One step in reforming property taxes

Property taxes are the only form of taxes levied on wealth, as opposed to the transfer of wealth. All other taxes, including the sales tax, the estate tax, the income tax, and so on, are levied as a percentage of some exchange of money. The income tax is a percentage of income taken in over a year; the sales tax is a percentage of dollars exchanged in some transaction; the estate tax involves inheritance. The property tax is the only tax levied that does not take into account any flow of money, but is assessed on wealth.

The reason for this is the theory behind this tax. Property taxes are levied on the assumption that the value of your house is a proxy for your ability to pay. A more expensive house indicates someone who should pay more tax. It is simpler to assess the value of a house than it is to audit someone's income, and it's harder to hide something like a house. Thus you have a low-overhead tax that is easy to levy, and this is why municipal governments across America are funded this way.

However, the assumptions become less sound in a rising real estate market, and they break down completely in markets such as we have experienced in the early 1980's and the late 1990's. Here, the value of a house is almost independent of a person's income, since the same house could have been bought recently for a high price, or long ago, for what now seems a pittance. With the current methods of property assessment, the net result of the property tax is that there is a fee -- imposed by the city -- to belong to certain neighborhoods. If you cannot afford the fee, you must move.

The result of this situation is that neighborhoods tend (even more than otherwise) toward the homogeneous. Only people with a certain income can afford to live on the East Side, for example, no matter how long they've been there and how much they've contributed to the rise in values there. Its property is the most valuable, and so the East Side is in the worst situation, but no neighborhood is immune to this effect. Someone who has lived in their house, and been a good citizen for 30 years is rewarded by being forced to sell their house and move to a neighborhood they can afford. Almost by definition, this is not as nice a place as they came from.

An Alternative

If the point behind assessing property is to find an accurate proxy for a household's income, the purchase price is a more accurate indicator than some arbitrarily assessed "value," which depends on forces far outside that household's control. Whoever owns owns that house had to buy it, so somehow they managed to raise the money to do so. If one assessed property based on the purchase price, you would have a less volatile, and fairer, system. People's income does tend to rise over time, so it would make sense to inflate the purchase price by the Department of Labor's figures for wage inflation each year.

People make changes to their houses. In order to do so, they take out building permits whose cost depends on the expense they are undertaking. In the spirit of the proposal, these additional costs would be taken into account for the purposes of assessment. However, the nature of the construction wouldn't be. That is, if someone has spent $10,000 putting on an addition, it shouldn't matter whether the addition has one bedroom or four. What matters is the household's ability to pay, and this is reflected in the cost of the addition.

Pros

These are the points in favor of the proposal.

Cons

There are obviously some points against it, too.

Phase-in and Cost

The latest revaluation has been done. The damage has been incurred. Next year is probably too late to ameliorate it. It may be that the best way to do this is just to freeze the assessments the way they are, and modify them with the purchase prices from here on out.

This is about changing the way the tax burden is distributed. There need not be any additional cost to the city government. The most significant change in costs would be a lowering of the amount necessary to administer the property tax and maintain the assessment database. The assessor's office apparently intends to spend about $1-2 million on this assessment, and that doesn't count all the appeals costs.