WEBVTT
00:00:00.050 --> 00:00:03.379
Hello and welcome to the Deduction Attacks Foundation podcast.
00:00:03.379 --> 00:00:11.300
I'm your host, Kyle Hulehan, and today we are joined by Jared Walczak, vice President of State Projects here at the Tax Foundation.
00:00:11.689 --> 00:00:15.380
Now, today we're gonna talk about the property taxes and.
00:00:15.548 --> 00:00:28.057
To frame this sort of whole discussion, I wanna set us up here with, what if I told you that eliminating the property taxes, which is something that, everyone would love to do could actually make communities worse off?
00:00:28.237 --> 00:00:34.658
That's sort of the thesis for today's podcast and what we're trying to dive into and, and understand about this.
00:00:34.718 --> 00:00:47.618
Um, so Jared, as we're we're looking at this, obviously people hate the property tax, you know, why could repealing the property attacks actually make people worse off?
00:00:47.618 --> 00:00:48.427
thanks for having me.
00:00:48.607 --> 00:00:51.968
And you're right, of course, that the property tax is an unpopular tax.
00:00:51.997 --> 00:00:53.468
Uh, economists tend to like it.
00:00:53.527 --> 00:00:56.287
Uh, most people, most taxpayers do not.
00:00:56.557 --> 00:00:58.207
Partly that's because they feel it.
00:00:58.207 --> 00:00:58.567
Right.
00:00:58.628 --> 00:00:59.378
You know, if you look.
00:00:59.552 --> 00:01:03.122
At what you owe in property taxes, you actually know what that amount is.
00:01:03.122 --> 00:01:03.902
Do you get a bill?
00:01:03.902 --> 00:01:07.832
You, you know, you pay it maybe a couple of times a year, once a year, twice a year.
00:01:08.222 --> 00:01:11.102
Uh, you don't know what you paid in sales taxes last year.
00:01:11.102 --> 00:01:14.852
A lot of people don't even know what they paid in income to taxes last year.
00:01:15.093 --> 00:01:17.597
This is a big lump sum of money.
00:01:17.798 --> 00:01:18.998
People really dislike it.
00:01:18.998 --> 00:01:21.158
And then people have philosophical objections as well.
00:01:21.158 --> 00:01:29.858
And I take those seriously, although I don't necessarily share some of them, but certainly this is an unpopular tax, but it's also a really important tax.
00:01:29.977 --> 00:01:33.397
It's 70% of local tax revenue nationwide.
00:01:33.427 --> 00:01:36.487
In some states it's as high as 95%.
00:01:36.847 --> 00:01:40.388
So if you're going to eliminate the property tax, you need a replacement.
00:01:40.447 --> 00:01:50.587
Multiple replacements, and the reality is that anything we choose to replace the property tax with is likely to be worse and worse along multiple vectors.
00:01:51.007 --> 00:01:58.778
It's worse economically in the sense that any replacement tax is going to create more economic distortions.
00:01:58.778 --> 00:02:03.817
It's going to hurt economic growth compared to the property tax, which is relatively efficient economically.
00:02:04.018 --> 00:02:10.828
It's worse for communities because many of the replacements, uh, just don't work very well in their communities.
00:02:10.858 --> 00:02:24.987
If, you know, we'll go into some of this, I'm sure, but if we're replacing this with local tax authority, sometimes there really isn't another local tax that could suffice if we're replacing it with state tax authority and we're distributing that revenue from the state.
00:02:25.342 --> 00:02:33.592
All kinds of challenges with how the state chooses to allocate that revenue and what that does and what incentives it creates at the local level.
00:02:33.592 --> 00:02:41.062
There's a reason why every state has property taxes at the local level and why no state has ever repealed property taxes.
00:02:41.092 --> 00:02:43.312
I know that's very much being discussed right now.
00:02:43.402 --> 00:02:47.812
It's a discussion that we need to take seriously, but there are good reasons why it hasn't happened yet.
00:02:48.263 --> 00:02:56.587
So to dive a little further into that, given how much the governments rely on property taxes, what actually breaks when we try to replace them?
00:02:56.788 --> 00:02:58.078
A lot of things potentially break.
00:02:58.108 --> 00:03:01.707
I mean, obviously if we don't replace the revenue, everything breaks.
00:03:01.707 --> 00:03:02.573
I mean, local governments.
00:03:03.013 --> 00:03:05.712
Fund a significant share of local roads.
00:03:05.712 --> 00:03:09.883
They often have obligations for local schools, or at least a major portion of that.
00:03:10.272 --> 00:03:14.953
Uh, police, fire, uh, local utilities in some cases.
00:03:14.983 --> 00:03:22.902
Uh, all the things that you rely on at your local level from parks to waste disposal, local taxes fund a substantial share of this.
00:03:22.902 --> 00:03:24.462
So we need that revenue.
00:03:24.478 --> 00:03:28.527
We can always have the debate about is local government funded at the right level?
00:03:28.527 --> 00:03:29.818
Could they be more efficient?
00:03:29.818 --> 00:03:36.448
But there's no question that they need a substantial amount of revenue, and the property tax is the way that they're getting a lot of that right now.
00:03:36.777 --> 00:03:40.437
So it has to be replaced, at least substantially replaced.
00:03:40.638 --> 00:03:46.487
And what breaks essentially is the ability to generate it from some other source.
00:03:46.698 --> 00:03:47.418
If we.
00:03:47.617 --> 00:03:51.548
Provided local sales tax authority in lieu of local property tax authority.
00:03:51.758 --> 00:04:00.487
That may work in an area with high retail concentration, where there's lots of shops, lots of stores, um, it doesn't really work in a bedroom community.
00:04:00.967 --> 00:04:03.187
It doesn't really work in an agricultural area.
00:04:03.367 --> 00:04:05.842
There's just really not a sales tax rate that you can set.
00:04:06.323 --> 00:04:09.562
That's even remotely reasonable, that would generate enough revenue.
00:04:09.802 --> 00:04:19.403
And if you have a highly unreasonable sales tax rate, well people are probably gonna just drive across the border to a county that has a slightly more reasonable one, or maybe to a state that has a more reasonable one.
00:04:19.612 --> 00:04:23.692
You're going to see that sort of casual evasion of the sales tax.
00:04:23.963 --> 00:04:35.213
Uh, same goes for local income taxes, and if you put it on the state, then not only are you going to have really high taxes in some other category, really high income taxes or really high sales taxes, but.
00:04:35.583 --> 00:04:49.173
As I'd like to get into with you throughout this, uh, you're gonna see some real distortions and some real perverse incentives that are created around distributing and allocating that revenue to local governments.
00:04:49.577 --> 00:05:04.398
And, and real quick just to follow up on this, for our audience, have you seen, or is there anything in your mind that we've done here at the Tax Foundation or worked on that kind of backs up the idea that behavior will change based on certain tax rules, like the things that you mentioned right there?
00:05:04.598 --> 00:05:10.867
Well, there's a broad literature on the way that people respond to tax changes, and you can respond in a lot of ways.
00:05:10.898 --> 00:05:21.848
So if you have massive sales tax differentials with, uh, a county border or a state border, you are certainly going to see people crossing state lines to purchase things in a lower tax.
00:05:22.913 --> 00:05:28.223
Uh, businesses can do less of this because they're going to have to pay the use tax regardless at the local rate.
00:05:28.463 --> 00:05:38.124
Although you may see them simply shift their actual operations in response to incredibly high sales taxes on their business inputs, their intermediate purchases rather than their final sales.
00:05:38.454 --> 00:05:44.064
Uh, you know, with income taxes, you will see people move somewhere else.
00:05:44.363 --> 00:05:49.728
You take examples like, say, Washington, Oregon, across that border, Oregon has no sales tax.
00:05:49.928 --> 00:05:51.699
Washington has no income tax.
00:05:51.939 --> 00:06:02.918
There's a lot of population right on that band of living in Washington and purchasing things in Oregon because they're taking advantage of those tax differentials.
00:06:03.129 --> 00:06:15.608
We also, just on a more general basis, see people moving to lower tax jurisdictions, setting up their businesses in those places, and they respond particularly on income taxes, far less on property taxes.
