As the Commonwealth plunges into debate over taxes, revenues, and local services, it should consider whether the property tax is as bad as it is often made out to be…. The property tax is basically sound. It works the way it was intended, and its high profile is actually a strength.
When the authors mention the property tax’s “high profile,” what they mean is that, in their opinion, taxpayers are acutely aware of how much they are paying in property taxes, much moreso than what they pay in other taxes, and they are therefore able to compare the amount they’re paying with the services those taxes are funding.
But for the taxpayer, this greater awareness of the amount paid in property taxes is actually a positive feature. We get the bill, and compare it with the local services we receive.
An interesting theory. How unfortunate that, for
the vast majority of many people who pay property tax, it has no connection to reality. Why? (emphasis mine)
[F]ew taxpayers have any idea of the amount they spend annually on sales taxes. Even income taxes that are withheld from paychecks are less visible than bills that must be paid in one or two large installments every year. The transparency of the property tax allows taxpayers to be engaged and to evaluate the performance of their local government to make independent decisions on the mix of taxes and services they prefer.
I’d agree that most taxpayers have no idea how much sales tax they pay each year. Same goes for other similar taxes, like the gas tax and the meals tax. But I strongly disagree that the property tax is more “transparent” than the income tax. The authors’ factual assumption here — that people pay property tax “in one or two large installments” — is obviously wrong in
most many cases, because unless you’ve paid off your house, that’s probably not in many cases not how you pay your property tax. Instead, along with your monthly loan payment, you pay an amount each month into an escrow account maintained by your mortgage company. It is the mortgage company, not the taxpayer, who writes the one or two large checks every year. [UPDATE: Jim Caralis notes that the escrow arrangement may not be as universal as I had assumed – I’ve edited the post accordingly.] Most taxpayers, I’d wager, don’t know exactly how much of their monthly payment goes to principal and interest, and how much goes to escrow (off the top of my head, I sure don’t). Many people have their mortgage payments automatically deducted from their checking account, further decreasing “transparency.” The fact that the escrow account normally covers homeowner’s insurance as well as property tax clouds things up even more.
With the income tax, in contrast, taxpayers are made acutely aware of how much they pay each year, because they have to work it out to the last dollar when they prepare their annual tax returns. Even if you have someone else prepare your taxes, you have to sign the return right below the line showing how much tax you owe. So it doesn’t really matter whether income taxes are “withheld from paychecks,” because it all comes out clearly on April 15.
And that doesn’t even take into account renters, who of course never see a property tax bill, but whose monthly rent payments are in part a function of how high the property taxes are in their communities. For renters, property tax is no doubt the least “transparent” tax of all, since they pay it indirectly but they never actually see how high it is. Yet renters vote in local elections too.
So the “transparency” argument really doesn’t hold up. Nor, I think, does the authors’ take on how property taxes really aren’t out of control.
Many residents point to the doubling of home prices since the year 2000 as evidence that property taxes are out of control. But consider how the property tax works. Increased housing prices lead to increases in assessed property values. Assessed values, however, are the tax base, not the tax bill. The average increase in taxes in the past fiscal year was a relatively modest 4.2 percent for single-family homes, according to a recent Globe article.
How you can go through that kind of discussion without even mentioning Proposition 2-1/2 and the impact of that law on the rate at which property taxes increase is beyond me.
Finally, it strikes me as, at best, incomplete to talk about how terrific property taxes are without at least acknowledging one of their central problems, namely, that when people stay in their homes for a long time, we end up with a lot of “house rich, cash poor” people who may find it very difficult to keep up with the level of taxes needed to maintain services in the community.
As is often the case with this kind of abstract economic analysis, it all sounds fine in theory. But it’s not all that relevant to the real world. IMHO.