Tuesday, July 18, 2006

Property Tax Reform

I got this sent in an email from one of our commenters that I think should be posted. I agree with most of these ideas and think that property taxes, more than any other tax, kills us here in Michigan.

The proposals for property tax increases in the upcoming election are making me re-evaluate the entire concept of property taxes. These are some of the problems I see with property taxes on real estate:

Problems with property taxes:

- High property taxes must be paid even if a person is unemployed or living on a fixed income. High property taxes can force families into bankruptcy and encourage retired families to relocate to tax friendly states.
- Property taxes penalize families for improving their homes.
- Property taxes discourage people from getting building permits for improvements due to fear of higher taxes and permit fees.
- The Headlee amendment limits tax increases for long time homeowners, making it difficult or impossible for some people to move because of the potential for a big tax increase.
- Local governmental bodies spend large sums of money each year to reassess property values and to deal with complaints over assessments.
- Crushing tax burdens within cities are encouraging families to migrate outward from urban areas to suburban and rural areas with lower tax rates, helping to fuel the decline in urban areas.
- Property taxes discriminate against families who choose to live in single family homes and give preferential treatment to families living in apartments and mobile homes, even though all families receive the same level of services. This is fundamentally unfair.
- Voters who choose to live in apartments and mobile homes have little incentive to take an active interest in local issues because tax increases have little effect on them. These residents can enjoy the higher level of services which result from tax increases while paying very little for them.


Can we do better?

Property taxes are used to finance schools and local government, so if we eliminate them we must find some other way to finance these services. The question is, how can we change the tax system to levy the tax load more evenly while continuing to support local services and still giving taxpayers a say in how their dollars are spent? Looking at the taxes we have in Michigan, the fairest tax we have is the flat rate income tax (Aside from the fact that the state government keeps tinkering with it to make it less flat). Nobody likes paying taxes but I hear fewer complaints about the flat income tax in Michigan than I do about any other tax.

I've seen the proposals for a "Fair Tax" floating around, but as far as I can tell they don't include any real estate property tax reform.

So I starting thinking . . . what if we were to get rid of the cumbersome property tax system that we all suffer under and replace it with a flat residential tax, where every residence in a taxing jurisdiction pays the same tax, regardless of property value or residence type? Any solution needs to keep the current financial independence of local governmental units and give voters as much incentive as possible to become involved in the decisions of local governments.

Replacing the real property tax with a flat residential tax

Concept: Eliminate all current property taxes on land and buildings used for houses, mobile homes, or apartments. Also eliminate fees on mobile homes, fees for building permits, and fees for transferring property. Replace the lost revenue with a flat residential tax, where all residential units within a given taxing jurisdiction would pay the same annual tax regardless of housing type or value of property. This flat residential tax would vary from jurisdiction to jurisdiction because tax proposals in each jurisdiction would still be voted on by taxpayers, giving voters in each individual school district, city, county, and township the flexibility to decide what types and level of services are wanted. So a residence would pay a flat tax to each of the local school district, county, and city/township jurisdictions that residence is located within, just as property taxes are currently paid to these governmental units. The difference is that the new FLAT tax would be the same for each residential unit located within these same jurisdictions, rather than based on value as it is now.


- The tax would be levied on each address regardless of the type of housing. This would make it possible for more families to buy their own homes, and for large families to move into larger homes.
- A flat residential tax would save Michigan taxpayers millions of dollars every year due to a reduction in staff currently used to assess and reassess property values.
- Homeowners would have no excuse for failing to pull permits for improvements.
- Spreading the burden for schools and local government more evenly over the population is the most fair way to tax elections.
- Having every family within a jurisdiction pay the same flat residential tax gives everyone an equal stake in property tax increases. This would encourage more people to take an interest in these issues and make it harder for local governments to raise taxes.
- A flat residential tax would allow people to move freely without having to worry about major tax increases.
- A flat residential tax would allow blighted areas to be rebuilt because owners would not face a big tax increases for improving their properties, giving a big boost to efforts to revitalize cities like Detroit and Flint where tax rates are monumental. Quite honestly, this might be the cheapest and easiest way to encourage revitalization in urban areas.
- This would remove a major objection to mobile home parks because mobile home residents would pay the same taxes as homeowners.
- This removes the need for the Headlee amendment because property taxes would no longer rise with property values. Essentially, this permanently fixes the single biggest problem with a tax system based on property values. Local units of government would see revenue increases only from new residential units or from property tax increases approved by voters (I know I've not addressed the issue of commercial and industrial property)


