Time to Reform State Taxes–Pt. 2: Property Tax Reform

As news leaks out about Gov. Walker’s desire to cut Wisconsin income taxes, it is remarkable that there has been an absence of serious discussion about property tax reform for over 2 decades.  This is surprising given that property tax revenue is the single largest source of tax revenue in Wisconsin and many other states, providing critical funding for schools and other municipal and county based services, including police, fire, and public health services.

Former Gov. Tommy Thompson recognized that there was a property tax problem in Wisconsin when he attempted to put a lid on property taxes over 20 years ago by restructuring how Wisconsin funds schools and local services, instituting revenue caps, which deny school boards and local governmental bodies the power to raise sufficient revenue to fund critical programs.  At the time this system was instituted, the trade-off was that state government pledged to provide much greater support for schools (2/3 funding) and other local services.  Unfortunately, his successor, Gov. Jim Doyle, reneged on that pledge of more state support, and then in Wisconsin’s current budget, Gov. Scott Walker went one step further by reducing the revenue limits drastically (amounting to an $800 cut to schools alone in revenue authority on top of an $800 million state funding cut).

But that is only one side of the story.  What about the people who pay property taxes?  Are they being taxed fairly?

The simple answer is that property taxes are the most regressive tax that Wisconsin and most other states use.  This is for one basic reason.  Unlike centuries ago when property wealth virtually always correlated very closely with income wealth, we no longer live in such a world.  Many examples abound, including:

  • The elderly homeowner who has fully paid off her home, but the value has risen tremendously in the 50 years since she built the home, and now her only earnings are from Social Security.
  • The divorcee, whose divorce agreement left her with a home for which she can make her mortgage payments, but after 5 years of rising property values, she can no longer afford to stay in her home due to rising property taxes.
  • The formerly comfortable middle class family, whose primary bread winner lost his job just before the $7,500 property tax bill came due.

Most of us, myself included, have lost one or more neighbors such as these.  This creates unstable neighborhoods, one of the hallmarks that works against the creation of safe and sustainable places to raise healthy, happy and well educated children.

The problem, of course, is that while virtually everyone agrees that Wisconsin’s property taxes are too high, almost no politicians are willing to make the hard decision about how to replace the revenue which would be lost if we reduced property taxes for those whose incomes clearly cannot afford them.

The answer is actually quite simple.  We can make state property taxes equitable by adjusting them up or down based on the property owner’s income. Of course, many variations could be instituted, including the number of adjustment categories and the percentage of adjustment.  However, any such system can be aligned to be revenue neutral to taxpayers. Moreover, Wisconsin’s system of shared revenue which moves property tax revenue from property rich tax districts to property poor districts can continue to be utilized to provide equity in such a system so that property/income rich neighborhoods contribute to the ability of less wealthy neighborhoods’ ability to fund schools and local services.

Here is an example of how a simple 3 tier property tax system with income adjustments would work:

  • Betty is a 78 year old widow who has lived in the mid-sized 3 bedroom home she and her husband built 45 years ago for $12,000.  She lives in a safe middle class neighborhood with good schools, and her home, though fully paid for, is now valued at $325,000.  That valuation results in a $7,000 property tax liability, which she cannot afford because her only income is her monthly $700 Social Security check.  She will need to sell her home once she has exhausted all her savings by the end of this year because she cannot afford her property taxes. Under my proposal, taxpayers with Adjusted Gross Incomes under $50,000/year would have their property taxes reduced by 50%, reducing Betty’s property taxes to a manageable $3,500.
  • Joe and Tammy have the exact same property value and tax situation, but they both work and each earn $60,000/year for a total of $120,000/year in family income.  Under my proposal, taxpayers with Adjusted Gross Incomes between $50,000-$250,000 would receive no adjustment since those with Joe and Tammy’s income while certainly not wealthy, can afford to pay their property taxes.
  • Sally and Don live in a house with the same property value, but they both hold very high paying jobs, each earning $200,000/year.  Under my proposal, their property taxes would increase 50%, to $10,500, which they can still afford, and which offsets Betty’s discounted property taxes.  Keep in mind that their property tax payment is fully deductible under federal tax law so they will actually receive a larger federal tax deduction under this plan.

In sum, while property taxes are indeed too high, they remain a critical component to funding critical local programs and services, including public education, so eliminating them is not really an option without a steep hike in income or other taxes.  By making them equitable as I have suggested, we will allow more people to remain in their homes, helping to maintain and create stable neighborhoods, without any loss of revenue.

Now the question is whether political leaders will have the courage to adopt real Property Tax Reform, such as the system I have proposed.


For more information on how I can help you accomplish effective, progressive systems change e-mail Jeff Spitzer-Resnick or visit Systems Change Consulting.

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8 thoughts on “Time to Reform State Taxes–Pt. 2: Property Tax Reform

  1. I commend you for your forward thinking but I have a question on your 3 tier system. I own a business that, at this time does not show income. Maybe in the future it would but as of now I do not see my business showing “income” for years to come. This “no income” situation is due to many factors that would take a book to explain thanks to our current tax system. Most of my tax liability goes to property taxes. If our state was to adopt your proposed 3 tier tax system my property taxes would be cut in half. Of course I would be happy about this as would all the other “no income” business owners. There would be no incentive to show income. I know I would never show income if my property tax bill was based on this. This 3 tier system is no better than what is currently in place. Why would I ever show income if this was the new property tax system? I mean no offence, just pointing out a flaw.

  2. This blog post was written entirely with personal property in mind and you point out that a different approach may need to be taken with business property. My question for you is whether most business owners would game the tax system by showing no income just to keep their property tax rates lower. Perhaps this would be true for property rich business, in which case, continuing to show no income for an extended period of time (3-5 years) should either drive the company out of business (not a very good strategy) or cause the tax authorities to audit the firm to understand how it can stay in business an show no income for an extended period of time.

  3. I think the State Constitution would need to be changed to repeal the Uniformity clause. I think it is against the State Constitution to have a tiered property tax system.

  4. I have long felt (naively?) that there was no rational justification whatsoever for most property tax. Why not abolish it completely (apart perhaps for fees associated with specific city services, such as street maintenance), and adjust state and/or local income tax rates to preserve overall revenue? I would much rather pay the same annual amount in income tax rather than property tax, knowing that if my income ever goes away, so does the tax.

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