To Save Essential Public Services, Restore the Original Wealth Tax!

By Polly Cleveland, on January 17th, 2011

State and local officials propose drastic cuts in public services. There’s an alternative: restore the property tax. It’s the oldest wealth tax of all, the tax that financed Chinese civilization over 2000 years ago, the tax that until World War II financed most of government in the USA.

The property tax? Our most hated tax? The tax that new Democratic Governor Cuomo of New York has vowed to cap—in the face of unprecedented budget shortfalls? Yes, that tax.

Ideally, property taxes collect a uniform percent of market value of real estate within a given jurisdiction, let’s say a town or school district, or an entire state. On average, half of that real estate is homes, and half is corporate property. The assessor, an elected official, assesses—that is, estimates—that market value, based primarily on comparable sales. Then the town imposes a tax rate, say 1.5% on the assessed value—often by a vote of the residents. Very democratic.

Even at a uniform rate, a property tax is intrinsically more progressive than an income tax! How so? Simply because property ownership is far more unequal than income. Most of us receive some income, yet the bottom 60% of Americans owns no significant wealth. Recent data from Edward Wolff of NYU shows the top 1% of Americans receiving 17% of income, but holding 34% of net worth, and 42% of non-home wealth—ie corporate securities and other assets.

In the age of loopholes, the property tax remains the only tax many rich people and corporations pay. Yet a triumph of confused statistics and cunning rhetoric has led most of us to perceive it as a burden on the poor and middle class, obsolete and unfair. How could this happen?

Confused Statistics

Over the last 60 years, income and sales taxes have largely replaced property taxes at the state level, leaving property taxes to local governments, school districts especially. This shift creates the primary strike against property taxes: rich districts can finance good schools at low rates, while poor districts can only finance lousy schools at high rates. Unfair? Yes. But the same goes for any local tax. States could mitigate the problem by consolidating small school districts—notoriously in New Jersey—and by sharing some revenue among districts—as New Hampshire is attempting. But look what happens when the naïve researcher throws statewide data on property taxes into her computer: lo and behold, poorer people apparently pay higher property taxes! She concludes the tax is regressive!

Moreover, many wealthy people use property to shelter income from taxes, for example by deducting excessive depreciation. But they still pay property taxes. While Ronald Reagan was California Governor (1968-72), reporters found he paid heavy property taxes on his famous ranch—and zero income taxes! So we get a bunch of high property tax/ low income tax pseudo poor like Reagan. Our naïve researcher throws them into the statistical pot with ordinary folks, and finds—surprise!—property taxes burden the poor.

And then there’s the naïve assumption that property taxes are simply “passed on” to renters, and to corporate customers, just like sales taxes. T’ain’t so. Too complicated to explain fully here, but in brief: A shopkeeper partially avoids sales taxes by selling less; while (short of bribing the assessor) a property taxpayer has no way to reduce the tax. Hence property taxes fall almost completely on property owners—be they owners of apartment buildings, or shareholders of corporations.

Cunning Rhetoric

In his book, Revolt of the Haves (1980), Robert Kuttner described the successful 1978 campaign for Proposition 13 in California. Prop 13 rolled back and froze property taxes. Its real estate mogul promoters depicted property taxes as a tax on small homeowners. Yet large corporate property owners enjoyed the primary benefits of Prop 13. Standard Oil of California saved $25 million in annual taxes.

Prop 13 set off nationwide anti-property tax campaigns. There were copycats like Prop 2 ½ in Massachusetts. There were reductions for special classes of property, like farmland and forest land. There were tax holidays for businesses. There were caps, “circuit-breakers”, limits on rate increases, and other gimmicks for homeowners. New York adopted a constitutional amendment limiting property taxes to 2% of real value. Assessors got into the act too, allowing assessments to fall way below market value, and giving friendly breaks to large property owners. With every hole gouged into the property tax, it became more inequitable—and more vulnerable to demands for special breaks from additional groups. States replaced some local revenue with grants from state sales and income taxes, but school quality declined. California schools fell from the top to near the bottom.

Now the crisis

The clamor for cutting and capping property taxes continues unabated. Only New Hampshire has resisted—so far! Tragically, leaders of the anti-property tax campaign include union-funded Citizens for Tax Justice—apparently befuddled by the statistics.

It’s time to wake up, to recognize that even in this crisis we can still fund the services we need. The means lie right under our feet!

(For further reading, see Mason Gaffney’s “The Property Tax is a Progressive Tax.”)

--Polly Cleveland