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Which Is the Unfairest Tax of Them All?

by Dennis Jacobe

Six in 10 Americans say the income tax they paid this year is fair, according to an April 4-7 Gallup Poll*. But when asked which tax is the worst, or least fair, tax they pay, 1 in 3 Americans point to local property tax over federal income tax, Social Security tax, state income tax, and state sales tax. This is bad news for local governments and public education systems, which remain highly dependent on local property taxes as their major source of revenue.

More importantly, recent economic trends suggest the public's disgruntlement will only grow as local property taxes are likely to increase in the months and years ahead. Could this mean another property tax revolt?

The Worst Tax

One in five Americans (20%) say the federal income tax is the most unfair form of taxation, while 14% each identify the state sales tax and state income tax, and 12% name Social Security taxes. In sharp contrast to these percentages, 35% of Americans -- nearly twice as many as for any other tax -- say local property taxes are the most unfair.

Necessary Evil

In economic theory, property taxes have little to recommend them on equity grounds; they vary widely across the country, raise significant questions about assessed values versus real values, and can impact the optimal allocation of investment dollars to real estate in the United States.

On the other hand, many fiscal theorists tend to view local property taxes as a necessary evil in terms of the entire U.S. tax structure. They argue that property taxes: 1) have the advantage of being direct taxes that are hard to shift to other taxpayers; 2) are largely predictable in advance; 3) are usually identified by the specific local needs they are used to address; and 4) are determined at the local government level. Probably most importantly, local property taxes are the only real source of revenue that federal and state authorities leave to local governments as a major funding source.

A Growing Problem

The reason property taxes tend to be most difficult for the average taxpayer to handle is the fact that it's a wealth-based tax, rather than an income-based or expenditure-based tax. So when housing values soar, as they have during recent years, the value of homeowners' properties increases, as do their property taxes. However, this appreciation in asset values doesn't provide homeowners with added realizable income, and the appreciation of home values is not treated as current income for other federal or state tax purposes.

As a result, homeowners are being required to add to their monthly housing payments to pay increased property taxes, even if their incomes remain stagnant or decline. At the same time, increased real estate taxes are causing monthly payments required to buy a home to increase for first-time homebuyers. Given this context, it is not surprising many Americans feel property taxes are unfair.

In addition, property taxes help pay for local services, including public education. During recent years, many local areas have experienced a flood of new residents because of illegal immigration. Increasing the property taxes to pay for these externalities, which are not controllable at the local level, also generates a perception of unfairness.

Finally, as the population ages, the number of older "empty nesters" and retired couples is increasing. These older Americans may feel it is unfair for them to have to pay for many services they do not use. Even more importantly, many retired people living on fixed incomes may feel they are being pushed out of their homes as property taxes eat up an ever-growing share of their income.

A Property Tax Revolt

Unfortunately, many of the underlying trends creating pressure for higher property taxes are unlikely to dissipate. There is no real national immigration policy, so local communities seem destined to face the challenges of increased service needs on their own. The baby boomers are approaching retirement, so the issue of paying increased real estate taxes on a fixed income is likely to grow. And while housing values seem to be increasing at an excessive rate, many people will continue to live in homes they could not afford to buy at today's prices even if the current housing boom takes a breather.

Many years ago, surging real estate taxes led to a property tax revolt in California. With one in three Americans currently viewing property tax as the most unfair form of taxation, and their property tax burden likely to increase in the coming years, another revolt may become a reality in the not too distant future. 

*Results are based on telephone interviews with 507 national adults, aged 18 and older, conducted April 4-7, 2005. For results based on this total sample, one can say with 95% confidence that the maximum margin of sampling error is ±5 percentage points.

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