Concept Review: Property Taxes

There are only two things mandatory in life: death and paying taxes.  In this post we will focus on the later.  

We pay many taxes in our lives.  These taxes fall into the general categories of income, sales, and property.  Did you ever think about where these taxes go?

The primary source of revenue for the federal government is the income tax.  Usually with every paycheck, you, and your employer if your not self-employed, pay income tax.  Every year you are required to file an income tax return by April 15^th to the Internal Revenue Service (IRS).  Income tax collected by the IRS goes to support various federal government responsibilities and programs such as national defense, paying interest on the federal deficit, social security and Medicare, interstate highways, and various federal programs.

Although most states have both income and sales taxes, it is the sales tax that is the primary source of revenue for most state governments.  The sale tax is used to fund state government responsibilities and programs including state government offices and departments, state roads, unemployment compensation, and other state run programs.

The property tax is the main source of funding for the responsibilities and needs of local governments.  It is the property tax that funds public schools, public libraries and hospitals, most roads, and municipal offices and services.

The property tax is an ad valorem (Latin phrase - ‘based on value’) tax meaning that this tax level is based on the value of the property being taxed.   Some tax jurisdictions have ad valorem tax on personal property such as cars, but the special characteristics of real property make is conducive to a value based tax. 

First of all, it is difficult for someone to hide real property.  Cars and personal property can be concealed but hiding a quarter acre from the local taxing authority is impossible.

Next, real property is a still major source and measure of wealth.  In fact, if we were trying to describe the wealth of the richest Americans 100 or more years ago, we would probably measure their wealth in terms of acres rather than dollars (we say Warren Buffet and Bill Gates are the richest based on the billion of dollars they own or donate and not the acreage they control).  Today, people with more valuable real estate can generally afford to pay higher property taxes although the property tax has been criticized for being somewhat regressive or not proportionally burdening the rich and poor alike.  It can be argued, that people with lower incomes pay a higher proportion of their incomes on housing and property tax as compared to people with higher incomes.  However, don’t forget we already have a progressive tax on income by the federal government.

Finally, the ad valorem property tax aligns the incentives of the local government and the local property owners.  Because the quality and quantity of municipal services directly affects the value of property, the taxing municipality has an incentive to maintain or increase their tax base by providing superior services (public school, street maintenance, utilities, etc.).  Although it is recognized that perhaps not all municipalities, public servants, and property owners recognize or choose to acknowledge this relationship.

Tax revenue from local property going to support local municipal services does make some sense.  It is the local property owners and inhabitants that use municipal services such as public schools, local road maintenance, garbage collection, water and sewer, fire, police, and ambulance services.  With the property tax, they people using the service are generally paying for these services.