The New York Times reports on a proposition being voted on today in North Dakota to abolish the property tax in that state.
Thanks to the oil boom, North Dakota is awash in state revenues, but it is not clear at all that the measure will pass, with many disparate organizations, such as the Chamber of Commerce and the public-service unions, opposed. It should pass. The property tax is an economic obscenity.
If you want a poster child for the enormous inertia of government, you could hardly do better than the property tax. It’s a relic of colonial times that makes no economic or policy sense today and yet remains in just about every jurisdiction in the country.
In the 18th century, property was almost all income producing (only the very rich had houses standing by themselves on town lots, the rest lived on farms or above the store). And in a fairly primitive economy it was the best measure available of a person’s ability to pay taxes.
Today, almost all residential property is income absorbing, not income producing, and residential property is among the worst possible measures of ability to pay taxes. If a man retires or loses his job, his income can drop precipitously. His property tax is unchanged. And if the real estate market tanks, greatly reducing a family’s net worth, the tax again usually remains unchanged.
The property tax is also grossly regressive. People tend to have as much house as they can afford, but only up to a point. How many indoor swimming pools do you want, after all? So while a middle-class family might pay 15 percent or more of their income in property taxes, the zillionaire hedge-fund manager down the road, despite his riding ring, three-hole golf course, and garage for his large collection of antique cars pays less than one percent. David Letterman happens to live in my town. His property taxes (I checked, they’re public record) are about five times mine. His income, I confidently assert, is at least a couple of orders of magnitude greater than mine.
The property tax is highly subjective, difficult and expensive to assess, and inconvenient to pay. It violates every single one of Adam Smith’s rules for good tax policy. And it has all sorts of adverse effects beyond tax policy, such as encouraging suburban sprawl and forcing people to move out of homes they love but can’t afford to maintain.
If the nation is truly entering an era of deep reform, property taxes should be high on the list of things to abolish. They are nothing less than grotesque.