Residential property tax makes economic sense with minor modification
There are no comments for this page [ Add Comment ]Sunday, March 23, 2008
By VIJAY K. MATHUR
Guest commentary
One of the most significant sources of funding for local public schools in Utah and elsewhere in the U.S. is property tax. According to the Utah Tax Commission, schools in Utah received 55 percent of property tax revenue in 2006, slightly more than 46 percent of which was generated by primary residential property taxes.
Recently residential property tax has come under heavy criticism from homeowners because in some local communities there has been a sharp jump in property taxes, due to very high appreciation in the market values of homes. But this spike in residential property taxes should not be used as an excuse to undermine this important revenue source for local schools. From 2005 to 2006 in Utah, property tax has decreased from 2.5 percent to 2.47 percent of personal income.
Recent bills enacted in the state Legislature do not address the source of the problem. I hope that future actions by the Legislature do not de-emphasize property taxes by shifting the burden of school funding primarily to other taxes -- for example, to a sales tax. It will deprive local governments of an important tool for distinguishing their communities in the quality of public services and especially of public education. In a seminal research paper in 1956, Charles Tiebout made a very cogent argument for the decentralized system of government where people have the choice between different tax-public service bundles.
Communities with diverse quality of public services and public education, and property taxes to support those services, provide a menu of choices to households. Households with different preferences "vote with their feet" and choose those communities which offer tax and service bundles and local governments which fit closest to their preferences.
Homogenization of communities by limiting the power of local governments to use property taxes to finance local services and education will weaken an effective tool to create communities distinct in quality and level of services; hence it ultimately diminishes choice and welfare of households.
Let us first look at the latest data provided by the tax commission on residential property values and property taxes paid by homeowners for 2005 and 2006. Estimates show that there was a 15.4 percent increase in the average sale price of residential properties in Utah during 2005-06. However, there was a very large variation in the sale prices across 29 counties in Utah.
During 2005-06, slightly more than one third of the counties experienced a loss in the average sale price of residential properties, ranging from 1 percent in Garfield County to 14.5 percent in Rich County. Similarly, there was a large variation among the gainers. The average sale price of residential properties in Uintah County appreciated 0.42 percent while in Wayne County appreciation was 68 percent. The disparity in sale prices is one reason for inequality in the property tax burden.
Statewide estimates show (tax commission, 2006, Table 6) that during 2005-06, the average "effective tax rate" on primary residential properties declined 5 percent. Based upon the estimated average sale prices of residential properties, property taxes declined in 13 counties. Tax decreases ranged from 1.1 percent in Iron County to 38.4 percent in Millard County. In the rest of the counties property tax increases ranged from 0.69 percent in Beaver County to 63.4 percent in Wayne County. However, in most counties, except Juab County, the property tax increase was less than the appreciation, and the tax decrease was more than the depreciation in the average sale prices. The outliers were Iron and Kane counties, where average taxes decreased while the average sale prices increased, and Juab County where the average tax increased 18.7 percent and average sale price increased only 9.6 percent. This data show that at the very least property tax burden on most Utahns has not worsened in this period.
The question is how to solve the problem of those households who face very high spikes in their taxes. First, we can partly mitigate this problem by imposing the actual property tax rate on five-year moving average prices of primary residential properties. It coincides with the five-year cycle of assessment according to Utah Code. Homeowners will also be spared with annual fluctuations in tax liabilities based upon the annual fair market value. Secondly, the five-year cycle also provides more stability in revenues to local governments as it smoothes out the business cycle effects on tax revenues, and hence improves the budget planning process of households as well as local governments.
Finally, there is a disparity in the assessment procedures. According to the tax commission, the effective tax rate on primary residential properties with up to one acre of land is 55 percent of the actual tax rate. Other primary residential properties with more than an acre of land do not qualify for the 45 percent exemption applied to fair market value to obtain taxable value. Hence, in Utah, this bias created an 81 percent higher tax rate, on average, on such properties in 2006. Therefore, homeowners in communities like Huntsville or Eden, properties with more than an acre of land, will face spikes in taxes when fair market values rise. There is no logical reason to treat primary residential properties differently unless legislators want to encourage higher structural density in communities with plentiful land. However, promoting higher structural density in areas with relatively cheaper land is an inefficient policy because it decreases the after-tax price of capital (structure) relative to land, thus promoting McMansions. In addition, different tax treatment of primary residential properties with more than one acre of land violates the spirit of fairness embedded in Article XIII, Section 2 of the Utah Constitution.
Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. At present he resides in Ogden. E-mail contact: vjmathur@hotmail.com.
Text 
