Thursday, February 17, 2011

A community or an investment club?

A good local tax system has two requirements -(1) to raise funds to be used for the common good and (2) tax in a manner that distributes the burden fairly.

The first goal is met better by the property tax than any other tax. Calculations based on property values always produce the needed tax revenue. Whether values rise or fall, the tax rate adjusts to meet the need.

The fair distribution of the burden however falls miserably short.

I asked an economist once if he thought it was fair to use property value to determine one’s fair share of the tax burden. He answered, ‘maybe not but it is easy’. The truth is that our present method is more like an investment club where those whose “investments” don’t do well one year are compensated for their “loss” by the ones whose investments did better. 

In a non-revaluation year property owners are taxed in direct proportion the the needs of their community - as levies rise, tax rates rise to provide the needed funds, and everyone is taxed proportionately. While it may be more than we'd like, it’s rational and it's fair.

But as values rise, new buyers were taxed on old, often lower assessments, and this is clearly unfair. 

The solution we use is a triennial revaluation.  New buyers will now pay a tax based on the market value of their property, which is fair, at least every third year. The effect of reassessments on the rest of the population however, is troubling. 

Rational increases that reflect tax levies are not possible with a revaluation. Instead, there are swings in tax increases and decreases that boggle the mind with some owners getting 50-100% increases!

One result of such onerous increases is a breakdown in morale and community spirit and people react in the only way available to them. They blame excess spending and they question the accuracy of their assessments, when in fact, the ancient method of reassessing everyone is much more to blame. 

We use a system of taxes that effectively takes money from some tax payers (the ones with increases greater than the levy) and transfers it to others whose values didn't rise as much. This transfer is of no benefit to the community, costs a lot to calculate, (revaluations are expensive), and most often, the transfer has been from the owners of lower valued property to those with higher valued property - not exactly fair or rational.

Let’s make up our minds - shall we tax using a system that treats our homes and properties as merely part of an investment club, or shall we all share the tax burden in a manner that’s good for the community fairly and reasonably?

It's about time Rhode Island adopts a Property Tax system to be proud of.  

To see how, please visit