Editors' note: Following North Dakota voters' rejection of the proposed property tax elimination measure, Tracy Gordon has written a new Up Front Blog post explaining why this was a wise decision. Read the blog post »
Today, North Dakotans are deciding whether to eliminate their local government property tax. Meanwhile, similar proposals are circulating in other states including North Carolina, Texas and Pennsylvania.
This is a bad idea. Property taxes are the lifeblood of local government, and with good reason. The property tax is one of the most reliable local revenue sources – holding up reasonably well even after the recent housing market crash.
One reason for this stability is the tax’s flexibility – policymakers can adjust tax rates within areas or over time to reflect current conditions.
But what really makes economists swoon is that property taxes are efficient. Because they are taxes on land as well as structures, and land cannot be taken out of circulation, property taxes are hard to avoid. Thus, they do not induce wasteful activities to avoid taxation, like sheltering income overseas.
Ironically, it is probably this virtue of efficiency that makes the property tax a target for voters. To be fair, the tax is not always well administered either, as evidenced by recent “pay-to-play” scandals in the Los Angeles county assessor’s office. News of similar mischief helped anti-tax crusaders pass California’s landmark Proposition 13 in 1978 after previous failures.
Property tax defenders would do well to crack down on these kinds of abuses and improve the assessment process. So-called “truth in taxation” laws requiring detailed explanations of local property tax bills are also a good idea. Local governments may also want to consider targeted tax relief for low-income residents and diversifying to a few other revenue sources where possible.
Finally, local governments should demonstrate that property taxes are “benefit taxes” supporting services such as roads, police and fire protection, and, typically, schools that enhance local property values and residents’ quality of life. If they did not, residents could “vote with their feet” and move to a neighboring jurisdiction.
In this sense, the property tax is the ultimate sustainable resource.