The Shape of the Future

E M Risse


 

Reforming the Property Tax

 

Forget about providing "relief" for residential property taxes. That's a Band-Aid. Restructure taxes to eliminate incentives behind so much of today's dysfunctional economic and social behavior.


 

Now that the primary is over and we know who will be on the ballot in November, it is time to get serious about the issues that should be the focus of the campaign.

 

There are three critical areas related to human settlement patterns where state government could and should have a major positive impact over the next four years. These issues have not yet been seriously addressed by any candidate who will be on the ballot in November. A lot of lip service and hollow rhetoric, yes. Serious consideration, no.

 

The critical issues?

  • The Access and Mobility Crisis

  • The Shelter Crisis

  • Residential Property Tax Reform

All three are on almost every voter's mind. At least these issues are of grave concern to the 80 percent of Virginia’s citizens who live in the urban regions of the Commonwealth. Two of the issues (mobility and shelter) involve governance services and functions that are controlled by the Commonwealth directly or indirectly -- “indirectly” due to the state’s responsibility for the existence, and structure of sub-state (aka, municipal) governance. The state has responsibility either by statute, granting charters, or by being “Dilloned.” The buck stops at the state on access and mobility, and on shelter.

 

The third critical area of concern, the residential property tax–and by extension the entire system of financing governance functions–is also a state government responsibility under the United States constitution. Because tax reform opens the door to fundamental reform of governance, we will start there.

 

This column, the first of three on campaign issues, addresses the property tax, specifically the tax on owner occupied residential property. The entire tax structure must be rebuilt to meet 21st century reality but the flash point and the invitation to counterproductive, short-term “political solutions” is the residential property tax.

 

Like the “Car Tax” of eight years ago, “Property Tax Relief” is likely to become the sound bite poster child that drives the election with the net probable result of no real solutions and many new problems.

 

As a recent Washington Post headline put it “Governor’s Race in Virginia Spotlights Tax Relief.” The first step is to understand the issue is tax reform, not tax relief. Fair, comprehensive tax reform will provide “relief” across the board, not just sops for squeaking wheels and escape hatches for pandering politicians.

 

Context

 

In Virginia, the Governor is limited to one four-year term. That is not a lot of time to achieve Fundamental Change in a complex area like governance revenue. There are two alternatives: Whine about the short time frame and argue the merits of a constitutional amendment, or start now and outline specific, detailed plans for what a candidate for office will do so that voters can elect individuals based on an action agenda, not slogans.

 

What will you do?

 

Who will you appoint to do it?

 

What are the overarching principles that you believe should guide Fundamental Change in the tax structure?

The problem in the past has been that the leaders of the two-party dictatorship have conspired to avoid any specifics so voters have no basis for choice beyond platitudes. This year three candidates are running for governor so the stakes are higher. A word to the wise: Spell out a specific, realistic, broad-based agenda or come in third.

 

The two Lt. Governor candidates are unabashedly running to be candidates for governor in 2009. They can win even if the person at the top of their party’s ticket does not win. So, if the three governor candidates try to hide, the Lt. Governor candidates should step out with a specific program. It will be up to the media (mainstream and internet based) to keep candidates from putting out more of the “weak stuff” that has been on the table during the run-up to the Primary elections.

 

Property Tax Background

 

Any discussion of the current situation must start with the fact that the whole idea of a “property tax” is one that made sense as a revenue source to support major governance functions two centuries ago but has little positive relevance now. The “property tax,” especially a tax on owner-occupied residential property is an historical anachronism. It was useful when 95 percent of the households were non-urban and owning land was not just the primary measure of wealth, it was the resource that was used to earn money.

 

Even those who owned an urban home likely lived in the back or up stairs and ran their business or profession out of a storefront or from a workshop on the alley. The primary reason for a tax on property, especially owner- occupied residential property would be:

  • A transfer fee to cut down churn which undermines the evolution of Balanced Communities

  • An unearned profit levy when the increase in property value is directly related to public investment: e.g. building an interchange or extending a shared-vehicle transit system. 

It also needs to be noted that there is a fundamental difference between owner-occupied residential land and commercial land.  Rental residential dwellings are commercial property for the landlord. Within a comprehensive new revenue generation system, owner-occupied dwellings could be treated as a separate form of property.

 

Finally, the so called “reforms” like California’s Proposition 13 ceilings, rollbacks, homestead exemptions and other crutches are not “solutions.” They only add complexity to a outmoded system of public revenue generation. The only significant change that has been on any table is Henry George/split rate tax for urban land.

