Recently, two very able young legislators,
Sen. Mark Hass and
Rep. Tobias Read, authored a blueprint for state/local
tax reform in Oregon. This is quite remarkable. Who can remember a major reform
emanating from the sapless branch of our state government, not forced upon it
by popular initiative?
The centerpiece of Hass-Read
proposal
is 5 percent sales tax combined with a substantial cut in personal income tax
rates. They claim that adoption of their proposal would create 50,000 new jobs
and raise nearly $500 million a year in net tax revenue. Frankly, I believe
that the need for and the benefits claimed for this proposal are
greatly over
estimated. But that isn’t the subject of this blog. There is no need to
beat a dead horse; the response to the main part of the Hass-Read proposal has
been overwhelmingly negative, albeit largely uninformed. Rather, I want to
speak to one of its elements, which has been given a generally positive
reception, the $50,000 homestead exemption.
Chuck Sheketoff, executive director of the
Oregon
Center for Public Policy, for example,
claims
that Hass and Read “rightly recognize that property taxes take a
disproportionate share of income from low- and middle-income households. So
their plan includes a long sought-after homestead exemption to lower the
property taxes of those with the least ability to pay them.” This claim
reflects two very serious misunderstandings: first, that property taxes “take a
disproportionate share of income from low- and middle-income households” and,
second, that a homestead exemption is a good way to deal with the perceived
inequities of property taxes.
No matter how you measure income, if property owners pay the
tax, property taxes are inherently progressive. Real property ownership is much
more unequally distributed than income. Ten percent of property owners (mostly
corporations, which are owned almost entirely by the top quintile of taxpaying
households and well over half by the top 1 percent) own 58 percent of the
taxable property in Oregon by value (versus 35 percent of taxable personal
income). The bottom 10 percent of those who own any property at all, own less
than 1 percent of the total property value. Moreover, forty-plus percent of
potential taxpayers in Oregon own no taxable property; very, very few have no
income (think Phoebe and Joey from Friends
rather than June and Ward from Leave It
to Beaver).
In response, Chuck observes that “property taxes are not
based on ability to pay – thus they are regressive. Two homeowners with homes
of the same value and same property taxes … where the homeowners have different
incomes make this clear. Exempting the first $50,000 of assessed value of
property that is taxpayer’s owner occupied principal dwelling as proposed …
would be good for low- and middle-income households. Who says it wouldn't?”
Chuck is clearly confusing horizontal and vertical equity. Tax
progressivity is concerned with vertical equity, i.e., the income elasticity of
tax payments. Where property taxes are concerned the best evidence is that the
elasticity is > 1 (progressive). That the correlation between income (ability
to pay) and tax payments is imperfect is a matter of horizontal equity. (Property
taxes do poorly on that measure where AGI is the independent variable; they do
about as well as income taxes where the Haig-Simons income definition – income
equals household consumption plus the change in its net assets, the definition
preferred by economists – is used; and somewhat better using permanent or
lifetime income. In other words, these definitions affect the degree of
covariance of income and property tax payments, but not the slope of the logged
relationship, which measures vertical equity.) Besides, given the fact pattern Chuck
cites, exempting the first $50,000 of assessed value of property would not
affect the progressivity of the property tax. (The proposal could have a
positive effect on the progressivity of the property tax, overall. I think there
is a good that it would. However, you really cannot tell without running the
numbers).
But the key issue here is whether property taxes are paid by
property owners or by consumers/renters. ITEP assumes that a substantial
portion of the tax is shifted forward to renters/consumers. Most of my
colleagues do not agree. That doesn't mean ITEP is wrong, but on this point
that they are wrong seems more likely than not. As for my second point, given
that they were looking at all 50 states using Census and US tax data, I don't
see how they had any alternative, but so far as we are talking about a specific
state and tax, it’s not right.
There are inequities associated with property taxes,
especially where homeowners have low or fixed incomes, cannot deduct their
property tax payments from their income taxes, and do not fold their property
tax payments into their mortgage payments. But many of the objections to
property taxes go to their inconvenience (e.g., property wealth is not easily
convertible into disposable income) or sound like special pleading (home
ownership is different from owning other assets). As an economist, I would
insist that anyone, who owns an asset, can convert it to cash, either by
selling it or borrowing against it. I am not persuaded by the claim that if you
sell your home, you won't have anywhere to live. If you take the standard
deduction on your personal income tax, you are probably financially better off
selling and renting (for a business that's comparable to a sale and lease back
arrangement); if not, a reverse mortgage is currently a very attractive option,
but there are a panoply of mortgage-backed, tax-deductible debt instruments
available to property owners.
As for being different from other assets, homes are, but
that is an argument for, not against, property taxes. Where residential
property is concerned, the implicit cash flow accruing to homeowners, in the
form of rents avoided, is exempt from income taxation. This exemption was
vouchsafed when the personal income tax was established, in part, because state
and local governments had already claimed the property tax base, by subjecting
the returns to property ownership, and generally those returns alone, to a
wealth tax (in this particular case it is easier to measure wealth, property
value, than income, rents avoided, although they pretty much amount to the same
thing). Fortunately, nearly everyone concerned avoided the double taxation that
would have resulted if the feds had taxed the returns to real property or states/local
governments had subjected financial assets to property taxes. The resulting
division of tax powers is arguably one of the glories of America’s unique system
of federalism.
So, how would I deal with the inequities of the property
tax? Rather than exempting the first $50,000 of assessed value of property
across the board, I’d address the fairness problem directly by linking the
benefit to the personal income tax, which would make it a lot easier to
calibrate its distributional properties to the precise ends sought. For
example, the state could grant a tax credit equal to $750 (indexed for
inflation) multiplied by their property tax assessment ratio (TAV/RMV) to
homeowners who take the standard deduction on their personal income tax. Not
only would this be targeted at the folks most unfairly treated by the property
tax and have better distributional consequences than an across-the-board
exemption, it would shift fiscal responsibility to the state where it belongs rather
than further depriving local governments of resources.
