Tuesday, January 2, 2018

Property tax update

Every now again in writing a blog one puts down an idea that is not only wrong, but pretty obviously wrong if one had stopped to think about 10 minutes about it. So it is with the idea I floated on my last post that property taxes are progressive.

Morris Davis sends along the following data from the current population survey.

No, Martha (John) property taxes are not progressive, and they're not even flat, and not even in California where there is such a thing as a $10 million dollar house. (In other states you might be pressed to spend that much money even if you could.) People with lower incomes spend a larger fraction of income on housing, and so pay more property taxes as a function of income. Mo says this fact is not commonly recognized when assessing the progressivity of taxes.

Part of this is a bit misleading, because  income is a poor concept. Many people with low incomes have temporarily low incomes -- see my S-corp owners with losses from the last post -- and don't move every year to accommodate that year's income. Retired people have less income and own houses. Permanent income or consumption would be much better divisors. On the other hand, I would guess (despite just proving how dangerous it is to guess anything) that housing as a fraction of wealth is even smaller for people with high wealth than is housing as a fraction of income or consumption. There are just so many houses you can buy.

The full list FYI.

Mo's website  has a treasure trove of data by the way.

Let us hope that this does not set a pattern for the year. Now I have my resolution -- stop to think before posting!


  1. Interesting, and I would have thought otherwise also for obvious reasons, Who owns property? Especially in urban areas? And we are an urbanized nation.

    As my late Uncle Jerry used to say "Even if it is true, I still don't believe it."

    Still, national property taxes strike me as a good idea.

    The income (or payroll) tax is a tax on productive behavior, and also becoming easily outmaneuvered, due to offshore banking and entities, expert tax avoidance (75,000 pages of tax codes!) and exploding cash in circulation (now near $5k per resident, and some say actually most of it is in the US, and not in suitcases buried in Muscovite backyards).

    Bring on property taxes, pollution taxes, import tariffs, fuel taxes, and Pigou taxes, and start cutting payroll and income taxes.

    We have to investigate property tax incidence more closely. Something does not add up.

  2. "Progressive" meaning a higher percentage, is not so true as you show above.
    "Progressive" meaning that richer folk pay more, is probably very true, tho the absolute amounts are not shown.
    Eyeballing CA (upper bound): 13.5 * 180 = 2,430 3.5* 1100 = 3,850 2.1*2150=4,515
    Since I don't work as an economist, the absolute numbers are also interesting, and do show that the richer are "paying more".

    On wealth, if the property tax were divided by the after tax income - house payments, the ratio would go way up for the middle classes who do not yet own their houses but are paying huge payments -- while the low income folk who already own are paying far less, so their ratios are likely to remain close to the above chart.

    For many (most?) homeowners, their house equity is most of their net wealth.

    The interest deduction should be replaced by a straight 20% tax credit, up to a lifetime maximum of 10*median wage of prior year (~$50k now, $500k max) so it slowly goes up. Multimillionaire J. Kerry & J. McCain would have long since maxed out their house buying lifetime credit.

    Among econ distortions, the one helping working class folk join the middle class by buying a house is likely the biggest positive net externality program.

  3. You could argue that, in many cases, a portion of rent is actually paying the landlord's property tax. I guess (dangerous?) that if this were rolled into the numbers then property tax would be even less progressive / more regressive.

  4. Most localities have a homestead exemption that negates the first $X value of a house with $X usually being set such that the lower tiers pay much less in property taxes.

    The actual picture is very complicated. Non-rental businesses usually pay the most property tax. After that come low income renters (as the landlord just passes on tax as part of rent). Next are non-retired homeowners. Lastly retired folk usually pay these least as most localities also have an EXTRA exemption for anyone over 65.

  5. It even goes beyond housing being a necessity. California has some state specific effects due to Prop 13.

    A 2016 analysis by Trulia shows California cities with higher median home prices have significantly lower effective property tax rates (tax as a percent of market value). Palo Alto and Stanford have the lowest effective property tax rates in the state.

    Prop 13 in a sense locks in property taxes at sale. Areas with high house price appreciation and low turnover have lower effective tax rates. Furthermore, Prop 13 encourages lower turnover, especially in areas with higher appreciation.

  6. Also, in my experience, undeveloped land is generally significantly under-appraised by tax assessors (compared to what it confidently could sell for). Not sure if that's for some reason (like they don't want to encourage sale or development) - but in any case I would assume the rich own a lot more of the undeveloped land, so that makes property taxes even more regressive.

  7. Others have mentioned real tax code tweaks that make actual property axes paid more progressive. This probably does not change the picture too much in practice, and it still leaves property taxes as income regressive. (A feature that, say, a childless couple, may not think is the worse “inequity” of a system mainly aimed at funding education…So all basis for taxation are subject to criticism.)

    But how about this. Doesn’t the (income tax) code correct some of this regressive in property taxes by not taxing the owner’s imputed rent? The rental yields (median rent/median housing value) of low value properties are much higher than those of higher value properties. (The data is clear in cross state comps – compare mid-west cities to coastal CA cities. It is also valid within most markets.) In other words, the low income owner of a low value house, gets to exclude what would be an otherwise large component of his economic compensation. The marginal value of income-tax free living is greater to him than to the high income owner of a high value house.

  8. There are couple of other factors that should be considered in the context of property tax progressivity:

    First, property owners get a tax "break" with respect to state and federal income taxes in that they don't pay tax on the return from their property in the form of use. I'm not making any judgment about whether they should, but it seems clear that this encourages ownership of property rather than income producing assets that could be used to pay the rent for property.

    Second, higher real estate taxes may already have been bourne by the owners of the property when the taxes were instituted/increased rather than the current owners of the property. Higher taxes reduce the value of the property and thus the current owners may have paid less for the property because of a high tax rate.

    I realize there are a bunch of other things working in opposition to these effects, so I guess the main point is that this is complicated to evaluate-- in interesting ways!

  9. I have a "tough" question for Dr. Cochrane:

    Balanced US federal budgets ever again? And what does that mean for monetary policy "in the real world"?

    Think about this: We have a GOP Congress, and the second-longest running economic expansion in US history (and still going), and the highest corporate profits ever (absolutely and relative to GDP), and a 17-year low in unemployment.

    The GOP just voted to add a couple trillion in additional fresh debt on the already accumulating federal debt.

    If the GOP does not balance the federal budget now, when would they? It doesn’t get any better than this.

    The last GOP president who balanced the federal budget was……….Eisenhower. And the Dems are worse (excepting Bill Clinton)!

    So…when you ponder about monetary policy, should one premise comments with, “Since the Congress will always run large federal deficits…..”

    Washington as Athens on the Potomac….but not the way we thought…yes,there is Grecian feeling about D.C….

    In this real world context, do helicopter drops make more sense than ballooning federal deficits?

    Or ongoing QE, ala Japan?

    Remember, the option of "fiscal responsibility" is off the table….

  10. I'd love for you to post how income taxes are similarly regressive. Just post along the X axis income level, and the Y axis, average income_taxes/net_wealth.

  11. Isn't the real question the incidence of the tax, not who formally pays it?

  12. So, property taxes are actually regressive. I was wondering why I had so much distaste for them.
    Not as bad as Maggie Thatcher's poll tax, though.

  13. This provides some support and show welfare effects: https://www.dropbox.com/s/dmvq394kpig1wbm/Working_paper.pdf?dl=0

  14. This does not only provide some support to the progressiveness. Shows welfare effects of abolishing the deductibility as well...


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