Property Tax Hallucinations

Junk Economics -- O'Neill Slips, and Slips, and ...

by Hanno Beck

According to a survey by the National League of Cities (NLC) entitled "City Fiscal Conditions in 1998," municipal revenues have grown 46% since 1988, while GDP rose by 65%, state revenues by 67%, and federal revenues by 80%. President of NLC and Philadelphia councilman Brian O’Neill said lower municipal revenues can be explained by municipalities’ reliance on property taxes, which are not as responsive to economic growth as income and sales taxes, the largest sources of state and federal government revenues. O’Neill expressed concern over the ability of cities to meet taxpayer demands in the event of an economic downturn, noting that the lagging revenues coincide with a shift of responsibility from state and federal governments to the municipal level.

What a load of nonsense! Can you see the junk?

Let's look carefully at the statistics cited. Over the past ten years, revenues for three different levels of government have grown at three different rates. No surprise. Somebody grew fastest, somebody was second, somebody was third. No surprise.

There's no exciting news in this, so Brian O'Neill proceeds to make something up out of thin air. He says the lower revenue growth for muncipalities is due to property taxes. Huh? Can't it equally be due to increasingly efficient municipal management, enabling cities to get a little more bang out of each taxpayer's buck? Can't it equally be due to successful tax "watchdog" groups, keeping local government spending in check? Can't it be due to the fact that during the last ten years, people did not like taxes, and local governments are more responsive to the will of the people than other levels of government? Finally, can't it be due to the fact that local governments simply did not raise taxes as much as the state and federal governments?

O'Neill's fantasy about property taxes makes him seem a little naive, which should not happen to a president of the National League of Cities.

But it gets worse. O'Neill goes on to say that property tax revenues don't rise and fall as fast as sales tax or income tax revenues. That's false too -- it depends on the accuracy of your municipality's property tax assessments. Land values rise much faster than inflation during an economic upturn and property taxes, particularly if based mostly on land values as they ought to be, capture this; boosts in land value, though not good for the economy, often come before upswings in sales and income. Well, O'Neill might be excused for his ignorance on this point because his state, Pennsylvania, is a national laughingstock for the low quality of its property tax assessments. Pennsylvania in our opinion is one of the three worst states in America in terms of property tax assessments. Until Pennsylvania begins to upgrade its assessment quality, of course its municipalities will be saddled with higher, less equitable taxes.

Then O'Neill goes on to contradict himself breezily, worrying that an economic downturn would make it hard for cities to generate enough revenue for their governments. For goodness' sake, you can't have it both ways -- if property tax revenue is slow to rise compared to sales tax and income tax, then it is also slow to fall. And that would be a good thing, a stabilizing factor that O'Neill should point to with pride. Rather than attaching their future to the flighty sudden up-and-down jumps of income and sales, responsible cities should draw revenue from the more solid, predictable source of property (especially site values). However, O'Neill apparently did not avail himself of that opportunity to be consistent.

Land owners from out of town will gladly tell you to cut property taxes and boost local income taxes, because that way they will pay less and local workers pay more. But why would a municipality listen to such bad advice -- why would it want to tax its own citizens harder while giving cuts to wealthy speculators from elsewhere?

Can you think of any wealthy Philadelphia land speculators who might be pulling O'Neill's strings, telling him to bash the property tax every chance he gets, so that they can shove their tax burdens onto the shoulders of local workers and consumers? That's what it smells like -- certainly there's something fishy when a man who really ought to know better, goes on a witch-hunt against the property tax, without the numbers backing him up and without even being consistent.

Junk economics!