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The property tax bound.

Article Excerpt
INTRODUCTION

The property tax in the United States has not withered away as many observers predicted and some hoped. In fact, it has remained a remarkably resilient component of state and local revenue systems. However, rather than a board-based, low-rate tax that treats all types of real property uniformly, the tax in most states is characterized by a bewildering array of constraints and preferences including classified bases, rate limits, revenue limits and caps, assessment exemptions, freezes and caps, circuit breakers, and special incentives for business. (1) Recently, steps have been taken in many states to reduce the impact of rising residential property values on homeowners.

It has been argued that the property tax is a poor revenue source that is revenue inelastic (fails to keep pace with the economy) and regressive. These alleged defects are often cited as reasons justifying the use of the constraints that are placed on the tax. In this paper, the analysis indicates that the property tax, rather than being a poor performing tax, ranks high in terms of both stability and revenue elasticity and that the regressivity concerns are likely ill-founded. The paper suggests that the restrictions and constraints imposed on the property tax are likely the result of the pursuit of political objectives by decision makers and not the result of structural problems with the tax itself.

The paper begins with a review of the role of the property tax in state and local revenue systems in the U. S., including the increased importance of residential property in the tax base. Then, the stability and responsiveness of the property tax within the state and local tax system are analyzed using an efficient portfolio approach borrowed from finance. Next, incidence issues related to the property tax are briefly summarized. The paper concludes with a discussion of alternative explanations for the existence of constraints on the property tax.

PROPERTY TAX RELIANCE: A REVIEW

The property tax in the U. S. has been a growing and consistent source of revenues for local governments since the late 1980s. Figure I presents the combined state and local tax collections in the U. S. for the four most important tax sources in most states: the property tax, the individual income tax, the general sales tax, and the corporate income tax. (2) The revenues for each tax are normalized by setting 1988 levels at 100. The results combine the impacts of economic growth as well as rate and base changes. Note that through 2005 property tax revenues have kept pace with the individual income tax and outpaced both the corporate income and sales taxes, but without the cyclical variations of the other taxes, most notably the corporate income tax. Annual percentage changes in property tax revenues are more stable as measured by their standard deviation than any other taxes. Only selective excise taxes such as the motor fuels and alcoholic beverage taxes are more stable, but they have lower growth rates.

[FIGURE 1 OMITTED]

For this same period, Figure 2 shows that the...