Written By: Joshua Vincent
CPTR and its parent organizations have demonstrated how a property tax can be made progressive by using the land value tax. Why? Businesses and homeowners in the lower quintiles of value benefit from the tax shift. Why? The percentage of the building’s value to its land value is higher (though individual results may vary).
There’s also solid theoretical and empirical evidence that land value taxation turns a property tax into one that comports with principles of progressive taxation. In other words, a “progressive” tax is one in which the tax burden increases with income. As a result, high-income families pay a higher portion of the tax burden, while low- and middle-income taxpayers shoulder a relatively lower tax burden.
This is a generally accepted practice for income taxes (except in states with a flat (ergo regressive) income tax). “Flat” means one rate for every income level (though some states exempt the first several thousands of dollars in wages). “Regressive” means low-income/wealth taxpayers pay a relatively higher percentage of the tax burden. In contrast, middle- and high-income/wealth taxpayers shoulder a relatively small tax burden.
Sales taxes are inherently regressive, which can only be fixed by large measures. For example, exempting groceries, resorting to services (usually reported), or building an overly complex tax structure could provide a solution. Still, nobody’s ever going to do it.
And yet, a progressive tax structure is where it’s at throughout most of the world.
CPTR conducts research on land-reliant property taxes. But this doesn’t stop us from wondering why one of the cornerstones of any modern administrative tax system doesn’t apply progressive principles to real property tax.
Again, LVT (presented here as the split rate property tax) seems to make property taxes progressive.
Here’s an example from the CPTR Philadelphia LVT project (in this example, residential properties) showing what effect a shift from buildings to land has on the quintiles of value:
The outcome of the simulation is clear: the reduction for the lowest quintile is 7.14%, and the next quintile is just about 9%. In the middle is just what we’d expect: a middling 4 ½% reduction. We see increases only when the simulation reaches the highest two sets of value. The need for future research on different urban and exurban geographies is indicated.
We are not the first researchers to consider the alternative scenario using a progressive income tax precedent. As we understand it, income tax is a wage tax. It is pretty much a creation of the Industrial Revolution. Property taxes started with the Sumerians and have been with us in one form or another since then.
“You can have a Lord, you can have a King, but the man to fear is the tax assessor. “
Anonymous citizen of Lagash, Sumer
Sales tax, a problem child.
Sales taxes historically have been a wobbly thing. Before the advent of snooper technology and centralized governments, taxes were rarely collected at the point of sale. Even if was attempted, the levy could easily be avoided. Legends arose from excise or sales tax evasion, such as the Whiskey Rebellion or smugglers in Great Britain in the eighteenth century. Modern-day proponents of a US national sales tax would do well to read their history books.
In addition, sales taxes are a creation of the twentieth century, particularly in the South, where state governments made up of landowners proved to be very solicitous of those who owned land. As a result, high sales tax rates exist in the same places as do poverty, poor schools, bad roads, and worse health.
Change begins at the roots
Rage against the property tax is a convenient (but mostly futile) political issue. Still, the proffered alternatives are either the income tax or the sales tax. Increasing either makes a polity less competitive and frankly poorer than its neighbors.
So it’s back to the old drawing board. Looking beyond the one-dimensionality of the usual property tax (property value multiplied by the tax rate), let’s think about doing what CPTR did in its Philadelphia Experiment. Apply the property tax to bands of value (think quintiles or quartiles). Washington DC uses a version of this concept. It is thinking outside the box but looking at how they do it that exposes a big messy inherent flaw: the classes described are a political creation rather than an economic prescription. Residential gets the lowest tax rate. Great. Commercial receives a higher tax rate. Great too, right? Wrong.
The whole point of a large community, such as a city, is to contain varied people and land uses. Therefore, there is no good reason for why Class 2 (commercial and industrial property) has a higher rate of $1.65 versus class 1’s $0.85. DC splits Class 2 into three discrete bands of value. Why should a corner store or a nail salon owned or operated by someone on the lower rungs of a commercial success ladder be lumped into a group valued at up to $5 million US?
Progressivity should more appropriately be across land uses. In other words, $0.85 for a house and $0.85 for a barbershop.
A hopeful future for the property tax
Policy experts who are trying to solve the housing problem and the staggering unaffordability of housing are starting to zero in on this inherent problem. British Columbia proposed it in 1993, and the ruling NDP party paid a long-term price for their temerity. But the idea is being revived.
Long regarded as a bellwether for nonideological policies, Singapore uses a progressive property tax to tame what would otherwise be a nuclear property market. There is even an owner-occupied exemption for the first $8000 of value.
The US has a long and complicated history with property tax. Generally, it’s been unfair and doesn’t comport with classic best practices for a tax policy. Changing our perceptions of what the property tax can do and how to utilize it is long overdue.