Of all the taxes we pay, the local property tax is probably the hardest to understand for most people. As the oldest tax levied in the United States, it remains an essential tax for most local governments today. This article from The New York Times provides some insight on how the taxes we pay for our property have a positive effect on our local economies.
A 2008 study by researchers at the Organization for Economic Cooperation and Development looked at a number of countries and found that taxes on real property caused the least drag on gross domestic product per dollar of revenue raised. Next came sales taxes, personal income taxes and corporate income taxes. In other words, property taxes were the best way to collect revenue without hurting the economy too much.
Real property is an excellent tax base because it can’t be moved and it lasts a long time. In the case of land, it usually lasts forever. We, as economic actors, cannot respond to a higher tax on land by reducing the amount of land that exists. We may change what buildings to construct and where, but once a building exists, it’s not likely to move in response to tax changes.
In rare cases, property taxes can get so high that they encourage people to abandon their property (see Detroit). But in general, property taxes simply lead to an efficient transfer of wealth from property owners to the government. That’s not necessarily lovely for property owners, but we need to finance government somehow, and it’s best for the economy that the manner be an efficient one.
Governments were caught off guard as the recession hit. Property tax was the only major state and local government tax that held up well in the Great Recession. In most states, property tax collections are devised to grow in a stable, steady manner, with the tax rate falling when property values spike and rising when they fall.
Property tax has grown as a share of total state and local government receipts since 2007, because sales and income taxes have been so extraordinarily weak in the recession and its aftermath that property tax has grown by comparison.
That growth serves as a reminder of the virtue of property tax: In good times or bad, it provides a stable, efficient source of revenue.
