The Affordable Property Tax Cap

Taxes pay for public services. Public services costs need to be covered. State budgets need to be balanced.  

In New Hampshire, the tax debate has been focused on the income tax ban amendment.  The high support for this  amendment ensure a continued reliance on property taxes by this state.   

Deciding how we collect our taxes is as important as deciding how much tax to collect.  Tax collection should be low cost and easy to do. Taxes should be  fair, ensuring that citizens are willing to contribute. And taxes should be economically efficient.  

Collection of income taxes are relatively easy and low cost, especially if the employer or the financial institution ensures early payment.  Income taxes can be fair if they are differentiated based on ability to pay. However, mobility and globalisation increasingly limit the ability of governments to monitor and collect incomes. This is particularly true for corporate income and high income individuals, who can use off shore accounts, multiple residencies and transfer pricing to minimize tax obligations. But its not just the 1 percent.  Swiss banking secrecy is used to hide legal and illegal gains.  Cash payments create a shadow economy for lower incomes.  

Economically, taxing employment discourages employment, especially if capital is taxed at a lower rate. Taxes  discourage whatever they are levied on. Sometimes that's on purpose.  “Sin taxes”  like those on cigarettes and alcohol increase prices, thereby discouraging the use of those substances. But in the case of withholding and income taxes, its an important factor in encouraging the replacement of people by machines. And a key factor by which countries compete to attract investors. Competition that creates a race to the bottom in public service provision. 

Property tax has significant advantages. It's also easy and low cost to collect.   Public records provide all the necessary information. And avoiding payment is difficult since the collateral can easily be found.   

Property is all about location. You can’t offshore being close to Boston and the White Mountains.  Geography can’t be moved.  This provides governments with a steady and predictable source of income to pay for the services that keep their communities  vital, competitive and beautiful.  Property taxes provide a hedge against the effects of globalisation. 

Property taxes can be considered a fee for service.  In the case of property tax the services include  maintenance of schools, roads and utilities.  Good schools are known  to increase the value of properties.  Houses in areas without poor infrastructure have lower value. Tolls and other consumption taxes have a similar rational. That makes them fair, in terms of paying for what you get. 

Economically, property taxes discourage the increased use of property for residential use.  Space is a scarce resource. We all benefit from the continued availability of non-residential space.  For recreation, for nature, and for the productive use of our soils. 

But as the Concord Monitor pointed out, property taxes have this fairness problem. In NH, high income earners pay as low as 2 percent of their income in property tax versus an average of 6 percent, and as much as 8 percent, for low income families. Having people in bad years pay a higher rate of tax then people who are doing well seems inequitable.

However that problem can be solved by capping the property tax at the average  6 percent  of income.  Such an affordability cap would apply to property taxes on the primary residence with a value of $1 million or less. 

An affordability cap doesn’t have to take a lot of extra work for taxpayers. It would be up to the state to demonstrate the ability to pay the tax. The government can use available federal income tax  and withholding tax information to provide owners with their adjusted tax assessment.  Such estimates are already provided by tax authorities in among others Finland, Singapore and the Netherlands.  Taxpayers keep the right to dispute this estimate.  

An affordability cap on the property tax is similar to the cap on deductions proposed by the GOP in the last elections. It maintains the special strength of the property tax system, while ensuring its affordable for all home owners.