Tax Expert Backs Reforms

Property Tax: Biases and Reforms

by Mason Gaffney, Ph.D.

Let's rephrase Burnham in the affirmative: "Make big plans: they have magic to stir people's blood." Big Plans imply Grand Visions. Henry George had few peers at stirring his hearers' blood, and agreed.

"If you would move men, to what shall you appeal? Not their pockets, but their patriotism; not selfishness, but sympathy. Self-interest is a mechanical force, but in loyalty to higher impulses men will give even life."

Big Plans can also scare people, it is true. We see this right now when drastic changes and new philosophies are moving in Congress. That does not mean they won't prevail, however. They scare some because they move many others. Abstract philosophies, living only in intellectual undergrounds, build up slowly until suddenly they take command. This is how change occurs.

Superficially it seems "sudden," but intellectually the way has been paved by years of Grand Visions and Big Plans.

The upshot is, we need Big Plans with Details Ready. I speak here of Big Plans with magic to stir the blood of those who see the benefits of supporting government from land and resource rents. I'll sketch the big picture, where details fit in, and how they all fit together.

Priority #1. Safeguarding the property tax

We need to uphold and safeguard the property tax as the mainstay of state and local finance. Remember, it is partly a tax on land value. It is the institutional basis for much of the Georgist goal. We speak of reforming the property tax, but first there must be a property tax. Because it exists, we can modify it to tap land rent for public uses in a non-catastrophic way, using traditional laws, administrative agencies, and land tenures. Capping the property tax rate, as in California, ties the hands of reformers.

There has been much ado about Hawaii's phased-in shift to a two-rate property tax plan. However, Hawaii raises only 16% of its state and local revenues from the property tax, so the rate is very low. You can focus the Hawaiian property tax on land values 100%, and still have an 84%-messed-up tax system. Studies would then show little visible result from the reform. Critics would say "Ho-hum, we told you so."

New Hampshire is another story. It raises 64% of its state and local revenues from the property tax, double the U.S. mean of 32%. New Hampshire is called a "low-tax" state, but its property tax is highest in the nation, per capita, at $1344. The U.S. mean is $699 pc (per capita), and it goes down to $174 pc in Alabama.

Politicians whose priority is raising sales taxes for property tax relief might study Alabama's economy overall, and ask if that is the model they aspire to. Its pc income ranks 41st in the U.S. Meantime, New Hampshire's marshy peneplains, barren granites, icy winters, and impassable mountains are producing the 7th highest pc income in the nation.

In New Hampshire, fortunately, Assemblyman Richard Noyes is hard at work upgrading the property tax. He is chair of the legislative committee overseeing assessment quality; his priority is bringing land assessments up to market, and building assessments down. He does this by pushing for more frequent reassessment. Whatever he thus achieves in The Granite State is magnified by its high dependence on the property tax.

How about New York? It ranks near the middle in the ratio of property taxes to all state and local taxes, at 33% (the U.S. mean is 32%). That is not because New York property taxes are low, but its other taxes are high. So New York is an OK place to sow the seed of 2-rate tax-plan, but the harvest of any success will be sparser than it would be in New Hampshire.

How about Pennsylvania? This state stands out for its efforts to reform local property taxation but, sad to relate, it ranks below the middle in the ratio of property taxes to all state and local taxes, at 29%. It is low in property taxes per capita, at $609, less than half the New Hampshire level.

Property tax reform in Pennsylvania is, therefore, heavily diluted. Add to that the problem of overlapping tax jurisdictions: when a city reforms its property tax, its county and school district carry on as before. What changes, then, is just 1/3 of 28%, or about 9% of the complex of state and local taxes. Federal taxes are totally untouched. Trench warfare in Pennsylvania cities is therefore inchmeal, and the results hard to measure.

What happens when a state radically slashes its property tax? Michiganders are saying they must wait and see, but there is no need for that: California can show you 17 years of experience. To read your future, just study our past. Here is what has happened since California passed Proposition 13 in 1978.

The obvious direct results have been to cut public services, raise other taxes, and lose credit rating. Our school support fell from #5, nationally, to #40 in 1985 when last seen, still falling. County road maintenance is down to where my county (Riverside) is repaving its roads at an annual rate of once every 130 years. Once in 20 years is recommended here, and up north you generally need higher frequency. You can't just build infrastructure and then stop paying for it, it's a perpetual commitment. Thanks to urban sprawl, a high fraction of our population now depends on these county roads.

In 1978 we had a surplus in Sacramento. Since then we have raised business taxes, income taxes, sales taxes and gas taxes, but go broke every June. Now our State bond rating is last among the states. One of our richest counties (Orange) has gone bankrupt; Los Angeles is on the brink of it, saving itself by closing emergency rooms and hospitals that serve as a last resort for the uninsured poor.

The private sector is doing badly, too. Raising income taxes, business taxes, and sales taxes is no way to stimulate an economy; they are all a drag on work and enterprise. Our income pc was down from #7 to #12 among the states by 1992, then fell some more. From 1992-94, California was one of three states where median household income fell. Our unemployment rate is 9%, 50% higher than the national mean of 6%. Our poverty rate is 18%, compared to 14.5% nationally. Not surprisingly, therefore, the only government function that grows now is building and operating prisons. One of our few rebounding industries is cinema, the art of escaping from reality: we excel at that. Another thriving activity is that of auctioning off used machinery for export to the east.

In 1993 there was net outmigration (including international migration) from this state that has symbolized American growth since time immemorial. It is unheard of. 426,000 people were lost, nearly 2% of the population. This is a watershed change: imagine of all states California, America's trend-setter, our El Dorado, The Golden State, our Horn of Plenty, the safety-valve for job-seekers and retirees and entrepreneurs from everywhere, the end of the rainbow, losing population! It's almost enough to make a person click off the TV and think!

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End of Part One. Part Two will appear on Thursday, March 12.

This paper was originally presented at a property tax reform conference at the Jerome Levy Institute at Bard College, New York, November 3, 1995.