Why Do We Look At Property Values?
Local Government as a Corporation
We analyze local government finances as though they were a corporation. Like a business, local governments have revenue and expenses and their success depends on making responsible decisions. Any incorporated entity, be it a business, government, or other endeavor is founded with a particular mission. Cities, towns, and counties differ from companies in their provision of public goods but they are nonetheless bound in the same way by their ability to make ends meet.
In this analogy our work parallels that of the financial advisor sifting through a company’s investment portfolio. We develop a picture from the data which reveals patterns of wealth creation and also inefficiency. This analogy is useful for putting financial sustainability in perspective. No matter what values a community deems important, no matter what services it wishes to emphasize, or how it wants to grow, its ability to achieve those goals stretches only so far as its ability to manage resources. Local governments draw their revenue from a variety of sources so why do we focus so heavily on real property taxes?
Property Tax: The Backbone of Local Government
“You can have a Lord, you can have a King, but the man to fear
is the tax assessor. ~ Anonymous citizen of Lasgash”
We could measure the power of a tax by its dollar value or its stability or its practical advantages but first and foremost, as a tax, we should consider exactly far back in history we can find "anonymous citizens" complaining about it. That honor happens to fall upon property taxes, mostly in the form of a portion of food production, in a city state in modern-day Iraq 8,000 years ago. A comprehensive and interesting overview of the history of property taxation can be found here. I will focus on these other parameters.
Property tax, millage tax, real property tax, or ad valorem taxes are one of the oldest and most common sources of local revenue worldwide. They form the backbone of local government finance. So important are real estate taxes that we often refer to them as synonymous with financial stability (tax base).
When we look at local tax revenue generated within US states we can find the dominance of property taxes. Only a few states receive more than half their tax income from sources other property taxes. This chart only covers tax revenues. Local governments get their income from a variety of sources and local budgets are complex. It highlights, nonetheless, the importance that property taxes play in the equation. Altogether they make up about 30% of local government revenue. From the cities where we have data, roughly half of their budgets are funded by property taxes.
Though far from perfect, property taxes offer some advantages over other options. Sales taxes are an important facet of revenue for local governments, particularly for some school districts and transit projects. Sales taxes are riskier, however, because they are so closely tied to market conditions. Sales taxes respond to a downturn immediately due to diminished sales while property taxes respond more slowly. Sales taxes also tend to be distributed in such way that the locations that produce the most revenue do not receive more services. This can include commercial districts that fund schools or revenue distributed from one jurisdiction to another. The most common issue is state and county governments absorbing more of the proceeds than they generate. In some places this has become contentious. Worse still is the amount of obfuscation and opaqueness surrounding sales taxes. Geographic data is often unavailable or unreliable. Where we have had access to sales tax data though, we have found a consistent and familiar pattern.
Property taxes, based on directly on a local government’s land area, are more stable and geographically relevant. Here is a good discussion of the advantages and disadvantages of property taxes: http://www.ipspr.sc.edu/grs/SCCEP/Articles/Proptax.htm. Because assessments incorporate market values, they too are susceptible to market conditions but in a far less volatile way. Growth and development have a much more profound impact on their production. Barring some extreme examples real estate is an extremely durable asset. Even in extreme circumstances underutilized buildings can continue to produce value.
This is because buildings and land cannot be picked up and moved. Property taxes are difficult to evade. More importantly though, there is a clear relationship between the revenue produced and services provided. We can visualize where revenue is produced and we can measure the cost of services. As an added bonus the things that property taxes pay for tend to enhance property values.
Beyond its durability, property tax is a stable source of revenue for local governments because of the autonomy it provides. Property taxes are the revenue over which local governments have the most control. The mechanism of this control is deciding what kind of development to allow or not to allow and is the precise point where policy, finance, and design intersect. We look at the way development patterns and urban design impact property tax revenue. What we find is that development that is compact, dense, urban, and high quality invariably produces revenue more efficiently. When you consider further that most local governments have constrained boundaries and thus a limited supply of developable land it becomes all the more important to develop it wisely.
At the end of the day though, it was the design of cities, the ingredients that make great places, that fascinated me and attracted me to this field. Property taxes and their importance to local government is the link that connects urban design to fiscal responsibility.