Distinguishing between the Capital Tax View and the Benefit View of the Property Tax at the Local Level
Evans, Russell R., Gade, Mary N., Journal of Business Strategies
The Great Recession of 2008 exposed municipalities across the U.S. to the dangers of over-reliance on a volatile sales tax base for general revenue financing. A 2010 interim study convened by the Oklahoma Legislature examined the possibility of offering access to the property tax base as a source of municipal general revenue. The feasibility of such a move depends crucially on understanding the economic incidence of the local property tax. Current research is divided on the issue, with one school proposing the property tax as a tax on capital generally (the capital tax view) and the other asserting the property tax as a user-fee for locally provided public services (the benefit view). We examine the incidence of the local property tax in Oklahoma County recognizing explicitly that the tax levy is really an aggregate of independent levies--each tied to the provision of a specific subset of local services --and that incidence outcome may vary by jurisdiction. An analysis of the 19 independent school districts in Oklahoma County over a 10-year period finds evidence that the incidence of the property tax varies both by levy and jurisdiction.
Property taxes persist as a staple of local government finance. Wallis (2001) notes that while the role of the property tax at the national and state level has diminished over time, it continues to be the most important source of local government revenue. In fiscal year 2007, local governments in the U.S collected $518.6 billion with just over 71%, or $370.4 billion collected via local property taxes. (1) In the same period, local governments in Oklahoma collected $3.6 billion, with property taxes accounting for roughly 52%, or $1.9 billion of total collections. In Oklahoma, county governments rely heavily on the property tax as a source of local revenue while municipalities rely instead on a general sales tax; school districts employ the property tax exclusively as a source of local funding. A 2010 Oklahoma legislative task force was convened to examine the feasibility of allowing municipalities access to the local property tax base as a source of general revenue funds. Interest in the property tax as a source of general revenue funding underscores the importance of understanding the incidence and efficiency implications of the local property tax. The unfortunate reality of an absent consensus is discussed subsequently.
Almost as widespread as the reliance on the property tax as a local revenue source is the dislike for and confusion surrounding the levy. O'Sullivan, Sexton, and Sheffrin (1995) document the fascinating passage of California's proposition 13 and the subsequent spread of property tax reform. In fact, while Wallis (2001) posits that the reliance of local governments on the property tax likely reflects the "ability to more closely match the beneficiaries of government investments, policies, and programs with the taxpayers who foot the bill," economic development packages often center on local property tax abatement programs (Dalehite, Mikesell, & Zorn, 2005). Accompanying (and perhaps contributing to) a widespread distaste for the property tax, is a lack of agreement of its economic incidence. (2)
Alternative Views of Property Tax Incidence
The traditional view approaches the property tax as an excise tax levied on land and capital improvements. Generally considered in a partial equilibrium, single jurisdiction framework, the traditional view concludes that a jurisdiction's perfectly inelastic supply of land cannot escape its portion of the tax. The levy on land is borne by landowners and to the extent that land ownership increases with income, the property tax on land will be progressive. The excise tax on capital improvements begins with the assumption of perfectly elastic capital (between industries within a jurisdiction) and concludes that capital avoids the tax generally, leaving the burden with occupants (tenants) of the improvements. …