Everyone wants the government to pay for stuff. We need our Social Security, our Medicare, our police and fire protection, our elementary schools; heck, some would add universal health care and free college too.
But no one seems to want to pay for it.
While Democrats have joined the call for income-tax cuts (despite a federal debt in the tens of trillions), many states, mostly red-to-purple, have targeted local governments’ largest source of tax revenue in what the Yale law professor David Schleicher is dubbing the “Great American Property Tax Freak Out.”
Schleicher’s short new paper on the subject is a tour de force. He explains where this movement comes from and its likely consequences, drawing on several pieces of important empirical research.
Like the property-tax revolt of the 1970s, this rebellion follows a big run-up in home prices. High property values are great for homeowners when they sell, but they also require them to pay higher taxes in the meantime.
Obviously, if rising property values cause a local government to collect more money than it needs, a rate cut can be a reasonable idea. But many new laws and proposals—which Schleicher extensively compiles—push far beyond that.
Wyoming recently exempted one-quarter of the first million dollars of a single-family home’s value from taxation, and it had already capped rates, making it difficult or impossible for localities to make up the lost revenue. Florida will soon vote on a referendum to increase its homestead exemption for non-school taxes to $250,000, which would exempt most homeowners from such taxes entirely.
Some advocates even contend that property taxes are fundamentally illegitimate—akin to “paying rent” to the government for one’s own property—despite the history of such taxation dating back to colonial times.
Whatever the merits of their case, when homeowners throw a temper tantrum, they’re likely to get their way. As it happens, the political power of homeowners is the subject of another new paper this week, which notes that the median voter is a homeowner—and adds the interesting finding that the most politically involved homeowners are also the ones who enjoy the most housing appreciation. They are “more likely to purchase undervalued properties, time housing transactions more effectively, and invest more in home maintenance and improvement.”
Schleicher details a number of practical consequences to continuing down this anti-property-tax road.
First, to the extent local governments are no longer funded by property taxes, they need to be paid for some other way to prevent service cuts. Property taxes are often understood as residents “taxing themselves to provide services for themselves,” as Schleicher puts it. By contrast, the typical modern “reforms” to property taxes—such as big exemptions for owner-occupied “homesteads”—have the effect of requiring homeowners’ services to be funded by others, such as owners of commercial property (including apartments, which by extension puts some of the shifted burden on renters).
Next, the movement threatens local control. State laws are the main way in which advocates seek to constrain local taxes, and in some cases state funding may be needed to make up the difference. This has the effect of making localities dependent on another level of government. If states ultimately do “backfill” lost revenue, richer areas may find their residents paying state income taxes to support services in poorer municipalities, and interestingly, some of the pushback to the revolt comes from wealthy suburbs.
What about zoning laws? Traditionally, property taxes have been understood to discourage cheaper and denser housing. (All else equal, cheaper property directly translates to lower tax revenue, while denser occupancy translates to more people to provide services to at a given revenue level.) One might assume that reducing property taxes would have the opposite effects, but the key nuance is that the taxes will be replaced by others with their own effects.
Local governments may hesitate to allow owner-occupied housing if it generates less tax revenue but readily permit commercial uses that pay more, for example—though property owners would face the opposite incentives when it came to building, as they’re the ones paying the taxes rather than collecting them. Or, if funding increasingly comes from the state, tax-revenue concerns may become less important to zoning decisions.
Perhaps the most troubling impact, though, is on the supply of housing to new buyers, including young couples wanting to start families. Here, Schleicher notes a recent paper coauthored by Manhattan Institute senior fellow Arpit Gupta, which makes two main points supported by both theory and empirical analysis.
One, property taxes encourage people to downsize if they own more house than they need, a situation especially common among retirees whose children have moved out. And two, property taxes have an interesting effect on home prices. Buyers pay attention not only to the purchase price of a home, but also to monthly payments that include property taxes—so when property taxes go up, buyers are willing to spend less on the home and the purchase price goes down, making them more affordable for young buyers. Turning to data on property reassessments from North Carolina, the authors find that a one percentage point increase in the property-tax rate reduces house prices by roughly 23 percent.
Essentially, property taxes encourage older couples to leave houses they no longer need and make it easier for young families to afford a home. To be anti-property-tax is to be anti-family-formation.
More generally, I would add that property taxes, as annoying as they can be, have a number of basic economic advantages. They fall in large part on the value of land, one of the few things you can tax without reducing the supply of it. They do a decent job of matching residents’ tax bills with the services they use and their ability to pay. In some areas they’re pretty much the only good option for collecting revenue.
