Business: Trying to Change an Unfair Tax

(3 of 4)

Obvious Abuses. Inexplicable inconsistencies abound. Pennsylvania exempts properties owned by the American Legion and Veterans of Foreign Wars, but the Elks, Moose, Eagles and Masons must pay taxes on their properties. The Lutheran Church's profit-making Augsburg Publishing House in Minneapolis is exempt, but Nashville's assessor has denied exemption to similar publishing enterprises of Methodists, Baptists and Seventh-day Adventists. The Holiday Inns at Greenville and Boaz, Ala., pay no taxes because the municipalities own them. The University of Michigan earns a tidy income from Willow Run Airport, on which it pays no property taxes; Michigan State University's exempt holdings include a large department store in Lansing. Thanks to a charter exemption similar to that of Cooper Union, Northwestern University for years has enjoyed a steady stipend from a supermarket, a medical office center and several downtown Chicago office buildings that it bought and then leased back to corporations.

To end some of the obvious abuses in tax exemption. Balk urges states to narrow the legal definitions of eligible property. If legislatures insist on requiring localities to give exemptions to favored groups, he argues, states should then reimburse localities for the resulting tax loss. Most of all, local assessors should be forced to publish more comprehensive and accurate exemption data. Balk even questions whether federal and state property should be immune from local realty taxation, because the arrangement often leads to a profligate waste of expensive land.

Prospects for Overhaul. Some critics of the property tax argue that it is so fundamentally unfair that it ought to be abolished. Property taxes add an average 25% to the rent that tenants pay and the carrying costs that homeowners must meet—a higher tax than is found on anything except alcohol, cigarettes and gasoline. For all its shortcomings, the property tax certainly will not be abolished because nobody has devised an alternative way to raise so much revenue. Still, the entire system needs a considerable overhaul.

The most basic step would be to change the structure of the tax. Realty taxes are a fusion of two separate levies —one on the value of locations and the other on buildings. Most cities collect two or three times as much tax from buildings as from the site value of land. This low taxation of land re wards speculators, who can easily afford to keep property off the market until urban growth forces its price up enough for a fat profit. A costly consequence of this is "suburban sprawl," much of which is caused by subdivision developers moving farther out of town to find cheaper land while bypassing idle acreage closer to the city.

At the same time, high taxes on improvements discourage both construction of new buildings and the maintenance of aging ones. Since every improvement leads to a higher assessment, landlords too often find it more profitable to let rental housing deteriorate than to modernize it. As Housing Consultant Perry Prentice points out: "Today's property tax harnesses the profit motive backward instead of forward. There is not a city in this country that is not making its growth, urban renewal and redevelopment problems worse by the way it misapplies the property tax to penalize improvements and subsidize the misuse of land."