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PSN on July 10, 2006 - 9:03am
For decades, property tax revolts have been a thorn in the side of progressives. California's Proposition 13 remains the highest profile example of the property tax revolt, but just about every legislator in the country can attest to the level of frustration many Americans feel about property taxes.
The concerns that come from property taxes are neither irrational nor inexplicable. Property taxes can be especially frustrating for several reasons. First, since housing costs consume a higher portion of low-income Americans' budgets, property taxes are regressive in nature -- hitting hardest those who can least afford them. Second, in some cases, people have little control over their own property's values. External factors can drive up property values -- forcing individuals to sometimes choose between paying taxes they cannot afford and leaving a home full of memories. Finally, rightwing moves across the country to cut taxes at the state level and shift costs to cities and counties has resulted in mounting property tax bills, as property taxes are one of the few revenue options that these local governments have.
But as serious as the problems with property taxes are, the implications of property tax revolts are worse. Property taxes in many areas are the primary funding source for schools. And while education cannot be the only component of efforts to grow economies and equalize the economic playing field, quality schools are unquestionably a key component.
Fortunately, by understanding the key causes of the property tax revolt -- regressiveness, tax shifting, and the powerlessness people have over tax bills -- progressives can prevent tax revolts while pursuing tax strategies that are clearly progressive in nature.
A textbook case of how to turn the property tax debate to progressives' favor is currently playing out in Montana, where progressive Governor Brian Schweitzer has put the state's rightwing on the defensive regarding the property tax.
The Montana Model: Progressive Property Tax Rebates
Following his election in 2004, Montana Governor Brian Schweitzer has caught national attention for his unique populist governing style. His methods have paid off well at home, too, where Schweitzer polls in the 67-74% range. His popularity has caused his rightwing opponents to work hard to find issues to rally opposition.
They finally thought they had found their issue with property taxes. In the 1990s, as in many states, rightwing state legislators shifted costs to local governments, driving up property taxes and fomenting the conditions for a tax revolt. With the groundwork laid, rightwing legislative leaders rolled out a proposal to permanently cut all property taxes in the state of Montana by 8%. In the short-term, the proposal would be paid for by surplus revenue. In the long-term, the state would likely be forced to cut spending further.
Rather than fretting about the looming policy battle, Schweitzer's Administration responded with a proposal of their own: a one-time flat rebate of roughly $400 to every Montana resident homeowner. The Governor's plan costs slightly more than the rightwing option in the next two years, but it still uses less than one-fifth of Montana's projected surplus -- reserving money that the Governor plans to dedicate to education and shoring up Montana's pensions. By dedicating the relief to Montana homeowners, the plan ensures that virtually all Montanans (more than 99%) get a larger refund under the Governor's plan than they would under the rightwing option. The advantages to the proposal -- from both policy and political perspectives -- are numerous.
A Larger Rebate Without Threatening the State's Finances
While the rightwing leaders have pledged to spend at least $70 million of Montana's current surplus on their property tax plan, the Governor's plan spends roughly $100 million. Despite being more expensive, Schweitzer's plan is actually more fiscally responsible. The rightwing plan would enact a permanent reduction in property taxes, using a short-term surplus to justify long-term changes to the state's fiscal health. The Governor's plan, by contrast, uses a one-time rebate to spend what may be one-time money.
Still, for most Montana property owners, the Governor's plan is significantly better. By issuing a flat rebate, Schweitzer is introducing the notion of progressivity into the property tax debate. And by omitting out-of-staters' vacation homes and large industrial property tax payers (more on this later), the Governor's rebates can be significantly larger. As a result, the Governor's plan is superior for homeowners in homes worth less than roughly $500,000. Given that only one-half of one percent of Montanans own homes worth more than $500,000, most of the state does much better under the Schweitzer plan.
