Affordable Housing Institute : US

What if you woke up one morning and local property taxes has been abolished?

 

No real estate tax escrows collected by your mortgagee. 

No assessments, no city assessors.

 

Before you smile too broadly, I have to mention some other George-Spiggott-inspired conditions of the scenario:

 

I want only your immortal soul

 

No local autonomy on schools, police, fire, health.  All would be funded from the national government in decisions where you had no input.

 

Nevertheless, your property would not be free from tax.  On sale, you’d pay a transfer tax fee, collected by national government, which rebated money back to your community. 

 

Would you be happy or sad?

 

There is such a place.

 

Irish revenues have fallen off the cliff

 

The Republic of Ireland. 

 

In 1978, Ireland abolished local property taxes, and substituted a 6-7% ‘stamp duty’ (real estate transfer tax).  From the mid-1990s onward, with the EU, the Euro, and the common European marketplace, immigration swelled Ireland population by 35%, adding about 1,500,000 people and over 500,000 new homes.  Prices boomed, and as they did, the state’s coffers bulged with stamp duty revenue.

 

Now prices have busted.  Every property-related statistic out of Ireland is gloomy.  With sales stopped dead, the government is receiving minimal revenue, yet it has obligated itself to provide high-quality local services throughout the country.  The party in power has miserable approval ratings and got walloped in the June local and European Parliament elections.  Should Ireland – might Ireland – could Ireland re-introduce recurring taxes on real property (as it was described by Chris Heady of the University of Kent)?  Is such a move good policy?  Is it political suicide?  If it is good policy, how can the government prevent political self-immolation?

 

I’m different and I don’t care who knows it

 

When I heard all this, I was agog, the more so because I learned about it via a request from the Irish Foundation for Fiscal Studies (FFS) to address their 24th annual gathering, The Fiscal Treatment of Property, on the subject of Lessons from the United States.

 

[Click here to access my whole presentation, in pdf.]

 

Now, gentle reader, you may think this an easy thing to rattle off, but I invite you to pause a moment.  You will have 45 minutes to explain the American property tax system to a nation that has not had one for thirty years, a nation whose area is roughly that of New England and whose population smaller than Massachusetts’. 

 

When everything is different, where do you start?

 

They asked me and yes I said yes I will Yes

 

What can you convey that may be useful in an utterly different context?

 

(By the way, in 1978 something occurred equally monumental to US real estate taxation.  I’ll let you ruminate for a while on what it was, and for extra credit, how it might have lessons for the Irish situation today.)

 

I started with the most basic point of difference – the triune government and its multiple ways of extracting taxes from the citizenry.  Have you ever counted them up?

 

Who’s got their hands in your pocket?

 

After I put this chart together – it’s a composite, an educated guess of the ranges – I was surprised that while the federal government gets the lion’s share, it’s local government that has the most diversity, with two guaranteed sources (real estate taxes and water/sewer) as well as the ability to levy other little pickups (and I didn’t list taxi-meter surcharges, soak-the-tourist hotel taxes, and speed cameras). 

 

I was also surprised that more than likely, you pay more in local taxes than you do in sales taxes.  Did you know that?  I didn’t.  I suppose it’s because the real estate tax bill is computed for you, whereas you have to do your own state taxes. 

 

Your mileage may vary because you may be in a high income-tax or sales tax state (like New York), and as a general rule, state taxes are high when real estate taxes are low, and vice versa.

 

[Any reader who has a chart of both, please email me the data or the URL; I'll be really interested. – Ed.]

 

How localities make ends meet

 

The reason is simple: localities that don’t get revenue-sharing from their state government have to make it up on their own.

 

Localities also like homeowners, preferably richer homeowners, preferably with fewer children, and it will surprise you to learn that the US lags more than ten points behind Ireland in homeownership: 68% to 79%.

 

Are higher numbers better?  Ownership percentages and mortgage debt relative to income

 

Not too surprisingly, when the homeownership rate is very high, so too is the relative level of mortgage indebtedness relative to income.

