During the 2020 presidential primaries, Senator Elizabeth [Warren] was widely lambasted for her proposed wealth tax, that is, a tax on assets that are owned rather than the income or revenue that is generated. Recently, there has been much agreement among economists that a tax based on assets will generally be less efficient than one based on income or some other measure of economic activity. Yet, Texas not only maintains its own version of this asset tax but has the seventh highest in the nation. Property taxes are taxes not on work, or trade, or any other sort of economic activity, but merely on keeping an asset. A clear-eyed look at the economics of the issue shows that Texas would do better without.
Property taxes have their root in feudal Europe. Back then, income was far more difficult to quantify than it is today, and sales taxes were difficult to enforce. Medieval central governments had a difficult time getting people to pay taxes at all, but one tactic that did work for them was taxing land. Land was not only comparatively easy to measure, but it was also the primary source of income and economic production, meaning the medieval land tax was not unlike the capital gains tax of today. And, since land generated a perpetual income from agriculture, there was a constant stream of income to balance out the constant stream of taxation.
Similarly, when Texas first implemented a true property tax in 1830, a large number of Texans were farmers or ranchers. Therefore, it made sense to tax property, as it was still the primary source of income for most Texans. But as the economy developed, less and less of our income came from land. Thus, as land was put to less productive use because it was a smaller part of the economy, the property tax worked less like a capital gains tax and more like a wealth tax.
So why are taxes on assets bad? In general, they are difficult to collect, cause economic distortion, and corrode the assets that they are meant to tax. Property taxes across Texas exemplify these problems. Do note that while each locality does things slightly differently, property taxes are similar enough across Texas that most of these critiques will apply generally. First, they are difficult to levy and collect. The formula used to collect property taxes is (Appraised Property Value − Exemptions or Special Appraisals) × Property Tax Rate ÷ 100. So how is property value appraised? Nominally, the goal is to set it at the market value of the property — the problem being that the only true way to figure out the market value would be to actually sell the property. Failing that, there are three methods for estimating market value, all of which are at least somewhat subjective and do not necessarily agree with each other. This general uncertainty in the value of the property means that taxes on similar properties can vary widely, adding to uncertainty in the system. This isn’t even going into all of the Byzantine complexity, and consequent opportunities for self-dealing and favoritism for special constituencies that make up the exemption term of the equation.
Property taxes also cause economic distortion. Because owning more valuable property now results in higher taxes for as long as the property is held, there is an economic incentive to make the property less valuable — as the lower tax burden will often cause less developed property to be more profitable in the long run. Indeed, a study in California found that higher property taxes decreased available housing. Eliminating property taxes would make it more worthwhile to build more and upgrade existing housing, which is especially pertinent for cities like Austin as they grapple with their ongoing housing crisis.
Finally, property taxes can force homeowners, especially lower-income homeowners, out of their homes. Imagine, for example, that you are a homeowner who bought a house in a relatively affordable part of your town. You spent a few decades paying off your mortgage and now are retired. However, gentrification has caused the market value of your home to increase, and with it your property tax burden, to the point where it is impossible for you to keep up payments on the house that you have owned for decades. Thus, you are forced to move. This is not hypothetical, but it describes the current situation in Fort Worth, where older homeowners were forced out by the situation described above. And this is a problem across Texas and the nation. Whether it be low-income homeowners being forced out of the only homes they could afford or retirees being forced out of the neighborhood they have lived in for decades, it is unfair that the government can continue to charge us for the property that we already own and have repeatedly paid for.
Texas has the seventh-highest property tax rate in the nation, and a rate more than triple that of the median European rate. The tax is both less fair and less efficient than alternative ways of raising revenue. Two alternatives would be consumption taxes or taxes on the sale of property, which would suffer from some of the same problems as property taxes, but to a far lesser degree. What is abundantly clear is that the current system is not working for Texans, and we need to replace it with one that does.
