Friday, December 9, 2011

Rethinking the Property Tax

It used to be a great idea; fund local government by taxing property. Before the industrial revolution the only significant source of income was land.  The owners of land, essentially royalty or the church, received income from lands in the form of rent or directly from the production of that land whose value was considered to be 20 years of derived income.

Thus it was sensible and fair to tax the value of that land as a source of local revenue. During that period, land values were quite stable.  If one's land were worth twice another's land it remained twice the value year after year and he paid twice the tax.

The result was a system of property taxes that was transparent, related fairly to one's ability to pay and was easy to assess.

Property value today is a function of the marketplace.  It's value is what a willing buyer and seller agree it's worth. For existing owners, market values are completely unrelated to their ability to pay.  It is quite clear that the actual value is real only at the time of a sale; otherwise it is a hope, a possibility. Treating it as if it were a real number has created the largest financial meltdown since the great depression.

And the value of property, this illusion, is the basis of our system of local funding, the property tax. This anachronistic practice has some strange consequences we must consider.

Because they are costly we revalue in RI every three years. In the off years the buyer of a new property will pay one price for a home but be taxed on the prior value, often lower than the sale price.  The result is that these owners don't pay a fair tax until a revaluation, producing yet another even stranger consequence.

The easiest way to visualize this is to consider what would happen if a town were to revalue in a year when there was no tax levy increase.

Properties change in value according to the marketplace at varying rates; some years lower priced homes might increase more in value than more expensive homes. Other years, during dropping home prices, more expensive properties might drop more than less expensive homes.

In either case there will be major tax bill increases for some existing owners and decreases for others despite the fact that the town has not changed its tax levy. In the above example the owners of lower priced homes would get increases which would fund the tax decreases for the owners of more expensive properties. Recall that the levy didn't increase therefore no one's tax increase actually funds the levy.

The bottom line is that our present system of taxing property values always produces and unfair tax for  either new owners or existing owners.

An Owners Charge can provide a solution. Visit the RIGHTTAX website to learn more.

No comments: