10/10/2023 0 Comments Is a flat tax regressive![]() ![]() The only cities where price/income ratios are systematically higher in ZIP codes where incomes are lower are the “Closed Access” cities where constrained housing supply has severely limited housing affordability. That means that if property taxes are imposed at the same rate across a city, property taxes as a proportion of incomes will be relatively flat across the city. Price/income ratios tend to be fairly level across cities. What does this mean for property taxes? It means that property taxes turn out to be a more neutral claim on incomes than it first appears. What is important is that the relationship is systematic and universal. There are many potential reasons for this relationship, which aren’t important for the discussion here. Homes with higher rents have higher price/rent ratios, up to some ceiling level that is different in each city. ![]() Price/rent ratios rise systematically as rents rise.įigure 1 shows median price/rent ratios, by zip code, in Los Angeles and Dallas using data from Zillow. However, since property taxes are usually imposed based on the market value of the properties, the tax is less regressive than one might think. As with other consumer staples, a flat tax that appears neutral may actually be regressive, because it taxes items on which poor households spend more of their income. For households in the bottom income quintile, housing costs can claim more than half of their income, while households in the highest income quintile tend to spend less than 20 percent of their incomes on housing. Households with lower incomes spend a much larger portion of their incomes on rent. Yet an important question to ponder is: are property taxes regressive? That is, do they hit households with low incomes harder than they hit households with higher incomes? Higher property taxes may also plausibly reduce the incentives that lead to political obstructions to housing supply that turn local housing markets into exercises in “rent-seeking,” or political behavior intended to bring profits to asset owners by restricting access to competition. They can reduce volatility in home prices, and they can be a relatively painless way to extract monopoly profits for public revenue. In parts nine, ten, and eleven of this series, I presented evidence that higher property taxes can have several beneficial effects. ![]()
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