Paul L. Caron

Tuesday, May 25, 2010

Do Property Tax Caps Work?

Wall Street Journal, The Tax Caps Cometh: Massachusetts Shows How to Put a Lid on Education Spending Increases, by William McGurn:

In Indiana, Republican Gov. Mitch Daniels has succeeded in lowering property taxes on homes to 1% of assessed value. In New Jersey, another Republican, Gov. Chris Christie, has introduced a reform package that would cap property tax increases to 2.5% each year. And in New York, Democrat Andrew Cuomo has just announced his candidacy for governor with a call for a 2% cap on property tax increases—lower than the caps proposed by two of the state's leading candidates for the GOP nomination.

How you think of property caps depends largely on how you think of government. If you see shortfalls in town and state budgets as a revenue problem, you probably think property tax caps are a very bad idea. The best examples here are all those California pols who blame all their state's budget woes on the father of all tax caps, Proposition 13—instead of on their spending like there's no tomorrow.

If, by contrast, you think of budget shortfalls as primarily a spending problem, you see a property-tax cap as a tool to control that spending.

Into this debate now comes a timely study that asks a simple question: Do Property-Tax Caps Work?  Released jointly by the Manhattan Institute and the Common Sense Institute of New Jersey, the study takes for its model Proposition 2.5. This was the measure Massachusetts voters approved in 1980, limiting annual property tax increases to just 2.5% of a home's assessed value.

While California gets the most attention, the Bay State cap helped the state shed its hated Taxachusetts label—going from the second most taxed state in the union when the proposition was passed to 23rd today, according to the Tax Foundation. In the study's executive summary, author Josh Barro puts it this way: "Proposition 2.5 has succeeded in restraining growth of property-tax collections, total tax collections, and per-pupil education spending in Massachusetts."

This study pays particular attention to the effect of the Massachusetts cap on public education. As it turns out, Massachusetts does not bear out the scare stories. Despite spending far less per pupil than New Jersey ($12,857 versus $16,163 in 2007), Massachusetts students in almost all demographics achieved better results than their Jersey counterparts.

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People forget that what makes Proposition 13 extraordinary is not the 1% property tax cap, it's the fact that AV growth is capped at 2% annually and reassessments only happen when the property is sold or improved. As the Tax Foundation shows, California is unique in this regard:

I've always thought that the screaming over property tax caps from the left was wasted energy on their own terms: if the government wants to raise revenue, it has plenty of other options available. But Proposition 13's ban on fixed-cycle reassessments means that the disparity in their property tax bills--even when you hold property value constant--is enormous and egregiously unfair.

Posted by: DreadGazebo | May 25, 2010 2:28:49 PM

Prop 13 arose because voters felt it was very unfair to tax people out of their homes, especially those on fixed incomes, due in large part to gov't inflation. Inflation steals from savers and those on fixed incomes (usually retired). I am hoping California will one day realize Property Taxes aren't working and abandon them (and their rediculous income and business taxes) in favor of a sales (consumption) tax which would capture money from much of the underground & criminal economies. Much more fair in that if you don't have money, you don't spend it and you are not taxed either.

Posted by: John | Jun 8, 2010 1:18:39 PM

Don't you think that if CA changed a portion of Prop 13 and allowed property taxes to be reassessed for businesses and when homeowners refinanced their homes wouldn't make it fairer? Furthermore, as long as one wall is standing when they remodel a home then its not considered a remodel, just seems like an unintended "loop hole." By far the largest problem is CAs over spending, but since Californians constantly keep voting on propositions which require the state to fund all these programs (high speed trains, fish ladders, etc) then shouldn't there be some give?

Posted by: Robert | Jun 9, 2010 7:22:30 AM