A Convenient Truth: Property Taxes and Revenue Stability

Local governments in the United States typically rely on several main sources of own-source revenues, including individual income taxes, general sales taxes, specific excise taxes, fees and charges, and local property taxes. Of these sources, the dominant is by far the property tax. According to the United States Census Bureau (http://www.census.gov/govs/estimate), local property taxes accounted for roughly three-fourths of total local government revenues and for nearly one-half of total local own-source revenues (including fees and charges) in 2010. A natural question is whether this heavy reliance is appropriate. Many approaches have been used to examine how a local government should determine its policies, including what might be termed an optimal approach, a portfolio approach, a tax smoothing approach, a political economy approach, and a tax assignment approach, among many others. In all cases, the appropriate structure represents a tradeoff among conflicting goals (for example, efficiency, equity, adequacy, growth, stability, simplicity, and electability), chosen subject to various constraints (for example, achieving a revenue target, minimizing revenue volatility, meeting distributional requirements, and satisfying constituents). In this broader context, local government reliance on the property has strengths and weaknesses. There is some evidence that the property has at least a proportional and often a progressive effect on the distribution of income. Given the relative immobility of the base, the is unlikely to seriously distort land markets, and it may in some circumstances actually improve the efficiency of resource use. The immobility of the base also makes it easy to identify and capture that base and enables the properties to be the natural collateral in cases of nonpayment. Because of its immobility, the property base also captures the value of location-specific capital investments and benefits from local government programs and services not otherwise captured through various fees, user charges, and other taxes. The property tends to fall on those with a greater ability to pay because immobile property can be the primary repository of wealth. Because property can be assessed by physical inspection, the is difficult to evade; indeed, local government officials are well situated to collect the tax. As a highly visible and politically sensitive revenue instrument, the property can serve as a perfect to encourage more responsive, efficient, and accountable local governments, especially because the can be viewed in part as payment for local services. The property also has major problems. The property is often rated in polls as among the least popular of all taxes. It is a highly visible to taxpayers because they typically pay it directly.