00:06:15.639 --> 00:06:19.088
So if, for instance, the income tax had to raise.
00:06:19.298 --> 00:06:23.228
Substantially to offset a property tax reduction or elimination.
00:06:23.468 --> 00:06:31.598
You'd see some behavioral effects there where you'd actually have migration and you'd have changes in business locations and business activity in response to that.
00:06:32.069 --> 00:06:45.149
Yeah, so you do a really great job of discussing this in your paper, which everyone needs to go on tax foundation.org and check out your work there., So why do we see, uh, with some of these alternatives, they, they don't seem practical.
00:06:45.149 --> 00:06:54.658
You know, you give this awesome example in the paper about, um, Florida statewide sales tax needing to jump from 7% to 15%.
00:06:54.959 --> 00:06:57.809
You know, why does it such a massive jump?
00:06:57.899 --> 00:06:59.244
You, could you break that down for us?
00:06:59.444 --> 00:07:02.053
The property tax is a really significant source of revenue.
00:07:02.084 --> 00:07:05.564
I mean, in Florida it raise is about$56 billion a year.
00:07:05.564 --> 00:07:09.613
It's projected to raise about 60 billion in the next year or so.
00:07:09.824 --> 00:07:12.944
You need to replace that revenue and that is more.
00:07:13.149 --> 00:07:15.369
Then the state currently raises from its sales tax.
00:07:15.369 --> 00:07:17.288
So the state has a 6% sales tax.
00:07:17.588 --> 00:07:28.149
You add in the local taxes that already exist and it gets to a hair over 7% on average, and you need to add, uh, another 8%.
00:07:28.348 --> 00:07:35.249
top of that to be able to offset the property tax collections that are currently in place.
00:07:35.459 --> 00:07:36.538
So you have two choices here.
00:07:36.658 --> 00:07:42.449
You could put in about a 15% state sales tax and then allocate revenue back to localities.
00:07:42.824 --> 00:07:50.863
Or you could tell the localities, Hey, you can raise your sales taxes in your local jurisdiction to whatever rate you need to replace the property tax revenue.
00:07:51.064 --> 00:07:54.574
That latter option really, really doesn't work.
00:07:54.783 --> 00:08:03.033
Uh, we mapped out, this is in the paper what the replacement sales tax rate would be, all in current rates, plus the new rates in every county in Florida.
00:08:03.454 --> 00:08:09.303
And you can find one tiny little county that basically has almost no population, but has a big truck stop.
00:08:09.519 --> 00:08:09.819
In it.
00:08:09.968 --> 00:08:13.059
Lots of, uh, you know, lots of people coming through and spending money.
00:08:13.329 --> 00:08:15.249
They would only need like a 9.8% rate.
00:08:15.249 --> 00:08:16.389
That's doable.
00:08:16.418 --> 00:08:21.129
I mean, there's plenty of jurisdictions in the South that have rates that are around 9.8%.
00:08:21.608 --> 00:08:23.694
another jurisdiction that needs a 35% rate.
00:08:23.894 --> 00:08:24.853
That's just not doable.
00:08:24.884 --> 00:08:29.233
No one can have a 35% sales tax rate, and of course there's a lot in between.
00:08:29.384 --> 00:08:40.585
There are a lot of other jurisdictions that would have high sales tax rates because they're bedroom communities, or they're rural or they just don't have that retail concentration.
00:08:40.855 --> 00:08:47.485
Everyone would get some sales tax, but in many cases there's just not enough locally to replace the property tax.
00:08:47.485 --> 00:08:51.534
in the paper you discuss, uh, an example with Ohio on income taxes.
00:08:51.534 --> 00:08:52.794
Could you break that down for us?
00:08:52.794 --> 00:08:54.715
I think that's a good example for our listeners
00:08:54.995 --> 00:08:58.054
Yeah, so in Ohio, again, you have a choice.
00:08:58.054 --> 00:09:03.754
You can have a much higher statewide income tax, or you could have local income taxes.
00:09:03.754 --> 00:09:06.725
And Ohio already has local income tax authority.
00:09:06.725 --> 00:09:11.975
They're one of the few states that significantly relies on local income taxes.
00:09:12.365 --> 00:09:12.904
So.
00:09:13.289 --> 00:09:23.250
If you were to have a statewide tax, Ohio is phasing down towards a flat 2.75% income tax, which will be really low at the state level.
00:09:23.250 --> 00:09:24.299
They still have the locals.
00:09:24.720 --> 00:09:32.580
If you were to replace the sales tax, you would need to bring that to a 12.6% flat tax.
00:09:33.559 --> 00:09:36.830
would be paying 12.6% on all of their income.
00:09:37.039 --> 00:09:42.049
That's pretty close to the top rate in California on income over$1 million.
00:09:42.049 --> 00:09:43.129
And this would be in Ohio.
00:09:43.490 --> 00:09:45.259
Uh, I just don't think that's viable.
00:09:45.500 --> 00:09:49.519
And it would be even more challenging if you were to do this with local tax authority.
00:09:49.789 --> 00:10:02.554
There you would see rates ranging from 9.75% to about 27%, and some of those highest rates are actually right along the Ohio River on the border with West Virginia, along the West Virginia panhandle.
00:10:02.945 --> 00:10:05.345
So you could just drive across the border to West Virginia.
00:10:05.345 --> 00:10:06.154
You could live there.
00:10:06.365 --> 00:10:09.934
Um, even if your job was in Ohio, you could live in West Virginia.
00:10:09.934 --> 00:10:11.554
And I'm sure you would see some of that.
00:10:11.735 --> 00:10:19.475
I'm sure just generally you'd see people leaving the state because it's just not viable to have taxes on income at these levels.
00:10:19.684 --> 00:10:20.975
Uh, there's reasons why we.
00:10:21.715 --> 00:10:24.294
Typically have multiple taxes in a jurisdiction.
00:10:24.355 --> 00:10:30.085
Um, and doubling down on income taxes like this just doesn't seem like a realistic solution.
00:10:30.284 --> 00:10:36.284
So then what new risks emerge when states take over some of that local funding?
00:10:36.284 --> 00:10:40.215
Especially for, for fairness, growth, and, and community control.
00:10:40.414 --> 00:10:48.250
Yeah, there are a lot of problems when the state assumes this authority because they need to, in some way decide how to.
00:10:48.615 --> 00:10:50.504
Return this money to the local governments.
00:10:50.705 --> 00:10:59.914
they could just take the final year of tax collections in any jurisdiction and use that as the baseline and provide that revenue to them in perpetuity, probably with some adjustment.
00:11:00.304 --> 00:11:19.368
What that does, of course, is reward the jurisdictions that had the highest tax rates in the past because you have some areas, often more affluent areas that have chosen to have relatively high property tax rates, but they also get the services that are associated with being a more highly funded jurisdiction you shift this to state authority.
00:11:19.607 --> 00:11:22.457
Those places continue to get all of the revenue.
00:11:23.042 --> 00:11:25.172
having higher taxes, but they're not paying more.
00:11:25.201 --> 00:11:25.501
Now.
00:11:25.501 --> 00:11:27.062
Everyone has that cost.
00:11:27.062 --> 00:11:29.851
Everyone is bearing the cost of subsidizing them.
00:11:30.302 --> 00:11:35.522
That's probably not going to be very attractive to all of the jurisdictions that historically had lower taxes.
00:11:35.721 --> 00:11:45.476
The flip side, of course, is if you choose some other way to allocate this, if you choose some other formula based on need or population or something that's not about what.
00:11:46.355 --> 00:11:47.436
used to be raised.
00:11:47.916 --> 00:11:54.875
Now you have these dramatic gaps where a jurisdiction that used to get a certain amount might be getting dramatically less.
00:11:54.875 --> 00:11:59.316
Another place might be getting dramatically more because of this new funding formula.
00:11:59.586 --> 00:12:01.625
Uh, that's going to create some crises too.
00:12:01.775 --> 00:12:05.196
Uh, you know, if suddenly you're getting 30% less revenue.
