TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, March 14, 2013

Shanske Presents Modernizing the Property Tax Today at UCLA

ShanskeDarien Shanske (UC-Hastings; moving to UC-Davis) presents Modernizing the Property Tax at UCLA today as part of its Tax Policy and Public Finance Colloquium hosted by Jason Oh and Kirk Stark:

It is commonly and correctly claimed that our national tax on income systematically undertaxes the income derived from owner-occupied housing. It is a truism of the fiscal federalism literature that the real property tax should be assigned to the lowest level of government. Because the real property tax is (largely) a tax on the income derived from owner-occupied housing, it appears that, in practice, our federal government has appropriately ceded this part of the income tax base to local governments.

This theoretically satisfying ex post rationalization for our current system has become increasingly frayed as the local real property tax has declined and the federal housing subsidy has, if anything, increased.

This decline in the property tax has had other unfortunate consequences, such as increasing state and local revenue volatility. But, even if unfortunate, perhaps the relative decline of the property tax was inevitable, caused, for instance, by shifts in the property tax base? It seems too early to be so pessimistic. 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 (e.g., employers report one’s income), and the income tax also uses withholding. Withholding is of particular import given the well-known difficulties that most of us have budgeting.

There is little reason that property taxes could not be withheld from income, especially in the 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 would not only ease budgeting 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 of incorporating income tax elements into the property tax would let “homevoters” respond directly to the relative merits of proposed projects without concern that they must insure themselves against future liquidity problems. These reforms could thus 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. The federal government should be concerned with the decline of the property tax not only because of this increase in state and local revenue volatility, but because of the reduced ability of the local property tax to serve as a complement to the federal income tax.

Dan Shaviro (NYU) comments on the paper here.

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