Monday, November 19, 2012
The decline in the use of the general real estate property tax at the state and local level is well-known, as is the relation of this decline to the rise of revenue volatility. Yet is the relative decline of the property tax entirely inevitable, caused, for instance, by shifts in the property tax base? It seems too early to say for sure. After all, the taxes that have increased as the property tax has declined are collected much more efficiently. For instance, both the sales tax and the income tax utilize third parties, and the income tax also uses withholding. Related private charges, e.g., for a home alarm system or private school tuition, are also generally collected much more efficiently.
There is little reason that property taxes could not be withheld from income, especially in the vast majority of states with income taxes - indeed this is a service essentially already provided by many mortgage providers (through escrow). A property tax withholding regime instituted more broadly by state governments would not only smooth cash flows for both taxpayers and local governments, but administering the property tax along with the income tax could improve the property tax. Specifically, withholding in connection with income allows for the property tax to respond effectively to the liquidity and progressivity concerns that plague the property tax. For instance, circuit breaker-type protections could be instituted directly through the income tax. Such a regime would let “homevoters” respond directly to the relative merits of proposed projects without concern that they must insure themselves against future liquidity problems. Prima facie, this should lead to increased local funding of good projects. In short, states and localities have allowed a revenue source to wither because it is collected poorly even though it is one that could possibly significantly mitigate their revenue problems, particularly as to volatility.
Kirk Stark (UCLA) is the commenter.