00:12:05.586 --> 00:12:06.846
What are you going to do with that?
00:12:06.846 --> 00:12:08.105
That's a real issue.
00:12:08.495 --> 00:12:11.436
Um, and then the question is, what do we do going forward?
00:12:11.676 --> 00:12:22.176
We can't use property values as a determinant of the allocation in future years because who is going to be assessing properties without a property tax?
00:12:22.385 --> 00:12:23.556
So we have to use something else.
00:12:23.765 --> 00:12:25.265
We could do an inflation adjustment.
00:12:25.265 --> 00:12:27.035
We could do inflation in population.
00:12:27.035 --> 00:12:32.015
There's a variety of things that we can do, but all of them are potentially deeply flawed.
00:12:32.216 --> 00:12:39.265
Essentially we're in some ways locking in the system as it existed when we eliminate the property tax.
00:12:39.655 --> 00:12:47.696
A jurisdiction that grows rapidly gets not just new population, but new investment and requires new services to be provided to them.
00:12:48.145 --> 00:12:58.556
Might not get the increases associated with that when the state is providing this by formula that they would, if they were generating new property tax revenue from all that new activity.
00:12:58.946 --> 00:12:59.755
So now.
00:12:59.956 --> 00:13:01.635
The dollars get spread thin.
00:13:01.905 --> 00:13:08.596
The more you grow, the faster you grow, the fewer dollars per capita you're getting, that actually encourages you to shrink.
00:13:08.775 --> 00:13:18.645
Instead of promoting economic dynamism, instead of saying, growth allows us to either have more revenue or to lower property tax rates and make the place more competitive.
00:13:18.885 --> 00:13:22.995
Now you're saying growth means that each dollar.
00:13:23.394 --> 00:13:29.094
cover as many people that like that every person is getting less than they used to.
00:13:29.364 --> 00:13:31.823
That encourages you to shrink rather than to grow.
00:13:31.823 --> 00:13:34.369
That's the exact opposite of what you would want to see.
00:13:34.469 --> 00:13:40.219
Well, it sounds like what you're saying is this will increase complexity quite a bit.
00:13:40.578 --> 00:13:46.249
What do you think maybe people are, are misunderstanding about the, the value of the property tax?
00:13:47.028 --> 00:13:50.508
Despite its unpopularity, the property tax is a pretty good tax.
00:13:50.687 --> 00:14:01.788
It's closer than most taxes to passing what we call the benefits test, where you are paying more in proportion to receiving greater value, uh, in local services.
00:14:01.788 --> 00:14:07.998
If you have a more expensive property, the value of the roads and the schools and everything else actually is worth more to you.
00:14:08.177 --> 00:14:09.437
They also have a feedback effect.
00:14:09.437 --> 00:14:13.427
Better schools mean your property's worth more, uh, so it's not a perfect tax.
00:14:13.628 --> 00:14:22.447
it's pretty good and it's very economically efficient compared to other taxes because there are fewer responses, economic responses to the property tax.
00:14:22.447 --> 00:14:29.977
The land's not going anywhere, so you can't pick up and move it in the same way that you can, a person or a job or a capital investment.
00:14:30.307 --> 00:14:31.087
So.
00:14:31.288 --> 00:14:34.168
It's good in that it doesn't distort behavior as much.
00:14:34.197 --> 00:14:36.717
Again, not perfect, but we're in the realm of taxes.
00:14:36.717 --> 00:14:37.587
Nothing is perfect.
00:14:38.208 --> 00:14:42.288
we shift to is going to create more economic drag.
00:14:42.288 --> 00:14:45.499
It's going to reduce economic growth and output.
00:14:45.859 --> 00:14:56.058
It's also going to require these really hard choices about where the revenue comes from, how high we want another tax to go, and how much shifting.
00:14:56.318 --> 00:15:07.658
We're willing to allow if everyone is paying more in income taxes or more in sales taxes, and then it's transferred through the property tax, that means radically different distributions.
00:15:07.899 --> 00:15:13.178
It's not like you as an individ individual, pay more in income tax, pay less in property tax than it's a wash.
00:15:13.479 --> 00:15:18.399
You may be paying more in income tax while your jurisdiction because you know either.
00:15:18.599 --> 00:15:23.188
had lower property taxes to begin with, or the new formula leads to a lower allocation.
00:15:23.578 --> 00:15:27.568
You're paying way more in income taxes than you're getting in property tax replacement revenue.
00:15:27.778 --> 00:15:31.109
Um, you know more than you were paying in property tax previously.
00:15:31.109 --> 00:15:32.609
Someone else might have the opposite.
00:15:32.639 --> 00:15:37.282
They may love this, but of people are going to find they're paying more.
00:15:37.481 --> 00:15:38.591
Some people would pay less.
00:15:38.802 --> 00:15:44.052
A lot of jurisdictions are going to find that they're cash strapped, that they're not getting the revenue.
00:15:44.052 --> 00:15:56.042
They thought while others might be awash with cash, even though they're shrinking in population, which is not where presumably we want to, you know, have this additional, you know, revenue just fundamentally, it's really hard to plan around.
00:15:56.042 --> 00:15:57.631
There's a lot of complexity to it.
00:15:57.631 --> 00:16:03.662
Any choice the state makes, potentially changes behavior in very undesirable ways.
00:16:03.751 --> 00:16:05.432
Things that just don't make a lot of sense.
00:16:05.631 --> 00:16:13.552
So why do you feel like some of these campaigns to repeal the property tax maybe don't?
00:16:13.701 --> 00:16:14.091
Uh.
00:16:14.292 --> 00:16:18.672
Live up to their expectations or, or what voters should want.
00:16:18.672 --> 00:16:21.552
Maybe they're not detailed enough or they don't provide enough clarity.
00:16:22.198 --> 00:16:25.168
So again, property tax repeal is popular.
00:16:25.259 --> 00:16:29.668
If you simply lead with that, wouldn't it be great if we eliminated your property taxes?
00:16:29.668 --> 00:16:31.769
I think a lot of people are going to sign up for that.
00:16:31.769 --> 00:16:36.658
They're gonna say, yeah, that sounds great, and what a lot of the proposals are missing.
00:16:36.904 --> 00:16:38.764
A serious discussion of replacement revenue.
00:16:39.081 --> 00:16:43.500
fact, many of the ballot measures that have been proposed even have that.
00:16:43.711 --> 00:16:53.221
They simply say the property tax will be repealed, and then it's incumbent upon the legislature once it's gone to figure out what the replacement revenue is.
00:16:53.421 --> 00:16:54.650
And I think that's backwards.
00:16:54.831 --> 00:17:08.780
I don't think you can have a serious discussion about this without talking about what the replacements are going to be and whether they're better or worse, and I really don't think that it's acceptable to have a situation where this revenue stream is just eliminated.
00:17:09.070 --> 00:17:13.780
And then after the fact, the legislature has to rush in and find something else.
00:17:13.780 --> 00:17:16.060
Again, there's a reason that no one's done this.
00:17:16.090 --> 00:17:23.681
It's really, really hard and we can have a discussion and a debate around whether there is a better alternative.
00:17:23.681 --> 00:17:24.851
I don't believe there is.
00:17:24.851 --> 00:17:27.431
I think the economic evidence is pretty clear.
00:17:27.641 --> 00:17:29.050
I think the alternatives.
00:17:29.115 --> 00:17:32.776
Speak for themselves when you really look at them, and that's what this paper is meant to do.
00:17:32.776 --> 00:17:42.526
We take six states where there's been a serious discussion about property tax elimination, and we show all these different ideas about how you might replace the revenue and what happens with that.
00:17:42.526 --> 00:17:43.996
How the distributions change.
00:17:43.996 --> 00:17:45.316
How the tax rates change.
00:17:45.675 --> 00:17:51.435
And I think people can look at that and say, maybe that's not what we wanted, but they're not being given that opportunity.
00:17:51.855 --> 00:17:57.135
Some of the ballot measures that are out there, and I worry about a situation where voters say, yeah, absolutely.
00:17:57.135 --> 00:17:58.516
Get rid of my property taxes.
