David Schleicher (Yale University – Law School) has posted The Great American Property Tax Freak Out on SSRN. Here is the abstract:
There has been a lot of news over the last two years, so it is understandable that neither the mass media nor the legal academy has focused on what is happening with the steady mainstay of local government finance, the property tax. While attention was elsewhere, though, the property tax has gone through a revolution, one nearly as profound as the great property tax revolt of the late 1970s and 80s that led to profound changes like California’s Proposition 13 and Massachusetts’s Proposition 2 1/2. In the last three years, a number of states have substantially reformed their property tax systems, providing huge tax benefits to owner-occupied homes and shifting the burden of paying for services like schools and police to commercial property owners (including rental apartment buildings), to other local taxes, and to state funding, which itself largely comes from sources like sales taxes and income taxes. A few, including Florida, Ohio, North Dakota, and Texas, have considered going further, either completely abandoning property taxation for owner-occupied housing or even abandoning property taxation entirely.
This Essay tries to explain why we have seen such radical changes in property tax systems around the country. It argues that, just as with the property tax revolt of the 1970s, the driving force was rising property values and our homeowner-dominated state and local politics. One might think that homeowners would be happy that their largest asset has appreciated substantially in value, as homes did, particularly in suburbs, in the post-COVID period. But because property taxes are wealth taxes, property owners have responded to their increasing wealth with political anger, pushing shifts in property tax policy, often leading to increasing rates on commercial property owners who have seen declining values during the same period.
More importantly, the Essay seeks to establish the policy implications of these radical transformations in property taxes. It argues that these reforms shift the property tax from a tool homeowners use collectively to provide for locally-wanted services towards a more standard form of redistributive taxation, charging commercial property owners to pay for services for homeowners. Further, they will lead to greater state authority over local governments, less stable funding for local governments (but also less tax foreclosure in recessions), and stricter zoning controls (but more building of homes where it is legal). Perhaps most notably, these property tax reforms will lead to higher housing costs, and thus constitute a substantial transfer of wealth towards people who already own homes and have already seen their net worth increase substantially in the post-COVID housing market.
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