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The Unpopular Property Tax

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In the U.S., most local governments levy taxes on real property, including land, commercial properties, and residential homes. These property tax revenues typically account for the largest source of funds to pay for schools, streets, roads, police, and other services.

Since taxpayers benefit from these services and infrastructure, you might think that people wouldn’t mind paying property taxes. However, a wide range of tax literature indicates the property tax is the least popular tax.

Reflecting people’s attitude toward property taxes, Figure 1 shows government’s share of tax revenues from property taxes declined substantially in the 1960s and 1970s and has remained relatively unchanged since 1980.

 

To account for a voter’s dislike of paying a property tax, there are many ways they can influence this rate.

They can vote to replace part of property tax revenues with a sales tax or income tax. A voter can also petition to put property tax limits on statewide referenda, making it difficult for the legislature or courts to reverse the limit—this is often called a “tax revolt.” California’s adoption of Proposition 13 in 1978 is an example of a tax revolt.

Why do people dislike the property tax?

All taxes impose a cost on the economy. For residential homeowners, the burden of a property tax is substantial, whereby property taxes are about 20 percent of a typical homeowner’s cost. From a recent report, Figure 2 shows that many homeowners throughout the Northeast and Midwest pay higher property taxes as a share of their house price.

 

The complexity of property taxes is also an issue. In Texas, there are more than 3,900 localities that impose property taxes, including school districts, counties, and special districts. Texas’ property tax burden has grown from approximately 1 percent of value in the early 1980s to nearly 3 percent today.

The rising burden from property tax is worse for the housing-rich but income-poor elderly homeowners. For example, elderly homeowners tend to move more often to reduce their property tax burden, which is an additional cost of owning a home for those who can least afford to move.

Interestingly, another reason voters hate property taxes is because they are more “salient.” A salient tax means that the burden is transparent, easy to understand, and hard to avoid. If paid directly, property taxes are found to be more salient compared with sales taxes applied at checkout or income taxes withheld from a paycheck.

This paper provides evidence this salience of property taxes actually matters. Despite an increase in tax salience for a property tax paid directly, about one-third of homeowners have their tax payments bundled with monthly mortgage payments, which is called tax escrow. Instead of writing a few checks every year, homeowners using an escrow account are less clear about their property tax payments, making the tax less salient and more complex.

Exploiting this variation in salience, the authors find that the more people pay in lump sums, the lower property taxes are likely to be. This means that when property taxes are more salient, they are lower and more likely to be subject to legal limits, which from Figure 2, is not the case across most of Texas.  

What does this mean for Texans?

With the Lone Star State’s complex property tax system that increases costs to homeowners and renters (property taxes are passed on by property owners in the form of higher rent), reduces incentives to invest in property and capital (the engine of a well-functioning economy), and distorts economic growth, it is time the Texas Legislature considers eliminating all local property taxes and replacing the revenue with a reformed sales tax.