property tax

Montana’s New Property Tax System

Jeremy Horpedahl4 Comments

SPOILER ALERT if you are watching the TV Series Yellowstone: at the start of Season 5, John Dutton (played by Kevin Costner) is sworn in as Governor of Montana. One of his first proposals in his inaugural address is that the state legislature “double property taxes for non-residents” who have been buying up vacation homes in the state, and contributing to the increase in property values in the state (a fact which drives many plotlines throughout the series). This episode aired in November 2022.

This week, the real governor of Montana signed a pair of bills which effectively did what the fictional governor John Dutton proposed: significantly increasing property taxes on non-residents. Starting in tax year 2026, the property taxes for non-primary residences (which will include non-Montana residents and Montanans who own vacation homes) will be based on 1.9% of market value, while Montana residents will pay a graduated rate structure for their primary residence: 0.76% for property up to the state median (currently about $340,000), 0.9% up to two times the state median, 1.1% for the value between 2 and 4 times the state median, and 1.9% (the same as non-residents) for the value of homes above 4 times the state median ($1.36 million currently). Currently residential property is taxed at 1.35% of market value, meaning that while the rate hasn’t fully doubled for non-residents, most non-residents will be paying twice or more in property taxes than Montana residents.

I was a non-resident member of the Montana Property Tax Task Force, and served on the “Tax Fairness” subcommittee where the plan for HB 231 originated, so I have somewhat of a unique perspective on these changes to property tax rates. I will offer a few thoughts, some of which are critical, but let me first say that it was a great honor to be asked to serve on the Task Force by Montana’s Governor. Also, everyone on the Task Force was very friendly and receptive to ideas from outsiders (I was one of three non-Montanans on the Task Force), and so my comments here are not critical of the Task Force process nor anyone on it. As I did when I served on the Task Force, my goal in this post is to try, as best as I can, to objectively analyze how this proposal (now law) will impact Montana.

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One Hundred Years of U.S. State Taxation

Jeremy Horpedahl1 Comment

From a paper recently published in the Journal of Public Economics by Sarah Robinson & Alisa Tazhitdinova, here is the history of federal and state taxation in the past century in the US in one picture:

The paper primarily focuses on US state taxes, thus mostly ignoring local taxes, but in the Appendix the authors do show us similar charts for local taxes:

In broad terms, the history of taxation in the US in the 20th century is a history of the decline of the property tax, and the rise of the income and sales taxes. In 1900, there were barely any federal taxes (other than those on alcohol and tobacco), 50% of state taxes were property tax, and almost 90% of local taxes were property taxes. Property taxes were essentially the only form of taxation most Americans would directly recognize (excise taxes and tariffs were baked into the price of the goods).

John Wallis (2000) provided a similar, and simpler picture of these changes: considering all taxes in the US, property taxes were over 40% of the total in 1900, but today are under 10%. Income taxes come out of nowhere and are now about half of all government revenues in the US:

Renting From the Government?

Zachary Bartsch2 Comments

When I was younger, and a more disagreeable libertarian, I was staunchly against almost all taxes. And not just all taxes in general. Each type of tax was a specific affront to human dignity in its own egregious way.

  • Sales taxes represented government meddling in private contracts.
  • Income taxes represented government stealing people’s time.
  • Property tax represented that living on land was a privilege provided by the state landlord. Private property was a myth.

I won’t win the fight over whether the state governments should be spending money. But, given that we have to pay for services, I can definitely opine on the desirable and undesirable traits of one tax or another. Economists tend to like sales taxes because they encourage saving, investment, capital formation, and greater output. Maybe that’s a good idea. But it’s not clear to me that we should incentivize consumption tomorrow at the cost of consumption today.  There is no singular right answer to that tradeoff.

I would love to have a per-adult lump sum tax in which everyone pays the same dollar figure no matter what. I would also love to receive a million dollars – and that ain’t going to happen either. In lieu of a lump sum tax on people, I think that the next best thing is a lump sum tax on land. Each acre in a county can pay the same tax bill. On the margin, firms would economize on land and tend toward density. That would bring lots of agglomeration and economies of scale. Jeremy wrote recently about land taxes, which have a lot of proponents. I share the concerns about estimating land value and I think that it’s a non-trivial challenge.

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Land-Value Taxes in the Real World: Split-Rate Taxes

Jeremy Horpedahl7 Comments

Tyler Cowen is skeptical about the possibility of a pure land-value tax, even though it has many theoretical benefits. In particular, Cowen points to a host of what we might call “Public Choice NIMBY” issues. In the real world, the same political forces that drive all of the current urban planning issues would either prevent it from being implemented at all, or prevent it from actually being implemented the way Henry George would have wanted.

I grant all these objections, but I do note that there have been multiple YIMBY successes in recent years, particularly in California where NIMBY forces are probably the strongest in the country. Still, if Cowen is mostly correct, are there any real-world options that offer some of the benefits of a LVT? In short, the main benefits are that the deadweight loss of the tax is very small, and that land is more likely to be used for its highest-valued use (which in many cases will mean more density, though this intersects with zoning policy).

Yes. For the clearest example, look to Pennsylvania. Cities are allowed to implement what is called a “split-rate property tax.” It does not only tax land, as a pure LVT would do, but instead taxes land at a higher rate than improvements. A ratio around 5:1 is typical (meaning land is taxed at 5 times the rate of improvements), though some cities have been as high as 26:1.

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What’s the Worst Tax?

Jeremy Horpedahl2 Comments

It’s the most wonderful time of the year, when we start to get all those little documents in the mail and electronically showing how much you earned in the past year. The purpose of these little documents, of course, is to complete your federal and state income tax returns. While many Americans dislike paying income taxes, there is another tax that is rated as even worse in surveys: the property tax.

Why do Americans dislike the property tax so much? One popular explanation is that people don’t like the idea that “you never really own your property.” In other words, even after you have paid off your mortgage, you must continue to pay property taxes, which feels like a form of “rent” that you pay to the government. Of course, that “rent” does pay for a variety of public services, primarily K-12 education in most locations, but this still seems to rub many Americans the wrong way. The libertarian phase “taxation is theft” conveys a similar sentiment for income taxes, that you never “really own” your own labor if you must pay taxes on your earnings.

But there is also an economic explanation for the hatred of the property tax: it is very salient, especially to taxpayers that no longer have a mortgage. While those of us that still have a mortgage on our home pay property taxes through our normal monthly mortgage payment, Americans that have paid off their mortgage typically write a check (or two) to pay the full amount of their property tax bill. An interesting paper by Cabral and Hoxby finds that jurisdictions with more taxpayers using escrow for their property taxes (meaning they have a mortgage) also have higher property tax rates. And furthermore, they “find that owners with tax escrow report their taxes much less accurately than those without tax escrow” (look at Figure 2 in the paper to see the huge differences).

Income taxes, on the other hand, are not salient for most Americans. Payroll withholding means that the taxes are taken out before we even get our paycheck, and you’ll only notice them if you look at your pay stub. And about three-quarters of US taxpayers get a tax refund at the end of the year. For most Americans, the only salient part of the income tax system is a check they receive as a refund, rather than writing a check for their property taxes.

What does all this mean? Should income taxes be made more salient? Should property taxes be made less salient? A simple answer could be that all taxes should be equally salient. Or if you view one tax as superior in some way, maybe that tax should be less salient, so there is less opposition to it.

I don’t have the answers to these questions. But I do have a question for readers: do you know your own income tax rate? Specifically, what is the marginal rate on your federal income taxes? I invite readers to write down their guesses, then look up the correct answer. How close were you? Please leave a comment, and be honest!