An Argument for Rehabilitating the Property Tax
As the great debate over how to improve American education continues, educators are aware that most of the recommendations for reform will cost money--probably more money than is now available for public schools. In today's debate, the question of how to pay for these educational reforms has become just as important as the question of what type of reform to pursue.
Until the 1960's, local property taxes were the main source of revenues for schools. Then an important but subtle tax reform began, significantly decreasing reliance on local property taxes to fund public schools and leaving states, the federal government, and in some cases, foundations or user-fee revenues (from charges paid for government services) to fill the gaps. This reform reached its climax with the tax revolts of the late 1970's.
But even though some angry property-tax payers have been mollified by the shift in dependence away from the local property taxes, the demands of education reform are about to force a return to a greater reliance on those taxes. And returning to reliance on local property taxes is not necessarily a bad idea. It is quite possible that if improvements in local property-tax assessment and collection that have developed in the last two decades are adopted around the country, schools will be able again to rely on local property-tax revenues while avoiding a return to the days of California's Proposition 13 and similar tax initiatives.
Local support for schools, most of which is derived from property taxes, has decreased over the last 20 years from about 56.3 percent of all revenue in 1963-64 to about 44.5 percent in 1983-84. While not all states reflect the national trend, in 35 states, reliance on local revenues has declined. For the country as a whole, between 1971 and 1981 property taxes decreased from approximately 1.98 percent to 1.26 percent of market value. Between 1972-73 and 1982-83, local support for schools dropped from $28.90 to $20.40 per $1,000 of personal income. And local support for schools, as well as property taxes, decreased relative to income in 44 states during the last decade.
Several factors stimulated the movement to reduce property taxes in the 1960's and 1970's. The property tax was the most unpopular tax, in part because it has always been highly visible. The property tax generally was paid in a small number of large payments rather than in a large number of small payments, like a sales tax, or in periodic wage deductions, like an income tax. Many people also viewed the property tax as an unfair tax. According to prevailing opinion, the property tax was regressive, creating a higher burden for people with lower incomes.
In addition, policymakers generally recognized that property assessments were not "equalized" within or between tax jurisdictions. That is, the assessed value of a $50,000 house might represent a higher proportion of its market value than that represented by the assessed value of a $100,000 house. And the assessed value of a $50,000 house often varied widely among jurisdictions.
Finally, the widespread perception that rising property values were providing unplanned windfall revenues for school districts added to the tax's unpopularity. Property-tax rates could remain the same and produce large, unforeseen increases in revenue because assessments were rising dramatically.
This is not to say that property taxes were universally unpopular. On the positive side, property taxes provided a relatively stable base of support for schools. Property was easy to identify and easy to tax. Unlike income and sales taxes, which are very sensitive to economic change, property-tax revenues would not decline in a recession.
Furthermore, over the last two decades, a number of changes have improved the property tax. First, assessment practices have evolved, causing the problem of the variability in the proportion of assessed value as compared with market value to lessen. Assessments are also now completed in a cycle of a few years in many states rather than over many years, a practice that often resulted in unpleasant surprises for taxpayers. Second, many states now use "circuit breakers" to limit the property-tax burden to a specified proportion of income: In seven states, this applies to all homeowners and renters; in 16 states, this applies to elderly homeowners and renters. Third, school districts in many states have limits either on the property-tax rate or the amount of funds the property tax can generate; these limits are meant to prevent windfall revenues and also to prevent revenues from automatically increasing without the direct involvement and approval of taxpayers.
While the reasons for lowering reliance on property taxes may have made sense in the past, they do not, in my opinion, make sense now in light of both these improvements and the new demands of the education-reform movement. It is true that some of the approaches for improving the quality of schools may not cost much, but most of those being proposed by governors and enacted by legislatures, such as increasing teacher salaries, implementing career ladders or merit-pay plans, decreasing pupil-teacher ratios, lengthening the school day or the school year, purchasing new materials and equipment, or rectifying the problems caused by deferred maintenance, will cost a great deal over the next few years. Recognizing this, the first states to act to improve the quality of their public education--among them Florida, North Carolina, South Carolina, Tennessee, and Texas--have typically provided large amounts of new revenue by passing new state taxes and earmarking funds for schools.
But I am concerned that we are unlikely to see a continuation of such bold action in the future unless local school districts provide their share of the necessary funds. There are several reasons to believe that the reform of our education system is dependent on an increased reliance on local property taxes. Although states have been the largest supporters of the reforms enacted in the past year, there is little evidence that they will be able to continue to provide the necessary support.
