Should the property tax be scrapped?
THE property tax system in Illinois has so many inequities and consequent distortions in the distribution of the tax burden that it should not be retained in its present form. This indictment is made regretfully since the property tax has been the mainstay of local government finance and has important advantages such as its ability to tax accumulated wealth not reached by the sales or income tax and its prodigious revenue raising capability. Nevertheless, the Illinois taxpayer should not be asked to tolerate the widespread and persistent inequities of the present system. The costs of poor administration are frequently hidden, but they are nonetheless real. To the average taxpayer, the property tax is the most disliked and the most unfair of the major taxes according to polls conducted by the federal Advisory Commission on Intergovernmental Relations. When people were asked "Which do you think is the worst tax — that is, the least fair?" and given a choice among the federal income tax, the state income tax, the state sales tax and the local property tax, the largest percentage chose the property tax as being the worst tax. Is the public's distrust of the property tax system justified? Studies of the quality of assessment show that it is. Under Illinois law, the assessments upon which tax bills are calculated should be set at a uniform percentage of market value. If assessments are uniform, each taxpayer will bear a portion of the tax burden proportional to the value of his property. Obviously, if assessments are not uniform, the tax burden will be distributed unfairly. Comparisons of assessments to sales prices give evidence of widespread patterns of inequity. Underassessment is common. Many assessors are unwilling or unable to make assessments keep pace with rapidly changing market values. Worse than general underassessment are the systematic biases in assessments. Low valued properties tend to be assessed at higher percentages of market value than high valued properties, thus exacerbating the regressive tendencies of the property tax. New homes tend to be assessed higher than older homes. Properties that sell frequently are likely to be assessed higher than properties which do not turn over. In addition to these systematic biases, many assessment jurisdictions show evidence of a high degree of random variation in assessments caused by neglect or inadequate assessment tools. If the primary problem with the property tax is inequitable assessment, should the solution not lie in assessment reform? Unfortunately, past experiences in Illinois have shown that assessment reform is unlikely to have more than a transitory effect (see Illinois Issues, March 1978). Brief flurries of activity a re succeeded by gradual returns to neglect and inequity. The administrative structure of the property tax and the political environment in which it operates are so intertwined as to make assessment reform difficult. Studies of efforts to achieve good assessments show the obstacles reformers face. In response to increased legislative and public attention to assessment inequities, some supervisors of assessments and assessors have made heroic efforts to improve assessment quality in their jurisdictions. Typically their work has aroused resistance and hostility. Some taxpayers tend to resist reassessment even when it is necessary to reduce inequities. They fear that in inflationary times, new assessments are generally higher assessments and that the taxing districts' pressures for more revenues will translate higher assessments into higher tax bills. If other local officials are not convinced of the necessity for the reassessment, then political infighting may result, and in some instances efforts have been made to remove the assessing official who initiated the reassessment. Individuals or groups who have been underassessed in the past are especially vehement in their opposition. If they cannot stop the reassessment on the local level, they may resort to judicial action or move their lobbying efforts to a higher level of government. In some cases they have succeeded in having their underassessed status legislatively legitimized. Moreover, even when they are implemented, reassessments are usually costly. In the absence of a strong public demand for reform, local officials may prefer inexpensive inequities to high priced reforms. Finally, maintenance of the gains in equity from a reassessment is difficult. Without a continuing reassessment program, a few years of changing real estate values can destroy the newly gained uniformity. Why is assessment reform so difficult to accomplish? One problem is that the incentive structure rewards inaction. Assessing officials collect the same salary whether
