By Tom Wolfe, January 28, 2022
It is no secret why property taxes are consistently a key issue in Texas politics. Property values across the state have skyrocketed over the last 20 years. Those inflated values have punished businesses and homeowners with painful tax bills.
Concern over property taxes is not limited to conservatives; polling in recent years indicates that Democrats and moderates also believe property taxes in the state are too high. Nevertheless, there are certain objections to property taxation that naturally flow from distinctly conservative principles of limited government. This blog post discusses five key flaws with property taxes; understanding these flaws is essential for policymakers seeking reform.
First, and most fundamentally, property taxes undermine private property rights. They force taxpayers to pay local taxing units annually to preserve their rights to inhabit and to use their own property. Under this model, a property owner resembles a renter; money must be paid periodically for the owner to keep the property. Respect for private property has been a key part of the American creed since the founding of the country, and undoubtedly is a key factor in the country’s remarkable and continuing dynamism. As Russell Kirk noted long ago, “Upon the foundation of private property, great civilizations are built. The more widespread is the possession of private property, the more stable and productive is a commonwealth.”[i]
Reasonable people recognize the need for government to collect revenue from taxpayers to perform its core functions. But the channels through which that tax revenue is collected should be constructed in a way that emphasizes the importance of individuals’ right to private property.
Second, a property owner’s tax burden increases as his or her property appreciates, even though there are few readily available means for the taxpayer to tap the increased value in order to pay the increased tax. For example, assume a taxpayer who earns $80,000 a year pays property taxes of 2.3 percent a year on a house and land with a taxable value of $250,000, which amounts to $5,750 a year. If this taxpayer’s property appreciates at a rate of 5 percent annually, he or she may have to cut back on living expenses in order to come up with the increased taxes. At some point, there is a threshold at which taxpayers are pressured into selling their homes in order to “downsize” and reduce their property tax bills. This concern can be especially pronounced for people who become unemployed for whatever reason (such as an illness or layoff). Indeed, Texas’s thriving property tax loan industry—through which companies lend people money to pay their property taxes in exchange for a lien on their property—is a testament to the liquidity problem that property taxes impose on property owners. And not just property owners—renters too. While renters do not pay property taxes directly, their landlords of course incorporate the expense of property taxes into the rent they charge tenants.
The third flaw of property taxes is almost a reverse of the second flaw. Just as a person’s property taxes can increase despite his or her financial situation deteriorating, a government’s intake of property taxes can increase even as its need for revenue declines. A perfect example of this is the growth in property tax collections by community college districts in Texas over the last decade. From 2011 to 2021, annual community college tax collections almost doubled due to rising property tax values throughout the state. Incredibly, this coincided with a decline in total enrollment at community colleges over this time period. Intuitively, community college districts’ need for revenue declines as the number of students they educate declines. Public policy does not reflect that intuition. Instead, community college districts over the last decade have received a property tax windfall that is entirely devoid of any logic. They take the increased revenue from property tax values and continue to lobby the state for increased state funding, regardless of the facts on the ground.
The fourth flaw inherent in property taxes concerns only businesses. A basic rule of tax fairness is that similarly-situated parties should be treated equally, but property taxes effectively penalize capital-intensive businesses. Suppose two businesses are identical in every respect, except that one chooses to provide services to customers face-to-face through a commercial facility and the other opts to provide them remotely. Even if the financial performance of the two companies is identical, the business with the commercial facility is subject to much greater property taxes. Why? Because it has the misfortune of using a business model that makes use of a facility. Of course, it could always change its business model to one that provides services remotely, but it is a sure sign of poor tax policy when the law encourages businesses to make decisions on how best to serve their customers based on tax considerations. In an economy in which many businesses’ value is wrapped up in intangible assets such as intellectual property and licenses, it is unfair to effectively punish companies in more traditional industries with a greater focus on tangible property, such as retail and manufacturing. Why, as a matter of basic fairness, should grocery stores pay more property taxes than law firms?
Fifth and finally, property taxes involve considerable compliance costs and administrative inefficiency. Every year, a given property must be appraised by the applicable appraisal district. Good faith estimates of a property’s values can easily vary by tens of thousands of dollars. Indeed, property owners take advantage of this through the property tax protest system, in which they present evidence that the appraisal district has overstated the value of the property. Contrast the administrative burdens of appraisal and protests with the sales tax system: when a business sells an item to a customer, the tax is collected at the point of the sale along with the purchase price. The entire process is transparent, with customers able to readily calculate what they will owe in tax before they make a purchase.
Reforming Texas’s property tax system is an ongoing challenge to policymakers. Subsequent blog posts in this series will examine property tax burdens in greater detail and propose specific reforms.
[i] Russell Kirk, The Politics of Prudence (1993).