Values and Criticisms of Property Taxes
Current tax laws force farmers and ranchers to consider the tax consequences of each input purchase, commodity sale, capital asset purchase or capital asset sale. Unfortunately, tax planning has become a part of everyday decision-making. Farmers and ranchers should be making business decisions based on economics, not tax consequences.
Even before there was money, early leaders extracted payments from citizens from levies based on property in the form of harvests and livestock. In the Fourth Century, BC, the Roman Empire paid its soldiers by a tax on capital assets, called a tribunum. Until the Industrial Revolution, most wealth took the form of agricultural land holdings, so most taxes were direct or indirect levies on this wealth. Because money transactions, such as cash wages, dividends, and interest, were unimportant by modern standards, property and property related measures had to be a major basis for taxes, rather than more modern bases of money received from sales and money received as wages and salaries.
Over time, the property tax system in the United States adhered to the concept that all property was taxable. As substantial values developed in things other than land and buildings, the taxes were applied to personal property as distinct from real property. As financial instruments such as stocks, bonds, and bank deposits became important, these were taxed also as intangible personal property. As households began to acquire personal property, such as cars and boats, the property tax was levied on them.
Until the Great Depression of 1929, property taxes were the mainstay of all government finance. The Depression triggered widespread use of the sales tax. The federal government expanded based primarily on taxing incomes and payrolls, and state governments expanded their use of sales taxes. Most taxed personal and corporate income as well.
The property tax gets criticized as unfair because it can appear as a means to confiscate money from people with low incomes and relatively high property wealth such as farmers with valuable land but low incomes in a particular year. Other criticisms of property tax include: the difficulty in administering the tax, lack of linkage to services rendered and to the ability to pay, and the power of government to take property for non-payment.
Over the years, public opinion polls consistently show property taxes to be the least popular form of state and local revenue-raising measures. One reason for this may be the fact that property taxes are paid in lump sums, usually once a year, by citizens who write checks for them or see the costs in their mortgage payments. Contrasts this with sales taxes, paid painlessly as part of the cost of a purchase, and income taxes withheld from wages and salaries.
Another criticism of property tax is taxpayers realize they are being taxed on “value” that isn’t necessarily applicable to their situation, particularly if they own a family farm or an older house in what real estate folks would call a “hot” neighborhood. Forty-years ago, the Utah Legislature addressed this concern, in part, by passing the Utah Farmland Assessment Act, also called the Greenbelt Act. This Act allows qualifying agricultural property to be assessed and taxed based upon its productive capability instead of the prevailing market value. This unique method of assessment is vital to agriculture operations in close proximity to expanding urban areas, where taxing agricultural property at market value could make farming operations economically prohibitive.
Productive values are established by the Utah State Tax Commission with the assistance of a five-member Farmland Assessment Advisory Committee. Leadership from both Utah Farm Bureau and Utah State University are represented on this committee. Productive values apply statewide and are based upon income and expense factors associated with agriculture activities. These factors are expressed in terms of value per acre for specific land classifications.
The argument that property tax is poorly associated with the services rendered is not only valid for the property tax but for most taxes. It is especially true of the major taxes, namely the sales, income and property taxes. These taxes are not used to pay for the costs of the specific services rendered by government to those paying these taxes. Rather, these taxes are used to provide sufficient revenue for the public goods and services collectively desired by the citizenry.
For example, in fiscal year 2009, Utah’s income tax accounted 28 percent of the state and local tax structure. This tax is largely dedicated to financing public and higher education. Yet many Utahns who pay the income tax do not directly use either system of education. During the same fiscal year, Utah’s sales tax derived 31 percent of the state and local tax structure. This tax is primarily committed to the state’s general fund. And finally, the property tax, levied and administered locally, attributed to 29 percent. The remaining 12 percent is shared between transportation, excise and corporate income taxes.
A major challenge for Utah lawmakers this year is to balance a budget when revenue is significantly down. One major tradeoff lawmakers must face is the tradeoff between revenue sufficiency and economic efficiency. Existing ongoing revenues appear to be insufficient to fund government services at the levels the Legislature appropriated last year. Lawmakers must choose between adjusting ongoing appropriation levels, ongoing revenue levels, or using one-time solutions to achieve budget balance.
In a recent survey, conducted by Dan Jones and Associates, the public was questioned about many issues facing the state this year. Six hundred Utahns were surveyed, by phone from January 8-11, about a range of topics with a focus on budgetary concerns. The results concluded that just under half of Utahns are willing to have services cut, 30 percent are willing to have increases in taxes, and 15 percent prefer a combination of tax increases and cuts to services.
In the end, a balanced tax policy in Utah that includes property tax, income tax and sales tax is best.