The Property Tax Is a Bad Tax, but It Need Not Be

Economists have long argued over the nature of the property tax - is it a benefits tax or a capital tax with local excise tax effects? Those who see it as a benefits tax draw upon the pioneering efforts of Tiebout (1956) to argue that households equate taxes paid with the value of public services received by voting with their feet. According to one of the leading advocates of this position (Hamilton, 1975a), the existence of choice among communities, combined with the use of zoning to exclude free riders, transforms the suburban public economy into a quasi-market, with the property tax serving as the price for public goods. If this case holds, as Hamilton (1975b: 13) pointed out, ... then this price should not distort the housing market any more than the price of eggs should distort the housing market. According to those who see the property tax as a capital/ excise tax, the national average rate of taxation is a tax on capital, and local differences from the national average rate produce local excise effects.Regardless of which of the two views of the property tax one subscribes to, to many economists the property tax does not look like such a bad Two principles are used to judge whether a tax is fair: the benefits principle and the ability-to-pay principle. benefits principle maintains that taxes paid should rise in proportion to the benefits received from public services. ability-topay principle has two alternative interpretations. One is that higher income households should pay more in taxes, and the other is that the burden of taxation, measured as taxes paid as a percentage of income, should be lower for lower income households. If the tax incidence by income class is progressive and not regressive, the tax satisfies either interpretation of the ability-to-pay principle. Obviously, if the property tax is the price for local public services, it satisfies the benefits principle of just taxation. If the tax is a capital/excise tax, it should be judged on the ability-to-pay criterion of just taxation. As it turns out, the property tax incidence by income class is a complicated issue, but the fact that the property tax is, in part, a capital tax suggests that it may be a progressive tax.If the property tax is a just tax in the eyes of many economists, why, from the 1970s through today, has it been reported as the least popular tax in repeated surveys of American taxpayers? Cabrai and Hoxby (2010: 20) reviewed the survey evidence from 1972 to 2005 and concluded the following: The property tax starts out unpopular in 1972 and ends up still unpopular in 2005: in both years, about 38 percent of adults stated that it was the worst tax. alternatives from which the survey respondents had to choose, all of which they liked more than the property tax, were the federal income tax, the Social Security tax, state income taxes, and state sales taxes. Cabrai and Hoxby's answer as to why the property tax is the least popular of all taxes was that it is the most salient, by which they meant that the property tax is the tax that people are the most aware of paying. Landowners pay property taxes by writing one or two checks a year, which makes the taxpayer acutely aware of the tax and its amount. By contrast, most people pay their income and payroll taxes through payroll withholding, so no physical act of payment is required except when too little has been withheld. In practice, most taxpayers do not have to write a check to the Internal Revenue Service at the end of the tax year, but rather they receive a tax refund, which surely contributes to the popularity of the income tax by comparison with the property Although sales and excise taxes are directly paid by the consumer at the time of purchase, they are part of the gross price of goods and services and are not paid separately from the price, which makes them less transparent to the average consumer. Moreover, the taxpayer pays sales taxes incrementally with each additional purchase and is not confronted with an annual total sales tax bill, so he or she may not be fully aware of just how much sales tax is being paid. …