Thursday, August 5th, 2010

The Demographics of Property Tax Revolts

We see in a lot of places – Indiana, Illinois, elsewhere – various tax revolts centered on property taxes. Property tax caps are a frequently proposed policy these days. Gov. Christie in New Jersey has just proposed them, for example.

A friend of mine had an interesting take on this related to demographics. He observed that there has been an increase in anti-property tax sentiment as the population has aged. Think about the various major categories of things that are taxed to raise funds at the state and local level – income, consumption, property. People who are coming up on retirement are going to see drops in income and consumption, but they own lots of taxable property. In fact, they probably have more wealth, much of it in the form of taxable property, than the younger families who are out buying clothes for their kids, furniture for their growing families, etc. Younger people are also those who are more likely to see their incomes go up, not down over time. Older households are also less likely to consume services, such as schools, typically funded by property taxes.

This person suggested that property tax caps are basically tax shelters for older people, and act to shift the tax burden towards the young. I’d be very interested to see some actual research around this topic, as the matter of demographic impacts on public policy, apart from some national level concern over entitlements, hasn’t gotten much airplay. It strikes me that the personal preferences and spending/saving behavior of people changes quite a bit over the course of a lifetime, and appropriately so. If that’s true, why wouldn’t there be policy preference changes as well? And what might that mean for an aging society? It’s an interesting matter to think about.

Topics: Demographic Analysis, Public Policy

18 Responses to “The Demographics of Property Tax Revolts”

  1. Jim Russell says:

    Related, the older demographic cohorts tend to be more concerned about brain drain. I think one of the reasons is the anger over paying for schools only to have the kids move away.

  2. Paul says:

    I’d add a quick observation from the ancient (1978) “proposition 13” property tax revolt in California which:

    “lowered property taxes by rolling back property values to their 1975 value and restricting annual increases in assessed value of real property to an inflation factor, not to exceed 2% per year and prohibited reassessment of a new base year value except upon (a) change in ownership or (b) completion of new construction.”

    The benefits for older owners seem rather obvious, and this occurred at a time when California was still on the receiving end of substantial net in migration. It would appear that a huge transfer of wealth from newcomers to existing property owners (when they sold) was occurring and that existing property owners wouldn’t be pressured into selling due to the increasing value of their property. Talk about a sweet deal!

  3. Tom Bowen says:

    Highly salient point for this sort of discussion/debate: older people vote, younger ones do not.

  4. JG says:

    Keep taxation diversified and progressive. Different people based on their trade, education, location, etc accrue and keep wealth in different places (property, securities, high income). It prevents placing excessive tax burden on anyone in particular. Progessive income tax is smart, and a similar approach ought to be applied to property and capital gains. Middle income retirees should have an adjusted rate on dividends or breaks for longterm ownership and primary accupancy of a home, for example.

    Flat taxes are the extreme opposite this, and I can only think advocated by the uneducated or nefariously selfish. Tax codes can be improved and streamlined without resorting to third grade mathematics.

  5. cdc guy says:

    Further to Tom Bowen’s point: younger people are more likely to rent and therefore to be unaware of how much property tax is assessed on their residence and included in their rent.

    In Indiana, the property tax caps are 1% for owner-occupied homes, 2% for rentals, and 3% for commercial property.

    Follow the votes…

    This is just more evidence that baby boomers (and their parents) are still setting the public agenda in most places.

  6. George Mattei says:

    One thing to look at is how each place uses taxes. For example, in Ohio property tax levys fund schools, so seniors often don’t vote for them, because they don’t have kids in the system. In Connecticut, however, property taxes funded ALL municipal government functions, including shcools, and was enacted primarily by a vote of the City Council.

    Some places fund everything by sales or income tax, or a mix, so its hard to make a blanket statement about seniors and property taxes.

  7. aim says:

    One item to check is whether a state mitigates property tax payments for seniors through special exemptions or “circuit breaker” provisions like this:

    If such provisions exist, do they help insulate states or jurisdictions from property tax revolts?