00:17:58.726 --> 00:18:05.836
And then the legislature goes into session and has to come up with a replacement for potentially billions and billions of dollars of revenue overnight.
00:18:05.836 --> 00:18:07.576
Do we think that's going to work well?
00:18:07.905 --> 00:18:10.455
Do we think people are going to be happy with the results?
00:18:10.756 --> 00:18:17.266
And then what does happen when you are one of those loser jurisdictions that's down 30 or 40 or 50% in your revenue?
00:18:17.465 --> 00:18:18.546
What do you do now?
00:18:18.990 --> 00:18:20.310
Uh, what does that look like?
00:18:20.310 --> 00:18:21.661
And do we have another crisis?
00:18:21.661 --> 00:18:24.181
The legislature has to respond to the following year.
00:18:24.381 --> 00:18:30.198
there's A through line here with, uh, politics and sort of the popular.
00:18:30.528 --> 00:18:32.417
What's a popular idea and what's good policy?
00:18:32.417 --> 00:18:40.847
We've had president Trump propose all the no tax ons, and those things are very complicated and complex and, but they sound really nice and, and it sounds nice.
00:18:40.847 --> 00:18:43.188
It sounds like, oh cool, we're gonna eliminate the property tax.
00:18:43.188 --> 00:18:43.728
This would be great.
00:18:43.968 --> 00:18:45.077
But actually it's.
00:18:45.413 --> 00:18:48.923
Really harmful for us, and it doesn't benefit us in the way we'd like.
00:18:48.923 --> 00:18:52.103
It's a nice tagline, but it, it doesn't actually do much for us.
00:18:52.553 --> 00:19:06.232
Um, and, and so right now I, I'd wanna switch real quick into, I made this little lightning round because there are things I've heard my friends say, and I just kind of wanted to do like a myth or fact with you real quick.
00:19:06.623 --> 00:19:08.603
Um, and so we'll lightning around this.
00:19:08.603 --> 00:19:10.042
I'll give you a quick second to respond.
00:19:10.373 --> 00:19:10.823
So, is this.
00:19:11.022 --> 00:19:12.163
Is this true or false?
00:19:12.163 --> 00:19:13.153
Is it myth or fact?
00:19:13.482 --> 00:19:17.430
Uh, sales taxes are more pro-growth, so just switch.
00:19:17.630 --> 00:19:18.950
Well, in fact, they're not.
00:19:18.980 --> 00:19:23.720
Um, sales taxes are more pro-growth than income taxes, but less pro-growth than property taxes.
00:19:23.720 --> 00:19:30.170
So doubling down on the sales tax to the exclusion of the property tax is actually less pro-growth.
00:19:30.174 --> 00:19:34.519
And part of that's just the way we design sales taxes in this country where they're taxing a lot of.
00:19:34.720 --> 00:19:35.650
multiple times over.
00:19:35.710 --> 00:19:42.190
If we had a better sales tax, the difference wouldn't be quite as much, but no, uh, the answer is no.
00:19:42.279 --> 00:19:43.119
Um, false.
00:19:43.180 --> 00:19:49.539
This would actually make the tax code less competitive if we shifted away from property taxes, even to sales taxes.
00:19:49.750 --> 00:19:52.150
But it's even worse if we shifted into income taxes.
00:19:52.349 --> 00:19:56.450
So myth or fact, renters don't pay property taxes taxes.
00:19:56.559 --> 00:19:57.279
Essentially myth.
00:19:57.579 --> 00:19:59.890
Uh, they don't obviously write a check.
00:20:00.160 --> 00:20:04.569
Uh, renters are not remitting property taxes to the local jurisdiction.
00:20:04.569 --> 00:20:17.799
The landlord is, but you know, there's a large literature on this and there are some disagreements on the exact amount that the renters bear, but everyone agrees that a very substantial portion of the property tax shows up.
00:20:18.000 --> 00:20:24.869
In your rent payment, and you can even see this when property taxes go up, that rent prices increase faster.
00:20:24.930 --> 00:20:26.789
Um, it can take a couple of years.
00:20:26.789 --> 00:20:38.279
Again, it's not always perfectly one-to-one, but over time, most, if not all of the cost of the property tax is born by the renter themselves.
00:20:38.480 --> 00:20:44.119
Sometimes there's these proposals that just provide relief to homeowners and that really leaves renters out.
00:20:44.299 --> 00:21:12.255
And some states even make it worse by taxing commercial property at higher effective rates and often classing, rental units as commercial property, which means that of the lower income individuals who are renting are bearing higher property taxes than the owners of homes, um, but certainly everyone's paying property taxes if we eliminated the property tax, that provides relief for everyone there.
00:21:12.255 --> 00:21:16.339
But it also, of course, means a vast array of new taxes that everyone will be paying as well.
00:21:16.736 --> 00:21:25.381
So as we're wrapping up here, Jared, uh, why is the property tax despite being so unpopular, as we've talked about the most stable, fair and growth friendly option that we have?
00:21:25.580 --> 00:21:30.560
The property tax, as we've discussed, is on largely fixed immovable assets.
00:21:30.621 --> 00:21:31.310
You cannot move your.
00:21:31.740 --> 00:21:32.221
Land.
00:21:32.371 --> 00:21:34.290
Um, you can choose where to build structures.
00:21:34.290 --> 00:21:41.671
You can choose some of these things, but the fact that it's a fairly fixed asset means that there will be fewer behavioral responses to it.
00:21:41.941 --> 00:21:47.280
Also, the fact that, as we've discussed, it better passes the benefit test means that.
00:21:47.480 --> 00:21:56.810
You're getting more for your money when you're paying more, uh, in a way that's not always true of the sales tax or the income tax, and therefore you're more willing, you may not like it.
00:21:56.961 --> 00:21:59.421
I mean, none, none of us really likes paying taxes.
00:21:59.421 --> 00:22:08.090
But when you look at the alternatives, you may find that your willingness to pay that as higher, even if you do complain about it, um, you know, certainly we see that with businesses.
00:22:08.090 --> 00:22:10.340
We see it with a lot of individuals where they locate.
00:22:10.340 --> 00:22:13.131
This is what, you know, economists call revealed preference.
00:22:13.191 --> 00:22:21.330
Um, you know, because you have your revealed preference of you actually do as opposed to your stated preference of what you dislike.
00:22:21.330 --> 00:22:23.671
You can say, I don't like property taxes.
00:22:23.671 --> 00:22:24.810
I don't want to pay them.
00:22:24.990 --> 00:22:35.280
Your revealed preference is sometimes you're not going to the lowest property tax jurisdiction in the same way that you might go to a lower tax regime for income taxes because of what the property tax is doing.
00:22:35.760 --> 00:22:37.020
And then finally.
00:22:37.401 --> 00:22:41.361
There is a local responsiveness to this tax that you don't have with others.
00:22:41.780 --> 00:22:44.421
When you don't like that your property taxes have risen.
00:22:44.691 --> 00:22:53.540
You can go to city council, you can go to your county board of supervisors or commissioners or whatever you have, and you can complain about this and you may have a real impact on them.
00:22:53.740 --> 00:23:01.060
If the state takes over this authority with a higher income tax or a higher sales tax and they allocate this, it's going to be way harder.
00:23:01.435 --> 00:23:18.655
For you to petition on this and even if you would be willing to accept lower government services or if even if your local government really cares about efficiencies and they want to be better with their money, they can't control what comes to them or what taxes are imposed on you to do this.
00:23:18.655 --> 00:23:24.316
So that local responsiveness piece is important and is fundamentally missing if we move away from the property tax.
00:23:24.516 --> 00:23:32.286
All right, well, before we sign off, if you have any burning questions on tax, you can send them our way or drop a comment on YouTube.
00:23:32.286 --> 00:23:35.526
You can email us at podcast@taxfoundation.org.
00:23:35.766 --> 00:23:38.586
You can slide into our dms at Deduction Pod on Twitter.
00:23:38.786 --> 00:23:41.276
Thank you so much for listening, and thank you, Jared, for being here today.
00:23:41.476 --> 00:23:41.865
Thank you.
