McGough ’23: America needs to talk about taxation

No politician likes to talk about taxes. Some will pepper their platforms with promises to “tax the rich” or “cut corporate taxes,” but few really go into the finer details of their ideal tax code. It makes sense. After all, no one has ever been enticed to vote by a W-2-talking accountant, and the average voter can sum up their tax policy preferences in one word: “weak.” It’s not sexy, but we need a thorough tax discussion. A government can only be as progressive as its tax code, and ours is deeply flawed.

One of the most pernicious but widespread problems is property taxation. Sometimes justified by land rents levied by the government, property taxes account for approximately 30% from local government revenues nationwide, funding schools, roads and municipal services like police and fire. They fund essential government functions, but come with a baggage that disproportionately harms low-income communities and cannot be ignored. Property taxes are inherently inequitable and harm low-income communities by levying a largely uniform tax on a wide range of income levels within a taxing jurisdiction. While a wealthier homeowner can bear the burden of property tax without much consequence, it doesn’t make sense to levy the same amount on someone who lives in a property of equal value but earns half the income. .

Municipal governments love property taxes. In fact, these are some of our oldest forms of taxation. They are also easy to administer, thanks to both a real estate market where everything has an estimated value and the fact that property cannot be hidden in an offshore bank account. Moreover, they are quite stable from year to year, always producing income even when ownership changes hands or income from income tax and sales declines. More importantly, local governments have a big influence on the property tax base – raise income taxes and people will move, raise sales taxes and people will buy elsewhere, but property taxes are literally tied To the earth.

They have their benefits, but property taxes are also widely seen as regressive, meaning they are levied disproportionately on the lower classes. Since property taxes do not take into account the financial history of the owner, they are almost always levied more heavily on low-income communities than other taxes. Two identical houses will be charged equal property taxes, regardless of who lives there. A government that increases its revenue regressively can hardly compensate for the adverse effects that result, no matter how progressive its social programs.

Property tax regressivity also serves to widen the wealth gap and create greater disparities in quality of life between low- and high-income communities. Low-income communities generally favor policies that keep taxes low, so unsurprisingly, their local governments keep levies low. Low incomes mean budget cuts, which can be as harmless as cutting the grass on the public football pitch less often or as harmful as firing local teachers. Discounts accumulate over time, making the community less attractive, lowering property values, and limiting community wealth. On the other hand, high-income communities tolerate high property taxes, can support high services, and therefore retain higher property values. Property taxes thus perpetuate a system in which high-income people can live in communities that provide quality services while low-income people live in communities that can barely afford basic services.

Property taxes have even more perverse effects, notably aggravating the housing crisis. Since landlords recoup property tax expenses through rent, a tax hike is roughly equivalent to a rent increase, allowing landlords to dodge the tax and pass it on to tenants .

In addition, property taxes constrain the supply of housing by discouraging development of underutilized land. For example, imagine a surface parking lot in an urban neighborhood. Since the development value on this parcel is low, so are the tax levies. Selling parking permits covers all of these low taxes and then some of it, earning the owner a nice profit and giving them no reason to turn the plot into housing or commercial space. Even if a homeowner wishes to build, property taxes can add excessive burdens and remove potential developments. Regardless of the income generated by the property, the owner is charged according to the market value of the land and its development. Therefore, a landlord wishing to add accommodations to his land will only do so if there are dozens of people waiting to be rented. Waiting that long to build a home reduces the risk of property taxes exceeding revenue, but drives up housing costs for everyone. So, thanks in part to property taxes, underutilized urban lots become long-term investments for the wealthy as land values ​​rise and the housing crisis deepens.

Economists generally agree that property taxes serve a legitimate function – to allocate land efficiently by imposing a public rent on it – but they are clearly broken in their current form. Changes need to be made so that taxes are less regressive, which by extension will begin to alleviate the housing crisis. However, implementing these changes will require politicians to get involved in taxation.

Politicians must first take steps to reduce property tax regressivity. Like income taxes, property tax rates should increase with the value of the property and with the number of properties the owner owns. Large property tax-exempt organizations, like megachurches and our own Brown University, should pay their fair share to offset new property tax exemptions for low-value properties in low-income neighborhoods.

When it comes to spending property tax revenues equitably, states should begin placing a percentage of property tax revenues into shared funds dedicated to redistribution to property-poor jurisdictions. This will reduce the tension between setting low rates for low-income residents and providing the services they need. For schools, this means that large, affluent suburban districts would send some of their revenue to lower-income rural and urban districts, reducing the tax burden on low-income communities and making schools more equitable across state boundaries. districts.

Another way would be to replace property taxes with a similar mechanism: the property value tax. Rather than taxing both the land and the buildings on it – which the current property tax system does – a land value tax only taxes the land below it. For landowners, this means that there is no downside to developing land and building housing, as it would not increase their levies. In fact, some land value tax proposals suggest taxing the land itself at an exorbitant rate, forcing owners outright to build on the land or sell to someone who will. This means more housing and less tax passed on to tenants. Support for this change is widespread: even conservative economist Milton Friedman called land value taxes “the least bad tax”.

Of course, no solution is perfect and change requires uprooting age-old norms. Americans may hate property taxes, but they hate talking about taxes even more. But the conversation about reconceptualizing the current property tax structure is long overdue and has critical implications for low-income communities across America. More importantly, we need leaders who want to talk tax and aren’t afraid to come forward on unsexy issues. American taxes are just as complicated as what we spend them on, but they don’t get even half the attention of the flashiest questions. Once we start talking about taxes and our politicians care about using them, we will have a better system that will benefit everyone.

Jackson McGough ’23 can be reached at [email protected] Please send responses to this opinion to [email protected] and other editorials to [email protected]