provision of goods and services will drive changes of local tax burdens, not changes in property valuations. This will be both fairer, and more economically efficient.