00:00:00.050 --> 00:00:03.379
Hello and welcome to the Deduction Attacks Foundation podcast.
00:00:03.379 --> 00:00:11.300
I'm your host, Kyle Hulehan, and today we are joined by Jared Walczak, vice President of State Projects here at the Tax Foundation.
00:00:11.689 --> 00:00:15.380
Now, today we're gonna talk about the property taxes and.
00:00:15.548 --> 00:00:28.057
To frame this sort of whole discussion, I wanna set us up here with, what if I told you that eliminating the property taxes, which is something that, everyone would love to do could actually make communities worse off?
00:00:28.237 --> 00:00:34.658
That's sort of the thesis for today's podcast and what we're trying to dive into and, and understand about this.
00:00:34.718 --> 00:00:47.618
Um, so Jared, as we're we're looking at this, obviously people hate the property tax, you know, why could repealing the property attacks actually make people worse off?
00:00:47.618 --> 00:00:48.427
thanks for having me.
00:00:48.607 --> 00:00:51.968
And you're right, of course, that the property tax is an unpopular tax.
00:00:51.997 --> 00:00:53.468
Uh, economists tend to like it.
00:00:53.527 --> 00:00:56.287
Uh, most people, most taxpayers do not.
00:00:56.557 --> 00:00:58.207
Partly that's because they feel it.
00:00:58.207 --> 00:00:58.567
Right.
00:00:58.628 --> 00:00:59.378
You know, if you look.
00:00:59.552 --> 00:01:03.122
At what you owe in property taxes, you actually know what that amount is.
00:01:03.122 --> 00:01:03.902
Do you get a bill?
00:01:03.902 --> 00:01:07.832
You, you know, you pay it maybe a couple of times a year, once a year, twice a year.
00:01:08.222 --> 00:01:11.102
Uh, you don't know what you paid in sales taxes last year.
00:01:11.102 --> 00:01:14.852
A lot of people don't even know what they paid in income to taxes last year.
00:01:15.093 --> 00:01:17.597
This is a big lump sum of money.
00:01:17.798 --> 00:01:18.998
People really dislike it.
00:01:18.998 --> 00:01:21.158
And then people have philosophical objections as well.
00:01:21.158 --> 00:01:29.858
And I take those seriously, although I don't necessarily share some of them, but certainly this is an unpopular tax, but it's also a really important tax.
00:01:29.977 --> 00:01:33.397
It's 70% of local tax revenue nationwide.
00:01:33.427 --> 00:01:36.487
In some states it's as high as 95%.
00:01:36.847 --> 00:01:40.388
So if you're going to eliminate the property tax, you need a replacement.
00:01:40.447 --> 00:01:50.587
Multiple replacements, and the reality is that anything we choose to replace the property tax with is likely to be worse and worse along multiple vectors.
00:01:51.007 --> 00:01:58.778
It's worse economically in the sense that any replacement tax is going to create more economic distortions.
00:01:58.778 --> 00:02:03.817
It's going to hurt economic growth compared to the property tax, which is relatively efficient economically.
00:02:04.018 --> 00:02:10.828
It's worse for communities because many of the replacements, uh, just don't work very well in their communities.
00:02:10.858 --> 00:02:24.987
If, you know, we'll go into some of this, I'm sure, but if we're replacing this with local tax authority, sometimes there really isn't another local tax that could suffice if we're replacing it with state tax authority and we're distributing that revenue from the state.
00:02:25.342 --> 00:02:33.592
All kinds of challenges with how the state chooses to allocate that revenue and what that does and what incentives it creates at the local level.
00:02:33.592 --> 00:02:41.062
There's a reason why every state has property taxes at the local level and why no state has ever repealed property taxes.
00:02:41.092 --> 00:02:43.312
I know that's very much being discussed right now.
00:02:43.402 --> 00:02:47.812
It's a discussion that we need to take seriously, but there are good reasons why it hasn't happened yet.
00:02:48.263 --> 00:02:56.587
So to dive a little further into that, given how much the governments rely on property taxes, what actually breaks when we try to replace them?
00:02:56.788 --> 00:02:58.078
A lot of things potentially break.
00:02:58.108 --> 00:03:01.707
I mean, obviously if we don't replace the revenue, everything breaks.
00:03:01.707 --> 00:03:02.573
I mean, local governments.
00:03:03.013 --> 00:03:05.712
Fund a significant share of local roads.
00:03:05.712 --> 00:03:09.883
They often have obligations for local schools, or at least a major portion of that.
00:03:10.272 --> 00:03:14.953
Uh, police, fire, uh, local utilities in some cases.
00:03:14.983 --> 00:03:22.902
Uh, all the things that you rely on at your local level from parks to waste disposal, local taxes fund a substantial share of this.
00:03:22.902 --> 00:03:24.462
So we need that revenue.
00:03:24.478 --> 00:03:28.527
We can always have the debate about is local government funded at the right level?
00:03:28.527 --> 00:03:29.818
Could they be more efficient?
00:03:29.818 --> 00:03:36.448
But there's no question that they need a substantial amount of revenue, and the property tax is the way that they're getting a lot of that right now.
00:03:36.777 --> 00:03:40.437
So it has to be replaced, at least substantially replaced.
00:03:40.638 --> 00:03:46.487
And what breaks essentially is the ability to generate it from some other source.
00:03:46.698 --> 00:03:47.418
If we.
00:03:47.617 --> 00:03:51.548
Provided local sales tax authority in lieu of local property tax authority.
00:03:51.758 --> 00:04:00.487
That may work in an area with high retail concentration, where there's lots of shops, lots of stores, um, it doesn't really work in a bedroom community.
00:04:00.967 --> 00:04:03.187
It doesn't really work in an agricultural area.
00:04:03.367 --> 00:04:05.842
There's just really not a sales tax rate that you can set.
00:04:06.323 --> 00:04:09.562
That's even remotely reasonable, that would generate enough revenue.
00:04:09.802 --> 00:04:19.403
And if you have a highly unreasonable sales tax rate, well people are probably gonna just drive across the border to a county that has a slightly more reasonable one, or maybe to a state that has a more reasonable one.
00:04:19.612 --> 00:04:23.692
You're going to see that sort of casual evasion of the sales tax.
00:04:23.963 --> 00:04:35.213
Uh, same goes for local income taxes, and if you put it on the state, then not only are you going to have really high taxes in some other category, really high income taxes or really high sales taxes, but.
00:04:35.583 --> 00:04:49.173
As I'd like to get into with you throughout this, uh, you're gonna see some real distortions and some real perverse incentives that are created around distributing and allocating that revenue to local governments.
00:04:49.577 --> 00:05:04.398
And, and real quick just to follow up on this, for our audience, have you seen, or is there anything in your mind that we've done here at the Tax Foundation or worked on that kind of backs up the idea that behavior will change based on certain tax rules, like the things that you mentioned right there?
00:05:04.598 --> 00:05:10.867
Well, there's a broad literature on the way that people respond to tax changes, and you can respond in a lot of ways.
00:05:10.898 --> 00:05:21.848
So if you have massive sales tax differentials with, uh, a county border or a state border, you are certainly going to see people crossing state lines to purchase things in a lower tax.
00:05:22.913 --> 00:05:28.223
Uh, businesses can do less of this because they're going to have to pay the use tax regardless at the local rate.
00:05:28.463 --> 00:05:38.124
Although you may see them simply shift their actual operations in response to incredibly high sales taxes on their business inputs, their intermediate purchases rather than their final sales.
00:05:38.454 --> 00:05:44.064
Uh, you know, with income taxes, you will see people move somewhere else.
00:05:44.363 --> 00:05:49.728
You take examples like, say, Washington, Oregon, across that border, Oregon has no sales tax.
00:05:49.928 --> 00:05:51.699
Washington has no income tax.
00:05:51.939 --> 00:06:02.918
There's a lot of population right on that band of living in Washington and purchasing things in Oregon because they're taking advantage of those tax differentials.
00:06:03.129 --> 00:06:15.608
We also, just on a more general basis, see people moving to lower tax jurisdictions, setting up their businesses in those places, and they respond particularly on income taxes, far less on property taxes.