 

 

Yet the correlation’s not linear, with the US at 101%, Ireland 116%, Australia 120%, and Britain 130%.   Fortunately, debt is a balance sheet number, and payments are only a percentage of the debt, so that a ratio above 100% isn’t necessarily evidence of insolvency  Still, these are not statistics to be proud of.

 

They do mean that residential homeowners form the backbone of local tax revenues, including state tax revenues.

 

The importance of recurring taxes nationwide

 

While I confess surprise at the outliers of Illinois and Wisconsin, and the anomaly of Texas, overall the nation shows a pattern, with highest tax rates in the Northeast, lowest in the Confederacy (Georgia and Florida get a boost because these states have been urbanizing and gentrifying.

 

One state defies the trend: California.

 

Why’s California so light?

 

Any guesses why, readers?

 

As this was only of secondary importance to my Irish audience, I went back to the basic real estate tax budget algebra:

 

Seen in a blog post near you!

Real estate taxes: basic budget algebra

 

Having explicated this at length previously, I won’t rehearse it here.  The main point I wanted this audience to grasp is that taxation can be calibrated by millage rate, and sounds not too expensive: so many dollars per thousand. 

 

Further, when there’s a hole in the budget, you can plug it by fiddling the millage rate:

 

– Budget hole gets bigger? Raise the millage rate

– Real estate values drop? Raise the millage rate

– Got asset values you want to favor? Change their fractional assessment

 

You can also discriminate against some asset classes by discriminating in favor of others.

 

Tax ‘em too much and they revolt

 

But you have to be careful, or the taxpayers will revolt.  And that, I pointed out, is a dangerous backlash:

 

No taxation without representation!

 

Our first tax revolt came in 1773 and was a flashpoint in our eventual revolution and independence from Britain, on the memorable and valid slogan, “no taxation without representation.”  At the same time, in 1978, the citizens of another great republic expressed their revolt over too-high taxes by passing a statutory cap, Proposition 13, which single-handedly blocked the growth of California‘s real estate taxes as a source of state and municipal revenue.

 

Personally, and from the safe distance of 3,000 miles, I think Proposition 13 one of the worst solutions ever forced on a government – a neck tourniquet for growth.  No matter how profligate California’s state and local governments were – and I am fully prepared to believe they were and are, particularly in light of recent events – blocking one revenue source is like damming one bank of a river, it just shunts the flow in another direction.  Worse for California, by giving non-movers a tax break relative to movers, it gradually develops into an embedded implicit subsidy of the elderly at the expense of the younger, more economically mobile and vital.  It’s torqued the state’s growth, shoved taxation toward more growth-inhibiting forms (like sales tax), and not stopped the bloating of government. 

 

[In Massachusetts, we have a similar real estate tax cap, Proposition 2½, the brainchild of Citizens for Limited Taxation.  Superficially similar, Prop 2½ is very different because its cap is higher, it's self-adjusting being tied to annual revaluations rather than progressively worse by virtue of being revalued only on transfer, and it allows for safety-valve overrides.  I've posted before about Prop 2½ and will likely return to it sometime soon. – Ed.]

 

Sounding the same note for thirty-plus years: Barbara Anderson

 

Take a lesson, I suggested to the Irish audience.  When you don’t tax owned property fairly on a continuous and recurring basis, and instead you rely on transactions to drive revenues (which Proposition 13 did because of revaluation and Ireland currently does with stamp duty), then you give the illusion of low taxes without local accountability.

 

In fact, that was my recurring theme to the Irish: You can get the populace to accept annual real estate taxes if and only if you tie them to locally autonomous control over visible local services like schools, police, and firefighters.

 

Indeed, it might be said that strong local real estate taxation is the means by which local government can and must grow, taking power away from an overly centralized national government.

 

Or their local governments

 

[Continued tomorrow in Part 2.]