DENNIS W. HOSTETLER JEAN H. HOSTETLER 12 /May 1978/Illinois Issues their jurisdictions are assessed well or poorly. Clearly, those officials who do not rock the boat may be more likely to be retained in their positions. The job is certainly easier for the official who is content to let inequities accumulate. Another characteristic of the assessment system making reform difficult is the involvement of different levels of government. While administrative reform of a state tax involves only different branches of the state government, property tax reform requires a consensus among state agencies, county officials and township officials. The historical tie of property taxes with local governmental autonomy also hinders reform. Any proposals involving consolidation of assessment districts or transference of functions to a higher level of government evoke opposition from groups who fear any loss of local control. A final but significant factor is the lack of public support for tax reform. This may seem paradoxical since public trust in the property tax is so low. Nevertheless, the taxpayer's distrust of the property tax is infrequently translated into overt demands for reform. First, few taxpayers realize the full extent of assessment inequities. Secondly, taxpayers are aware that reform and reassessment often mean higher taxes. Given this dilemma, many taxpayers choose to tolerate inequities. If the taxpayers are not actually in revolt, why not let the present system continue? The current policy of muddling through with occasional bandaid reforms is attractive because it demands the least choices. Nevertheless, policy makers should consider fundamental revisions for several reasons. The Illinois Constitution requires assessment uniformity. This is the system citizens voted for when they approved the Constitution. The lack of taxpayer support for assessment reform stems not from an abandonment of the principle of uniformity, but from ignorance and a fear of higher taxes. The public's elected representatives have a responsibility to work toward meaningful reform or toward a complete change in the system instead of an ostrich-like tolerance of the wide discrepancy between law and practice. Long acquaintanceship has blunted the taxpayer's sensitivity to assessment inequities. The distortions caused by the inequities are nonetheless serious. The approximately one-and-one-half billion dollars in state aid to schools is distributed according to a formula which includes assessed valuation per pupil as a component. Systematic patterns of over- and underassessment distort the allocation of this aid. Variations in assessments also affect individual tax bills. Studies of 1975 assessments show that in 75 counties the average variation from the median assessment level is 30 per cent or more. This means that a taxpayer could expect to have a tax bill 30 per cent higher or lower than another taxpayer who owns a property of similar value. Since taxpayers are unlikely to make a study of market values and tax bills, the inequities are usually undetected. Although taxpayers may lack specific knowledge, they have encountered enough publicity on assessment problems in the media and through legislative investigations to validate their distrust of this form of taxation. Since the property tax is so intimately tied to local governments, the lack of support for this tax may eventually spill over into a lack of support for the principle of local government. Finally, the patchwork tax relief and reform efforts which are legislated as escape valves for the mounting dissatisfaction with the property tax may worsen the situation in the long run. Assessing officials, heavily burdened with the details of administering a variety of narrowly focused program, too often find their energies and resources deflected from their basic task of establishing equitable assessments. Although incrementalism and gradual change accurately describe the decision making process in many policy areas, experiences in Illinois and other states indicate that significant changes in property tax administration are most often accomplished in a crisis atmosphere. Recent history reveals two typical crisis scenarios which can lead to significant changes in property tax laws. In one scenario the courts are catalysts of reform. A properly framed lawsuit can expose discrepancies between assessment law and practice to 14/ May 1978/ Illinois Issues judicial notice, and the courts can order existing laws to be enforced. Illinois, Georgia, New Jersey, Kentucky, Florida and Washington have had to raise assessments considerably to comply with legal standards. Frequently the publicity accompanying the court action and the rapid increase in assessments sparks additional reform efforts going beyond the direct court mandate such as increased professionalization of the assessment process, stronger state supervision and increased tax relief for taxpayers especially hard hit by the assessment increases. In the second typical crisis scenario, the impetus for change arises from a taxpayers' revolt. Although the taxpayer is generally apathetic about property tax inequities, his underlying distrust of the property tax can be mobilized for brief periods under the proper conditions. A sufficiently broad based taxpayers' revolt, even if short-lived, can produce legislative action. In this scenario the response is generally slanted toward tax relief measures designed to reduce tax burdens, with less emphasis on reforms directed at improving the equity of tax administration. Since 1970 fourteen states and the District of Columbia have applied new controls on local taxing or spending powers in order to put the brakes on rising property