To give this proposal a real shot at being implemented I feel that it should be revenue neutral, otherwise local officials statewide would rise up against it. A revenue neutral proposal allows this proposal to be considered solely based on it's own merits. (Sorry, taxpayer groups)

Obviously there are more issues that would need to be addressed as this is just a simple outline. But I think the basic idea is good and I would like to hear commentary from others on this idea about potential issues and about ways in which it might be fine tuned to make it work better. So fire away . . .

4 comments:

Pogo said...

Needs refinement, but this is a really good idea. I wonder why nobody has come up with this before?

It sure would be nice to do something to reverse the decay in Detroit by letting people build new homes without punishing them with a super high taxes. Urban renewal without massive government aid. . . Has anyone sent this idea to DeVos?

anonymous said...

I've always thought that property taxes are bad. It is completely backwards to penalize homeowners for making improvements. I also have to agree with the author that it is fundamentally unfair that homeowners have to shoulder nearly all the burden of paying for local government services.

One problem I see is that some people might not be able to afford the flat property tax, but that would be very easy to fix by creating a board to grant tax reductions to low income people, or it could also be fixed by allowing low income people to apply for a tax credit or rebate. This would make it less flat but would eliminate the biggest objection to this idea.

Since people would be billed a dollar amount rather than a percentage of property value it would also be necessary to index the tax amount so that it would increase along with the rate of inflation.

Some people might object that rich people are getting off too easy. I think that is a small price to pay for the simplicity of this tax, but if really pressed we could always keep the property tax on the top 5% most expensive homes.

The idea that it could spark renewal in places like Detroit is also VERY interesting.

With these little fixes I would absolutely vote for this proposal.

Patrick Flynn said...

This is good dialog for an issue that screams for reform. New innovative thinking about property tax reform will be a vital element to Michigan's economic recovery.

Pogo said...

Lots of good elements in this plan - decoupling taxes from property values would do a LOT of good. The rise in property values would no longer be limited by the ability of purchasers to pay taxes and it would make it much more affordable to build new construction in places like Detroit (67 mill tax rate).

I also like the idea of spreading the tax load for local government evenly over the entire population as long as we give some kind of relief to low income people. This would make home ownership more affordable for a larger group of people.

Anything which makes government smaller also has a lot going for it. This eliminates one of the most hated functions of local government, assessing the value of homes. One of the really nice things about this plan is that it is simple - simple to implement, simple to administer, and simple to enforce. It also keeps tax dollars local, out of the hands of state politicians who would certainly try to re-distribute revenues which passed through state coffers. President Reagan believed that local government is best able to determine and meet the needs of citizens. I agree.
Some people might say that we should just switch to a sales tax, but that would be collected and distributed by the state. This would result in loss of control of financing of local government, the same way that we are gradually losing local control over our schools now that so much tax money comes down through state coffers. If we switch to a sales tax local governments would constantly get jerked around by the state. For example, if Democrats were to get control of state government they could shift a lot of funding from townships to places like Detroit, forcing residents to do without while further subsidizing urban areas. This will NEVER work. We must keep local control over local government by having local financing of local government.

This plan avoids all the problems associated with switching to a sales tax while providing all the same benefits, and more. It fixes the problems that Headlee tried to address and also takes the financial pressure off local governments faced with large numbers of new apartments and mobile homes being built. It creates an incentive to pull building permits, build new construction in areas with high mills, and improve older structures everywhere. It also fixes the problem that Headlee created where two people living next to one another in similiar homes may now pay vastly different taxes, and allows established residents to move to a new home without getting bushwacked by a big jump in taxes.

Never have I seen a plan that fixes so many problems while making government SMALLER at the same time.

From a political standpoint just about everyone can support this plan. Democrats can support it because it promotes urban renewal (with the provision to protect low income residents in it). Republicans can support it because it makes government smaller and simpler. Local officials can support it because it would provide for stable and predictable tax receipts and realtors can support it because it makes it possible for long time residents to move.

The more I look at this idea, the more I hope to see a feasibility study done with it.