The Income-Stimulating Incentives of the Property Tax

Mason Gaffney and Richard Noyes

[Chapter 8 of the book, The Losses of Nations, published in 1998; reprinted with permission of the authors]

1. Reputation of the property tax

IT WAS common practice in the 1990s to proclaim the unpopularity of the property tax in the United States.

Unpopularity, of course, is generic with taxes. Property taxes are levied in relatively large sums once, twice or at best only a few times each year, an inconvenience that may aggravate the attitude more so than for taxes that are candy coated . But is there something universally detrimental in this case? Or is the attitude fostered by the holders of large properties who find other taxes easier to escape? The architects of good government need to know.

The hard evidence supports the latter explanation But whatever the explanation the electorate s prejudice where it exists, is misconceived. The facts are clear enough. Where a large share of fiscal revenue comes from property taxes, individual income tends to be high. There is a clear propensity for the local economy to grow faster than in those states which are less dependent upon the property tax than on taxes linked to income or sales.

New Hampshire shows a strong and stable aversion to taxes on income or consumption (Table 8:1), and a strong preference for the property tax. It is the only state in the Union where more than half of all government revenue, both state and local, comes from the property tax. In fact, nearly two-thirds of all state/local revenue is from that source.

But that is not the only distinctive feature about New Hampshire. For example, it has been growing twice as fast as its neighbors - such as Maine and Vermont - and that difference needs explanation. Could there be a connection between the property tax and prosperity?

California's use of the property tax has diminished sharply since the change known by its enactment: Proposition 13. Its tax history has been more typical of the 50 states as a whole, during the two or three decades when the unpopularity claim emerged. Limited sharply in property tax use, it has turned of necessity to taxes on both sales and income. Its once vigorous growth rate has been slowed. Could there be a connection between the decline of the property tax and the slump in the state s economic prosperity?

The two states differ in other ways, too, so we have looked at a wider number of states, grouping them by a range of differences, in search of valid conclusions.

As unpopularity was charged against the property tax, voters came to oppose it sharply enough to make political leaders propose, as alternatives, new taxes on labor, industry, trade and money flow. The property tax, once the principal source of money to fund state and local governments, dwindled in the latter half of the 20th century. Having provided some 80% of all state-local revenue until the early 1920s, [it] was providing only 45% of that total in the mid- 1950s and had fallen to about 30 % at the start of the 1980s (Netzer 1983: 222).

Some states shifted away from it sooner than others. New Hampshire refused to make the shift at all. The results make it possible, by a comparison of tax structures in the 50 United States, to draw some conclusions about cause and effect.

Table 8: 1
Rates of Three Major Taxes
Selected States, USA, 1992: %

	Individual income tax (range)	Corporation income tax (range)	General sales taxes
New Hampshire	(a)	8.0	0.0
California	1.0 - 11.0	9.3	6.0
Maine	2.1 - 9.89	3.5 - 8.93	6.0
Vermont	(b)	5.5 - 8.25	5.0
New Jersey	2.0 - 7.0	9.0	6.0
New York	4.0 - 7.87	9.0	4.0
Pennsylvania	2.95	12.25	6.0

SOURCE: Tanzi 1995:21, Table 3-1, which drew from data furnished by the Advisory Commission on Intergovernmental Relations (ACIR).

Note (a):

New Hampshire has only a twilight shadow of a personal income tax. A 5% tax on income from interest and dividends is a left-over from the earlier revision of personal property taxes on securities. Local assessors had found it hard to keep up-to-date information on them, so the state imposed the tax on income. The total income subject to it in 1995 was only 2.5% of all individual personal income.

Note (b):

Vermont's income tax was pegged at from 28% to 34% of federal income tax liability. California s basic state rate for sales taxes is 7% (1997), but counties may add to it. The top combined rate in San Francisco county is 8.5%. Ever since Proposition 13, sales taxes have risen to make up for the losses.

