A Taxing History

Arizona Tax Revolt commentary:

This article says it all. Until reading it I had believed that we had the Romans to thank for property taxation because it was them that coined the phrase “ad valorem” which means based on value.

Marc Goldstone, Chair.
Arizona Tax Revolt

Published: January 03, 2008
Daily Herald

Taxes have challenged lawmakers since the beginning of recorded history.

But when the Utah Legislature convenes this month, fixing the property tax system ought to top the list of things to do.

Complaints about property tax assessors and collectors are found in hieroglyphics on ancient ruins. Pharaohs, kings and emperors taxed everything in sight. Gold could be buried and cattle could be moved for a day to keep assets away from prying eyes. But land was always there in plain sight, making it an easy mark for a tax. In an agricultural economy, land was synonymous with wealth.

That system more or less continued through the Middle Ages and into the early days of America. The debate over the U.S. Constitution in 1789 included proposals for a national property tax. But Southern politicians, owners of big plantations, quashed that idea, presaging struggles that only intensified as the nation grew.

Over the years, property owners learned how to wheedle favors from assessors. As the nation industrialized, land became less important as an indicator of wealth. "Reformers" in the 19th century demanded that tax rates be made uniform and extended more stringently to all property.

But these "fixes" only made the system harder to administer, and they infuriated taxpayers. Some found ingenious ways to beat the system; others lobbied for special favors for certain groups -- invariably groups to which they belonged. But when some groups get tax breaks, other groups pay more, starting a vicious cycle of reforms and adjustments.

Sometimes the cure seems worse than the disease. In the early 20th century, for example, disgruntlement with property taxes helped fuel a shift to sales and income taxes.

And frustration with out-of-control property taxes sparked the nation's most famous tax revolt -- California's Proposition 13. The 1978 amendment to the state constitution limited increases in assessments to a small percentage each year, so long as the property was not sold, and otherwise tried to put a lid on it. Restrictions on property taxes were passed in 29 states.

Advocates of tax sanity argued that such measures were the only way to put the brakes on out-of-control government spending. With it's gushing money spigot turned down, government got creative: Instead of raising property taxes, it began to grab money more enthusiastically through special fees, taxing districts and other gimmicks. As proof we note that California is not known for low taxes today.

Some government officials staunchly defend the concept of property taxes. The revenue is predictable and easy to raise. Nowadays you can bank in Switzerland or on the Internet, but your house or farm is fixed in one spot within in a municipality, school district, etc. Why the home-owning public puts up with this without a fight is amazing. It's as though they've been lulled to sleep by a century of expectations.

The problem has never ebbed. Florida, Indiana, Idaho, New Jersey, New York, Pennsylvania, Rhode Island, South Carolina, and Texas have all introduced property tax relief legislation, and it's a topic of furious debate in many other states.

In the wake of wild property tax revaluations, a tax revolt is now simmering here in Utah. Citizens Coalition for Tax Fairness, spearheaded by angry property owners in Davis, Weber and Washington counties, is demanding change. Several measures are being floated in the Legislature, including one like Proposition 13.

We have to wonder if property taxes still make sense in today's world. It hasn't changed much in 8,000 years. It still seems designed more for the convenience of government than for fairness.

The whole idea that government can raise taxes on an investment even when no transaction has taken place to establish its market value may be subject to question. Virtually no other investment works this way. You can buy gold or Euros, and you can hold your investment indefinitely without paying taxes on it. Only when you sell are you subject to tax on what you gained.

It has been argued by some, not unpersuasively, that capital gains taxes are intrinsically fair because they reflect actual value received in a market transaction. Conversely, periodic increases in the tax you pay on a house you've lived in since 1963 are seen as intrinsically unfair because no transaction has taken place. It is literally possible to tax someone's house out from under them merely because they made a wise investment years ago.

Absent an actual transaction, a tax based on what an assessor says your house is worth is like having IRS base your income tax on how much the government thinks you should have made last year.

In a very real sense, your house isn't worth anything until you sell it. There is no value because it's not on the market.

On the other hand, it's clear that government requires money. Every dollar that's placed off limits in one sector is a dollar that must be wrung from taxpayers in another. Today's trouble is that incremental tax games that have been played over decades, and even centuries, have given us a claptrap Rube Goldberg system. It's sometimes hard to make sense of it, let alone change it.

As economist Frederick C. Stocker noted, the property tax "resembles a structure designed by a mad architect, erected on a shaky foundation by an incompetent builder, and made worse by the well-intentioned repair work of hordes of amateur tinkerers."

Property taxes were initially designed as a way to tax the wealthy. But few today would equate home ownership with wealth. It's fair to ask whether property in the form of a single-family dwelling represents wealth in the same sense as vast plantation acreage once did. Many a homeowner will say that it's a source of poverty.

The fact that "we've always done it this way" is no reason to continue any system. Perhaps the time of the property tax is past. We do not use ancient Egyptian medicine or Roman astronomy anymore. Maybe it's time to take a broad new look at how we feed the government.