Property vs Sales Tax

[The Last Northerner]

Which do you prefer?

This question came up in the iSideWith and other places. I'll use California as an example.

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Basically it limits the growth of property taxes. Note this includes commercial property in addition to residential property. Old homeowners pay a proportionally lesser rate than new home buyers due to being indexed to the time of purchase. A property might rise 10% during a boom but their taxes do not.. The argument for it is it helps senior citizens with fixed incomes while opponents say it sucks tax dollars out of schools (which are partially funded by propety tax) and is responsible for the high cost of housing in California.

The counterpart to this is sales tax. Local governments need money and seem more willing to approve development of commercial areas to get more sales tax money due to limited property tax income. Critics say it further strains the housing market due to land being used for stores instead of housing and is more regressive to lower incomes.


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North Dakota's housing market has seen an increase in the last few years due to the oil boom. I've seen some pros/cons of sales vs property taxes increases/decreases. I'm curious to which you prefer or think is 'better'.

[muon2]

Property taxes do not have to be directly tied to the value of a property. For example in IL a unit of government levies property taxes for the whole district independently of the value of the property in the district. The assessed values of the properties are used to determine the share of the levy owed by each property. If a boom causes all properties to rise by 10% but the unit of government raises taxes by 4%, then each property would pay an additional 4%, not 10%. There's no windfall when property values boom, but there's also no relief when property values drop as they did during the Great Recession.

[Torie]

Property taxes do not have to be directly tied to the value of a property. For example in IL a unit of government levies property taxes for the whole district independently of the value of the property in the district. The assessed values of the properties are used to determine the share of the levy owed by each property. If a boom causes all properties to rise by 10% but the unit of government raises taxes by 4%, then each property would pay an additional 4%, not 10%. There's no windfall when property values boom, but there's also no relief when property values drop as they did during the Great Recession.

The tax amount is still tied directly to value, with just the rate bouncing around. There certainly should be a tax for property related services, at a minimum. How you otherwise raise revenue is open to discussion, but the sales tax is at once the most efficient, and the most regressive. Prop 13 in CA does indeed distort all of this, and with values rising faster than 10% per year, it discriminates against more recent buyers.

[muon2]

Property taxes do not have to be directly tied to the value of a property. For example in IL a unit of government levies property taxes for the whole district independently of the value of the property in the district. The assessed values of the properties are used to determine the share of the levy owed by each property. If a boom causes all properties to rise by 10% but the unit of government raises taxes by 4%, then each property would pay an additional 4%, not 10%. There's no windfall when property values boom, but there's also no relief when property values drop as they did during the Great Recession.

The tax amount is still tied directly to value, with just the rate bouncing around. There certainly should be a tax for property related services, at a minimum. How you otherwise raise revenue is open to discussion, but the sales tax is at once the most efficient, and the most regressive. Prop 13 in CA does indeed distort all of this, and with values rising faster than 10% per year, it discriminates against more recent buyers.

How is it directly tied to value? Suppose my city doesn't increase its levy. Then if all properties rise 10%, there is no increase in tax. I claim that under the IL system the assessment only determines how the pie is sliced, not the size of the pie. The size is set by the levy request of the local government.

Yes, it can be viewed as a moving rate determined by dividing the levy by the total value of a district, but that misses the fundamental difference between the IL system and the conventional view of property taxes where there is an established rate and the tax rises as a direct result of the rate times the value.


As to the OP question, I think that both taxes should be used as finance tools with an appropriate balance. Property taxes tend to be inelastic and sales taxes tend to be elastic. A mix provides natural growth during expanding economic times and secure revenue during recessions.

Both property and sales taxes can have problems in areas with many small jurisdictions. The revenue to those jurisdictions may be based on zoning decisions made decades before, resulting in unusual disparities that cannot be corrected by the local units in the present. The disparities can only be resolved by a regional entity collecting the tax and disbursing it to the smaller local units on a per-capita (or equivalent) basis.

[Torie]

Yes, the value determines how the pie is sliced. Under Prop 13 in CA, with the cap, value goes beyond pie slice size. But pie slice size is far more important than the amount of revenue raised. The amount of revenue raised works within relatively tight constraints. Value can make one pie slice three times bigger than another.

I agree about the disparity issue between jurisdictions (Hudson has the burden of a lot of property off the tax rolls, as the host to the regional hospital and county government, and a prison). There need obviously to be revenue sharing arrangements, as there are, and in a rather large scale, between poorer and richer jurisdictions, particularly when it comes to school funding, where the state moves a lot of money around. As to sales taxes, versus property taxes, versus income taxes, beyond all of that, and stability of revenue flow issues,  there still is the degree of progressively versus regressively issue. It has to be a factor considered in the mix.

I don't sound much like a Pub anymore do I? 

[muon2]

I don't see anything anti-Pub about saying that there is an ideal size to collect and distribute taxes. It's not always about downsizing, sometimes its rightsizing that is the best use of the taxpayers money.

Nor is it anti-Pub to say that units established centuries ago are inappropriate for some services given the changes in population over more recent decades. IL is stuck with over 7000 units of government because the small scale worked at one time but is now inefficient with taxes. Historically Pubs were seen as the group most supporting local control, and hence maintaining many units of government. Recently Pubs here (cf DuPage chairman Dan Cronin) have led efforts to consolidate or abandon some of the old units in the 'burbs.