How Property Tax Has Shaped Our Local Economy (and look at the shape we’re in)

By Susan Donderewicz:

This is our third annual public meeting on the economy. If ever there was a subject that lent itself to varied and often inconsistent viewpoints, it is the economy. Tonight, we’ll focus on the policy of collecting taxes based on property. It has occurred to me as I planned for this program that most people, the sane ones, would rather have knee surgery than sit through a meeting about tax policy. So thank you so much for being here. I’m going to try to make this as listener-friendly as possible. We’ll look at some different taxes and see what kind of footprint each leaves.

Income tax takes a bite out of wealth in motion. On the plus side, it targets those most able to shoulder the burden of public expenses. Also, nothing needs to be liquidated to pay these taxes, since they take a percentage of wealth that is already liquid. However, it discourages the production of income, and in this way depresses activity. Those most able to make income, the most profitable ones, are more apt to leave the area for a site where there is a tax policy more lenient for them. The best justification for reliance on income tax to fund public needs is that it takes a community working in concert to produce income anywhere.

Sales tax also takes its cut out of money in motion. “Sales” is a misnomer: it should be called by its true name, “purchases” tax. We are asked on the state income tax return if we bought anything out of state and still owe taxes on that purchase. We are not asked if we had out-of-state sales and still owe taxes on that transaction. The sales tax discourages commerce within our area. This has both a beneficial and a deleterious effect. People will leave the area to do their shopping if they are able, so raising the sales tax in a small district leads to economic slowdown. For every percentage hike in the sales tax, there will be diminished sales, even if consumers cannot go elsewhere. On the bright side, an economic slowdown could arguably heighten the quality of life, if only we could reduce the public overhead. The slavish cycle of consumption and the feverish labor to pay for this consumption have made life arduous and unhealthy—you couldn’t get a rat to live like that. The exorbitant sales taxes charged on tobacco, for instance, have caused people to smoke less.

In my mind, the gasoline tax should have paid all costs brought on by the automobile/highway system from the very beginning. This transportation system has never paid its own way, and is bleeding us dry. Imagine if drivers had to pay the costs of repairing the roads they drive, maintaining these roads in the winter (paying the workers, buying and repairing the equipment, buying the salt and sand), paying the retirement and health insurance benefits of all workers and administration, current and retired, liabilities for injuries caused by the highway, the payroll for policing the highways, the cost of police cars, all the employment benefits for these police and their administration, current and retired. Not to mention the environmental costs from the exhaust and the salt. The myth has been that good roads would help us get our products to market. The reality is that we have become the market and we no longer produce anything. Local farms and small manufacturers have borne the brunt of these costs via property taxes–local producers have gone out of business while giant retailers have moved in.

Technically, the social security “contribution” taken out of your paycheck is not a tax. But when a portion of your income is taken by law and put into the general fund, I call it a tax. I’m all in favor of the social security system of benefits for the old, as well as Medicare. However, only earned income is taxed for social security (unearned income, such as interest from money-lending, is exempt), and only the first $80,000 or so are taxed. So the social security tax has evolved into a special tax on labor, targeting those that earn the least.

I have called the lottery the special tax on fools, but the truth is, the ticket buyers are not so much foolish as they are desperate. A huge portion of our population (I believe more than half) is in such desperate circumstances that it would take a miraculous windfall to make them solvent.

Property tax is one elusive and interesting character. Many renters are not aware that one half of their rental payments go directly towards property tax on their apartment buildings. Are all properties subject to taxation? No. We tax visible, tangible property. Income producing investments such as stocks and bonds are exempt from local taxes. In the 1800’s, this worked just fine. It was about the only way to determine the approximate income of the residents, and their ability to contribute to the burden of local expenses. Then in 1913, with the 16th amendment, the federal government began collecting income taxes, based on self-reporting by income earners. That would have been a good time to convert our local taxation to income taxes, using data that was now available. With the help of the internet, it is now possible to generate lists from state tax returns for local use, for little cost and effort. How many people do we pay right now to keep track of the value of local properties? How much public expense could be eliminated without all that bureaucracy? Our local officials try to make this system as fair as possible, but residents come to town meetings all the time to point out discrepancies in how their own home is valued compared to the neighbor’s. Each time, there is a request for a revaluation. Each time, this request is shot down when the cost of such a project is disclosed: between $200,000 and $500,000.

