Problems with the property tax

The price of real estate is soaring in Northern Virginia. Condo values are up 28 percent from last year in Alexandria, where I live, and homes have more than doubled in value since 2000. Yet many homeowners are unhappy with this state of affairs. You would think it a boon to have your property rise in value, but Alexandria, like most municipalities, is saddled with a property tax, and one’s property tax is determined by the value of the property being taxed. If your condo doubles in value, so does your yearly tax.

And it’s not just my hometown in Virginia feeling the bite. According to the Census Bureau, revenue from state and local property taxes from 2004 was up almost 8 percent from 2003, and up 30 percent from 2000. This year is continuing the trend.

Naturally, the rich don’t have many problems with paying rising property taxes. But it can be a big deal for the less affluent. Typically it’s one of two issues: Either the landlord is increasing the rent because the landlord is being made to pay higher property taxes, or a homeowner who bought an affordable house just a few years ago suddenly finds the yearly costs quite unaffordable. While the homeowner will at least reap some benefit from selling at the higher price, in both cases the resident is given pressure to move elsewhere–and nobody likes to have to move.

Advocates of property taxes argue that it is proper to tax those who benefit the most from government services, and that tends to be real estate owners. However, most states have tied property tax revenue to the public schools, and the increasing presence of the homeowning elderly, private schools and homeschooling have made this connection much weaker. Homeowners are not as likely to be using the public schools as they once were.

Property taxes were also seen as a sort of progressive equalizer to offset the financial advantage enjoyed by those who can afford to buy real estate. But real estate isn’t the marker of wealth that it used to be a century ago. Nowadays home ownership is a reality for most Americans.

There are two major problems with property taxes, one philosophical and one practical. Philosophically, property taxes create the impression that although we seem to be buying and selling real estate, we’re really just renting it from the government. If you don’t pay the property tax you lose the property, much as a landlord would evict you for not paying the rent. It’s an unsettling notion when you have to keep paying for something that you’ve already paid for. For a society that prides itself on ownership, property taxes make it seem impossible to truly own property.

Practically, the property tax creates perverse incentives in the local economy. Rising property values reflect a demand to live in the area, indicating that it’s probably a good place to be. But those not interested in selling will want to keep property values lower because higher land values means higher costs. Landlords for low-income housing are in the worst situation since their renters will call for rent control to prevent rising tax costs from boosting the rent, leaving landlords with no incentive to improve the premises or the community.

It shouldn’t be this way. Increasing property values are a good thing and should be heralded, not dreaded. We should want all residents and owners to be desirous of making their locality a place that people want to live in, and hence more valuable. As it is, property taxes make higher property values a problem for everyone but those who are looking to sell. In other words, those who wish to stay are worse off than those who want to leave!

One group, Virginians Over-Taxed on Residences, has proposed a scheme by which property taxes could not be increased by more than two percent per year or the rate of inflation, whichever is less, and a property would not be reassessed for its new tax rate until it is sold, as opposed to being assessed every year as is the case now. Politicians aren’t interested yet, and why should they be? The real estate boom has created a huge windfall for the Commonwealth’s coffers.

But even a restructured property tax like the one proposed by VOTR doesn’t solve all the problems. Since the tax rate you get at the time you purchase the property will be the one you’ll be stuck with until you sell, there will be more gaming of the system. Buyers will have more incentive to wait out the booms, and owners will find ways to transfer their property to friends and family and then back during lulls in the market to get a new assessment when the property values fall.

It is often said that taxation is the art of plucking a chicken with the least possible squawking, yet property taxes continually rile taxpayers during the time when things should be agreeable to all. There are other ways for state and local governments to raise money. Taxes may be a necessary evil, but property taxes we can do without.

James N. Markels is an attorney and a regular columnist for Brainwash.