Doctoring the Tax System: First, Do No Harm!

Question one on the Maine ballot this November will be the so-called "Palesky Tax Cap", a proposal to freeze property taxes at 1% of assessed values, and limit increases in assessed value to 2% per year. (The referendum also calls for property values to be set at 1996 levels, but the Maine Supreme Court has already determined that provision to be unconstitutional.)

The tax cap is modeled after California's Proposition 13, one of history's most abysmal miscarriages of public policy. After Prop 13, state support for public schools fell from #5 nationally to #40. Road maintenance schedules stretched on into infinity; California's bond rating became the nation's lowest. Unemployment in 2000 was 50% above the national average; the 2000 census showed a net migration out of the state. Far from making housing more affordable, the tax cap rewarded the hoarding of urban land; rents and housing prices went through the roof.

Despite all that, polls are showing roughly a 20% lead for the Palesky tax cap. Desperate times seem to be calling for desperate measures. Proponents talk about our neighbors who are losing their homes due to skyrocketing property taxes... farmers who can't afford to farm because of their high land taxes... what's this all about?

A property tax cap appeals to Maine voters for two very different self-interested reasons. On the one hand there are the land-rich poor, rural Mainers, whose taxable income is low. The local property tax is the lion's share of their tax burden, and it comes to them in the form of a frightening lump-sum annual bill (when they get behind on it, their town's report lists them in arrears, for all to see). Then there are the "in-migrants" who have moved here in search of reasonable real estate and a simpler life. They like real estate as an investment — and they're not thrilled with rising property taxes. For suburban mortgagees, tax hikes show up in the form of higher monthly payments.

The state government reports that while job growth in Maine is sluggish, housing sales and construction are bullish. "Home sale" values rose by 11.3% in 2003 — but that use of the word "home" is misleading: the cost of building a house tends to rise at the general rate of inflation, and the value of an existing house tends to depreciate — so we can see that what's really growing are land values — and that is the reason for the property tax revolt.

Tax Cap Yes! cites numbers suggesting that Maine is among the highest-taxed states. Maine's state and local taxes take 12.2% of Mainers' income, making Maine #2 on CNN's list of high-tax states, behind the District of Columbia. (Surprisingly, Washington DC's economy is more like Maine's than one might think: average per capita income is $28.7K, and 20% of residents are below the federally-defined poverty line.) Like DC, Maine is not so much over-taxed as it is under-paid. When people's incomes are low, and they don't buy very much taxable merchandise, the property tax is going to take a higher portion of people's income. That's what the tax-cappers are actually saying when they cry about how overtaxed we are in Maine.

The main recipients of property tax revenues are the public schools, and so, some characterize the tax cap debate as a "parents vs. non-parents issue". That view may make sense politically — but economically it's off the mark. People outside of the real estate business often forget the one indicator that directly registers the effectiveness of public spending on services: the value of land. People are willing to pay more to live in a district that has quality schools, safe streets, etc. The value of those amenities shows up in what your land is worth.

In 2003, the five states with the lowest property taxes were Alabama, New Mexico, Arkansas, Oklahoma and Louisiana — not exactly economic powerhouses. The highest property tax states are New Jersey, New Hampshire, Connecticut, New York and Rhode Island — states with higher incomes, lower poverty rates, more kids entering college and lower dropout rates than we have in Maine.

The Palesky plan is so bad that we should look in the opposite direction for a good alternative. There's a hint in the fact that the referendum proposal does allow taxes on new construction. The tax cappers want to roll back land assessments to eight years in the past, but continue to penalize people for creating nice homes, and for creating jobs!

So let's grant tax relief — to buildings and improvements! While we're talking radical reform, what do you say we eliminate taxes on buildings completely? No longer would people live in unsightly, unfinished homes to avoid tax hikes!

Furthermore, since — as we've seen — land values accurately reflect the level of public services enjoyed by a landholder, the best, most sensible source of revenue for those public services is land value. The sane alternative to Palesky is a revenue-neutral shift to higher taxes on land values and lower taxes on buildings.

True, that would not lower the property tax burden. Needs-based relief for the poorest and for people on fixed incomes should be part of the package. But we should not mince words about the effect of the Palesky plan on our tax burdens! Let's face it, the tax cap will not lower the overall tax burden — it will just shift it to sales and income taxation, and more inefficient state-level oversight and bureaucracy. Would the tax cap raise overall revenue by attracting more business to the state? It sure didn't in California! No, the Palesky tax cap would make Maine a poorer state, with a less-friendly business climate and poorer educational opportunities. More people would lose their jobs. More young people would leave the state and not come back.

A property tax shift from buildings to land, on the other hand, has provided strong economic advantages wherever it has been tried. By increasing the cost of holding land idle, it promotes sensible building in high-traffic areas, creating a built-in incentive for urban infilling and against suburban sprawl. Basing public revenue on land values ensures an increasing source of revenues in precisely the places where the services are needed.

The most prosperous states in the USA are those with higher, not lower property taxes. And, the most prosperous cities in Pennsylvania are those which have shifted tax burdens off of buildings and onto land values. Here's an example: between 1978 and 2000, Harrisburg, PA shifted its property taxes from an even land/building ratio to a rate six times higher on land value than on building value. Relieved from the burden of taxation, new homes and businesses sprang up. In 1980 there were 1,908 businesses on Harrisburg's tax rolls; in 2002 there were 5,976. Twelve new restaurants opened in downtown Harrisburg in 2002. The city's crime and fire rates have progressively dropped, even as population and business activity have increased.

Nineteen other cities in Pennsylvania have adopted the land tax shift, and all have shown similar productive gains. Others that didn't undertake the shift continued to decline. Every time the shift to land value taxation has been tried — in Australia, Denmark, South Africa, and most spectacularly in Hong Kong and Taiwan — it has achieved the same kind of success.

The first priority for Maine's voters is to observe the Hippocratic oath and do no harm: vote NO on Question 1. Then we can begin to explore a much better, fairer way to give our communities and families what they need.

-- Lindy Davies