00:06:15.639 --> 00:06:19.088
So if, for instance, the income tax had to raise.
00:06:19.298 --> 00:06:23.228
Substantially to offset a property tax reduction or elimination.
00:06:23.468 --> 00:06:31.598
You'd see some behavioral effects there where you'd actually have migration and you'd have changes in business locations and business activity in response to that.
00:06:32.069 --> 00:06:45.149
Yeah, so you do a really great job of discussing this in your paper, which everyone needs to go on tax foundation.org and check out your work there., So why do we see, uh, with some of these alternatives, they, they don't seem practical.
00:06:45.149 --> 00:06:54.658
You know, you give this awesome example in the paper about, um, Florida statewide sales tax needing to jump from 7% to 15%.
00:06:54.959 --> 00:06:57.809
You know, why does it such a massive jump?
00:06:57.899 --> 00:06:59.244
You, could you break that down for us?
00:06:59.444 --> 00:07:02.053
The property tax is a really significant source of revenue.
00:07:02.084 --> 00:07:05.564
I mean, in Florida it raise is about$56 billion a year.
00:07:05.564 --> 00:07:09.613
It's projected to raise about 60 billion in the next year or so.
00:07:09.824 --> 00:07:12.944
You need to replace that revenue and that is more.
00:07:13.149 --> 00:07:15.369
Then the state currently raises from its sales tax.
00:07:15.369 --> 00:07:17.288
So the state has a 6% sales tax.
00:07:17.588 --> 00:07:28.149
You add in the local taxes that already exist and it gets to a hair over 7% on average, and you need to add, uh, another 8%.
00:07:28.348 --> 00:07:35.249
top of that to be able to offset the property tax collections that are currently in place.
00:07:35.459 --> 00:07:36.538
So you have two choices here.
00:07:36.658 --> 00:07:42.449
You could put in about a 15% state sales tax and then allocate revenue back to localities.
00:07:42.824 --> 00:07:50.863
Or you could tell the localities, Hey, you can raise your sales taxes in your local jurisdiction to whatever rate you need to replace the property tax revenue.
00:07:51.064 --> 00:07:54.574
That latter option really, really doesn't work.
00:07:54.783 --> 00:08:03.033
Uh, we mapped out, this is in the paper what the replacement sales tax rate would be, all in current rates, plus the new rates in every county in Florida.
00:08:03.454 --> 00:08:09.303
And you can find one tiny little county that basically has almost no population, but has a big truck stop.
00:08:09.519 --> 00:08:09.819
In it.
00:08:09.968 --> 00:08:13.059
Lots of, uh, you know, lots of people coming through and spending money.
00:08:13.329 --> 00:08:15.249
They would only need like a 9.8% rate.
00:08:15.249 --> 00:08:16.389
That's doable.
00:08:16.418 --> 00:08:21.129
I mean, there's plenty of jurisdictions in the South that have rates that are around 9.8%.
00:08:21.608 --> 00:08:23.694
another jurisdiction that needs a 35% rate.
00:08:23.894 --> 00:08:24.853
That's just not doable.
00:08:24.884 --> 00:08:29.233
No one can have a 35% sales tax rate, and of course there's a lot in between.
00:08:29.384 --> 00:08:40.585
There are a lot of other jurisdictions that would have high sales tax rates because they're bedroom communities, or they're rural or they just don't have that retail concentration.
00:08:40.855 --> 00:08:47.485
Everyone would get some sales tax, but in many cases there's just not enough locally to replace the property tax.
00:08:47.485 --> 00:08:51.534
in the paper you discuss, uh, an example with Ohio on income taxes.
00:08:51.534 --> 00:08:52.794
Could you break that down for us?
00:08:52.794 --> 00:08:54.715
I think that's a good example for our listeners
00:08:54.995 --> 00:08:58.054
Yeah, so in Ohio, again, you have a choice.
00:08:58.054 --> 00:09:03.754
You can have a much higher statewide income tax, or you could have local income taxes.
00:09:03.754 --> 00:09:06.725
And Ohio already has local income tax authority.
00:09:06.725 --> 00:09:11.975
They're one of the few states that significantly relies on local income taxes.
00:09:12.365 --> 00:09:12.904
So.
00:09:13.289 --> 00:09:23.250
If you were to have a statewide tax, Ohio is phasing down towards a flat 2.75% income tax, which will be really low at the state level.
00:09:23.250 --> 00:09:24.299
They still have the locals.
00:09:24.720 --> 00:09:32.580
If you were to replace the sales tax, you would need to bring that to a 12.6% flat tax.
00:09:33.559 --> 00:09:36.830
would be paying 12.6% on all of their income.
00:09:37.039 --> 00:09:42.049
That's pretty close to the top rate in California on income over$1 million.
00:09:42.049 --> 00:09:43.129
And this would be in Ohio.
00:09:43.490 --> 00:09:45.259
Uh, I just don't think that's viable.
00:09:45.500 --> 00:09:49.519
And it would be even more challenging if you were to do this with local tax authority.
00:09:49.789 --> 00:10:02.554
There you would see rates ranging from 9.75% to about 27%, and some of those highest rates are actually right along the Ohio River on the border with West Virginia, along the West Virginia panhandle.
00:10:02.945 --> 00:10:05.345
So you could just drive across the border to West Virginia.
00:10:05.345 --> 00:10:06.154
You could live there.
00:10:06.365 --> 00:10:09.934
Um, even if your job was in Ohio, you could live in West Virginia.
00:10:09.934 --> 00:10:11.554
And I'm sure you would see some of that.
00:10:11.735 --> 00:10:19.475
I'm sure just generally you'd see people leaving the state because it's just not viable to have taxes on income at these levels.
00:10:19.684 --> 00:10:20.975
Uh, there's reasons why we.
00:10:21.715 --> 00:10:24.294
Typically have multiple taxes in a jurisdiction.
00:10:24.355 --> 00:10:30.085
Um, and doubling down on income taxes like this just doesn't seem like a realistic solution.
00:10:30.284 --> 00:10:36.284
So then what new risks emerge when states take over some of that local funding?
00:10:36.284 --> 00:10:40.215
Especially for, for fairness, growth, and, and community control.
00:10:40.414 --> 00:10:48.250
Yeah, there are a lot of problems when the state assumes this authority because they need to, in some way decide how to.
00:10:48.615 --> 00:10:50.504
Return this money to the local governments.
00:10:50.705 --> 00:10:59.914
they could just take the final year of tax collections in any jurisdiction and use that as the baseline and provide that revenue to them in perpetuity, probably with some adjustment.
00:11:00.304 --> 00:11:19.368
What that does, of course, is reward the jurisdictions that had the highest tax rates in the past because you have some areas, often more affluent areas that have chosen to have relatively high property tax rates, but they also get the services that are associated with being a more highly funded jurisdiction you shift this to state authority.
00:11:19.607 --> 00:11:22.457
Those places continue to get all of the revenue.
00:11:23.042 --> 00:11:25.172
having higher taxes, but they're not paying more.
00:11:25.201 --> 00:11:25.501
Now.
00:11:25.501 --> 00:11:27.062
Everyone has that cost.
00:11:27.062 --> 00:11:29.851
Everyone is bearing the cost of subsidizing them.
00:11:30.302 --> 00:11:35.522
That's probably not going to be very attractive to all of the jurisdictions that historically had lower taxes.
00:11:35.721 --> 00:11:45.476
The flip side, of course, is if you choose some other way to allocate this, if you choose some other formula based on need or population or something that's not about what.
00:11:46.355 --> 00:11:47.436
used to be raised.
00:11:47.916 --> 00:11:54.875
Now you have these dramatic gaps where a jurisdiction that used to get a certain amount might be getting dramatically less.
00:11:54.875 --> 00:11:59.316
Another place might be getting dramatically more because of this new funding formula.
00:11:59.586 --> 00:12:01.625
Uh, that's going to create some crises too.
00:12:01.775 --> 00:12:05.196
Uh, you know, if suddenly you're getting 30% less revenue.
