Taxing Property Like Income Does Not Respect Property Rights

March 2, 2020   Robert Gmeiner

  • Property, Markets & Trade
  • Blog

It is reasonable to view property taxes as a direct infringement of property rights.  After all, if you don’t pay the tax, the government will take your property.  Setting this aside, property rights in the United States are pretty secure in most respects, at least compared to much of the world.  Property taxes ought to be, and usually are, a simple matter.  The property is assessed a certain value, a tax rate has already been established, sometimes by multiple jurisdictions, and the tax bill is easy to compute.  Procedures exist for disputing the assessed value and tax rates are set according to political rules.  Nowhere does income earned by the property or by the property owners apart from the property affect the bill, except for some reasonable abatement programs to keep retirees from being taxed out of the homes as they appreciate in value.

Some measures are being taken to let income factor into the valuation of property.  Those that have garnered the most attention are efforts to stop “dark store appeals” of assessed value.  The logic behind a dark store appeal is that, if all comparable business properties are vacant and not worth much, the business property that is not vacant should be taxed like its peers.  This seems reasonable because value should be assessed based on market value.  Municipalities, fearing a loss of revenue, have pushed back, arguing that the non-vacant property is worth more than others because it produces more value than the others and the owner treats it as such.  This is ridiculous because basic economic theory dictates that one only buys something, or keeps it after buying it, if he or she values it more than others.  Using the municipalities logic, market value would never be a good metric for valuing property.  Compounding the problem, individuals’ and firms’ private valuations are not transparent and these owners have no incentive to tell the truth and risk a higher tax bill.

Linking property value to income is not unique to business properties.  The proposed property tax reform by Bill de Blasio has been lauded by the New York Post, the same newspaper that has called for his ouster.  The Post finds one serious flaw in the tax proposal in its plan to link a homeowner’s residential property tax bill to household income, claiming it opens a Pandora’s box.  The Post further points out that it will encourage property owners not to increase their income and possibly even to hide it.

Why does treating property like income disrespect property rights?  The punishment for not paying property taxes is to lose your property.  This is enough of an infringement.  If your income goes up, you should not have to pay more to keep what you already own.  If you don’t pay your income taxes, your money gets seized and your wages can get garnished, but you don’t lose your house.  If property is going to be taxed, it ought to be taxed as property.  California, for all of its flaws, has done remarkably well with this by prohibiting positive reassessment of value at times other than when a home is sold (with some minor nuances) – your property taxes in California are based on what you paid for the house.

Dark store appeals have a counterpart in income-based property taxes for residences.