States are now the largest single source of school-district revenues; during the last five years they have provided, in aggregate, nearly two-thirds of all new funds available for public schools, thus taking up the slack caused by relative decreases in property taxes and federal support. During the last two years, the states increased taxes and cut spending in order to avoid severe fiscal problems. Today, although the fiscal picture of the states is brighter thanks to these measures and to the easing of the recession, it remains likely that, rather than allowing surpluses to grow or increasing expenditures for education, state leaders will either reduce taxes or direct their new resources into other problem areas. Many of those states that provided large increases in support for schools last year were spending for services in general at relatively low levels; those states that earmarked taxes for education might be reluctant to continue doing so when revenue sources do not behave as anticipated or other interest groups attempt to earmark funds for their needs.
Alternative sources of local revenue, such as educational foundations and user fees, have not produced large sums in most school districts. It is unlikely that these sources will increase dramatically in the future except in a few districts. Nor has the imposition of new local taxes proven particularly popular. Local income taxes and sales taxes, which are permitted in some districts, are viewed as unnecessarily burdening taxpayers who are already paying state income and sales taxes as well as federal taxes.
Federal funds are equally unlikely to increase in the near future. Federal funding has never provided a significant portion of school revenues; when federal funds were higher, they were targeted for special services and could not be used freely by school districts.
It is important to note that education reform is likely to be an intimate, local activity designed to respond to specific needs of individual school districts or groups of districts. While the states or the federal government may provide some fiscal incentives for improvement, their role will be to support demonstration projects, to disseminate information, and to provide advice. For example, if career ladders are to work, there will be hundreds of versions, not just 50, and certainly not just one.
Finally, the viability of the education-finance system depends on the diversity of revenue sources. Any attempt to eliminate a revenue source (many of the recent property-tax reductions are the compromise result of efforts by taxpayers to eliminate the property tax entirely), no matter how well intended, poses a threat to the education system. The complexity of this country's intergovernmental fiscal system may appear illogical; however, it may also be the genius of the system given relatively few tax bases and a large number of governmental tasks.
Thus, for both fiscal and programmatic reasons, there is likely to be greater emphasis on local funding and the property taxes that provide the bulk of local resources. If the following changes in the property-tax system can be made around the country, then the taxes should not become so unpopular as to bring on a repeat of the tax revolts of the late 1970's.
- Eliminate local assessing jurisdictions and assess all property on a statewide basis. Property assessment is both a science and an art, but that does not mean it needs to be purely political. In many states, assessors are locally elected officials with no professional assessment experience. States should develop guidelines for the assessment of different kinds of property, assessors should be trained, and assessments should be audited periodically for accuracy.
- Property assessments should be updated on a regular schedule every few years so as to minimize large changes in value and large shocks to taxpayers.
- Major properties, particularly those with a statewide or regional impact, such as utilities, should be taxed by the state rather than by the particular school district in which they are located. My experience is that districts without major properties do not object to the huge windfalls that other districts receive because one day they may acquire such a windfall; this attitude should be discouraged.
- States should use circuit breakers to limit the impact of property taxation on all low-income property owners and renters.
- States should enforce rate-rollback provisions to assure that property-tax rates decrease when property values increase and windfalls do not accrue. Property-tax revenues should only increase when the tax rate increases by action of a school board or vote of the people.
- States should set limits on property-tax-rate increases or increases in the yield of property taxes but not on increases in property assessments. The basis of the tax should not be constrained by artificial manipulation, which will cause problems in the future, even if the rate or the yield is constrained. The current situation in California, where assessments cannot be increased unless a property changes hands, means that the equity of the system in the future is threatened even as the current homeowners are reaping benefits.
- Local school districts should be allowed to set their own property-tax rates within broad guidelines established by the state. In order to promote their own development, districts should be able to exempt property from taxation; however, such property needs to be counted when determining the property wealth of the district, a measure used by states in allocating education funds.
- Property taxes should be collected periodically throughout the year so that individuals are not faced with enormous payments. Not only would public acceptance of property taxes improve, but the cash-flow problem caused by the conflict between the time taxes are collected and the time funds are needed to operate schools would be alleviated.
- State-aid systems should be continually examined to evaluate their sensitivity to the property wealth of school districts. As reliance on property taxes increases, this sensitivity will become more important in order to assure that school support is adequately and equitably distributed.
Vol. 04, Issue 06, Page 24, 18