To Save Essential Public Services, Restore the Original Wealth Tax!

State and local officials propose drastic cuts in public services. There’s an alternative: restore the property tax. It’s the oldest wealth tax of all, the tax that financed Chinese civilization over 2000 years ago, the tax that until World War II financed most of government in the USA.

The property tax? Our most hated tax? The tax that new Democratic Governor Cuomo of New York has vowed to cap—in the face of unprecedented budget shortfalls? Yes, that tax.

Ideally, property taxes collect a uniform percent of market value of real estate within a given jurisdiction, let’s say a town or school district, or an entire state. On average, half of that real estate is homes, and half is corporate property. The assessor, an elected official, assesses—that is, estimates—that market value, based primarily on comparable sales. Then the town imposes a tax rate, say 1.5% on the assessed value—often by a vote of the residents. Very democratic.

Even at a uniform rate, a property tax is intrinsically more progressive than an income tax! How so? Simply because property ownership is far more unequal than income. Most of us receive some income, yet the bottom 60% of Americans owns no significant wealth. Recent data from Edward Wolff of NYU shows the top 1% of Americans receiving 17% of income, but holding 34% of net worth, and 42% of non-home wealth—ie corporate securities and other assets.

In the age of loopholes, the property tax remains the only tax many rich people and corporations pay. Yet a triumph of confused statistics and cunning rhetoric has led most of us to perceive it as a burden on the poor and middle class, obsolete and unfair. How could this happen?

Confused Statistics

Over the last 60 years, income and sales taxes have largely replaced property taxes at the state level, leaving property taxes to local governments, school districts especially. This shift creates the primary strike against property taxes: rich districts can finance good schools at low rates, while poor districts can only finance lousy schools at high rates. Unfair? Yes. But the same goes for any local tax. States could mitigate the problem by consolidating small school districts—notoriously in New Jersey—and by sharing some revenue among districts—as New Hampshire is attempting. But look what happens when the naïve researcher throws statewide data on property taxes into her computer: lo and behold, poorer people apparently pay higher property taxes! She concludes the tax is regressive!

Moreover, many wealthy people use property to shelter income from taxes, for example by deducting excessive depreciation. But they still pay property taxes. While Ronald Reagan was California Governor (1968-72), reporters found he paid heavy property taxes on his famous ranch—and zero income taxes! So we get a bunch of high property tax/ low income tax pseudo poor like Reagan. Our naïve researcher throws them into the statistical pot with ordinary folks, and finds—surprise!—property taxes burden the poor.

And then there’s the naïve assumption that property taxes are simply “passed on” to renters, and to corporate customers, just like sales taxes. T’ain’t so. Too complicated to explain fully here, but in brief: A shopkeeper partially avoids sales taxes by selling less; while (short of bribing the assessor) a property taxpayer has no way to reduce the tax. Hence property taxes fall almost completely on property owners—be they owners of apartment buildings, or shareholders of corporations.

Cunning Rhetoric

In his book, Revolt of the Haves (1980), Robert Kuttner described the successful 1978 campaign for Proposition 13 in California. Prop 13 rolled back and froze property taxes. Its real estate mogul promoters depicted property taxes as a tax on small homeowners. Yet large corporate property owners enjoyed the primary benefits of Prop 13. Standard Oil of California saved $25 million in annual taxes.

Prop 13 set off nationwide anti-property tax campaigns. There were copycats like Prop 2 ½ in Massachusetts. There were reductions for special classes of property, like farmland and forest land. There were tax holidays for businesses. There were caps, “circuit-breakers”, limits on rate increases, and other gimmicks for homeowners. New York adopted a constitutional amendment limiting property taxes to 2% of real value. Assessors got into the act too, allowing assessments to fall way below market value, and giving friendly breaks to large property owners. With every hole gouged into the property tax, it became more inequitable—and more vulnerable to demands for special breaks from additional groups. States replaced some local revenue with grants from state sales and income taxes, but school quality declined. California schools fell from the top to near the bottom.

Now the crisis

The clamor for cutting and capping property taxes continues unabated. Only New Hampshire has resisted—so far! Tragically, leaders of the anti-property tax campaign include union-funded Citizens for Tax Justice—apparently befuddled by the statistics.

It’s time to wake up, to recognize that even in this crisis we can still fund the services we need. The means lie right under our feet!

(For further reading, see Mason Gaffney’s “The Property Tax is a Progressive Tax.”)

5 comments to To Save Essential Public Services, Restore the Original Wealth Tax!

