Voters have rejected Preparation HH. The Democrats in the legislature have ignored the voters’ mandate to permanently rein in property taxes without cutting into TABOR refunds, although they did offer some temporary relief. Now, rather than piddle with a broken system, we should fundamentally rethink property taxes. Indeed, we should eliminate them.
Why have property taxes at all? They mean that no one ever really owns their home or other property. Instead, people have to perpetually pay a sort of rent to the government, on pain of government seizing their property by force. Property taxes are fundamentally at odds with property rights.
Property taxes also require a new layer of bureaucracy to process the taxes, resulting in hugely expensive time sucks for government and property owners alike. The Colorado Sun reports, “Property owners filed at least 308,298 protests with Colorado’s 64 county assessors this year, which compares to an average of 103,000 annual protests in the last three assessment cycles in 2021, 2019 and 2017.” And challenges represent only part of the compliance costs. All that wasted time is deadweight loss.
Mine is a radical proposal, to be sure. As the Urban Institute points out, “Taxpayers in all 50 states and the District of Columbia pay property taxes,” mostly to local and regional governments, especially school districts. Property taxes provide 16.6 percent of state and local tax revenues, ranging from less than 10 percent (New Mexico) to 34 percent (New Hampshire). In Colorado the figure is 18 percent (this is for 2021).
Democrats need not break out the paper bags just yet. Take deep, slow breaths. I’m not making the truly radical proposal that government simply cut spending to accommodate the elimination of the property tax. Whether various programs should be cut is beyond the scope of this article. Rather, here, I’m assuming that government will keep spending the same amount of money on the same programs, only it will raise other taxes in a revenue-neutral way.
How might that happen? The two other major types of taxes are on income and sales. (In addition, some cities charge an “occupational privilege tax.”) So what I’m saying is that we should eliminate property taxes and increase income or sales taxes to backfill the missing revenues.
Local and regional governments already collect sales taxes, so it would be no big trick to replace property taxes with higher sales taxes. But I don’t like sales taxes either. Not only do sales taxes entail their own bureaucratic compliance nightmares, they tend to be regressive, meaning they disproportionately hurt the less-well-off.
If I could snap my fingers to change tax policy, then, I’d eliminate both property and sales taxes (including the idiotic “use” taxes) and make up the difference in increases in income taxes. Yes, this would mean shifting to local and regional governments collecting income taxes rather than property or sales taxes. But we’re already locked into the federal income-tax scheme, so piggy-backing on the federal system at the state and local levels at least would minimize compliance costs.
While we’re on the topic, unlike a lot of conservatives, I don’t have a huge problem with a mildly “progressive” income tax. Even though we say we have a “flat” income tax here, in fact, once we account for exemptions, we see that we already have a two-tiered system of 0 and 4.4 percent. Converting our two-tiered system to a three- or four-tiered system doesn’t strike me as too big a deal. There’s an economic argument for doing so: For a person of modest means, the next dollar is a lot more precious than it is for a person of wealth.
Nevertheless, for political reasons, I’d keep the “flat” (two-tiered) system, for the simple fact that Democrats would immediately and perpetually seek to abuse a multi-tiered system to soak the rich. Which means to incentivize the most-productive (or in some cases the most-fortunate) Coloradans to move out of the state and find a new home elsewhere. Remember, some states, including Wyoming, Nevada, Texas, and Florida, have no personal income tax. If we could have permanent tiers of, say, 0, 2, 4, and 6 percent, I’d be okay with that, but Democrats always would want to drive up the higher tiers. We should want high earners to move into Colorado, not move away.
I am aware that some people, including Governor Polis, say they’d like to eliminate state income taxes instead. There are several problems with that idea. For starters, they will never be able to convince the federal government to give up its income tax, so we’d be left with those compliance costs anyway. And then we’d always have to contend with the other two major sorts of taxes too, with their additional bureaucratic headaches and compliance costs.
Polis seems to want to make up the difference with “sin” taxes (as on carbon emissions), but not only would that not raise remotely enough money (again, here assuming revenue neutrality), it gives government a vested interest in encouraging people to “sin” as much as possible so as to maximize tax revenues. The incentives are perverse.
Polis says, correctly, that generally you get less of what you tax. But taxing people with property or sales taxes is just a roundabout way of taxing their income. Whether you tax people coming or going makes little difference.
I know that legislators rarely want to do what makes the most sense, but still a person can dream. The best way to reform the property tax is to get rid of it.
Ari Armstrong writes regularly for Complete Colorado and is the author of books about Ayn Rand, Harry Potter, and classical liberalism. He can be reached at ari at ariarmstrong dot com.
