Houses in Providence (via Wikimedia Commons)
In 2010, the property tax came into full view for me. That was the year the Providence City Council was forced to raise taxes on the East Side, whose property values had increased while the rest of the city’s had fallen. A friend of mine called me up to turn out with his family to the City Council meeting. Flanked by three landlords (all living on the property they rented) I sat through the proceedings, which brought cries of anguish from the watchers as the Council did what it felt necessary to prevent bankruptcy.
I was working on David Segal’s campaign at the time, and I went back to work the next day. Mr. Segal, himself a former Providence city councilor, later summed up the ills of the property tax in one very succinct sentence (as I recollect): “it’s the only tax that doesn’t take into account people’s ability to pay.”
Sometime after, we were canvassing voters in Woonsocket, and door after door, property taxes topped the list of complaints. It’s hard to stand there and listen to a woman describe how she’ll have to leave the home she raised her children in because she can’t pay the tax and knowing that there’s little the office your candidate is running for will have little to do with it.
Property tax seems to be the forgotten trio of the big three taxes in the state; the other two are sales and income. Duels over the latter two seem to be yearly battles; Governor Lincoln Chafee previously fought ineffectually to broaden and reduce the sales tax, while House Minority Leader Brian Newberry made it his opening salvo for the 2013 legislative session. The General Assembly, which implemented a “flat tax” and then handily “repealed” it by making it permanent. It seems to have had the intended effect, if that effect was for the economy to stay flat.
Property taxes, in the meantime, have shot up, with communities across the state asking to raise them beyond state caps. Anger over the car tax (a form of property tax) has become especially emblematic of the issue; worse, it has turned citizens against large nonprofit institutions who pay only voluntary payments to communities. Unrestricted by property tax, they’re free the purchase real estate and shrink a community’s tax base while greatly enriching the nonprofit.
But our communities have little choice to accept this; they are devoid of other funding mechanisms. The General Assembly is unwilling to provide funding for cities and towns, the same funding it cut off years ago. So now we are strangling ourselves with the property tax.
A solution to this revenue dilemma seems to lie in a post on The Urbanophile, (urban analyst Aaron Renn’s blog) post about New England vs. Midwest culture (and yes, I saw Mr. Renn recent post in GoLocal and did some reading):
The manner in which local taxes were levied in Connecticut is very different than in Ohio. In Ohio, income tax (charged where you work, not live) funds much of the local revenue for cities and townships, with property taxes going to fund school districts which are operated as separate governmental subdivisions. In Connecticut, property taxes support most of the local level spending, so property value is king. In a majority (although not all) of the communities the school district is only semi-autonomous and is funded directly as a line item in the municipal budget.
Would allowing Rhode Island’s communities to tax in this manner; levying an income tax based on employment location, while reducing property taxes to cover only school districts; create a better Rhode Island? It would drastically shift incentives, away from maintaining property values (which are already going to be high in one of the most densely populated states) towards job creation.
Furthermore, it would change the tax base away from those who can’t pay the tax to those who can. Rents, likewise, would lose some of their upwards pressure; renters might actually see savings afterwards, and rents might be likely to come down. Resentment towards large institutions might also dissipate. While protected from property taxes, I’m pretty sure nonprofits are not shielded from income taxes, meaning that they would be taxpayers along with the rest of Rhode Island’s citizenry. Negotiations over raising their voluntary payments might permanently end, especially if large institutions found ways to assist their local school systems.
It would undoubtedly be a radical action for the state to take. But when the moderate, timid actions have failed, what else is left? It’s time to give our communities better tools to defeat their fiscal fears.
“While protected from property taxes, I’m pretty sure nonprofits are not shielded from income taxes”
The people who work for non-profits pay income taxes, but the entity itself, so long as its income generating activities are in line with its stated purpose, is not subject to a tax on business income.
Thank you for clarifying that.
Yes, a system of local income taxes to replace property taxes would undoubtedly be a good idea.
School boards in NY levy school property taxes. It’s separate from other property taxes, clear, entirely for schools and entirely controlled by the people in charge or running schools.
The first step in RI should be to leave the bizarre model where we have a school committee beholden to a city council. People are willing to spend money on education and it’s the school board that’s responsible for meeting state mandates on programming and quality. Separating and protecting the schools from the broader ills of the city (and in some cases, vice versa) would provide better accountability and take the first steps toward getting these things under control.
The biggest problem with collecting income tax where someone works is the huge number of people who work outside of RI and strong consolidation of work in just a few places which could cripple some cities and towns.