To use visible property as a basis for taxation might require liquidation of the home or business, two dangers we will examine more closely. Throughout the 1900’s, local farms and businesses such as sawmills and fabricators were at a disadvantage in competition with producers from places where the costs of living were lower. Because these businesses are visible and tangible, they were prime targets for property tax. Local expenses rose while local businesses tightened their belts. First came the decision not to advance the business: build it up or adopt new technology; second came the decision not to replace worn-out equipment; then the draw-down of reserve cash—the savings of generations for family businesses; lastly, resorting to debt to finance taxes which are not based on the availability of liquid funds. Even the most stalwart go out of business. The overall result has been the erosion of the productive industry to near completion in our community: We no longer produce, we consume. Also, as fewer people were living on farms, and fewer were self-employed, property taxes have evolved into a special tax on homes.

Local officials explain their bias towards property tax by saying that it keeps public revenue stable and they know from year to year what they can count on, regardless of the ups and downs of the economy. Homeowners can look forward to the same progression as small local businesses. Those whose income has been interrupted by the fall of the stock market or lay-offs or extraordinary medical expenses will first forego expenditures that advance their family, such as education; second, forego repairs; third, use any savings; and then, resort to debt. When they no longer can come up with the liquid cash to pay taxes on their visible, tangible home, they will be forced to sell it. Since the majority of us depend on outside sources of income, a collapse of the economy outside our control could leave much of the population homeless. Why don’t we have a legal provision to dissolve property tax obligation if we were to enter another depression? If that never came to pass, there would be no harm done. If the economy were to collapse, homes would be protected.

Property taxes include the school tax, which is also based on property. The rising expense of our ineffective school system is a problem complex enough to deserve its own public discussion, and maybe it should be the topic for next year’s public meeting on the economy.

Those people who were miffed by the recent government bail-outs to banks and insurance companies might well be outraged that these industries have enjoyed sweetheart status for the entire history of our country. The greatest public needs arise and are paid for at the local level. The local bank paid property tax on its storefront, but the real profit-making property was all on the inside—not assessed and not taxed. All the businesses dealing in intangible assets have been essentially exempt from the local burdens of schools, highways, and poverty alleviation. Suppose there were twins—let’s call them Bobby and Booby. From the beginning, they have dressed the same, slept in the same kind of bed, played with the same toys, and eaten the same food, with one exception: every morning, Mom slips Bobby a piece of bacon, but gives none to Booby. At lunch, Bobby has more strength and energy and is able to compete for more of the food. By dinnertime, Bobby is even in better shape and at more of an advantage than Booby. Every morning, Bobby gets the extra piece of bacon, and over time, he has come to look like the Incredible Hulk, and Booby looks like Popeye without spinach. The history of our local economy has been the story of preferential taxation.

I believe the most important thing we can do as citizens of a democracy is to daily, continuously, find new ways to look at the world. What are solutions to problems of the present, past, and future that could have or might yet make life more harmonious? What is our ultimate goal, anyway? Do we want to make life more stimulating, prosperous, free, and inspired; nurture individuality and alleviate suffering? As our culture is today, our ideas don’t get much airtime—we are insignificant specks, dwarfed by this huge nation. I deliberately don’t say “great” nation. A great nation is made up of significant specks; a nation of where the ordinary people are insignificant is an insignificant nation. I believe that we could one day become a great nation, and we can prepare by broadening our horizons, embracing an ever greater multitude of world views, and conjuring new and creative solutions to humanity’s troubles. In fact, that’s how we transport our situation from what we have now to what we’d like to have: by each cultivating ourselves as caretakers of the universe.