Are Property Taxes a Feasible Basis for Town Revenue?
Posted by whforums on October 21, 2008
When taxes get out of hand, people get really pissed off.
This is one of the fundamental historical narratives of the United States, one of the most compelling arguments for limited government and a contemporary local theme in towns far beyond West Hartford’s bubble. And while the panicky language associated with current events (we had the “tax revolt” in California a while back, and the NYT referred to West Hartford as being on the verge of “tax revolt” – this only serves to highlight the degree to which revolution is misread beyond its borders) may only serve to point out how far we have to go before we get really angry, there’s no question that the sentiment that taxes outstrip services is real, especially in West Hartford. And you know what? It’s true that people who have lived in West Hartford for many, many years are being forced out by property taxes, and that’s something that, as residents, we can’t ethically abide. But we also can’t ethically abide cuts in crucial town services (police, fire, education) if those cuts create a real negative impact on the lives of any of our residents. And that leaves us with the ugly question which has too often framed our budget debate – how do we protect vulnerable homeowners without gutting the services that keep the quality of life in West Hartford so high?
The Problem is Property Taxes
So, I’ve spent a lot of time thinking about this, and a lot of time reading about this, and here’s the conclusion I reached – the problem is not the taxation itself but the mode of taxation.
Last month I was thinking about my retirement account, and wondering, as the market crashed and burned, where my money was going. And the answer hit me (I guess it’s obvious, but I’d never spent much time thinking about it before) – the money was never really “there” to begin with, it was only “potentially” there. If I had cashed out when the market was at 13,000, I could have had that money (with taxes!), but in lieu of cashing out, the gains I was making were really potential gains that existed for about as long as a Higgs boson in the CERN collider. The money was only there if I chose to realize its potential – otherwise it was just a number that had the potential to become a different number –an abstracted abstraction, despite the dollar sign on my quarterly statement.
It’s the same way with a house, but here’s the rub. Let’s imagine the situation of the many West Hartford residents who bought a house here in the 70’s for about $30,000. Although their homes have gained value, unless the home is sold, that value remains only potential profit, not actual profit (excepting home equity loans and reverse mortgages). But real property taxes (not potential taxes) increase as potential value increases, so a person who paid $30,000 for a home may very well be paying that much in taxes today over a five year period. In other words, these homeowners pay as much in taxes in five years as they have invested in the ownership of their home (at my current tax rate, it will take about 40 years for me to reach the cost value of my home in tax payments, assuming taxes don’t go up (ha!)). This creates situations where actual taxes meet potential values but may outstrip actual incomes, and leads me to the conclusion that it’s dangerous to base a town’s tax revenue on non-liquid assets, especially when those assets are of imaginary value (potential value if you’d prefer). It’s at the very least a system that discourages (or penalizes) long-time home ownership and long-time contribution to a community. And let’s face it – that’s pretty shameful (“you can’t eat the orange and throw the peel away,” etc.).
So, let me throw two potential solutions at you, and you can tell me what you think.
1. Rather than a property tax (which taxes potential and unrealized profit), why not tax the real profit of our residents – our income? A graduated town income tax (replacing a property tax) would require those who make the most money to give the most back to their town, regardless of the home they own or the car they drive. Tax rates could be set to realize the same revenue (I know nothing about how to do this, but I’m sure it could be done) by imposing higher taxes on the highest-income residents (who would stay in the town for the same reason residents with large property tax bills stay – for the quality of life). Residents with lower incomes or fixed incomes would be protected, town revenue would be protected, and, theoretically, no one would be forced out of town.
2. Institute a local sales tax to make up any difference in revenue. The sales tax wouldn’t need to be severe – it could be 1 percent on all purchases over $50, or half a percent on purchases over $100, or something like that. If West Hartford is a boutique shopping destination (and it is, between the Center, BBS and Westfarms), it won’t likely suffer a loss of business to other local competitors (who competes with Crate and Barrel, and would a half percent tax at Crate and Barrel really keep anyone away?). One dollar on a two hundred dollar purchase would be a drop in the bucket for someone who is in a position to make that purchase, but it would be another dollar of tax relief for residents and another dollar toward our quality of life. And as inflation becomes a greater problem (and with all this money we’re printing, that seems like a given), we’ll have a small, tractable hedge against that inflation.
I’m no economist and I’m certainly no financial expert (I might have weathered “market conditions” better otherwise), and I don’t mean to argue that spending cuts aren’t real and necessary (the days of leaf collection are over, folks), but these seem like some common sense, big picture solutions to our budget debate. In all of our bickering about mill rates, perhaps we need to realize that the problem isn’t necessarily the taxes – it’s that we’re choosing to tax potential profit rather than realized income.