Wednesday, May 16, 2007

Property Tax Roulette.

Catherine Orloff's commentary on property taxes in the Providence Journal recently was, for me, like a tasty worm on a hook.

I just had to bite.

There is much to be said in support of Ms Orloff's position, that the property tax is the better way to fund tax levies and especially education. Her discussion of the differences between income taxes and property taxes regarding fairness and progressivity however missed what I believe are the most important considerations. Also, the summary offers no solution when she states, "The property tax is not perfect, it can be improved, but it is more open and democratic than most if not all other taxes...".

In my view an income tax is far more fair than a property tax. The fundamental principle of income taxes is that one pays according one's ability to pay - more income, more taxes. If all the loopholes could be plugged so that none of the tax lawyers could wriggle their clients out of their fair share, it still has one fatal flaw that makes it second best for funding local government: it is not dependable.

When local governments commit to providing services and enter into contracts with municipal unions they need to be able to pay for them. If tax levies were funded by income taxes (or sales taxes) and the anticipated revenue fails to satisfy the need, towns would be left with deficits. Deficits are expensive as borrowing costs money.

The property tax on the other hand is predictable and dependable. If a town needs $75 million dollars to fund its tax levy it will get $75 million dollars in property taxes. Period. This is critical to a town's being able to pay for what it needs without the nasty surprises that a slipping economy can bring, should income taxes or sales taxes dip. In case anyone needs proof, note that the state which depends primarily on income and sales taxes, will need to fund an anticipated $360 million dollar deficit over the next few years. What if our towns faced these deficits?

The real problem with property taxes is that they are not distributed in a fair manner. Ms Orloff states that "...since real estate ownership is closely associated with wealth...the property tax is quite progressive." Sorry to disagree. Real estate is associated with wealth at just one point in time, when a buyer makes a decision to purchase a property. At that time the decision depends on the new owner's ability to pay the down payment, the mortgage payments and the property taxes. In short, can she afford it?

Over time, the down payment obviously doesn't change, the mortgage payments remain constant and the owner's income may change but not usually dramatically. Yet property revaluations produce huge tax swings, wildly upward for thousands of owners and downward for thousands as well. Those property tax payments no longer reflect an owner's wealth, or even the changing needs of the tax levy, but merely the fickle and unpredictable gamble we call the real estate market.

Can we preserve the reliability of the property tax, so necessary for the fiscal health of our cities, and at the same time fix this very unfair distribution produced by the swings in the real estate market? Absolutely we can. Rep. John Loughlin II is trying to introduce legislation that will do just that. It is modeled on the principles introduced on the website, such that new owners pay a fair tax precisely as they do now and existing owners are protected by the limits on the growth of the tax levy. He deserves your help.

I doubt that the property tax, in Ms Orloff's words " one of the major reasons for the economic and the political greatness of America." but at least it shouldn't be the reason for folks' losing their homes when revaluations distribute tax increases and decreases no better than a throw of the dice, or a spin of the roulette wheel. 

Hey, but maybe that's just me.