There was an economist named Henry George who pointed out that all government taxes really “ought” to be paid for by taxes on real estate. That plan has a lot of advantages.
There is never a question of jurisdiction: we know where every piece of land is. We don’t know where a sale on Amazon.com is (where the buyer is? Where the seller is? Where the warehouse is? Where Amazon is?) If a person works for a company in Washington DC but lives in Maryland and commutes to an office in Virginia, who gets the income tax?
In some sense, the government “deserves” a cut of real estate. Misgoverned, corrupt cities like Detroit tend to have much lower property values than quiet, well-governed cities like San Diego. Why shouldn’t the municipality participate in the wealth it creates?
Actually, George himself believed the tax should be based on the value of the unimproved land underneath any buildings, not the buildings themselves. I think his logic for that belief is compelling but as a practical matter, it is very difficult to calculate that value, so I am going to concentrate on the entire value of the property. As everyone knows, the three most important factors in the value of real property are location, location, and location–which is another way to say that it is the price of the land that is important.
But there is a big problem with property tax: appraisal. With an income tax or a sales tax, the dollar value of the transaction is largely obvious. It’s whatever the person pays or is paid.
Property is typically taxed on its “fair market value” (FMV), what it would go for if it were sold today. Of course, it is understood to be difficult to calculate the value of a house or a building that hasn’t changed hands in years.
The truth is, it isn’t difficult. It’s impossible.
I once put my house up for sale. The lowest offer I received was $430,000; the highest was $510,000. That means, reasonably intelligent people, with expert advice and days to think it over, spending their own money, came up with estimates that were $80,000 apart. You think a bureaucrat who has never seen the place, with a few minutes to work, would be able to find a number that both of those people would find plausible? Not happening.
My solution: abandon FMV in favor of WWYTFI: What Would You Take For It?
Under WWYTFI, each year the government asks the property holder, “What would you take for it?” and then assesses the going rate on the answer. If you say your house is worth $500,000, to you, and the tax rate is 1.1%, then you owe $5500.
The kicker, of course, is that if anyone else wants to pay $500,000, the property is now his. After all, you said that figure was what the property was worth to you. The sales is automatic: you are paid the half-mil and kicked out of your house.
If you want to keep your house, it’s in your interest to declare WWYTFI honestly–which is to say, high. You don’t want someone buying the house out from under you. Consider the difficulty of moving out, the need to find a new home, the sentimental value of the current place, all that.
On the other hand, if you are bored of your house and looking to move, put the WWYTFI low; maybe someone will take it off your hands.
Which is exactly the point: if the local government can run a nice city, keep the street-lights lit, arrest burglars, and generally make people want to live and work there, it will get the high assessments, and the high tax income, it deserves. If the local government is incompetant, it will be systematically starved for resources.
As a side benefit, my solution solves the eminent-domain issue too. If the government wants to build a park or a highway, there isn’t any question of how much it has compensate the owners of the property it condemns to do so: it pays WWYTFI, not a penny more (or less), and nobody can complain.