Six in 10 Americans say the income tax they paid this year isfair, according to an April 4-7 Gallup Poll*. But when asked whichtax is the worst, or least fair, tax they pay, 1 in 3Americans point to local property tax over federal income tax,Social Security tax, state income tax, and state sales tax. This isbad news for local governments and public education systems, whichremain highly dependent on local property taxes as their majorsource of revenue.
More importantly, recent economic trends suggest the public'sdisgruntlement will only grow as local property taxes are likely toincrease in the months and years ahead. Could this mean anotherproperty tax revolt?
The Worst Tax
One in five Americans (20%) say the federal income tax is themost unfair form of taxation, while 14% each identify the statesales tax and state income tax, and 12% name Social Security taxes.In sharp contrast to these percentages, 35% of Americans -- nearlytwice as many as for any other tax -- say local property taxes arethe most unfair.
Necessary Evil
In economic theory, property taxes have little to recommend themon equity grounds; they vary widely across the country, raisesignificant questions about assessed values versus real values, andcan impact the optimal allocation of investment dollars to realestate in the United States.
On the other hand, many fiscal theorists tend to view localproperty taxes as a necessary evil in terms of the entire U.S. taxstructure. They argue that property taxes: 1) have the advantage ofbeing direct taxes that are hard to shift to other taxpayers; 2)are largely predictable in advance; 3) are usually identified bythe specific local needs they are used to address; and 4) aredetermined at the local government level. Probably mostimportantly, local property taxes are the only real source ofrevenue that federal and state authorities leave to localgovernments as a major funding source.
A Growing Problem
The reason property taxes tend to be most difficult for theaverage taxpayer to handle is the fact that it's a wealth-basedtax, rather than an income-based or expenditure-based tax. So whenhousing values soar, as they have during recent years, the value ofhomeowners' properties increases, as do their property taxes.However, this appreciation in asset values doesn't providehomeowners with added realizable income, and the appreciation ofhome values is not treated as current income for other federal orstate tax purposes.
As a result, homeowners are being required to add to theirmonthly housing payments to pay increased property taxes, even iftheir incomes remain stagnant or decline. At the same time,increased real estate taxes are causing monthly payments requiredto buy a home to increase for first-time homebuyers. Given thiscontext, it is not surprising many Americans feel property taxesare unfair.
In addition, property taxes help pay for local services,including public education. During recent years, many local areashave experienced a flood of new residents because of illegalimmigration. Increasing the property taxes to pay for theseexternalities, which are not controllable at the local level, alsogenerates a perception of unfairness.
Finally, as the population ages, the number of older "emptynesters" and retired couples is increasing. These older Americansmay feel it is unfair for them to have to pay for many servicesthey do not use. Even more importantly, many retired people livingon fixed incomes may feel they are being pushed out of their homesas property taxes eat up an ever-growing share of their income.
A Property Tax Revolt
Unfortunately, many of the underlying trends creating pressurefor higher property taxes are unlikely to dissipate. There is noreal national immigration policy, so local communities seemdestined to face the challenges of increased service needs on theirown. The baby boomers are approaching retirement, so the issue ofpaying increased real estate taxes on a fixed income is likely togrow. And while housing values seem to be increasing at anexcessive rate, many people will continue to live in homes theycould not afford to buy at today's prices even if the currenthousing boom takes a breather.
Many years ago, surging real estate taxes led to a property taxrevolt in California. With one in three Americans currently viewingproperty tax as the most unfair form of taxation, and theirproperty tax burden likely to increase in the coming years, anotherrevolt may become a reality in the not too distantfuture.
*Results are based on telephone interviews with 507 nationaladults, aged 18 and older, conducted April 4-7, 2005. For resultsbased on this total sample, one can say with 95% confidence thatthe maximum margin of sampling error is ±5 percentagepoints.
