Get Off My Property - Part 2

After two necessary sidetracks (Obama's unsurprising support for same-sex marriage and a short blog for Mothers Day, below) I return to the exciting topic of Real Estate Property Taxes.  In Part 1 of Get Off My Property I provided a history of the property tax and pointed out a number of problems with it.  There are "fairness" problems due to real estate property not approximating wealth or the ability to pay and there are problems implementing the tax equitably due to inherent flaws with assessments or valuations (including timeliness).  And not to mention that the whole exercise is expensive to implement and operate.

I concluded Part 1 by claiming that the real estate tax as a source of local government revenue has outlived its usefulness.  I promised (threatened?) to discuss abolishing property taxes.

Before I get too far I want to note two local occurrences subsequent to Part 1.  PA State Senator Wayne Fontana (D) introduced a bill that would allow either county councils/commissioners or voters in a referendum to eliminate property taxes.  It would allow local governments the option of implementing higher income and sales taxes and/or a fee based on the square footage of property. 

Then last week former Allegheny County Councilman Dave Fawcett wrote an op-ed and he proposed what he claimed was a more objective process to conduct reassessments. He wrote in the Pittsburgh Post-Gazette "[a]ssessments should be based upon the sales price of the home being assessed (not some comparable), adjusted for inflation....The price paid for the home, adjusted for inflation, would be presumed to be the property's current market value. This value could be additionally adjusted based on the previous year's sales in a defined geographical area in order to capture local market trends and account for places where values are changing in a manner that is out-of-step with the county average."

I like Senator Fontana's proposal to eliminate (almost) property taxes, but some aspects are scary.  Pennsylvanians have voted on so-called tax reform before and always voted it down, fearing the devil they don't know.  Most voters, rightly, found it unacceptable to vote for reduced property taxes in exchange for higher income taxes.  They all smelled a rat - that is, that in the not too distant future nothing was going to prevent local government bodies from increasing property taxes, resulting in property owners paying higher taxes across the board.

Fontana's inclusion of an optional per square foot property tax falls into the unacceptable.  Any effort at reform must prevent local governments the ability to raise future property taxes.  In other words, tax shifting needs to be an all or nothing proposition.

Dave Fawcett's proposal has some merit I suppose.  Maybe it would reduce the subjective nature of using comparables, but really it just reduces the subjectivity.  The inflation adjuster could be a can of worms.  It would not be sufficient to use the CPI, for example.  This does not reflect property price inflation. Further, we all know that property values in the county do not inflate uniformly.  That is why we have the current problems with reassessments.  Fawcett allows for some adjustments to capture local market trends, but isn't this again going to be subjective?

I have for years trumpeted the idea of abolishing property taxes for all the above mentioned reasons.  The common response then is what tax will local governments use?  I suggest either the earned income tax or personal income tax.  The earned income tax has the attraction of being easy to implement - nearly every municipality already uses it.  The personal income tax has the advantage of better reflecting a person's ability to pay (or wealth).

I acknowledge some issues with this reform proposal, but any shortcomings I think are far less a problem than what we live with now.

In abolishing property taxes, usually the question of commercial property comes up.  I have two ideas. Allow local governments to forgo taxing businesses within their boundaries.  Probably won't happen; but it could be a good way to bring businesses in that would provide jobs to citizens.  The other idea is, of course, locally tax the businesses' income.  This could get complicated, but it is doable.

Some people have pointed out to me that there are municipalities in the Commonwealth that don't have many full-time residents (e.g., resort areas or large farming or forest areas).  These few citizens would be carrying a heavy individual burden if local government relied on their income tax contributions to run government.  Well, could there be exceptions for these type of areas?

Perhaps Senator Fontana has a good idea about allowing counties the option of abolishing property taxes.  For those counties where the property tax better reflects wealth and the ability to pay allow them to keep it.  The great majority of counties in Pennsylvania would be better off without property taxes.  Maybe the optional route would get around another objection heard in Harrisburg: that many counties do not have the problems with property taxes or reassessments that western PA has and therefore they are not interested in so-called reform.

I would insist on an important proviso to Fontana's option.  Once the property tax is eliminated there is no going back.  Citizens must be assured that government is not trying to pull a fast one on them and later add on a property tax.

Are you ready for radical reform in local taxes?  Abolish property taxes. Let me know what you think.