taxes. Increasingly, limitations on expenditures or levies are supplementing or replacing more traditional rate limits which have provided little protection to the taxpayer during periods of rising real estate values and higher assessments. The recent movement in California to limit the total property tax rate to 1 percent of market value is an extreme example of this type of crisis situation. (In Illinois tax rates are approximately 2 to 8 per cent of assessed value or 2 to 3 per cent of market value.) Limitations on local governmental use of the property tax create pressure for alternative revenue sources. Local revenue diversification is proceeding slowly. Finding a tax or combination of taxes which can be equitably administered and which have relatively neutral economic effects is not easy. Locally administered sales or income taxes can create administrative nightmares and undesirable economic consequences. Other revenue sources such as selective sales taxes, license fees or user fees allow for diversification, but are insufficiently productive to allow significant property tax relief. Perhaps the most realistic options are an increase in the present state administered local sales tax or the introduction of a similar "piggyback" income tax in which the state would increase the state income tax and return a fixed percentage to local governments. These options may not be attractive to local government advocates who fear further erosion of local control. Nevertheless, if neither local governments nor the state legislature can reform the property tax, a shift to more equitably administered taxes at the state level may paradoxically be the best method of restoring public trust and support in the financing of local government and in local government itself. May 1978/ Illinois Issues/15
A FRIEND of mine argues that the elimination of taxes on real property would drive up interest rates on government securities. The wealthy, he says, would sell off their tax-exempt municipal bonds and put their money in tax-exempt real estate. My friend's argument is not among those typically advanced in defending property tax. Apart from the humor it evokes. however, his analysis raises important questions about the role of property in both the economy and the tax structure. These questions need to be examined lest we fall into the easy trap of turning too ferociously on the hapless property tax, which is a tempting target for fiscal reformers. We are told, for example, that the property tax is unfair, unpopular and unworkable. Therefore, the arguments go, property taxes ought to be replaced with the fairest of all taxes - the income tax. Even my friend who worries about the spiraling cost of government borrowing would join me in rejecting this proposition. More significantly, the citizens of the states* who were given the opportunity to switch from property taxes to income taxes have also voted "no." Given these precedents, there are sound reasons why Illinois should not and cannot abandon the property tax.. One of the most common arguments against the property tax is that public opinion is against it. Some people say the public prefers an income tax because the people over in the next township don't pay nearly as much property tax as we do." Actually, the only preferred tax of any kind is one levied on someone else. Taxes in general are so despised that it's splitting hairs to say that one is preferred over another. As the five states mentioned earlier should demonstrate, the only thing we can say for certain about taxpayers is that they prefer the known to the unknown. If the political community is interested in good public relations per se, it will find some way to make property taxes payable in weekly or monthly installments — the way we pay our income taxes — rather than undertake drastic changes in our system of taxation. More specifically, critics cite at least three inequities in the property tax. First, they argue that the property tax is regressive because everyone — rich or poor — pays at the same rate. Actually, the property tax is no more regressive than the sales tax or the flat-rate income tax. In fact, it is probably less regressive except for its effects on a few poor souls who, like Nelson Rockefeller, have a lot of taxable property but no taxable income. Another argument of this sort contends that property taxes are inequitable because people in Community A pay higher (or lower) taxes than those in Community B. This is true, but does it have anything to do with the inherent fairness of the tax? If we were to evaluate the income tax by the same standards as the tobacco tax, we would probably conclude that the income tax is inequitable because we all pay it but don't benefit equally from its largesse. Likewise, it makes no sense to judge the property tax by the same criteria as the income tax. They are unlike in many respects — including the purposes they serve and the manner in which rates are set. Actually, property taxes represent just one part of a comprehensive tax program. It is probably impossible to devise a single tax that is fair to everyone. Rather, to be equitable, a tax program must reach many forms and sources of wealth. Being the most enduring source of material wealth on