time for truth in property taxation
The tax on real estate that is used to pay
for schools and other local government is a bad one for several
reasons, but one flaw becomes particularly evident in an
election year because the tax practically invites public
misunderstanding and less-than-honest statements by politicians.
Public misunderstanding stems from how
amounts of tax relate to values of taxed properties. Many people
think that if the value of their home goes up, the amount of
real-estate tax they owe somehow must go up, too. This isn't
true, but some politicians are overly willing to perpetuate the
Real estate or property taxes go back for
centuries. The process is pretty straightforward. Officials
decide what public needs are and how much money must be raised
to meet those needs. They tabulate the value of taxable
property. Then the total amount to be raised in taxes is divided
by the total value of property. That calculation gives the
percent of the value any real-estate owner must pay on his or
If a village needs to raise $250,000 and it
has $10 million worth of real estate, then each homeowner will
have to pay 2.5 percent of the value of his or her house.
It is more complicated in practice because
there are different classes of property — owner-occupied,
rental, commercial and industrial. There also may be laws that
favor homeowners or limit the amount that the assessed value of
any particular house can increase in a year.
The key question, however, is how much
local government officials decide must be raised in taxes. Take
the example above. If spending remains at $250,000, but property
increases in value to $12.5 million, then the tax rate could
drop to 2 percent of value. If officials leave the rate at 2.5
percent, taxes collected will increase to $312,500. But that
increase results from a decision by officials to hike the amount
raised in taxes. It is not the inevitable outcome of increasing
Some officials understandably foster that
misconception: "Gee, it's too bad. We kept tax rates the
same, but your property rose in value so you had to pay
more." Their implied explanation is "tough
break." But no law says government cannot reduce the tax
rate as property values climb.
This is a classic "fallacy of
composition," in which people assume that what is true for
one must be true for all. The homeowner opens her tax statements
and sees that the assessed value has increased by 10 percent
since the previous year. Tax owed is up by the same proportion.
Therefore, the fault lies with rising home prices.
An increase in the value of one house
obviously implies an increase in taxes due. But an increase in
the value of all houses does not mean that all owners need to
pay more. That only occurs when elected officials decide to
Some owners get all wrapped up in whether
their houses are assessed correctly. If they can get their
assessments down to a fair level, they reason, they will owe
less in taxes.
That is true for each owner as an
individual. It does not mean that if all owners could get their
assessments reduced, then taxes would go down for all. That can
happen only if government chooses to raise less in total tax.
All this is not intended as an anti-tax
diatribe. My wife and I pay about $3,900 in taxes on our house
in St. Paul. We get pretty good value for our money from our
city, county and schools. People complain about government
waste, but it seems pretty clear to me that there is more
mismanagement in the private, for-profit company that built my
pickup truck than in the public schools that educated my
But if we are going to finance local
government by taxing real estate, let's be honest about what
drives the level of taxation.
St. Paul economist and writer Edward
Lotterman can be reached at email@example.com.