Assisting Montanans Without Rewarding Polluters
One of the most important differences between the Governor's plan and the rightwing option is that the latter provides huge tax breaks for industrial users and non-residents who own pricy vacation homes. Among the industrial users who would receive more than $1,000,000 in property tax breaks if the rightwing plan passed are Exxon, the oil company witnessing record profits while gas prices eat up paychecks; BNSF, the railroad in trouble with the state of Montana for failure to clean up its messes; and PPL, the power-generating company drawing the ire of Montanans for profiting hand-over-fist from energy deregulation. Needless to say, none of these companies is especially popular right now, especially as prospective recipients of huge tax breaks.
Reaching Out to Rural Montana
Another key political advantage to the Governor's plan is the effectiveness it has as an outreach tool in rural Montana. Rural areas tend to have lower property values, meaning that small town and rural Montanans will witness even more pronounced benefits from a progressive rebate. Taking advantage of these opportunities to build connections with populations that identify as rightwing is a key strategy for progressives.
Fighting TABOR With a Tax Rebate
In a move that has already drawn praise for its political acumen, Schweitzer has already started using his property tax rebate as a tool to fight Montana's proposed TABOR amendment. Like in other states across the country, Montana is facing a TABOR ballot initiative this fall -- a proposal to strictly limit spending increases and require that the state refund most of the money not spent to taxpayers. But as Schweitzer's Administration has pointed out, the TABOR amendment narrowly outlines how the money can be rebated. And progressive, flat rebates like the Schweitzer plan would be illegal in most cases if the TABOR amendment passes.
Realizing they had already been outflanked on the property tax debate, rightwing leaders howled with rage upon realizing that the Governor had also found a useful tool for defeating their disastrous spending plan. And by giving voters a concrete example of how the TABOR will actually hurt their own pocketbooks, Schweitzer promises to significantly change the tone of the debate over the spending cap this fall.
The Limitations of the Montana Model
In addition to his canny political sense, Schweitzer had some other advantages in dealing with the property tax revolt: namely, a significant surplus to work with. In other states, such opportunities are not available or other options will be desired regardless. Still, the key principles of the Schweitzer proposal are sound as they address the root causes of the property tax revolt. By injecting progressivity into the property tax code and shifting tax obligations back off the homeowner and back onto the big corporations, Schweitzer's plan successfully resolves two key issues. Other strategies, discussed below, can also prevent instability in property tax system and bring about the ease-of-mind that comes with predictability.
Additional Strategies for Preventing Revolts
Beyond smart rebate strategies like that proposed in Montana, there are ways to modify the basic structure of the property tax to make it fairer and less oppressive to middle class families whose incomes often don't increase at the same rate as property values and often their tax burden. Most of these strategies are restricted to a limited number of property tax payers, usually the elderly and very poor.
Property Tax "Circuit Breakers": The basic idea here is simple (see this policy brief for more). Instead of the typical proposal to cap property taxes at some percentage of the property value -- which disproportionately benefits the wealthy -- a circuit breaker caps property taxes at a percentage of a taxpayer's income. Different states restrict circuit breaker caps to various groups - the elderly, the very poor-- or offer them to renters as well as homeowners. Some examples include:
- Illinois: Grant up to $700 per year that is restricted to low-income elderly and disabled homeowners and renters (who can count 25% of their income as tax payments under the state formula).
- Massachusetts: Credit for homeowners over age 65 where they paid more than 10% of their total income for real estate taxes, including water and sewer debt charges. Renters can count 25% of their rent as real estate tax payments.
Property Tax Deferral Programs: A variation on the circuit breaker idea are programs that defer payment of property tax increases for certain homeowners until property is sold, allowing owners to wait until the profits from sale of the land make paying the taxes less of a burden. Like other common tax relief measures, they are generally restricted to certain populations, including:
- Minnesota's Green Acres Tax Deferment program for farm land
- Colorado's Property Tax Deferral program for those age 65 or older
Property Tax Homestead Exemptions: Forty states exempt a certain amount of a home's value from tax. This is a progressive tax solution, but many states restrict the exemption in ways that deny tax relief to many working families. Also, many are not indexed to housing inflation, so their value can rapidly be eroded in times of housing price booms.
A key strategy for progressives should be expanding these tax relief programs to include more working families, which would go a long way in undermining potential "tax revolt" strategies by rightwing politicians before they even start.