earth, real property cannot be ignored. Even a hovel down by the river has value that appreciates with time. Whether the person living in that hovel can afford to pay taxes is not an issue, in my opinion, because low income is not a problem that can be solved by eliminating the property tax. Experience shows that tax breaks on deteriorating property simply lead to exploitation by absentee owners. Property must be treated as both a source and measure of wealth, and the problems of the poor and the aged should be addressed through more appropriate channels. The second inequity cited is that the property-poor community must tax at exorbitant rates in order to provide the same level of services as the wealthy community. And of course there is a direct correlation between tax revenues and level of services. But the same relationship would exist with a local income tax or sales tax. This is not a matter that can be resolved by eliminating or restricting the property tax. It's a matter of much broader public policy, namely: should citizens establish, finance and control their own local services or should state and federal governments do it for them? The third inequity cited by critics of property taxation involves the lack of uniformity in setting property values and the corresponding differences in rates among communities. Because state and federal financial assistance is often based on local wealth or local tax rates, this is a compelling argument. Uniformity of assessments is essential, for example, because school aid in Illinois is
*Voters in California, Colorado, Michigan and Oregon defeated proposed constitutional amendments in 1972. Voters in Washington followed suit the next year.
GERALD R. GLAUB May 1978/Illinois Issues/13 funneled in largest amounts to districts with low property assessments and high tax rates. Unless assessments are reasonably equitable, the taxpayers in County A unfairly subsidize the school system of people in County B, where appraisals are artificially low. But, this problem can be addressed without taking the drastic measure of eliminating property taxes completely. If it's possible to levy a federal income tax in an equitable manner, it ought to be possible to do the same with property taxes on a statewide basis. It's simply a matter of enforcement. A more important question, however, is whether property is the only measure of wealth available for determining eligibility for state or federal aid. It would probably make more sense to base such funding (e.g., school aid) on some other measure of need, such as income. The most powerful argument for keeping the property tax is, quite simply, that Illinois governments can't do without it. The property tax produces as much as the sales tax and the state income tax combined. The income tax would have to be tripled to take the place of the property tax. Moreover, the property tax doesn't fluctuate with changes in the economy in the way that the income tax does because property values tend to increase gradually but steadily. Like any consumer, local governments need revenue growth. Dependence upon state fundings just about insures periods of famine combined with occasional feasts. The property tax lends itself to orderly growth — or it would if the legislature would set effective machinery in motion, see that the tax is properly administered and stop making concessions to special groups of taxpayers. It may be theoretically possible for the legislature to enact an income tax replacement for the property tax, but the chances are slim and the results could be chaotic. Of course, some of us value local discretion more than others. But some people believe that equality increases as 14/ May 1978/ Illinois Issues decisions are made at increasingly higher levels of government. What it boilsdown to is that the property tax and those who control it are associated with fiscal conservatism by those who want more government and with wild spending by those who want less. Regardless of what is taxed (property, sales or income), local governing bodies will have to retain substantial control over the amounts levied and spent. Otherwise, local officials can't be held responsible for either spending levels or the results. Waste can result when local governments are given a free hand with money they don't have to account for to local voters. It seems obvious that local government will be most accountable when it has to answer for tax levels and the quality of its services. Where the legislature is raising the money, you can be sure the legislature will carefully regulate how it's spent. School districts are learning this in a slow but painful manner. Taxation plays a dual role in America. It provides revenue to pay for services. It also helps regulate the acquisition of wealth and the investment of capital. What's taxed and what isn't frequently influence who invests what and where. Real estate is already a major source of income as well as a relatively safe long-term investment for those interested in capital growth. To ignore the role that property taxes play in stabilizing prices and in reaching sources of wealth would be to leave a gaping hole in the nation's overall tax program. May 1978/Illinois Issues/15
|
|||||||||||||||
