I’ve spent a good chunk of the last few years arguing that property taxes need to be cut. Some of the reasoning is political, but there are also strong policy reasons to cap, and then cut property taxes.

Let’s talk politics first. Property taxes are one of the most hated taxes, allowing for a potent political issue at the state and local level. This gives newcomers to the political process a powerful issue with which to club tax and spend political machines that have bankrupted entire cities. Furthermore, the conservative success in cutting and/or capping income taxes at the national level has left whole swaths of the populace immune the “tax cut” siren song of conservatives fighting the last war.

Aside from these political calculations, cutting property taxes is good policy as well. While many of us might be familiar with the libertarian arguments favoring property taxation (see Henry George), the fact is that there are two powerful arguments for capping and cutting them across America.

First, the majority of property taxes are collected through mortgage payments. This means that your payment is “hidden,” similar to the withholding of your income taxes on your paycheck. Now combine that attribute with the extreme increases we have seen over the years, as the real estate bubble developed. The result is a tax that is both steeply regressive (hitting the middle class property owners as their taxes spiked, and fairly progressive at the same time. (as the wealthy saw their property values rise the fastest.)

Most of us are aware of the argument that a high marginal rate is one of the most economically damaging tax policies. Yet many seem oblivious to the fact that property taxes have virtually the same effect as they have climbed dramatically over the last few decades.

To reiterate, property taxes are not benign. They are hurting the economy.

Next up, ask yourself where most of the property taxes go.
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Let me take a brief detour here to discuss two books that I (or someone, anyway) should write.

First, someone needs to explode the conservative/libertarian myth that “local government is better.” Again, it sounds theoretically true, but in practice, local government is probably more “corrupt” than either state or federal.

Why? Because local government is elected in off-year and Spring elections, where the process is controlled by those who have the most to gain from controlling the local budget. Local elections also garner far less attention with the broader electorate, leaving the powerful interests to control outcomes and trade off the government jobs they control.

The next book that needs to be written should attack the policy of funding education with 3 (theoretical) sources of income. With education being funded by federal, state, and “local” dollars, the “Government Education Complex” has built a perfectly complex machine that can never be held accountable and never be “reformed.”

All the complexity of school districts, state boards, funding formulas, and the “local property tax,” have made education reform nearly impossible. This is by design, BTW. You will have to destroy this system, as it can’t be “reformed” in its present context.

It is also important to point out that the Federal Government, the NEA/AFT, and the combined clout they exercise over every state board and school district, have created a situation where your local school is more and more like a foreign institution than an American school.

Now let’s go back to property taxation.
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As an education reformer who has been trying to find a workable reform mechanism that transitions us to 100% fully-funded choice, it became obvious to me that the “property tax” for education has to go.

Gone. Abolished. Ended. Killed. Disemboweled and left twitching on the pavement.

[This is as good a time as any to step back, think about what fully-funded school choice really means, and shed some of your dogma. "Local control of education" is a myth. Property taxation being easier to control because it is "local" is a myth (it's easier to stop a state tax increase than it is to stop a referendum "for the children unions.]

Now that you’ve reflected a bit, you will realize that a) fully funded school choice is the only avenue to “local control, and b) that you will never attain that goal if you have un-screw the “federal/state/local” Gordian knot. You have to cut that knot, and you cut it by getting rid of the local property tax for education.

Now that I’ve gone on that long rant, here is where to start. Stop fighting tax increases and start capping taxes. Even better, start capping spending. Once we’ve capped spending the tax issue solves itself.

The Tax Caps Cometh

How you think of property caps depends largely on how you think of government. If you see shortfalls in town and state budgets as a revenue problem, you probably think property tax caps are a very bad idea. The best examples here are all those California pols who blame all their state’s budget woes on the father of all tax caps, Proposition 13—instead of on their spending like there’s no tomorrow.
If, by contrast, you think of budget shortfalls as primarily a spending problem, you see a property-tax cap as a tool to control that spending.

Into this debate now comes a timely study that asks a simple question: “Do Property-Tax Caps Work?” Released jointly by the Manhattan Institute and the Common Sense Institute of New Jersey, the study takes for its model Proposition 2.5. This was the measure Massachusetts voters approved in 1980, limiting annual property tax increases to just 2.5% of a home’s assessed value.

This study pays particular attention to the effect of the Massachusetts cap on public education. As it turns out, Massachusetts does not bear out the scare stories. Despite spending far less per pupil than New Jersey ($12,857 versus $16,163 in 2007), Massachusetts students in almost all demographics achieved better results than their Jersey counterparts. Indeed, on the most common measure of achievement, the National Assessment for Educational Progress, Massachusetts remains the clear leader, and the achievement gap has grown over time.

The education comparison is important because so many public schools depend on property taxes for funding. In many New Jersey towns, for example, school spending consumes more than two-thirds of the town’s budget. That makes the public school budget the de facto municipal budget. Mr. Barro argues that here the Massachusetts cap offers an advantage over Proposition 13 in California, giving Massachusetts citizens the right to override it and spend what they want if they vote to do so.

Cap property taxes, and you have capped teachers unions. One of the best ways to kill a tumor is to cut off its blood supply.