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.
raj says
…As the guy who does Doonesbury instructed us a few months ago, these operations are actually belieftanks.
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Rene Descartes is ascribed as having written “I think, therefore I am.” These belief-tank people are nothing more than “I write horse manure, therefore I earn.”
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As an aside, has anyone seen any reports of this http://www.spiegel.d… in the US? I’m sorry, it’s in German, but some elementary school kids in New Jersey were protesting having to wear uniforms. Their protests were relatively novel. They plastered their buttons with Hitler-Jugend symbols. Moreover, they wore T-shirts emblazoned with a picture of GWBush and the legend “International Terrorist.” The school tried to make them stop doing those things, but the federal judge said that the school could not.
hoyapaul says
All you say is true, and the other curious thing is that criticize the local option taxes as mainly benefiting towns with large retail bases, presumably leading to an unequal distribution of tax income across municipalities.
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Yet, of course, this is the big problem with the property tax — high-cost property towns are able to raise far more from the property tax than low-cost property towns, leading to significant inqualities in ability to raise tax revenue.
shawn-a says
“High-cost property towns are able to raise far more from property tax” is not exactly true.
They can raise only 2-1/2 percent (plus growth) per year. Like everyone else.
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The difference is that high-cost property towns tend to attract people with higher incomes.
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These people tend to care less about tax increases (because of the percentage of taxes vs their income) so they tend to approve voting for tax increases for themselves more often.
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In my town, and others with a greater “working class” core, the voters are much more careful about thier taxes, and will not vote to increase them unless they see a very great benefit for themselves.
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In some ways, this report is correct. The people who pay close attention to the taxes being paid will keep a closer eye on it (and face it, a great percentage of seniors know exactly how much they are paying in property taxes… and vote).
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I, too, much prefer a property or simple large tax to the nickel and dime method of taxation. The sales tax, gas tax, liquor, bottle redemption, etc taxes are all designed to make the taxpayer be less aware of what they are paying.
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hoyapaul says
No, I didn’t mean anything as far as Prop. 2 1/2 goes. My point is that “rich” towns can raise far more money in absolute terms (not % terms), since the taxable property base is so much larger (since the homes are worth more).
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If the local option taxes pose a problem because some towns have a larger taxable commercial base, as the authors of the article suggest, then why is this “taxable base” problem with the property tax not a problem as well (and a much bigger problem, I might add).
nopolitician says
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One thing that few people bring up is that when Proposition 2.5 went into effect, not everyone started at the same point. The key metric to observe would be “dollars per resident”. If you look at the 1981 tax levy information, available on the state DOR website, you will see examples such as:
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Westfield: $412.45 per resident
Everett: $809.32 per resident
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Those two cities are nearly identical in population, so the scale of their government should be relatively alike. So in 1981, when Proposition 2.5 kicked in, Everett was already raising and spending almost twice as much money than Westfield.
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Each town had the ability to raise their tax levy by 2.5% per year. Do you think it’s possible for Westfield to ever raise as much tax revenue as Everett? Maybe, via a lot of tax overrides, but since there is a $25/1000 levy cap, a high-valued community will always be able to spend a lot more than a low-valued community simply because the low-valued community will hit against that cap.
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New growth can help a community increase its position, but only if the new growth is for housing that is significantly higher than the average existing property value.
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Is one community in need of less services because its property value is lower than another? No, in fact, the relationship probably goes the other way, since wealthy communities don’t need to provide as many public services as poor communities (not many people earning $200k/year break into houses, for example).
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The more I think about this, the more I think the state should offer communities a very wide range of ways to raise revenue and should decrease the contentious state aid. Let each community raise revenue on its strengths, one size does not fit all in this state.
bobvm says
I haven’t yet read the op ed but I want to defend the Lincoln Institute. In my experience, attending seminars on urban planning issues there and reading their publications, it is a fairly diverse and intellectually open place, definitely not a “belief tank”. I believe that the founder was a follower of the 19th century reformer, Henry George, but I don’t think that has a great deal of influence on the discourse that is encouraged by the institute today.
fenmore says
I agree with bob here. Pick on the report all you want but the Lincoln Institute is a very diverse group of thinkers that run many good programs. Anthony Flint, who used to write for the Globe and cover urban sprawl issues, now works for Lincoln Institute and wrote a book about land use policy, and he has a very refreshing progressive outlook to solving land policy questions.
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I don’t think it’s fair to complain about the Institute just because of one op-ed.
raj says
definitely not a “belief tank”
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I went to their web site and was unable to find a list of donors. Who is funding them? Are they only reliant on the lincoln foundation out of Cleveland? I suppose it is possible, but it does strain credulity to believe that they could run such an extensive operation without other donors.
jimcaralis says
1. I pay my real estate tax in 4 quarterly payments (my house is not paid off). This may be more common than you think.
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2. If you do use a mortgage company to pay your taxes I imagine that you will notice if your mortgage payment goes up, which is what will happen if your taxes go up (unless your ARM is up in which case you may have bigger problems!).
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3. If you do use a mortgage company to pay your taxes you still get mailed a form that tells you how much RE tax you paid so that you can deduct it from your income taxes.
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4. Regarding renters, I agree it’s not very transparent. But if you really want to find out you can.
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5. What other tax do we get to control by vote? That’s pretty powerful. I’m pretty sure when it does come up for a vote people educate themselves quickly.
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All in all I didn’t find their op-ed all that dubious.
david says
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2. It’s more complicated than that. First, as I said, some have payments automatically deducted, which means it just happens (though you’d be notified). Second, the company is always adjusting the escrow payments up and down, which may or may not be related to a change in the property tax.
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3. That’s true — assuming that you’re paying close attention to your income taxes, which strengthens my argument that income tax is transparent.
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4. Yes, renters can find out if they want. But the same goes for sales tax, gas tax, etc. – anyone who really cares how much they pay in those taxes can figure it out.
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5. Are you talking specifically about Prop 2-1/2 overrides? If so, you’re right – there’s no other mechanism like that for other state taxes, save perhaps the ballot initiative to enact legislation changing the income tax rate. And we all know how well that worked!
jimcaralis says
My loan is with a standard well known commercial lender and I just pay the mortgage with no escrow at all (taxes or insurance).
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I agree, income is certainly more transparent, but I do believe that RE taxes are reasonably transparent. Which is evidenced by all of the attention it gets from homeowners and the media.
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Unrelated and perhaps out of bounds – are you for or against casinos? I haven’t been able to draw a conclusion from your postings.
david says
That could change, but that’s where I am right now.
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The Globe said it, so it must be true! đŸ˜‰
raj says
…but before we paid off our mortgage, we had the option of paying the taxes and insurance ourselves, or to have the mortgagor do an escrow and have them provide for payment of taxes and arranging for insurance.
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One year, there was a miscommunication regarding insurance, and the mortgagor arranged for insurance. That insurance was at a ridiculously high rate–much higher than our insurance agent’s rate. Fortunately we got that straightened out.
gary says
That is, if I had a casino nearby, I’d wager that if you polled some group of homeowners and ask “how much did you pay in a) real estate tax and b) income tax in 2006?” most people would know the answer for real estate tax and would not know the answer for income tax.
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Now that’s just an opinion and I only see a few thousand tax returns and taxpayers each year, but IMHO anyway.
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And, I think the reason’s been listed several times in this thread: withholding of income tax is slow and painless with an “accounting” prepared on April 15 (piles of numbers leading to a refund of amount owed).
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Real estate tax is quarterly, or at its slowest, monthly, and it’s very visible on the regular bill.