Like any tax, property taxes should come down when they’re too high. But ideally, we’d have those conversations on a local level—rather than staging a national freak-out, raiding state governments’ coffers, and undermining young families in the process.
From the Manhattan Institute
Josh Appel explains how New York City can use AI to improve the quality of life.
Other Work of Note
Ranking cities based on how quickly housing can be built there. Permitting delays have increased over time and appear to be a major contributor to the cost of housing.
How should we measure “collectivism” across cultures?
The spread of the Internet may have undermined religion.
A Census Bureau paper on AI disruption in the job market.
“AI-related harms are already emerging, including incorrect or misleading outputs, deepfakes, privacy violations, intellectual property disputes, fraud, product defects, and discriminatory decisions. These harms create demand for insurance but do not fit neatly within existing insurance lines.”
Do flat income taxes boost economic growth?
Does school spending pay off more than you think?
Apparently you can meet the new Medicaid work requirement by gambling.
OSHA inspections reduce injuries at nearby businesses, not just the targets.
To continue the alphabet-soup theme, check out the GAO’s report on DOGE.
Who gets ahead in modern academia? Check out Tables 10 and 11 on demographics.
Supplemental Security Income seems to help kids in the households it goes to—but only when their parents don’t reduce work effort.
How do people decide when to start claiming Social Security? And what about disability?
Interesting mix of findings: “We find no evidence that the Medicaid expansions had a beneficial effect on mortality but do find that the ACA net of Medicaid expansion reduced mortality.”
How much money you make is partly genetic.
Explaining the gender gap in STEM majors.
Employers are not impressed when you explain a resume gap as a “self-directed mental health break.”
Did immigration spread disease in Massachusetts circa 1900?
Some predictions about how the new “public charge” rule will affect immigrant welfare use.
Which H-1B workers get paid the most?
Telling conservative voters about election-integrity protections didn’t seem to affect their turnout or confidence in elections.
New census data on income and poverty trends.
What can we learn from all the recent guaranteed basic income experiments?
Another study on soda restrictions in SNAP.
Apparently, litigants in California can remove a judge from their case simply by claiming bias. They can only do this once, and they seem to use the power strategically.
Sexiest paper of the week: “Omitted Variable Bias in Difference-in-Differences Designs.”
Where are pediatric gun injuries most common?
Big week for the Bureau of Justice Statistics, which has filled up my inbox with reports on the victimization of students, immigration court stats, violent firearm victimization, and the “Offense Text Auto Classifier” tool.
How different measures of racial disparities in police stops produce different results.
Who should be responsible for investigating AI cyberattacks?
“In both heterosexual and male same-sex couple formation, the age gap between the richer and poorer partner, as well as the likelihood of an extreme age gap, increases with the income of the richer male partner, especially when he belongs to the top income decile. By contrast, women, even when they rank high in the income distribution, are usually matched with an older partner.”
How the brain processes music.
The fundamental problem with property taxes is they enable the government to collect additional tax revenue without an elected official voting to do so. All bureaucracies have an insatiable appetite for more money.
If inflation is 3.4% but property values rise 10%, taxes have risen 6.6% in real terms. What does the citizenry receive this tax increase? Often nothing. Government work demand, and if they are in blue state, probably get, increases in the pension benefits that were already far better than the rest of citizenry enjoys.
So, is it a temper tantrum to want to end automatic tax increases?
The proponents of the property taxes often, as this article does, rely on the property taxes being assumed to be a proper way to raise government revenue since they have a long history. However, I have yet to hear a good or even a serious answer to why revenues should rise faster than inflation just because property values are rising.
It’s possible to design a property tax system without these automatic increases by using a levy system where tax rate is determined by dividing the government budget (or portion from property tax revenue) by assessed value. Thus, if your taxes rises, some elected official had vote for extra revenue. This also changes all the incentives. New apartment buildings in your town lower your taxes! (assuming the government doesn’t increase its budget). We’re now providing incentives to support development instead of relying on high taxes to strong arm retirees to sell their homes. Who is pro family formation now?
1) Florida’s property tax amendment targets young families who bought after 2020.
Boomers who bought before 2020 already have $250,000+ homestead exemptions because their assessments are capped at 3% a year.
2) due to higher assessments property tax revenue has grown far faster then inflation and population. The amendment would merely bring us closer to 2019 levels of per capita spending adjusted for inflation.
Opposing the Florida amendment is fundamentally about wanting to fleece young homebuyers to subsidize boomers.