What is wrong with property taxes? Plenty

23 Oct

In Fort Lee, New Jersey–a municipality with one of the greatest concentrations of co-ops and condominiums in the state–a co-op wants to convert its building to a condominium in order to boost property values and remove restrictions on shareholders.  The co-op board wants the town to phase in the higher assessments over 20 years to avoid an immediate spike in property taxes.

Condominiums tend to sell for more than comparable co-op apartments because co-op shareholders face several restrictions such as needing board approval for a perspective buyer and doing renovations in the apartment.  Hence, when a co-op converts to a condo, unit prices tend to rise as these restrictions are removed, but so do property taxes, because the newly converted units will be taxed at the higher assessed values.

Unfair, cry members of other co-op boards and the town council, who feel taxpayers would be “subsidizing” the new condominium owners reaping the benefits of higher property values but would be paying property taxes based on the lower co-op valuations until the higher property taxes are totally phased in.  Although municipalities cannot defer tax assessments on newly converted condominiums without changes in state law, this issue is moot for the time being.

The conversion of a co-op building to a condominium reveals one of the greatest flaws in property taxation.   First, the property tax on a 2,000 square foot co-op apartment is lower rate than that of a 2,000 square foot condominium apartment.  Why?  Because the resident of a co-op is a shareholder in a corporation, and the tax rate on the co-op building is significantly lower than that of condominium units, which are taxed as if they were private homes.  Yet even though both units are comparable in terms of square footage, co-op shareholders pay far less property taxes than owners of condominiums do.

Second, if two adjacent houses in a town with the same square footage had markedly different property taxes, the glaring unfairness would be obvious to all.  Yet, this is the situation when it comes to taxing condominiums and co-ops.

I am not making the case for higher property taxes on co-ops.  I live in a Fort Lee co-op and certainly do not want my taxes increased.  I am making the argument that property taxes are arbitrary and capricious.   In short, property taxes, like all taxes, do not reflect the fundamental reason for taxation, namely, we the people pay “fair” taxes for services provided by all levels of government.

The flaws in property taxation are monumental.  First, if government provides “services” that only it can provide, a dubious assertion to begin with, how should it charge the people?  We have one sound method to pay for government services, user fees.  The gasoline “tax,” tolls on bridges and tunnels, and fees at the post office, are examples of paying for government services without resorting to taxation.

The more you drive, the more you pay–just like anyone who buys more groceries at the supermarket.  Large families will pay more at the checkout line than singles, childless couples, widows or widowers.   No rational person would argue that supermarkets should charge everyone the same amount for groceries, no matter how much they buy.

Getting back to property taxes.  Property taxes pay for local schools, police and other municipal services.  Yet, childless singles and couples, widows and widowers, are taxed for public schools, a service they do not use.  However, the argument goes, good schools increase property values, and therefore every property owner should pay school property taxes for the benefits of a good school system and high property values.  This argument begs the question.  Property values in Bergen County also reflect the demand for housing because we are located near New York City.  Should New York City demand a “tax” on the residents of Bergen County because proximity to the Big Apple drive up property values in the county?  That would be a patently absurd demand by New York City.  Yet, this is the rationale for taxing every property owner for public schools.

The fairest way to pay for public schools is to levy a user fee for parents who send their children to government schools.

In addition, parents who send their children to parochial or independent schools or home school would no longer be subsidizing their neighbors who send their children to government run schools.  Moreover, residents of condominiums and co-ops have much greater security in their building than private homeowners have in their single-family homes.  Yet they pay property taxes for police departments that provide virtually no services to condominiums and co-op buildings, which are very secure buildings.

The bottom line:  property taxes should be abolished and local governments should levy fees on end users.  This would eliminate the debate of how to tax condominiums and co-ops and put back into the hands of the people of how much they want to pay for government services.  In short, I am arguing for the establishment of a free society, beginning at the local level.

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