Revitalizing Local Political Economy Through Modernizing the Property Tax
University of California, Davis - School of Law
March 22, 2014
Tax Law Review, Forthcoming
UC Davis Legal Studies Research Paper No. 374
As the Great Recession dramatically illustrated, state and local governments need a more stable revenue source. Accordingly, states and localities as diverse as Texas and San Francisco, are experimenting with new kinds of taxes. However, there has been essentially no experimentation with the oldest and most traditional local tax, namely the tax on real property.
This blindness to the property tax is unfortunate for many reasons, including that the property tax is both relatively efficient and stable compared to the other taxes available to states and localities. Of course, it is possible that the property tax has been ignored because, despite its merits, it has structural weaknesses that cannot be reformed. For instance, property tax liability is based on the value of the property and not on the income of the owner, which means that property taxes can impose great burdens on taxpayers on a fixed income. Furthermore, property taxes are typically collected once or twice a year, which imposes a significant obligation on taxpayers to budget correctly.
Yet there is no reason that the property tax needs to continue to be collected in much the same way as it was in the nineteenth century. Property taxes could be withheld from income just like income taxes, thereby making them easier to budget for. Furthermore withholding the property tax as part of a larger income tax system allows for the property tax to respond effectively to the cogent concern that taxpayers may not always have the income in a given year to pay their property taxes. Since the property tax and income tax systems would be integrated under my reform proposal, property tax liability could also be deferred (and perhaps forgiven) when the property tax liability grows to be too high as a percentage of income. Such a regime of incorporating income tax elements into the property tax would allow local taxpayers to respond directly to the relative merits of proposed public projects and services without concern for insuring themselves against future liquidity problems.
Number of Pages in PDF File: 53
Keywords: property tax, withholding, salience, state and local public finance, circuit breakers
Date posted: March 23, 2014 ; Last revised: April 23, 2014