 

Posts on Bacon's Rebellion Blog have detailed the problems with the existing property tax structure and documented the critical response to the “solutions” put forward by candidates so far.

 

Principles

 

There are many potential paths to a better tax system for the Commonwealth. It would be unwise for a candidate to lay out a specific reform plan. It is imperative that all three lay out a reform process and the principals to guide that process. Otherwise the tax issue will just be a political foot ball.

 

The place to start is for candidates to develop a statement of principles about the tax structure and have it ready by the end of August. There are already a lot of good ideas in the public domain. Jim Bacon and others have long supported fundamental restructuring of the tax and in Bacons Rebellion Blog has raised excellent questions about of what to tax and how:

  • Should taxes to support community and regional governance be simply progressive or should they include targets like attracting the most productive and innovative workers and enterprises?

  • Should taxes and fees favor good behavior like conservation, recycling, reduction of consumption, creating a small ecological footprint?

  • Should there be credits given for volunteer time and effort that supports dooryard-scale, cluster-scale, neighborhood-scale and village-scale governance?

There is good reason to support a broadly based tax on energy consumption sometimes called a “carbon tax.” We will be addressing a concept of a “hydrogen economy” in a future column but the “carbon tax” idea might better be an “oxygen tax.” When oxygen is combined with carbon compounds or with hydrogen to create energy, the results have far reaching impact. The issue is conservation of energy. You guessed it, that means functional human settlement patterns.

 

Flat Earth, Flat fees and Expanding the Tax Base without Creating Balanced Communities

 

Whatever the specifics, a major goal must be to shift from flat fees to use/consumption-based charges. It will be important that taxes and fees reflect the real location-variable cost of goods and services that are required to support contemporary life.

 

When urban systems started expanding at an accelerating rate following World War II, it was assumed that the “cities” and “suburbs” would continue to expand as they had in the prior 40 years. As polycentric New Urban Regions began to emerge with “Edge Cities” and other new forms, the large municipal governments in the northern Part of Virginia hit on a strategy of attracting jobs to create “tax base” to support the services demanded by the growing population. This seemed to be working, for a while.

 

The Washington Posts's Peter Whorisky did a fine job of documenting the demise of this tactic. In a Page A-1 story on April 12, 2005 “Property Owners’ Burden Rising: Home Taxes Cover Larger Share of Government Costs,” Whorisky examined the FY 2001 and FY 2006 year budgets for Alexandria, Arlington, Fairfax, Loudoun and Prince William.

 

The percentage of these jurisdictions' budgets supported by residential property tax went up an average of 10.5 percent in this six -year period. Loudoun County, which has grown at a record pace, increased by 14.1 percent.

 

Fairfax County which has developed by far the most “tax base” land use now derives 48 percent of its $385.5-million budget from residential property taxes with a 12.6 percent rise in home owner burden in just six years. The strategy to “expand the tax base,” a program Fairfax County pursued for 35 years, has turned out to be not as wise as the plan to create Balanced Communities which was the official strategy from the mid-50s to the mid-60s.

 

Arlington Alexandria, Fairfax, Loudoun, Prince William reassess property tax each year and have used the increased assessments to increase the property tax. As far as can be determined from the media, they apparently have not made it clear to citizens as required by Virginia law that they are in fact increasing the tax yield beyond the 101 percent level through reassessment.

 

Leave the Political Weak Stuff Behind

 

As they say at this time of the year, “Do not come with any of that weak stuff.” Citizens want real reform, not just political posturing. Real tax reform should go hand in hand with fundamental governance reform. Here the principle is simple:

Move controls, revenue sources and other decision making to the level of impact.

This means moving the focus of control--revenue to support government and management--down from state and up from municipality to the regional scale.

 

The New Urban Region (and the Urban Support Region) are the fundamental building blocs of contemporary society. But it also means moving control and resources down from municipality to new sub-municipal governance structures within the Commonwealth’s three largest regions.  There are now municipal jurisdictions with one million. That is “local” government?

 

Above all, it must be kept in mind that governance of an complex urban society costs money. Good government cost a lot of money. Dysfunctional government cost a lot more money. The next two columns will focus on action agendas for mobility and shelter that, along with reformed tax policy and governance restructuring, will encourage the evolution of functional human settlement patterns.  

 

-- June 20, 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

Ed Risse and his wife Linda live inside the "Clear Edge" of the "urban enclave" known as Warrenton, a municipality in the Countryside near the edge of the Washington-Baltimore "New Urban Region."

 

Mr. Risse, the principal of

SYNERGY/Planning, Inc., can be contacted at spirisse@aol.com.

 

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