Paul L. Caron

Friday, August 16, 2019

Weekly SSRN Tax Article Review And Roundup: Kleiman Reviews The Property Tax Forty Years After Prop 13 and Alternative Local Government Revenues

This week, Ariel Jurow Kleiman (San Diego) reviews two recent articles on Californians’ perceptions of property taxes,by Ronald C. Fisher (Michigan State), Robert W. Wassmer (Cal State Sacramento), and Zachary Kuloszewski (Michigan State): Perspectives of the Property Tax Forty Years after Proposition 13 and Support for Alternative Local Government Revenues.

StevensonTax experts are befuddled and frustrated by Americans’ diehard aversion to the property tax, which contravenes professional wisdom on the tax’s salutary qualities and hamstrings local governments’ ability to provide necessary and popular public services.  The rich trove of survey research sparked by the 1970’s property tax revolt, e.g., here and here, speaks to decades of such consternation.  Two recent papers by Fisher, Wassmer, and Kuloszewski use 2016 CalSpeaks surveys to add modern texture to this body of data.

In Support for Alternative Local Government Revenues, the authors conclude that the property tax revolt is “alive and well in California forty years after Proposition 13.”  To arrive there, they asked survey respondents to choose a preferred revenue source to either: 1) make up for a public revenue shortage, or 2) raise revenue to improve inadequate services.  (Side note, data on respondents’ opinions of the adequacy of various public services is interesting on its own.)  In both cases, only about 15% of respondents preferred to raise property taxes, compared to about 30% who preferred to raise the sales tax, and 42-52% preferring to raise fees.  Unsurprisingly, they find that those who self-identify as progressive are more likely to support raising revenue via property taxes, and less likely to support doing so via fees.  Those who identify as conservative are more likely to support fees over taxes.  Aside from ideology, they also find that most other personal characteristics (such as race or education) are not correlated with tax preferences.  Two exceptions to this are homeowners and people with income above $150K, both of whom are less likely to prefer the property tax over other revenue sources. 

The second paper, Perspectives of the Property Tax Forty Years after Proposition 13, presents data on survey respondents’ knowledge of California property taxes as well as their perceptions of the tax’s progressivity, finding a positive correlation between the two.  To test tax knowledge, the survey asked respondents whether tax rates in California vary (correct answer: no), what the annual tax rate is (correct answer: 1%), and how tax burdens are calculated (correct answer: purchase price of home and number of years owned).  For the latter two questions, a majority of respondents answered correctly.  For the first question, only about 20% chose the correct answer according to the authors’ interpretation.  It is possible, however, that survey respondents misunderstood this question.  By the authors’ own admission, actual property tax rates do vary slightly because localities can increase property taxes to repay voter-approved borrowing.  (See this LA Times calculation of different rates in LA County cities.)  Further, respondents may have understood that Proposition 13 capped rates at 1%, rather than requiring rates to be set at 1%.  These alternate interpretations would mean that Californians may have a better understanding of their state’s property taxes than the presented data suggest.

The authors also find that a significant majority (69%) of respondents believe the property tax in California to be regressive, and tease out various factors and characteristics that may influence this belief.  For example, regression analysis reveals that high-income respondents (income above $150K) and those who answered the above three questions correctly are more likely to perceive the tax as progressive.  Notably, they also find that respondents who self-identify as politically moderate, those who identify as very progressive, African-Americans, and senior citizens are less likely to perceive the tax as progressive. 

While somewhat surprising, there may be good reason for a perception of regressivity among African-Americans, and perhaps among those who identify as very progressive.  First, in some parts of the United States, the property tax has been racially inequitable in application and outcomes.  Camille Walsh documents this legacy in Racial Taxation, reviewed by Clint Wallace here.  Such history could generate reasonable mistrust of the tax.  Second, due to various factors including past redlining and the fact that homes in majority white neighborhoods tend to appreciate more quickly in value, Proposition 13 may have racially disparate outcomes in California, causing black and Latinx homeowners to pay higher taxes on average as a percentage of a home’s value.  See here, here, and here.  If survey respondents correlated race with income, such factors might cause them to perceive the property tax in California as regressive.

Reading the two papers side by side offers interesting insights.  In the Perspectives paper, the authors find that high-income taxpayers are more likely to believe that the tax is progressive, and in Support, they find that high-income taxpayers are less likely to support property taxes.  These results suggest a self-interested position.  Wealthy taxpayers believe that they will bear a larger proportionate burden if progressive property taxes are increased, so they oppose the increase.  Perhaps even more interesting, the Perspectives paper finds that those who self-identify as very progressive are less likely to believe that property taxes are progressive, yet Support finds that progressives are more likely to support raising property taxes.  How can we square these results?  Perhaps they suggest that partisanship trumps personal understanding.  That is, progressives may support the property tax because their political party supports it, despite believing personally that the tax is regressive.

Both papers to varying degrees suggest that local governments should better educate residents about the administration and incidence of property taxes.  (Although touting the property tax’s progressivity may not increase broad support for the tax.) I heartily agree with this conclusion, which echoes an argument I have made elsewhere. See here. (Shameless plug.)  Improving civic education—including open and frank conversation about public services and the revenue needed to provide them—could help to revive Americans’ vanishing trust in government.  Property taxes, a controversial but necessary fiscal device, may offer a unique opportunity to do so. 

Here’s the rest of this week’s SSRN Tax Roundup:

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The property tax still unpopular? Not surprised at all. As much recent social research has concluded, the feelings that bind communities, and even nations, fray and dissipate the more diverse the population becomes. People tend to be willing to make societal/tax investment if they share a common culture and language with the neighbors who will be co-beneficiaries. The less in common, the less social cohesiveness and the less support for funding "common" expenditures. Add to that the fact that someone "land rich" is often "cash poor" and the inability of property taxes to differentiate the $750,000 McMansion and the $750,000 (appraised value) 200 acre family farm, and you have a recipe for disaster.

Posted by: ruralcounsel | Aug 19, 2019 4:16:33 AM