A brilliant idea on property taxesFrom Otis White's Urban Notebook, copied in full (as usual) because he doesn't have permalinks. I love this piece, because it not only explains the problem of skyrocketing property taxes and the solution, but also notes the good incentives it provides for city government and the un-discussed downside if we eliminate or hobble the property tax (like California's Prop 13, which has had the exact effects he describes at the bottom).
Houston could be an innovator here, but I doubt it. The housing bubble and associated property tax revolt is much stronger elsewhere in the U.S., esp. on the coasts. One of those places seems more likely to try out this approach. They can work out the kinks, and we can learn from their mistakes and follow in their footsteps in future years if and when it makes sense. But it's definitely worth keeping in mind if accelerating property taxes becomes a front-burner issue here again (unlikely, given our recent 5% (?) cap that passed).
The Death Strategy
One Way to Save the Property Tax
Is there a way to save the property tax? Rarely has there been a tax as despised, in part because of the way it’s presented (usually in a single, shocking bill), but never has there been a tax as well suited to localities. Better move quick: If something isn’t done soon, the property tax will be so hobbled by irresponsible state legislators or hotheaded voters that it will cease to be a mainstay of city revenues. And woe be to cities then.
Why is the property tax so well suited to cities? Because determining land use is what cities do best. Think about it. From zoning to road expansions, sewer improvements to streetscaping, slum clearance to law enforcement, cities affect the value of property. With a single decision sometimes, a city council can turn a weedy lot into a hot development property. Given this, why not reward cities for doing what we most want them to do — constantly push up our property values?
But here’s the problem: Not everybody who buys a house does so as an investment; some are there for the long haul. Their dream is to retire, live out their lives and die in the house. If anyone is going to make money from their property, it will be their heirs.
The New York Times reported recently on a group of such homeowners near Boise, Idaho. These are people who bought large tracts a long distance from the city, only to see urban sprawl run up their property values and tax bills. One retired state employee paid $454 a year in property taxes when he bought his hundred-year-old farmhouse 17 years ago for $59,500. Last year, he paid $3,005 in taxes on land now valued at $225,000. Another property owner saw taxes on her 33-acre land soar from $2,200 to $10,871 in a single year. What could cause such a surge? Her land was rezoned from agricultural to residential. “All I’ve got is a rundown barn in the middle of Idaho,” she complained to the Times.
Two thoughts: Valuations and tax rates are separate things, and if the assessments are surging (thanks to the good work of city governments, a little luck or both), wise city councils can ease the pain by lowering tax rates. That will help some. But we need something more: a new way of collecting property taxes that allows owners to defer some taxes until the property is sold. That way, cities would still be rewarded for their good work in boosting land values, but homeowners or small-business owners could be spared some of the bill until they (or their heirs) cash out
Wouldn’t cities suffer? After all, they need revenues from property taxes now, not years from now. Wall Street could solve that: There should be plenty of investors willing to buy deferred taxes at a discount, particularly if the taxes accumulated interest during the deferral period. And what about homeowners’ heirs? Won’t they be upset at receiving a gargantuan tax bill when the estate is settled? Well, this may be the value of a single, shocking bill. Cities can present the tax bill on a statement showing how much their actions, over the years, have raised the value of mom and dad’s house. In the end, then, cities would be asking for a percentage of the increase they made possible. And just as few sellers begrudge real estate agents getting their share, who could object to cities getting theirs?Footnote: Let’s think about the worst-case scenario. What happens if the property tax goes away? Cities will be rewarded for doing crazy things, like trying to cram high-volume retail outlets on every corner (to get sales tax revenues) or office buildings everywhere (to get payroll taxes). And no place will want homeowners, who will be regarded as a bunch of high-cost freeloaders.