Property taxes certainly excite the passions, at least judging by the spate of communications I have received – positive as well as negative – in reaction to columns that I and my counterpart Joe Soucheray wrote recently. Before we move on to other topics, here are a few of the issues that merit additional comment.
The central one seems to be whether it is fair that people with more expensive houses pay more for local government than those with less expensive houses. Some argue that since everyone benefits the same from police or fire protection, parks, etc., everyone should pay the same flat fee. Forcing owners of more valuable property to pay more means they unfairly must carry other free riders on their financial shoulders, the argument goes.
Like it or not, this is the way our real estate tax system, rooted in late Middle Ages England, has always worked. And economists have no objective basis on which to determine whether it is fair or not. But most, along with most philosophers and theologians, argue that taxes owed generally should vary at least somewhat with wealth. Adam Smith held this view, often to the surprise of modern libertarians who see him as an anti-government intellectual father of their cause.
Yes, it may take exactly the same fire engine to fight a fire in a $30,000 hovel as in a $1 million home. But that is not the only consideration. Those with more wealth have more at stake, both in their property and in the general order of things, than those with less. And a perfectly equal capitation tax would impose a much greater hardship on some indigent widow than it would on my wife and me with our comfortable incomes.
So while there is no “scientific” answer about the equity of alternative ways of financing local government, the weight of argument over the centuries has favored taxes that rise with the value of property. If that is taken as a given, then increasing the value of one’s property inevitably will boost one’s taxes.
My wife and I have spent tens of thousands of dollars improving our house, some in big projects involving contractors and permits and much more in room-by-room makeovers that we did ourselves. When I built a large new garage two decades ago, my assessment did go up. New windows and a roof may have had some effect in years our taxes rose sharply. If we finally bite the bullet and hire a contractor to replace the remaining old windows and ugly siding, they may rise even more. And that is fine for us.
Not everyone feels the same way. As Soucheray has noted, some who have improved their properties have been hit with sharp hikes in their property taxes. Yes, this is an incentive not to improve one’s property. It has not, however, been a factor in our own decisions about how to schedule our own progressive renovations. Other people will have to speak for themselves.
Taxes are one of many factors in how people spend their money, but “tastes, preferences and values” are of greater importance. And these are not rational. In recent years, my wife and I have plowed much of our discretionary income into our farm and business, rather than our house. That is our choice.
If we were to spend more on ourselves, we would choose to increase spending on overseas travel rather than on a bigger house. This choice is little different than that I spend thousands a year on books, but no longer much on guns, while a friend spends a lot on guns, but little on books. We go out to eat a lot while a farmer cousin who owns far more property seldom does.
None of these choices is right or wrong but simply reflect different preferences. And all these choices have tax implications. If you dine out, you pay sales and hospitality taxes.
If you travel, you pay excise taxes on airline tickets. If you build a larger house, you pay more in property taxes. If you plow money back into a farm or wind project, you will pay more in commercial real estate taxes. Whether all this is fair or unfair is ultimately a question that economists cannot answer. But in a democracy, policies produced through elections and representative government should not be dismissed lightly.
Would I see things differently if my house were worth more and my taxes far higher? Perhaps.
But over some 1,200 columns, I have never written one complaining about any of the taxes we pay – local, state or federal.
Our real estate taxes owed did jump 53 percent from 2005 to 2008, but I never thought of writing about it. And regular readers will know that I often call for abolishing policies, such as farm subsidies, ethanol and wind mandates, or the “step-up basis” exclusion of capital gains, that I think are bad for our society but that enrich me personally. (You can search for any of these topics on this website.) So they will have to judge my motives themselves.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.
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