Europe's Great Untapped Revenue Source: Property Taxes
PARIS – In the sidewalk cafes of Paris, people jam the tables, nursing coffee and kir. If global financial trauma has bludgeoned the French capital, it’s not obvious. But clues are there, if you look closely. Broken ticket machines and escalators in the Metro hint at deferred maintenance. On the pricey rue de Rivoli, a shop window proclaims a liquidation sale.
In Athens, 1,300 miles away, economic suffering is blatant. Whole neighborhoods are all but abandoned to squatters and riots. The Greek Orthodox Church is serving 250,000 meals a day to the hungry. Graffiti has spread like fungus.
While headlines focus on national economies, city streets are where the trauma will play out. Buses and subways break down. Potholes deepen. Police and fire service dwindles. Since 2008, the U.S. has lost half a million local government jobs. And for European cities, "the worst is yet to come," OECD senior economist Hansjörg Blöchliger told a recent Paris conference of planners, academics and urban experts convened by Johns Hopkins University’s International Urban Fellows Program. For American cities, municipal budgets will suffer until at least 2015, University of Wisconsin professor Andrew Reschovsky told the group.
Why so gloomy? The answer involves tax policy. How taxes are structured, and who has the power to levy them, profoundly influences city and metro region growth and stability.
When neighboring suburbs compete over a new Walmart, they’re probably eying sales tax revenues. Zoning that pushes up housing costs may have as much to do with property tax revenues as with fear of the poor. And when cities need state permission to raise taxes, you can get fiascoes like Atlanta’s failed regional transportation vote in July; its convoluted political structure came about in large part in order to win the Georgia legislature’s okay even to hold a vote.
In America, the 2008 financial crash and housing crisis sent many local government budgets into the tank. But many European cities are only now facing the grim reality, finance experts told the Johns Hopkins conference. And, surprisingly, some key European economists are pushing greater use of property taxes. Among potential levies – including property, income and business taxes – "property tax is the best," Blöchliger of the OECD told the group.
In general, European cities depend far more on fund-transfers from national governments, far less on property taxes. In Spain, for instance, 40 percent of local government revenue arrives from those transfers, with 15 percent from property taxes. That makes even stable European cities more vulnerable to national spending cuts as the Euro crisis continues.
In the U.S. it’s conventional wisdom that local governments rely on property taxes. That’s true some places, but economist Andrew Reschovsky tallied all revenue for large American cities and found the state is the biggest funder, contributing on average 34 percent of funds used in U.S. cities, compared with 27 percent from property taxes.
Reschovsky, of Wisconsin’s Robert M. La Follette School of Public Affairs, says that unlike other recessions since 1973, U.S. cities are now seeing fairly dramatic declines in income from states. Also unlike other recent recessions, sales and income tax revenues – more sensitive to downturns – have been slower to revive. Typically in a downturn, property tax revenues start sinking about three years in. By then, other revenues are rising.
In Europe, as funds to cities dwindle, economists suggest turning to the less volatile, more progressive property tax, especially where property valuations and taxes are unrealistically low. The OECD’s Blöchliger said some assessed values date to the 1930s.
Earlier this year, the OECD urged Germany to hike property taxes and reduce taxes on labor. Similar reports went to Denmark, Norway, and the United Kingdom.
Is anyone listening?
A few years back, Italy scrapped them for primary homes; it just reinstated them. In Spain, Prime Minister Mariano Rajoy in July announced a reversal of some property tax breaks just reinstated last December. Ireland had scrapped its residential property tax in 1977. This year a new, 100-Euros-per-homeowner levy sent protesters into the streets.
In the U.S., that reaction is familiar. Even small property tax hikes can raise big political stinks. Just ask California politicians, who still consider 1978’s Proposition 13 a political third rail – touch it and die.
Many economists have changed their minds about the property tax, said Sandra Newman, a professor of policy studies at Johns Hopkins who directs the International Urban Fellows Program. They once saw property taxes as regressive, she said. Today, many promote them as more progressive than sales taxes, less volatile and harder to evade than income taxes. What riles people, economists say, is mainly the one large, yearly bill.
The coming years will challenge cities’ ability to collect the garbage, plow the snow, staff classrooms and keep the lights on. Whether in Europe or the U.S., local governments need more authority than most now have if they’re to build a balanced portfolio of income streams. And the political will to make this happen would not be unwelcome, either.