Symposium on developing a property tax expenditure budget.

Author:Bell, Michael E.


Property taxes are the most important source of local revenues. In FY 2011, local governments raised $429 billion in property tax revenues, more than any other single source of state and local revenues. The property tax accounted for 29.4% of local general revenues nationally, 47.4% of local own-source revenues and 74.2% of local tax revenues. (1)

Most economists agree that the property tax is a good tax for local governments because it scores well on the basic criteria used to evaluate the strengths and weaknesses of individual revenue sources vis-a-vis other potential local revenue sources. The property tax is generally thought to be a productive revenue source, which is fair and efficient, simple to administer and promotes accountability by linking taxes paid with services provided.

In reality, however, the property tax is becoming further and further from these ideals because of its increasingly narrow focus, policies that create distortions to private decision making by favoring some land use types more than others and the administration of the tax is becoming less uniform and less fair. The property tax is becoming less accountable because of "the confusing and opaque jumble of special provisions that accumulate as the broad base of the property tax is destroyed" (Witte, 2009, p. 314).

Some factors undermining the role of the property tax are beyond the control of local decision makers. For example, the economy-wide shift from manufacturing to services, technology and information results in less commercial land, fewer plants, and less equipment subject to property taxation. These structural changes in the economy contribute to a shift in the composition of the property base, and resulting tax liabilities, from commercial to residential owners. As homeowners experience increases in property tax liabilities, they pressure politicians to provide property tax relief through a variety of mechanisms. State and local policy makers respond with a number of public policies that exacerbate problems with the property tax to the detriment of local governments.

In search of a solution for reducing the gap between ideal property tax systems and actual property tax systems, Witte (2009) suggests that strengthening transparency of the property tax system may help. For example, a tax expenditure budget identifies public policies that deprive local governments of property tax revenues and result in distortions that could ultimately undermine the legitimacy of the tax. This symposium addresses more directly the concept of tax expenditure budgets for property taxes and their potential role in informing the debate on various property tax policies that cost local governments significant own-source revenues.

Stanley Surrey, Assistant Secretary for Tax Policy in the U.S. Treasury Department, coined the term "tax expenditures" in 1967. The Treasury department first published a tax expenditure budget of federal personal and corporate income taxes in 1968. Six years later, the Congressional Budget and Impoundment Control Act of 1974 defined tax expenditures in the law and began requiring that the federal budget include a list of tax expenditures (Harris 1997, 385; Pomp 1988, 66).

By converting what appear to be problems with tax reform to problems of spending reform, the tax expenditure mind set involves asking a different set of questions associated with spending programs: what is the goal of the program, how cost effective is the approach, what are the distributional consequences of the program and should the program be replaced with a direct expenditure program? [Ladd, 1994, 50-51] Ladd supports the concept of tax expenditure budgets because

"Given the strong historical, institutional, and political pressures to continue using the tax system not just as a revenue-raising device, but also as a policy tool, it is essential that we have a way to account for...

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