Three Points in Favor, One Big Flaw

Richard K. Green, University of Southern California

Point of Contention: Property Taxes

For this issue’s Point of Contention, we asked four well-known public economics specialists to argue either for or against the following proposition—“Relative to the other revenue sources generally available to local government, the property tax generally is superior on efficiency grounds, because it induces less undesirable behavior and avoidance, and on equity grounds, because it bears less harshly on those less able to afford it.”

Some of the text in this article comes from my unpublished comment on Fischel (2010).

The statement as written is almost certainly true, but it does not necessarily imply that the property tax alone should fund local governments and schools. Let us begin with the basic truth of the statement, and then discuss why property taxes should be a principal, but not the lone, source of funding for local government and schools.

The property tax has three strengths to recommend it. First, in economics jargon, it is a tax on something that is fairly inelastically supplied (that is, real estate) in the medium (and sometimes long) run, and hence it does not create much deadweight loss. In other words, owners of real estate generally cannot physically move their buildings, so a somewhat higher tax rate does not change their medium-term behavior much; therefore, society does not suffer much loss of overall income or welfare from property owner reactions to tax changes.