  • I mostly agree, of course, but I think I must question one point: You write that the property tax is passed on to apartment building owners. I agree that the land tax is paid by landowners, but the property tax on buildings is passed on to tenants. Raise the building tax, and construction ceases until rents are high enough to pay the tax, as well as a return on the cost of erecting a building. I’m oversimplifying just a bit, but I think that’s essentially true.

  • John D Kromkowski

    Thank you for important note. Going “back to the future” will require directly taking on issue of whether the property tax is progressive or regressive.

    But the only way to deal twisted or misinterpreted data is to show directly that the property tax (or even a reimagined and improved property tax falling only on land value and not improvement value) is progressive with real up-to-date data and careful analysis. Whatever the truth that might certainly exist in Dr. Gaffney paper, it will hardly be deemed relevant by nay-sayers because it is nearly 30 years old!

    “But look what happens when the naïve researcher throws statewide data on property taxes into her computer: lo and behold, poorer people apparently pay higher property taxes! She concludes the tax is regressive!”

    This statement by you, I think perhaps is not productive because you haven’t shown where she has gone wrong with some precision. The condescending tone, at least to my ears, will more likely lead to pushing a scholar/researcher into a corner, confirming her position that she has the data and knows what EQS and SSPS are while you are just making snide comments that seem to suggest that using data and computers is somehow misguided. In 2011, complaining about the use of computers and data-analysis will get you nowhere.

    I think there is book called “if you want to promote it, prove it first.”

    First, in the tradition of Henry George: operationalize what you mean by “progressive” and “regressive”. Let us define this in a way that having agreed upon a definition, we will be able to lead reasonable property tax nay-sayers to a test that will show whether or not the tax is in fact regressive or progressive. In other words, “He who sees the truth, let him proclaim it, without asking who is for it or who is against it.” If Socrates was able to lead one of Meno’s slaves to “remember” the Phythagorian Theorum, surely we can lead researchers to the conclusion that the property tax or it’s re-imagine cousin the land value tax is progressive. So long as we have the data that shows this.

    Having looking into the issue, as an “amateur”, things may well be messy. When I examined the issue in a now out-of-date exploration called “Who owns Baltimore”, I found that using a GINI analysis was quite useful. The top 10% of owners (all corporations) owned 58% of the total taxable land value. The bottom 10% of owners owned less that 1% of the total taxable land value. And, of course, this bottom 10% of owners does not include the 60% of residents in Baltimore City who own no land, at all. But I think you’ll note, that a GINI approach is, in my cursory review of the literature seldom, if ever used in assessing whether a property or land tax is progressive or regressive. One of the reasons, is that it can be difficult: You have to know how to combined all of the chain grocery stores, gas stations, and corporate holdings together. And if you only look at individuals, then you’ll miss out on all the corporate ownership of land – so it can easily devolve into apples and oranges. Moreover, in terms of residential properties, the poorer neighborhoods tend to get over-assessed and the richer neighborhoods tend to get under-assessed. As a result, if you only look at homeowners as your set, it is certainly possible to see that relatively the wealthiest homeowners might not really be paying their fair share – which get’s twisted into a claim that the middle and working class homeowners are being hit harder. So that cohort, even the most righteous, just and upright of them, can hardly be charmed by the fact that the really poor renter class doesn’t pay the property tax (at least directly in a way that seen in the tax rolls.) Cf. Matthew 20:1–16

    The long and the short is that we have to not be afraid of the data. If we say the property tax and its hope for revised version the land value are progressive, then we must prove it.

    End of soapbox. Typed with haste and without proofreading.

    John D Kromkowski

  • Very nice article. I absolutely appreciate this site. Thanks!

  • A very high marginal income tax may be simpler. The top-earning 5% of tax-filers, all with incomes over $200,000 a year, take in 30% of all personal income. The top 5% of households own about 50% of everything and 75% of all financial assets. Sources: Joint Committee on Taxation, 2012, Sylvia Allegretto’s report State of Working America’s Wealth, May 2011. Between 1952 than 1963 the top marginal tax rate was 91% on income over — I forget — $1 million. What happened to the economy, did it collapse during the 50s? No everyone did well, between 1946 and 1976 all household income quintiles doubled their incomes in real inflation adjusted terms. I read Andrew Sum’s article at Huffington blog, he says 2000-2010 average worker income increased by 2%, corporate profits by 58%. The top have so much in income and wealth — that’s where tax reform should start. I have a blog, — about inequality and how it depresses the entire economy.