VI. What Can Local Municipalities
Do to Reduce Property Taxes?
A. Embrace the Concept of Depreciation
Convenient as it may be to blame the financial problems of municipalities on the state the reality is that municipalities contribute to many of their own problems. One of the major problems that municipalities face is their failure to take depreciation into consideration in their spending and taxation policies.
The goal of many municipalities is to pay their current bills while keeping taxes at the lowest possible level. Ironically and unfortunately, many politicians pride themselves in keeping taxes low in the face of a crumbling infrastructure and increasing debt, as though taxes and debt are unrelated. Ideally the municipality should calculate each year the amount the municipalities’ infrastructure has declined in value and require through local law that at a minimum that amount be reinvested in the infrastructure.
B. Eliminate Political Subsides
To accomplish this objective, subsidies must be divided into two groups, political and social. Schools, for example, constitute a social subsidy. For many families the school taxes they pay only covers a fraction of what it costs to educate their children. This is a social subsidy and a sensible one because everyone benefits from a well-educated populace.
However, political subsidies should rarely be permitted. A political subsidy is a service provided by a municipality that is underpriced, with any financial shortfall being covered by homeowners through the property tax. A simple example of this is dog licenses. People who own animals, which are licensed, should pay the entire cost associated with licensing and regulating their behavior. There are numerous other examples such as building permits, site plan review, water and sewer charges, and fees for recreational activities.
Covering costs for municipal services is not just a matter of covering direct costs; indirect costs such as medical coverage, retirement contributions, departmental overhead must all be built into the fees. A common refrain of politicians is that taxpayers can’t afford that, should not be confused with the taxpayer not receiving that. What the statement means is that the taxpayer will receive the service at a subsidized price with the shortfall being borne by all the property owners through the property tax. Wherever possible fees and charges of every sort should be set so that the user of a particular municipal service pays the cost associated with that service.
C. Link Municipal Fees to the Consumer Price Index
Politicians are uneasy about increasing costs for services they provided to the public, and with good reason. In many instances even a moderate fee or tax increase makes headlines. To make matters worse, some elected officials seek to enhance their political viability by opposing any increase in taxes or fees regardless of logic. The result of this type of political maneuvering creates an unwanted contrast between the good guys opposing any increase in taxes or fees and the bad guys wanting to raise taxes. This type of conflict inevitably leads to long periods of no increase in fees or taxes followed by dramatic increases that both surprise and punish the taxpayer.
One of the best examples of this political mindset is the tuition the State University of New York (SUNY) charges its students, see Table 4. In 2003 tuition increased by an absorbent 32%. Clearly costs had not risen 32% in one year. Presumably the increase was to make up for past years when costs were increasing but the legislature was unwilling to increase tuition at SUNY. The dramatic increase creates a terrible burden for students and their parents. Modest increases in tuition that match increases in costs are something everyone can live with. After increasing the tuition 32% you would think an effort would be made avoid this problem in the future, but students were hit with another 14.4% hike in tuition in 2009, again after several years of no tuition increases. See Table 4 below. There is some “good news” in that New York State has implemented a rational tuition by $300.00 per year for the next few years.
VII.What Can Property Owners Do to Reduce the Real Property Tax?
A. Review Their Tax Bill
Politicians are inordinately careful about not criticizing those who put them into office. As a result, voters often come to believe that they have no responsibility regarding the taxes that they are forced to pay. Politicians often serve as piñatas for the angry taxpayer and in many cases this is justified. It is also a fair statement that politicians often cater to what they believe their constituents want to hear as opposed to what their constituents need to hear. One thing everybody needs to hear is that it is extremely important to review your tax bill. Ask the average person how the highway tax in their town compares with the highway tax in a neighboring town; the response in nearly 100% of the cases will be that they don’t know. The taxpayer who is paying these enormous property taxes must shoulder some of the responsibility for these taxes getting out of control. Pearson’s Law says that, “That which is measured improves. That which is measured and reported improves exponentially.” Unfortunately, many of the tax metrics are neither measured nor reported in a meaningful way and, as a result, cost and expenses tend to drift upward. It is only when there is continual analysis of costs that costs can be controlled.
B. Vote for Politicians Who Talk About Improving and Maintaining the Infrastructure as Opposed to Reducing TaxesRoads wear out. Buildings wear out. Infrastructure wears out. The voter has to at least listen to those politicians who tell them that the municipality cannot be run on a cash budget (i.e. paying bills, not improving the infrastructure and leaving those costs to the next supervisor or legislator who is elected).
In 1977 Jim Gilmore was elected Governor of Virginia on the extremely popular mantra, “No Car Tax.” The Car Tax was clearly unpopular, however the real question that should have been asked was: How would the shortfall in revenue from the elimination of the car tax be replaced? These are questions that often go unanswered. In many instances popular tax reductions or subsidized programs are what generate our ever-increasing property taxes.
Detroit has been the poster child for fiscal neglect and as a result the citizens of Detroit, as well as the public servants of Detroit, are the ones who are paying the price as bondholders and pensioners battle over money. When you look at the rows of abandoned homes you know that some families invested a considerable amount of money in these homes but that is money that they will never recoup. People often claim that this can all be avoided if people vote with their feet. The reality is not everybody can and as a result the governments at every level have an obligation to structure their tax policies in such a way that the most important asset most families have is not placed at risk.
Who to tax and how to tax are difficult issues. However, for all the reasons discussed above, we believe that it is clear that taxing real property excessively is a poor policy at every level. Taxing income at the level it should be taxed is perhaps the most efficient and equitable way to tax but unfortunately political considerations make this approach very unlikely. Thus the sales tax is the last best option. In fact in a recently published book on the financial success of states, the authors (Laffer, Moore, Sinquefield, and Brown, 2014) conclude all taxes are bad for growth, but some are a lot worse than others. What a state should prefer is a low rate, broad-based flat tax, and a sales tax fits this concept to a T. That is why we observe high sales tax states outperforming low sales tax states. High sales tax states often have less of the more damaging taxes, and low sales tax states often have more of the more damaging taxes. We do not necessarily agree that all taxes are bad, however the evidence is overwhelming that excessive real property taxes produce a crushing burden on the citizens of the state and its’ businesses.