Sunday, June 24, 2012

The Seven-Year Itch: a Tale of Tax and the City

Published in The Tennessean, Sunday, June 24, 2012 and Forbes with archives.

by Richard J. Grant

The mayor of a major Southeastern city recently asked for and got a substantial increase in property tax rates. The hoped-for revenue from the tax increase implies a transfer of $100 million from taxpayers to the local government. The mobilization of substantial public opposition to the tax increase tells us that many taxpayers felt that they could better use that money themselves and that the city government should make better use of the money that it already receives. But a majority of council members saw things differently.

None of this is unusual. Different people are guided by different standards, and they also perceive costs differently. In this case, the relevant costs were those perceived by the city officials. They responded to the incentives that they face. Their decisions suggest that they imagine the world, or at least the city, being made better by redistributing the use of funds from individual taxpayers to the collective purposes of the municipality. That is what councils do.

In the public pitch for the tax-rate increase, supporters repeatedly emphasized that it was “the first property-tax hike in seven years,” as if that was somehow important for other than merely historical interest. It seemed to imply that a tax increase was overdue.

But if, after seven years, a tax increase is overdue, does it follow that another tax-rate increase will be due within seven years, and so on? The assumption seems to be that government spending should grow faster than the tax base and is therefore naturally entitled to an increasing share of that tax base.

This is just a local example of the general confusion over the difference between tax revenues and tax rates when speaking of “tax increases.” In a world with price inflation, the cost of government can be expected to rise with the general price level. For a given tax rate, property-tax revenues can be expected to rise as the assessed values of local properties rise.

But there is no natural guarantee or even a likelihood that all prices will increase uniformly. A real-estate bubble would inflate not only current property-tax revenues but also expectations of future revenues. Any official plans made on the basis of those inflated expectations can be expected to lead to disappointment and, in turn, to calls for tax-rate increases.

As is true at all levels of government, those who expect to benefit disproportionately from government spending are more likely to favor the tax-rate increases that they believe will enable the spending increases. They are also more likely to lobby and work for the tax increase.

The $100 million given up by taxpayers will not be spent on private education, on private security, on private medical care, on private transportation or invested in private pensions. These are some of the costs borne by those taxpayers who protest against the tax increases. But mayors and council members, just like presidents, senators and representatives, often face a different calculus — a calculus backed by compulsion. Re-election has its own incentives.

Special interests often find common cause with ideological statists, both of which promote the expansion of government and the redistribution of resources toward their own purposes. One group does it by accident; the other does it on purpose.

This is why, in the absence of effective constitutional limits, governments tend to grow to test the economic limits and patience of their hosts.


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail messages received at: rjg@richardjgrant.com

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Copyright © Richard J Grant 2012