  8. david vartanoff says:

    some thoughts about CA Prop 13 from a 40 yr resident. So I stretched to buy a cheap little bungalow in 77 and within 4 months the county sent me an assessment 15% over the purchase price. I balked and won. Meanwhile a house across the street turned over in a divorce at double what they had paid 3 years earlier. Long time residents were literally seeing their ageing parents taxed out of the family home which on paper had vastly increased in value. The commercial speculators saw their chance and using the residential price craziness locked in permanent tax relief for themselves. The campaign focused on waste fraud etc as if limiting real estate tax would obliterate welfare and public schools. CA woke up to find that since welfare was partially Fed funded, it was not possible to get rid of, but local services middle class homeowners actually wanted were getting cut — street cleaning, libraries, rec centers, police, fire etc. The state government promised to rescue the counties and cities, but whenever state revenues shrink there is a huge fight over who loses with a hardcore anti-tax faction of Republicans constantly trying to gut all services except police, highways, and prisons.
    Fast forward 3 decades, indeed geezers such as myself are adamant about keeping 13 for existing residents. Real Estate people tell me my house is now worth 20 times what I paid. Can anyone imagine surviving a twenty fold real estate hike?
    That said, of 30 houses on my two block street 18 turned over (some twice) since 1990 meaning they were assessed at then market though increases since are restricted. So in fact the real estate taxes on my street and all over are growing as younger better salaried people move in.

  9. I’m a Gen-Xer, but there’s one demographic/political development that I’m wondering if we’ll ever see: a millenial-driven effort to, for better or worse, “screw over” old people.

    I’m talking things like repudiating or devaluing pensions, reducing social security benefits, not to mention undoing numerous ways that seniors enjoy preferential treatment. A movement based on charges that boomers, and neighboring age cohorts, ran the country into the ditch, and are now collecting fat pension checks while the young have a hard time finding jobs.

    I’ve seen some stirrings of this, mainly in regard to the pension benefits of public employees (and some private-sector unionized workers). Right now, in the public sector, it’s fretting about the need to cut services or raise taxes to meet pension obligations; but I suspect it won’t be long before some politician starts making hay with an “age war”.

  10. Tim says:

    As another Gen-Xer …. this is the defining issue of the next twenty years. Boomers have certainly done very well out of all the low-cost oil / food / land, and constructed free education and health systems in many countries, only to pull the drawbridge up gradually behind them. Cheap housing? Free schooling? Free healthcare? (Sorry US, you never got that ‘advanced’) Not likely for my generation, let alone my kid’s.

    I would just hate to the one of the last years of the Boomers. Man, the payback will be harsh. The falling house prices are just the start of it right now….

  11. Noel says:

    As for Indiana, I’m not certain the property tax cap will remain in place. Granted, with a rather ill-informed electorate, it was an easy sell and a political ploy. But as the revenues for smaller towns and cities face a dramatic reduction, this will be seen more and more–regardless of political persuasion–as a law that benefits only those in Indianapolis, or more correctly, the surrounding suburbs. Having worked on projects in small towns the past few years, the local governments were struggling to find any way to maintain quality of life, civic services, and even to keep fire and police services at status quo. Once school districts are more clearly affected, I think it will mobilize younger voters to roll back this law which set the fairly arbitrary (and low when compared to other states) property tax at 1% of assessed value.

  12. Noel, I think the problem in Indiana, and I suspect elsewhere, is the one identified by Michael Hicks (?). That is, there is no perceived link between taxes paid and service provided. Back in the Peterson administration, a lot of Indianapolis residents saw their property taxes skyrocket while their quality of services declined (infrastructure, etc). Unsurprisingly, they were outraged.

    Conversely, taxes that fund new, capital intensive services often fare surprisingly well. Stadiums, light rail, etc. frequently are passed by voters despite their high price tags. I think one reason is that people perceive that they will get a physical object they can point to for their money, as opposed to it just disappearing into the maw of local government.

  13. cdc guy says:

    To underscore Aaron’s point: a couple of years ago, voters in the Indianapolis Public Schools district voted to raise their own property taxes in support of a specific school renovation/modernization plan.

    EngineerScotty and Tim: I’m one of those late Boomers (as is the current president); my kids are Gen Y Millenials.

    Alas for your viewpoint, the Gen-Xers (45 and under today) bear considerable responsibility for things going off the rails in the past 3-5 years. It wasn’t Boomers driving the overheated housing credit markets…we already had houses and were busy taking home equity loans to add rooms and renovate kitchens and bathrooms or to help our kids with college. And the Wall Street “young guns” at Lehman and Bear Stearns who helped create the financial crisis were just as likely Xers as Boomers.

    Finally, white-collar Boomers in the private sector largely don’t have the defined-benefit kind of pensions that the public sector does. We’re the first 401k generation, and we’ve been paying huge Social Security taxes much of our working lives to fund the first bailout in the 80’s. I’ll have to work to 67 to get full SS benefits as it is, and probably can’t afford to retire until 70 or so.