I wonder what the effect would be on some of the smaller towns with less of a business tax base? Providence, Warwick, Newport etc. would certainly help, but how would Burriville, Foster, etc make out. I don’t think it would help workers if they have to pay a huge income tax in rural towns because they do not have a big enough employee tax base to support its needs.
Rather than shift from property taxes to local income taxes, I think a consitutional requirement that state to provide a certain amount of state aid to towns, based on a metric like population, would provided much need relief. This would allow cities and towns to benefit from much broader state-level tax base without having to actually impose a broader taxes on the local level. It would also prevent the State from balancing its budget deficits by cutting state aid (and shifting the burden to the cities and towns) then patting itself on the back for avoiding tax increases, much like it did in the past. If less services have to be paid for with property taxes, then the taxes do not have to be as high. It could be coupled witha stricter cap for those worried about local government spending.
“I think a consitutional requirement that state to provide a certain amount of state aid to towns”
Doesn’t that essentially equate to money laundering? Not in the illegal sense of course, but the State collects the money from the resident of the town, takes a cut off the top and delivers it back to the town where the resident lives. That seems like a terribly inefficient means of raising revenue.
Less efficient than 39 separate cities and towns enacting and administering their own separate tax systems, when the state already has a system for collecting and administering state taxes?
Its an idea worth considering, but some cautions: a property tax is at least a tax on wealth, and less easily evaded than income taxes which can miss the underground economy, under-reporting of certain incomes, plentiful loopholes including off-shoring…. Perhaps tax streams should have a component of a statewide preperty tax, after all, regionalization proponents sometimes say we are really just like a county. And that would lessen the incentive for one town to raid businesses from another, and make bad land use decisions such as locating nuisances as town boundaries so 1/2 the burden is on another town.
To speak to Jason and Sully’s point about disparate effects on the state’s communities, I think it’s fair to say that any state legislation that is passed should enable cities and towns to make the change to their method of taxation; not mandate it. That would be as dictatorial as removing state aid from the cities and towns and then telling them to “get their fiscal houses in order.” If a community doesn’t feel this is a correct tax structure for their city, then they won’t bother with it. Allowing cities and towns a greater degree of choices to rethink their economic structure is the goal here.
I also think it’s worth pointing out that urban centers are where our jobs are, and it’s also where our most impoverished are. Commuters who come into those urban centers to work do utilize city services (such as the road system), and should shoulder some of the burden to pay for those services. I think it might also give Rhode Islanders a greater sense of connectivity; if you’re a taxpayer not only to the place of your residence, but also to the place of your employment, you are essentially a member of two communities.
I also should point out that this isn’t a wand-wave solution, no matter how enthused I may seem when writing about it. While it can change a large part of the dynamics of the economy of Rhode Island, it isn’t going to solve all of our problems, and certainly not overnight. That, and there will of course be unintended (though not necessarily unforeseeable) consequences.
Property taxes are easily audited and relatively inexpensive to administer. In order to do away with them, you have to make the substitute as simple to collect for the towns doing the collecting. Property taxes are also far more stable through a recession than either the income or sales taxes.
Property taxes also have the benefit of forcing people who don’t actually reside here to share some of the costs of protecting/enhancing their property. Narragansett has low property taxes because so much of the town is owned by people from Connecticut. Same situation in Block Island and the rest of the coastline cities and towns.
Property taxes here are far too high and unfairly administered, but they probably have a place in an ideal system, if only for these features.
Tom, what do you think an ideal system would look like? I know that’s a really complex question, but even just fuzzy outlines or vague ideas would be intriguing to me.
Also, to the point about administering them; given that many communities around the nation do administer them this way, perhaps we can look at their methods?
In Maryland, where I paid taxes when I was quite young, the local income tax was at the county level, not town, and was applied as a ‘piggy back’ tax on top of the state tax. Therefore the local govt didn’t have to process returns, etc. It sounds more like a ‘contract’ between state and county govts to provide income taxes. Yes, they also have property taxes in Maryland.
As to the point earlier about small towns without strong tax bases, I think that also points you toward county level government, since all counties typically have a ‘seat of government’ with more commercial activity.
The “opt between income and property tax” idea doesn’t work. What if I work in a place which taxes income, but my town taxes property. I’m taxed twice.
Do you think localities could do the piggyback tax?
That squeeze you’re talking about is one which I don’t really have an answer to. Part of me understands a whole system works most effectively when it’s uniform. But at the same time I wouldn’t want to force localities to do this.
The issue to me becomes that if we add in an extra layer of government (as per my regionalization post, I don’t think it should be a county government), we’re essentially replicating the state aid system, and so it’d really be easiest to restore state aid. I think the purpose of an emphasized income tax for local employees and a property tax for local residents is to switch the local incentives away from increasing property value and towards providing jobs.