The devastating news has hit again, as it does around this time every few years. Sometimes, the media deliver it somberly, like casualty reports from a distant battlefield, with photo spreads of depressed Americans shaking their heads in despair. Other times, it's delivered like a call to arms, quoting angry citizens demanding that their government do something to alleviate their suffering.
No, it's not news of war, disease, poverty or crime. The terrible news is that . . . property values are increasing.
David Brunori takes your questions on Monday, February 14 at 2 p.m.
That's right. This collective unhappiness is a reaction to the property tax assessments going out around the area, informing people that -- gasp! -- their houses are worth more. Mine certainly is. The assessed value on my house in Northern Virginia is up some 70 percent over what it was three years ago.
I, for one, am celebrating. But so many other people seem suddenly to have forgotten that this is a good thing. I know that lots of us don't view purchasing a home the same way we view investing in the stock market. But the economic effect is just the same. If you buy a house for $250,000 and it doubles in value in a couple of years, you've just made a remarkable return on your investment. If it doubles again, you could be a millionaire. You can sell your house for a substantial (and, for most Americans, a tax-free) profit. You can borrow against it on favorable terms. You can leave a substantial inheritance to your loved ones. You are -- in short -- rich.
Yet this decidedly good news is invariably spun into a very depressing tale, with a familiar, dreaded villain: the property tax. Once those assessments come out, all we can talk about is how we'll have to shell out more for property taxes. Yes, there are some homeowners, particularly older ones on a fixed income, who struggle to absorb a bigger tax bill. But that's why many state have caps of various sorts to help ease their pain.
The rest of us, amid our complaining, lose all focus on the upside. Yet our fear and loathing of the property tax is largely unwarranted: It is, in fact, the ideal way to raise money for local government services.
Unfortunately, not everyone agrees. The property tax has long been among the most unpopular ways of raising revenue, largely because it's so visible. You can see how much your assessment has risen each year, and how much you'll have to pay. If you've paid off your mortgage and no longer pay your property tax in monthly installments, you get a large tax bill every year -- lots of Americans used to get them right before the holiday gift-giving season. Who appreciates that? And the system was plagued for much of the last century by shoddy administration, which meant that identical houses were sometimes assigned vastly different values. Though most of those problems have long since been addressed, the property tax remains an object of public scorn.
But it shouldn't. We all want well-staffed police and fire departments, well-paved roads, regular trash collection and, above all, good schools. The property tax is the one tax that provides a stable, continuous stream of revenue to localities to ensure that these services are adequately funded. To me, its visibility is a virtue -- even if it's often painful. Homeowners know exactly what they're paying out, and they can see what they get in return. In this regard, the property tax is capitalized into your housing values; that is, your property's value goes up because of the services being provided as a result of the taxes you pay on your property. The correlation between good public services and high property values is no coincidence. Just ask any real estate agent.
From state to state, there are wide variations in the taxes levied by local governments. New York and Connecticut have among the highest per capita state and local tax burdens in the country. Alabama and South Carolina have among the lowest. Guess what? New York and Connecticut spend the most money per capita on public services, while Alabama and South Carolina spend the least. Most people choose where they want to live. I live in Fairfax County, and I pay a lot in property taxes. But we have one of the best public school systems in the nation, and safe streets. I could move to a place with lower taxes, but I like what I'm getting for my money. So do lots of other folks. Despite all the grumbling about property taxes, we don't see a trail of vans heading out of the D.C. area to lower-tax -- and lower public service -- environments.
The property tax is simple to administer and to pay. We don't spend a lot of time on it. There are no forms to file, and no accountants need be hired. And it can't be evaded. This helps minimize the government's administrative costs. But honest taxpayers should appreciate it as well.
We rarely think of these virtues, though. Instead, opponents continue to demonize the tax and call for more limitations on local governments' ability to levy it.
But look at the results of that approach. Lots of states have decimated their property tax systems. California's Proposition 13, which was passed in 1978, was the granddaddy of the movement to restrict the tax. On its heels, 43 more states enacted some form of property tax limitation. While politically popular, the results in California have been devastating for local government, and particularly hard on the state's once-excellent public school system. After Proposition 13 came into force, per pupil spending in the state, usually a good measure of school quality, fell from fifth in the nation to 40th. Test scores dropped and private school attendance skyrocketed.
There is no economic justification for limiting property tax rates and assessments. Such limits keep revenue artificially low and merely shift the burden of paying for government to other types of taxes, such as state income and sales taxes. Indeed, without a strong property tax, local governments are at the mercy of state (or in the case of the District, federal) aid to pay for fundamental services, which virtually guarantees that local government services will be underfunded. The politicians in Richmond and Annapolis, no matter how well-meaning, simply won't spend as much as we would like on our local services. We should pay for them ourselves. And lest we forget, all state and federal money comes with strings attached. The lawmakers who give local governments money also like to tell them how to spend it.
The next reaction to rising property taxes is usually to propose larger homestead exemptions, which allow homeowners to exempt a portion of the value of their residences from taxation. But larger homestead exemptions, of the type that Virginia legislators are proposing, do nothing but reduce local tax revenue and provide relief to rich folks living in mansions along the Potomac, who get the tax relief from homestead exemptions just like everybody else, even though they probably don't need it.