    It is no surprise that we don’t want to face ever-increasing property taxes as retirement (and the higher healthcare costs of old age) loom large.

    Generational warfare aside, I’m for a balanced local tax regime of income, sales, and property taxes. The California-led shift toward centralizing municipal revenue at the state level is not a good thing, but Indiana (for example) has just gone down that road. The “price” of local property-tax caps was a 1% increase in sales tax statewide and increasing dependence for schools on the Legislature’s appropriations.

    It would have been far better for municipal finance to allow a LOST (Local Option Sales Tax) regime in addition to the COIT (County Option Income Tax). Also my favorite, a commuter income tax equal to about a third of the COIT (on the theory that you can move to the burbs and work in the city, but you still have to help carry the capacity costs you impose on streets, sewers, emergency services, etc. during the day.)

  14. cdc guy says:

    Noel, if you go by the 2-3x income rule of thumb for determining the price of house you can afford, then a 1% property tax on market value works out to 2-3% of income, on top of Indiana’s 3.4% income tax, County income taxes of 1.6%, and a 7% sales tax (which might apply to as much as 50% of income, for a 3.5% effective rate).

    So in Indianapolis, for a middle-class taxpayer in a house s/he can afford, the effective tax rate is about 11% of income to state and local government spread over the various taxes. That doesn’t seem like much until you consider that middle-class taxpayers already pay 7.65% FICA (doesn’t include another 7.65% hidden “employer share”) and 5-30% federal income tax depending on exemptions and deductions.

    It’s no wonder people win elections by saying it’s important to limit taxes. A middle-class person with limited income-tax exemptions and deductions faces taxation approaching 50% of income.

  15. John says:

    I had the same observation about Evanston’s continual attempts to raise the real-estate transfer tax to pay for pensions. I see it as a way to shift the tax burden from older single-family homeowners who are established in the community and aren’t going anywhere to the young people who will be selling condos and moving into houses, and the new people who will be buying their first places.

    If you’re going to fund something that benefits the whole community (like police and fire coverage), why wouldn’t it come from the total property tax base instead of just people who are moving?

  16. Certainly, I’m not calling for any generational warfare; and were it to occur us Xers might find ourselves on the wrong side of the barricades. But it could occur.

    Many are concerned that the US economy is kinda like the guy who bought himself a big house, right before he got laid off from his job. His new job only pays half what the old one does, and the mortgage is underwater. He can make the payments, but it only leaves enough left over for beans and rice for dinner; the car still runs but not very well; a major repair bill might be devastating.

    In such a case, there are several choices the fellow can make: Live a life of poverty until the place is paid off, but emerge with credit unscathed; walk away from the loan (and seriously jeopardize his ability to get further credit), or make some settlement with the bank. As a government with a sovereign currency and the right to levy taxes, the US has options available to it that cash-strapped homeowners do not, but many of the choices are the same.

    Much of the debate in the coming years will probably be on a) how much of the public debt will be repudiated, devalued, inflated away, or clawed back with targeted tax increases (or in some scenarios, INCREASED in value via deflation), b) whose debt, if any, gets devalued, and c) to the extend that we pursue austerity rather than repudiation, whose goodies get taken away.

    And the elephant in the room is that one of the largest holders of public debt in the US–are retirees. (Social security, private pension funds, you name it).

  17. Alon Levy says:

    Generational warfare is extremely unlikely, Scotty. The reason is that the AARP is powerful and coordinates its members’ generational interests, whereas younger people do not align interests with their generations. When young people do engage in generational activism, it’s usually about a more reformed culture: gay rights, environmentalism, immigration, the drug war.

  18. Wad says:

    cdc guy wrote: It’s no wonder people win elections by saying it’s important to limit taxes.

    That’s because the electorate thinks tax cuts are a pile of money on the table.

    Tax cuts are vote-buying by another name. Any reduction in the tax burden makes income rise, but on the government’s ledger it means forgoing income (a liability).

    It’s one of those problems that takes at least one fiscal year to manifest itself. Also, cutting expenses in government is not free. Workers aren’t just kicked to the curb; they get severance packages, unemployment, health care and any vested pensions. Beyond the payroll, there’s also the issue of liquidating assets. The government might have to sell off surplus land and equipment at a great discount, so revenues from those sales have the possibility of coming in short as well.

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