A Medieval Tax in a Modern World

For a lot of people, the biggest chunk of money they hand over to a government entity is their property tax check. Here in Vermont, a small portion of it goes towards town road maintenance and the like, while the bulk of it finances our public schools. Property tax has its problems, though. It is regressive, unfairly burdening those least able to pay. It promotes reckless development. In a strange way, it doesn’t allow us to own our land – we effectively rent it from our town government. If we get far enough behind in our payments, we can be evicted and our real estate sold at auction.

How did we get here? Originally, property tax was a general property tax. Individuals were taxed on both land and personal property such as furniture and jewelry. Wealthier individuals tended to avoid full payment by moving their valuables from one household to another, avoiding the tax assessor. Partly because of this, the general property tax evolved into a tax on buildings and land, which were fixed and visible. At the founding of our country, this had an element of fairness as well. Nine out of ten people farmed. The more land someone had, the more crops they produced, and the more money they made. It was a rough income tax in a time when income was difficult to track.

The situation is now reversed. Today, around 2% of the population farms. Farmers haven’t been in a majority since 1880. For most people, their real estate holdings have no mathematical relationship to their income. Income itself is relatively easy to track, given the prevalence of the W-2 form and the mandatory reporting of interest and capital gains.

Here’s a hypothetical, round number situation. Imagine two couples who live in the same town, one a pair of working stiffs, and the other a pair of medical specialists. The first couple has a combined income of $50,000 a year and a house worth $150,000. The second couple makes $500,000 a year and lives in a $450,000 house. The income differential is 10:1, but the tax payment differential is 3:1. What’s more, there is a large disparity in disposable income, the actual ability to pay.

Vermont has tried to deal with this by instituting homestead exemptions, rebates, current use programs, and the like. All of these laws are part of an attempt to make the property tax more “income sensitive.” I’ll just let those last two words hang in the air and beg a question.

When the question is raised as to why we finance education with an archaic property tax instead of a modern income tax, a number of emotional and inaccurate responses tend to come forth. The most popular involves local control. People want to have the sense that they control their local schools. Sorry, but you don’t. The minimum curriculum, the teacher qualifications, and the funding structure are all set by the state legislature. All you can really do is reject the budget and deny your children the facilities, supplies, and teachers they need, or you can pull out your smoking checkbook and try to eat more mac and cheese. It is much like having local control of an airplane that is running out of fuel.

We should consign property tax to the same fate as its medieval cousins, medical bloodletting and witch burning. We could make education financing truly income sensitive and create a statewide education income tax.

Even now, the state has a statewide property tax and distributes block grants on a per pupil basis to local school districts. As one observer wryly put it, this shifts the tax burden from poor people in poor towns to poor people in rich towns. Considering that the state had about 16.48 billion dollars in taxable income in 2004, and raised about 815 million in education property tax revenue, then an average 5% tax would cover the whole deal. The rate should be income-adjusted, but without all the rigamarole of prebates and exemptions. Of course, we could keep taxing the property of non-residents at some rate, their income being unavailable and their second home being an indicator of ability to pay, reducing the 5% average rate.

The money would be collected by the state and distributed in its entirety to the school districts on a per-pupil basis. Individual school districts could institute local income tax add-ons if they wanted to exceed the minimum block grant, following the tax schedule set by the state.

The results? True income sensitivity. Taxation based on ability to pay. Adequate school budgets. Land development decisions made on the basis of real need instead of economic desperation. Elderly people on fixed incomes able to keep their homes in gentrified areas. The ability to truly own land instead of holding it under the threat of tax sale.

It will be a fight to overcome two centuries of institutional inertia and fantasies of local control, but it will be worth it.