00:12:05.586 --> 00:12:06.846
What are you going to do with that?
00:12:06.846 --> 00:12:08.105
That's a real issue.
00:12:08.495 --> 00:12:11.436
Um, and then the question is, what do we do going forward?
00:12:11.676 --> 00:12:22.176
We can't use property values as a determinant of the allocation in future years because who is going to be assessing properties without a property tax?
00:12:22.385 --> 00:12:23.556
So we have to use something else.
00:12:23.765 --> 00:12:25.265
We could do an inflation adjustment.
00:12:25.265 --> 00:12:27.035
We could do inflation in population.
00:12:27.035 --> 00:12:32.015
There's a variety of things that we can do, but all of them are potentially deeply flawed.
00:12:32.216 --> 00:12:39.265
Essentially we're in some ways locking in the system as it existed when we eliminate the property tax.
00:12:39.655 --> 00:12:47.696
A jurisdiction that grows rapidly gets not just new population, but new investment and requires new services to be provided to them.
00:12:48.145 --> 00:12:58.556
Might not get the increases associated with that when the state is providing this by formula that they would, if they were generating new property tax revenue from all that new activity.
00:12:58.946 --> 00:12:59.755
So now.
00:12:59.956 --> 00:13:01.635
The dollars get spread thin.
00:13:01.905 --> 00:13:08.596
The more you grow, the faster you grow, the fewer dollars per capita you're getting, that actually encourages you to shrink.
00:13:08.775 --> 00:13:18.645
Instead of promoting economic dynamism, instead of saying, growth allows us to either have more revenue or to lower property tax rates and make the place more competitive.
00:13:18.885 --> 00:13:22.995
Now you're saying growth means that each dollar.
00:13:23.394 --> 00:13:29.094
cover as many people that like that every person is getting less than they used to.
00:13:29.364 --> 00:13:31.823
That encourages you to shrink rather than to grow.
00:13:31.823 --> 00:13:34.369
That's the exact opposite of what you would want to see.
00:13:34.469 --> 00:13:40.219
Well, it sounds like what you're saying is this will increase complexity quite a bit.
00:13:40.578 --> 00:13:46.249
What do you think maybe people are, are misunderstanding about the, the value of the property tax?
00:13:47.028 --> 00:13:50.508
Despite its unpopularity, the property tax is a pretty good tax.
00:13:50.687 --> 00:14:01.788
It's closer than most taxes to passing what we call the benefits test, where you are paying more in proportion to receiving greater value, uh, in local services.
00:14:01.788 --> 00:14:07.998
If you have a more expensive property, the value of the roads and the schools and everything else actually is worth more to you.
00:14:08.177 --> 00:14:09.437
They also have a feedback effect.
00:14:09.437 --> 00:14:13.427
Better schools mean your property's worth more, uh, so it's not a perfect tax.
00:14:13.628 --> 00:14:22.447
it's pretty good and it's very economically efficient compared to other taxes because there are fewer responses, economic responses to the property tax.
00:14:22.447 --> 00:14:29.977
The land's not going anywhere, so you can't pick up and move it in the same way that you can, a person or a job or a capital investment.
00:14:30.307 --> 00:14:31.087
So.
00:14:31.288 --> 00:14:34.168
It's good in that it doesn't distort behavior as much.
00:14:34.197 --> 00:14:36.717
Again, not perfect, but we're in the realm of taxes.
00:14:36.717 --> 00:14:37.587
Nothing is perfect.
00:14:38.208 --> 00:14:42.288
we shift to is going to create more economic drag.
00:14:42.288 --> 00:14:45.499
It's going to reduce economic growth and output.
00:14:45.859 --> 00:14:56.058
It's also going to require these really hard choices about where the revenue comes from, how high we want another tax to go, and how much shifting.
00:14:56.318 --> 00:15:07.658
We're willing to allow if everyone is paying more in income taxes or more in sales taxes, and then it's transferred through the property tax, that means radically different distributions.
00:15:07.899 --> 00:15:13.178
It's not like you as an individ individual, pay more in income tax, pay less in property tax than it's a wash.
00:15:13.479 --> 00:15:18.399
You may be paying more in income tax while your jurisdiction because you know either.
00:15:18.599 --> 00:15:23.188
had lower property taxes to begin with, or the new formula leads to a lower allocation.
00:15:23.578 --> 00:15:27.568
You're paying way more in income taxes than you're getting in property tax replacement revenue.
00:15:27.778 --> 00:15:31.109
Um, you know more than you were paying in property tax previously.
00:15:31.109 --> 00:15:32.609
Someone else might have the opposite.
00:15:32.639 --> 00:15:37.282
They may love this, but of people are going to find they're paying more.
00:15:37.481 --> 00:15:38.591
Some people would pay less.
00:15:38.802 --> 00:15:44.052
A lot of jurisdictions are going to find that they're cash strapped, that they're not getting the revenue.
00:15:44.052 --> 00:15:56.042
They thought while others might be awash with cash, even though they're shrinking in population, which is not where presumably we want to, you know, have this additional, you know, revenue just fundamentally, it's really hard to plan around.
00:15:56.042 --> 00:15:57.631
There's a lot of complexity to it.
00:15:57.631 --> 00:16:03.662
Any choice the state makes, potentially changes behavior in very undesirable ways.
00:16:03.751 --> 00:16:05.432
Things that just don't make a lot of sense.
00:16:05.631 --> 00:16:13.552
So why do you feel like some of these campaigns to repeal the property tax maybe don't?
00:16:13.701 --> 00:16:14.091
Uh.
00:16:14.292 --> 00:16:18.672
Live up to their expectations or, or what voters should want.
00:16:18.672 --> 00:16:21.552
Maybe they're not detailed enough or they don't provide enough clarity.
00:16:22.198 --> 00:16:25.168
So again, property tax repeal is popular.
00:16:25.259 --> 00:16:29.668
If you simply lead with that, wouldn't it be great if we eliminated your property taxes?
00:16:29.668 --> 00:16:31.769
I think a lot of people are going to sign up for that.
00:16:31.769 --> 00:16:36.658
They're gonna say, yeah, that sounds great, and what a lot of the proposals are missing.
00:16:36.904 --> 00:16:38.764
A serious discussion of replacement revenue.
00:16:39.081 --> 00:16:43.500
fact, many of the ballot measures that have been proposed even have that.
00:16:43.711 --> 00:16:53.221
They simply say the property tax will be repealed, and then it's incumbent upon the legislature once it's gone to figure out what the replacement revenue is.
00:16:53.421 --> 00:16:54.650
And I think that's backwards.
00:16:54.831 --> 00:17:08.780
I don't think you can have a serious discussion about this without talking about what the replacements are going to be and whether they're better or worse, and I really don't think that it's acceptable to have a situation where this revenue stream is just eliminated.
00:17:09.070 --> 00:17:13.780
And then after the fact, the legislature has to rush in and find something else.
00:17:13.780 --> 00:17:16.060
Again, there's a reason that no one's done this.
00:17:16.090 --> 00:17:23.681
It's really, really hard and we can have a discussion and a debate around whether there is a better alternative.
00:17:23.681 --> 00:17:24.851
I don't believe there is.
00:17:24.851 --> 00:17:27.431
I think the economic evidence is pretty clear.
00:17:27.641 --> 00:17:29.050
I think the alternatives.
00:17:29.115 --> 00:17:32.776
Speak for themselves when you really look at them, and that's what this paper is meant to do.
00:17:32.776 --> 00:17:42.526
We take six states where there's been a serious discussion about property tax elimination, and we show all these different ideas about how you might replace the revenue and what happens with that.
00:17:42.526 --> 00:17:43.996
How the distributions change.
00:17:43.996 --> 00:17:45.316
How the tax rates change.
00:17:45.675 --> 00:17:51.435
And I think people can look at that and say, maybe that's not what we wanted, but they're not being given that opportunity.
00:17:51.855 --> 00:17:57.135
Some of the ballot measures that are out there, and I worry about a situation where voters say, yeah, absolutely.
00:17:57.135 --> 00:17:58.516
Get rid of my property taxes.
