Minnesota’s “Bizarro World” of Property Taxation

Minnesota property tax policy debates are upside down with respect to property tax principles.  Tax research provides the reason.

DC Comics (with a huge assist from the television show Seinfeld) introduced popular culture to the term “bizarro world” – a universe where reality is inverted  and people and things have opposite or backwards qualities and characteristics.  Round things are square, strong people are weak… you get the idea.

Having reviewed several decades of MCFE/MTA publications for our look at Minnesota Miracle past and present, it struck me that a substantial part of this organization’s history has been one long, protracted commentary on Minnesota’s bizarro world of property taxation – where public finance principle, theory, and practice gets turned upside down and inside out.  We have long argued that local reliance on property taxation is a good thing, that relative to other potential sources of local revenue it is a fair tax (especially after factoring in our very generous and accessible income-tested refund programs), and that a dollar used to pay local property taxes is mathematically equivalent to a dollar used to pay any other tax.  In bizarro world, greater reliance on local property taxes and increases in property tax collections are bad, it is the least fair tax, and (for some reason never quite explained) it is better to have a dollar go to pay income or sales taxes than to pay property taxes.

The bizarro world of property taxation comes with bizarro political arguments.  My personal favorite is the popular phrase invoked whenever the history of state aid cuts is referenced: “balancing the state budget on the backs of local government.”  What makes this phrase so through-the-looking-glass-strange is that the whole purpose of local aids is to balance local budgets on the back of state government.  It’s local governments’ own self-determined budgets, their own decisions, their own local control, the cost structures they create driving the car; the state is an interested – and certainly invested – passenger.

There is a scientific explanation – highlighted in tax literature – for the existence of bizarro tax world.  It’s tax visibility.  Some of the most entertaining tax research studies I come across address what the academic literature calls “tax salience.”  (“Salience” is the $20 word for “visibility.”  Academicians seem professionally obligated to use such words to make their research as inaccessible as possible to the general public and the real world of policy making.)  These research findings point to a consistent theme: the visibility of a tax has a powerful effect on taxpayers’ behavior and attitudes and consequently the government’s ability to raise revenue.  One study found toll rates are 20% to 40% higher following the adoption of electronic toll collection and the elimination of the need to use cash.  Another study found that simply posting sales tax-inclusive prices reduced the demand of consumer goods by roughly 8%.

The impact of property tax salience is especially relevant and significant.  A Stanford study hypothesized the “in your face” nature of the property tax had much more to do with property tax hatred than actual tax burdens.   To test this hypothesis they examined the relationship between tax levels/tax revolts and the use of property tax escrow which smoothes property tax bills out over 12 months.  Researchers found that areas in which the property tax was less visible because of the higher use of escrow were also areas in which property taxes were actually higher and were also areas where property tax revolts were less likely to occur.  Appropriately enough, the researchers reached a bizarro conclusion about property taxpayers:

“A primary implication of our results is that a non-benevolent government will wish to decrease the salience of taxes and that voters facing a non-benevolent government will wish to keep taxes' salience high – even if the forms of taxation that are highly salient cause inconvenience and animus such as that generated by the property tax.”

Using a trusty “Academic to English” translator, you get this:

“A primary implication of our results is that a government which tends to prioritize its own internal interests over the interests of citizens will want to reduce the visibility of taxation.  Voters dealing with a government exhibiting this characteristic should want very visible taxes – even if it causes extreme annoyance and anger like the property tax does.”

For decades MCFE has argued that one of the greatest assets of the local property tax is its visibility.  It ensures local accountability and does a great job of matching taxpayers’ expectations of government with their willingness to pay for it.  But given these findings it’s easy to see why property tax visibility is often seen not as a tremendous asset but a major liability.  So taxpayers; love your hatred of the property tax.  And welcome to bizarro world!