There is no clear pattern to the new taxes adopted by states as the property tax waned. Texas, Wyoming, South Dakota, and Washington are among states which have no personal income tax but do have general sales taxes. Oregon has no sales tax, but a personal income tax ranging from 5% to 9%. Several states have corporate income taxes. Most states have added many Sundry nuisance taxes like a surtax on hotel rooms, tuition hikes at state universities, sin taxes, etc.

All things taken into account, New Hampshire s state tax burden is the lightest for any of the 50 states when measured as a percentage of per capita income. When local taxes are included, the total burden moves up a little in the rankings, but the essential fact is that those local taxes are on property. And by a number of different measures, the state is among the most prosperous states.

Could this correlation be due to its heavy dependence on the property tax, coupled with a low dependence on other taxes?

California, by contrast, has been running down its use of the property tax as a revenue-raiser. Can we accurately see, as a result of this, the relative collapse of its economic prosperity and the quality-of-life of its citizens?

Figures published by ACIR in its two-volume Significant Features of Fiscal Federalism (SFFF) for 1994 provide some data that will help. They are for the year 1992.

Since the search is for evidence of cause and effect, it is necessary to be concerned with relationships. This explains the fact that many of the numbers in what follows are ratios: a measure of relationship.

It makes sense to examine the relationship between the property tax and all state and local taxes, taken together. We start at the top and at the bottom of the list, with New Hampshire and Alabama, comparing them with the average for the nation. And because the population of the 50 states varies so greatly, it is not total dollars that interest us, but dollars per capita.

Table 8:2
Taxes Per Capita ($)

	Property Tax	All state/local taxes	Ratio
United States	699	2178	.32
New Hampshire	1344	2098	.64
Alabama	174	1435	.12

The top and bottom are highly suggestive. They accurately symbolize our more general findings. However, we need to look at the figures for more states, and to the ratios between more of the factors under consideration. We start by grouping those states with high ratios of property tax use and those states with low such use ratios, so as to compare those highs and lows, and other factors (Table 8:3).

The top five states in this Property Tax/All Taxes ratio have higher per capita incomes than the bottom five states. It means extra columns; the three in Table 8:2, plus one for personal income (PI) per capita, and another for the per capita income ranking within the whole country.

Table 8: 3
States Ranked by Property Tax per capita ($)

TOP FIVE	Property Tax	All Taxes	Ratio	Income Per Capita ($ 000s)	Rank
New Hampshire	1344	2098	.64	21.9	8
New Jersey	1268	2926	.43	26.1	2
Connecticut	1198	3061	.39	27.2	1
New York	1178	3534	.33	24.1	3
Alaska	1069	3835	.28	22.1	7
(Unweighted Mean)	1211	3091	.41	24.3	4.2
BOTTOM FIVE
Louisiana	277	1654	.17	15.9	45
Arkansas	261	1518	.17	15.6	46
Oklahoma	243	1635	.15	16.4	42
New Mexico	217	1788	.12	15.5	49
Alabama	174	1435	.12	16.5	41
(Unweighted Mean)	234	1606	.15	16.0	44.6

Source: ACIR, 1994, Significant Features of Fiscal Federalism (SFFF). Data refer to 1992.

The New Hampshire five have high property tax per capita as the sum of two reasons: first, higher taxes per capita; and second, a higher ratio of property tax to all state and local taxes. Of the two reasons, the second is stronger. Here are the ratios for the means above: first, 3091/1606 = 1.92; second, .41/.15 = 2.73

Do the top five levy higher taxes per capita because of higher per capita income? The ratio for the means here are 24.3/16.0 = 1.52. This direction of causation would require that a 52% rise of income per capita caused a 92% rise of all taxes, and a 173% rise of property taxes. That seems extreme, and therefor implausible. It is more plausible that the heavier dependence on property taxes caused the rise of personal income per capita. We explore this further below.

Part 2