The Side Effects of Property Taxes

Michael Lewyn's picture
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A recent article in the Economist suggests that property taxes are more pro-growth than other taxes, because property taxes are more stable than other sources of revenue.   Even assuming this is the case, property taxes have a variety of negative side effects that the article fails to consider.

Property taxes promote NIMBY (Not In My Back Yard) resistance to new housing.  If a housing development is unusually affordable, the housing will produce less property tax revenue than the rest of the housing stock.  Thus, the housing will (compared to more expensive housing) reduce the municipal tax base- which means higher taxes or fewer services for existing taxpayers. In such a situation, the municipality's residents have an excellent reason to oppose the development..  

But what if a proposed housing development is more expensive than nearby housing?  The new development may make all of the city or neighborhood's housing more valuable, thus causing the municipality to force everyone to pay more taxes.  Such a revaluation may be good news for neighbors who wish to sell out- but bad news for other neighbors who will have to pay higher taxes to stay in their homes. Thus, neighbors may rationally oppose the expensive housing as well, fearing that the new housing will cause them to be forced out of their homes by higher property taxes.

It follows that municipal reliance on property taxes leads to high levels of NIMBYism, which means less housing would get built than would otherwise be the case, which in turn leads to out-of-control housing prices.

In addition, property taxes tend to be extremely unpopular because they are often assessed in a lump sum (as the Economist article admits).  So a city dependent on property taxes is likely to have its revenues periodically reduced by tax revolts.  State-level politicians in particular have an incentive to buy votes by promising to reduce local property taxes, because if a city is forced to reduce services as a result, mayors rather than governors will suffer at the polls.  Is this a good thing?  I think not, because when one level of government makes decisions that another level can be blamed for, the public accountability that democracy rests upon is eroded.  Moreover, the public services provided by municipalities include the most obviously "basic" such as fire and police- so when state government tampers with municipal services, it tampers with public order. 

Michael Lewyn is an assistant professor at Touro Law Center in Long Island.
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