But local control of revenue is eroding. The property tax has steadily declined for years. Where it once provided localities with 80 percent of their own-source revenue, it now accounts for less than 40 percent.
There are no viable alternatives to the property tax. Local-option sales and income taxes and user fees cannot raise enough money to sustain local governments. Without their own revenue sources, localities will be forced to rely on states to fund more services.
This is a very dangerous trend. Relying on states to fund local police, fire, ambulance and school systems virtually guarantees that those and other essential local public services will not be adequately funded. Besides, state aid comes with limitations as to how the money can be spent. All forms of financial centralization are accompanied by such "strings." This affects everything from the kinds of books in the local library to the artwork adorning public buildings.
Increased reliance on state funding also creates fiscal uncertainties for local governments. When states run surpluses there is always pressure to cut taxes rather than increase spending on local public services. When states run deficits, local aid is among the first expenditures slashed.
The only dependable source of revenue for localities is the property tax, and it needs to be strengthened. For years, it topped survey lists of what taxpayers considered the "worst tax" they had to pay. But many of the problems that used to plague the tax have been addressed. Now, the public needs to know the positive aspects of the tax: It provides a steady stream of revenue; compliance and administrative costs are minimal; there is virtually no opportunity to avoid the tax, a fact that honest taxpayers will appreciate; and it is visible--citizens know what they are paying and can evaluate what they are getting in return.
To complement this education effort, the excesses of the property tax revolts must be reversed. There is no economic justification for rate and assessment limitations. Such limits keep property tax revenue artificially low and merely shift the burden of paying for government to other types of taxes and to other taxpayers.
Not all aspects of the tax revolts should be repealed. Provisions designed to protect low- and fixed-income property owners should be retained. Concerns over government revenue windfalls, especially in times of high inflation, can be addressed by retaining rate rollbacks designed to ensure that governments collect only enough to meet obligations.
Governments must also address the problem of exempt properties. Exemptions for economic development and charitable organizations cost local governments billions of dollars and shift the burden of paying for public services to other taxpayers. Politicians are now starting to discuss the issues behind these politically popular exemptions. Economic development incentives, for instance, are viewed by many as an inefficient means of creating jobs. And more people are questioning the wisdom of exempting property owned by charities since these organizations use public services.
States must address the problem of inequities in education finance. The overall goal is not controversial--all children should be afforded equal educational opportunities. The answer is not to cede control, financial or political, to the state. Methods of equalizing school spending that do not include reducing local taxing authority must be found.
Finally, political leaders should explore alternative ways of taxing property. For example, the concept of split-rate taxation, which involves taxing improvements at lower rates than land, should be seriously considered. Reducing the tax burden on improvements could have a significant impact on development by creating an incentive to develop underutilized space, such as empty buildings and vacant lots. Politically, split-rate taxation can work since most homeowners would see their property tax burdens decrease.
It will take political courage to initiate comprehensive reform. But it is necessary if localities are to remain a viable part of our system of government.
