PM – Public Management Magazine, August, 2012 –

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Break the Boom and Bust Cycle

by Rick Rybeck and Walt Rybeck

The widespread reduction in property tax yields created by the real estate bust is grim news for local governments because this tax remains their major revenue source. It is our contention that reforming the property tax can set communities on a path that generates jobs, reduces sprawl, expands affordable housing, and attacks a root cause of boom-and-bust cycles.

Traditional property tax incentives are upside-down. They impose higher taxes on owners who construct or improve homes and commercial structures. They reduce taxes for owners whose buildings deteriorate. Owners of boarded-up buildings and vacant lots typically pay lower taxes than owners of well-maintained properties.

The tax penalty on buildings is easily underestimated. Property tax rates, typically set at 1 or 2 percent of value, seem modest. Unlike a one-time sales tax, however, the tax is levied year after year. Over the life of a building, the building tax can be equivalent to a whopping 10 to 20 percent sales tax.1 This cost barrier explains why many developers launch major projects only after first obtaining property tax abatements.

Those are the opening paragraphs of a fine article, co-authored by Walt and Rick Rybeck. Walt is the author of a recent book, Re-solving the Economic Puzzle, available from amazon and schalkenbach.org. I commend both to your attention.