The Property Tax Is a Bad Tax, but It Need Not Be

Keith R. Ihlanfeldt, Florida State University

Economists have long argued over the nature of the property tax—is it a benefits tax or a capital tax with local excise tax effects? Those who see it as a benefits tax draw upon the pioneering efforts of Tiebout (1956) to argue that households equate taxes paid with the value of public services received by “voting with their feet.” According to one of the leading advocates of this position (Hamilton, 1975a), the existence of choice among communities, combined with the use of zoning to exclude free riders, transforms the suburban public economy into a quasi-market, with the property tax serving as the price for public goods. If this case holds, as Hamilton (1975b: 13) pointed out, “... then this price should not distort the housing market any more than the price of eggs should distort the housing market.” According to those who see the property tax as a capital/ excise tax, the national average rate of taxation is a tax on capital, and local differences from the national average rate produce local excise effects.