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Property Tax Analyses

© Allen C. Goodman, 2015

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Analyzing the property tax

• If we look at land, labor, and capital, the property tax is a tax on plant, land, and equipment, but not on labor.

• As a result property tax will be borne by– Owners of the property and/or– Consumers of the goods that are made by the taxed

factor – most often housing.

• Much of the analysis comes from an important (but almost entirely unreadable) article by Peter Mieszkowski, “The Property Tax: An Excise Tax or a Profits Tax,” Journal of Public Economics, 1972

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How Mobile is Capital?

• From town to town, ultimately pretty mobile.

• For the country as a whole, possibly not very mobile.

• What does this mean?

Suppose the supply elasticity of capital is 0!

Suppose the supply elasticity of capital is 0!

S% return

Amount of Capital

D = MPcapital

Income from Capital

r0

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If we impose a national property tax?

• Effective demand shifts down (same as with an excise tax).

S

Amount of Capital

D = MPcapital

Income from Capital

r0

(r0-t)• Who pays the tax?• This is a gen’l

equilibrium problem.

TAX

Why?Why?

Why this

way?

% return

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We don’t have a national property tax … but

• Suppose we have 1000 municipalities and none of them impose a property tax.

• Now, suppose that one of them (Southfield) imposes a 2% property tax.

• We want to look at Southfield … and at the rest of the world.

• What happens to capital in Southfield … and what happens elsewhere?

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Southfield … and elsewhereSouthfield

LR Supply, why?

Demand

Amount of Capital

LR Supply, why?Demand

Amount of Capitalb0 B0

After-Tax Demand

1000

01

ii

b B

r0

% return% returnElsewhere (1000 communities)

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Where does the capital go?Southfield

LR Supply

Demand

Amount of Capital

Elsewhere

LR Supply

Demand

Amount of Capitalb0 B0

After-Tax Demand

Everywhere Else!Everywhere Else!

B1

b1

r0

% return% return

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What has happened?Southfield

LR Supply

Demand

Amount of Capital

Elsewhere

Demand

Amount of Capitalb0 B0

After-Tax Demand

B1

b1

Return to capitalwent up a LOTin Southfield

This is an excise tax

effect!

Return to capital went

down by0.02/1000

Elsewhere.

LR Supply

Prices of items made

with capital in Southfield

a lot.

Prices of items madewith capitalelsewhere

a little.

r0

r0+0.02

r0-0.00002

% return% return

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Remember

• This was only 1 city in 1,000.• Suppose a second city passes a 2%

property tax. Big excise tax there; little capital tax

elsewhere.• Suppose eventually that every one of them

passes a 2% property tax.• What do you have? A national property

tax!

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What has happened?Southfield

LR Supply

Demand

Amount of Capital

Elsewhere

Demand

Amount of Capitalb0 B0

After-Tax Demand

B1

b1

(r0– 0.02)

Allocation of capital isthe same as at the beginning.

Return is 2% lower!

LR Supply

% return% return

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So … what do we have?

• The tax differentials between jurisdictions (e.g. Southfield, Farmington Hills) function as excise taxes (if there is a “national” property tax of 2%, then a jurisdiction w/ taxes of 3% will incur excise tax effects).

• The overall weighted property tax functions as a national tax on capital and land.

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Incidence

• Incidence depends on:– Excise tax effects (probably somewhat

regressive)– Capital ownership effects (probably somewhat

progressive).

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Is Property Tax Progressive, Regressive?

• This has long been debated.

• The “traditional” view was the property tax as an excise tax.

• If so, it is passed forward to the purchasers of the goods that are produced.

• If this is the case, it might be thought to be regressive. Why?

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Purchase of taxable goods relative to income

• If income = y, and goods expenditures are pq, then property taxes add some percentage t to that.

• Suppose X = a + by.• Tax = tX = t * (a + by)

Income, y

Taxable Goods Expenditures, pq = X

X = y

X = a + by

• As y , X/y , or pq/y , or (1+t)pq . Taxes are tpq.

• Tax starts as big proportion of income and falls.

Tax = tX

Slope = Tax/ySlope as y

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As a capital taxTable 14.1

Pechman's Analysis of Effective Property Tax Rates

Burden on Burden onFamily y log (income) Cap Own. Consump Total

2.5 0.3979 1.0 7.9 8.97.5 0.8751 0.6 3.0 3.612.5 1.0969 0.9 2.4 3.317.5 1.2430 0.9 2.1 3.022.5 1.3522 1.0 2.1 3.127.5 1.4393 1.2 2.1 3.340 1.6021 1.4 2.2 3.675 1.8751 2.2 2.3 4.5300 2.4771 3.9 2.2 6.1750 2.8751 5.2 2.2 7.41500 3.1761 5.8 2.3 8.1

• With the recognition that property tax may be a tax on capital, the progressive/regressive analysis also comes to rest on ownership of capital.

• If capital ownership as income , then property tax has progressive elements.

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As a capital tax• With the

recognition that property tax may be a tax on capital, the prog/reg analysis also comes to rest on ownership of capital.

• If capital ownership as income , then property tax has progressive elements.

% Burdens on Capital and Consumption

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50

Log Income

% B

urd

en Cap Own.

Consump

Total

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… and there’s the benefit view

• We talked about how if property taxes finance benefits, maybe they are neither progressive or regressive.

• Supporters of benefit tax view point to Tiebout sorting.

• Supporters of capital tax view say that there aren’t enough communities to work for Tiebout sorting – certainly central cities don’t fall under this analysis.

Or …

https://www.google.com/search?q=floor+wax+dessert+topping+snl&oq=Floor+wax+desert+topping&aqs=chrome.2.69i57j0l3.15176j0j7&sourceid=chrome&espv=210&es_sm=93&ie=UTF-8

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Who pays?

• Carroll and Yinger (1994) look at $1.00 increase in city property taxes used to produce $1.00 of services for renters.

• They find that landlords bear between 70 and 91% of the increase because tenants are relatively more mobile than landlords.

Is the Property Tax a Benefit Tax?  The Case of Rental HousingRobert J. Carroll, John YingerNational Tax Journal, Vol. 47, No. 2, June 1994, pp. 295-316.                     http://ntj.tax.org/

Who Pays?

• Jennifer Gravelle (2007) has examined the tax rates implied by the capital-tax view.

• She estimates that the national effective rate of tax on capital in the U.S. associated with property taxation is on the order of 1.49 to 1.65%, where the variation depends on certain assumptions concerning imputation of various shares of the tax.

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More Gravelle

• She also finds that the excise tax effects have little impact on the progressivity of the tax and that

• “... under the new view of property tax incidence it is fair to conclude that the property tax should be viewed simply as a tax on capital income” (p. 889).

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Gravelle, Jennifer 2007. Who pays property taxes? A look at the tax effects of property taxes across the states. State Tax Notes46 (December 24): 887-890.