00:17:58.726 --> 00:18:05.836
And then the legislature goes into session and has to come up with a replacement for potentially billions and billions of dollars of revenue overnight.
00:18:05.836 --> 00:18:07.576
Do we think that's going to work well?
00:18:07.905 --> 00:18:10.455
Do we think people are going to be happy with the results?
00:18:10.756 --> 00:18:17.266
And then what does happen when you are one of those loser jurisdictions that's down 30 or 40 or 50% in your revenue?
00:18:17.465 --> 00:18:18.546
What do you do now?
00:18:18.990 --> 00:18:20.310
Uh, what does that look like?
00:18:20.310 --> 00:18:21.661
And do we have another crisis?
00:18:21.661 --> 00:18:24.181
The legislature has to respond to the following year.
00:18:24.381 --> 00:18:30.198
there's A through line here with, uh, politics and sort of the popular.
00:18:30.528 --> 00:18:32.417
What's a popular idea and what's good policy?
00:18:32.417 --> 00:18:40.847
We've had president Trump propose all the no tax ons, and those things are very complicated and complex and, but they sound really nice and, and it sounds nice.
00:18:40.847 --> 00:18:43.188
It sounds like, oh cool, we're gonna eliminate the property tax.
00:18:43.188 --> 00:18:43.728
This would be great.
00:18:43.968 --> 00:18:45.077
But actually it's.
00:18:45.413 --> 00:18:48.923
Really harmful for us, and it doesn't benefit us in the way we'd like.
00:18:48.923 --> 00:18:52.103
It's a nice tagline, but it, it doesn't actually do much for us.
00:18:52.553 --> 00:19:06.232
Um, and, and so right now I, I'd wanna switch real quick into, I made this little lightning round because there are things I've heard my friends say, and I just kind of wanted to do like a myth or fact with you real quick.
00:19:06.623 --> 00:19:08.603
Um, and so we'll lightning around this.
00:19:08.603 --> 00:19:10.042
I'll give you a quick second to respond.
00:19:10.373 --> 00:19:10.823
So, is this.
00:19:11.022 --> 00:19:12.163
Is this true or false?
00:19:12.163 --> 00:19:13.153
Is it myth or fact?
00:19:13.482 --> 00:19:17.430
Uh, sales taxes are more pro-growth, so just switch.
00:19:17.630 --> 00:19:18.950
Well, in fact, they're not.
00:19:18.980 --> 00:19:23.720
Um, sales taxes are more pro-growth than income taxes, but less pro-growth than property taxes.
00:19:23.720 --> 00:19:30.170
So doubling down on the sales tax to the exclusion of the property tax is actually less pro-growth.
00:19:30.174 --> 00:19:34.519
And part of that's just the way we design sales taxes in this country where they're taxing a lot of.
00:19:34.720 --> 00:19:35.650
multiple times over.
00:19:35.710 --> 00:19:42.190
If we had a better sales tax, the difference wouldn't be quite as much, but no, uh, the answer is no.
00:19:42.279 --> 00:19:43.119
Um, false.
00:19:43.180 --> 00:19:49.539
This would actually make the tax code less competitive if we shifted away from property taxes, even to sales taxes.
00:19:49.750 --> 00:19:52.150
But it's even worse if we shifted into income taxes.
00:19:52.349 --> 00:19:56.450
So myth or fact, renters don't pay property taxes taxes.
00:19:56.559 --> 00:19:57.279
Essentially myth.
00:19:57.579 --> 00:19:59.890
Uh, they don't obviously write a check.
00:20:00.160 --> 00:20:04.569
Uh, renters are not remitting property taxes to the local jurisdiction.
00:20:04.569 --> 00:20:17.799
The landlord is, but you know, there's a large literature on this and there are some disagreements on the exact amount that the renters bear, but everyone agrees that a very substantial portion of the property tax shows up.
00:20:18.000 --> 00:20:24.869
In your rent payment, and you can even see this when property taxes go up, that rent prices increase faster.
00:20:24.930 --> 00:20:26.789
Um, it can take a couple of years.
00:20:26.789 --> 00:20:38.279
Again, it's not always perfectly one-to-one, but over time, most, if not all of the cost of the property tax is born by the renter themselves.
00:20:38.480 --> 00:20:44.119
Sometimes there's these proposals that just provide relief to homeowners and that really leaves renters out.
00:20:44.299 --> 00:21:12.255
And some states even make it worse by taxing commercial property at higher effective rates and often classing, rental units as commercial property, which means that of the lower income individuals who are renting are bearing higher property taxes than the owners of homes, um, but certainly everyone's paying property taxes if we eliminated the property tax, that provides relief for everyone there.
00:21:12.255 --> 00:21:16.339
But it also, of course, means a vast array of new taxes that everyone will be paying as well.
00:21:16.736 --> 00:21:25.381
So as we're wrapping up here, Jared, uh, why is the property tax despite being so unpopular, as we've talked about the most stable, fair and growth friendly option that we have?
00:21:25.580 --> 00:21:30.560
The property tax, as we've discussed, is on largely fixed immovable assets.
00:21:30.621 --> 00:21:31.310
You cannot move your.
00:21:31.740 --> 00:21:32.221
Land.
00:21:32.371 --> 00:21:34.290
Um, you can choose where to build structures.
00:21:34.290 --> 00:21:41.671
You can choose some of these things, but the fact that it's a fairly fixed asset means that there will be fewer behavioral responses to it.
00:21:41.941 --> 00:21:47.280
Also, the fact that, as we've discussed, it better passes the benefit test means that.
00:21:47.480 --> 00:21:56.810
You're getting more for your money when you're paying more, uh, in a way that's not always true of the sales tax or the income tax, and therefore you're more willing, you may not like it.
00:21:56.961 --> 00:21:59.421
I mean, none, none of us really likes paying taxes.
00:21:59.421 --> 00:22:08.090
But when you look at the alternatives, you may find that your willingness to pay that as higher, even if you do complain about it, um, you know, certainly we see that with businesses.
00:22:08.090 --> 00:22:10.340
We see it with a lot of individuals where they locate.
00:22:10.340 --> 00:22:13.131
This is what, you know, economists call revealed preference.
00:22:13.191 --> 00:22:21.330
Um, you know, because you have your revealed preference of you actually do as opposed to your stated preference of what you dislike.
00:22:21.330 --> 00:22:23.671
You can say, I don't like property taxes.
00:22:23.671 --> 00:22:24.810
I don't want to pay them.
00:22:24.990 --> 00:22:35.280
Your revealed preference is sometimes you're not going to the lowest property tax jurisdiction in the same way that you might go to a lower tax regime for income taxes because of what the property tax is doing.
00:22:35.760 --> 00:22:37.020
And then finally.
00:22:37.401 --> 00:22:41.361
There is a local responsiveness to this tax that you don't have with others.
00:22:41.780 --> 00:22:44.421
When you don't like that your property taxes have risen.
00:22:44.691 --> 00:22:53.540
You can go to city council, you can go to your county board of supervisors or commissioners or whatever you have, and you can complain about this and you may have a real impact on them.
00:22:53.740 --> 00:23:01.060
If the state takes over this authority with a higher income tax or a higher sales tax and they allocate this, it's going to be way harder.
00:23:01.435 --> 00:23:18.655
For you to petition on this and even if you would be willing to accept lower government services or if even if your local government really cares about efficiencies and they want to be better with their money, they can't control what comes to them or what taxes are imposed on you to do this.
00:23:18.655 --> 00:23:24.316
So that local responsiveness piece is important and is fundamentally missing if we move away from the property tax.
00:23:24.516 --> 00:23:32.286
All right, well, before we sign off, if you have any burning questions on tax, you can send them our way or drop a comment on YouTube.
00:23:32.286 --> 00:23:35.526
You can email us at podcast@taxfoundation.org.
00:23:35.766 --> 00:23:38.586
You can slide into our dms at Deduction Pod on Twitter.
00:23:38.786 --> 00:23:41.276
Thank you so much for listening, and thank you, Jared, for being here today.
00:23:41.476 --> 00:23:41.865
Thank you.
