Hate property taxes? Here’s what Idaho’s Legislature should do | Peter Crabb

You’ve heard it said that “the only things certain in life are death and taxes.” No one really likes to talk about death, but our policymakers have a lot to say about taxes.

The legislative agenda in Idaho this year is all about raising more tax revenue to fund spending priorities like education, and how to reform some revenue polices, like property taxes.

In these discussions policymakers should consider basic economic principles that shed a lot of light on the question.

The state of Idaho raises revenue using three forms of taxation – income, sales, and property taxes. We best judge the efficiency of each method for raising the needed revenue by applying two key economic principles: (1) people respond to incentives, and (2) the true cost of any action is what you give up to get it.

The first principle shows that society loses when taxes alter incentives and distort the allocation of resources. Well-designed tax policies minimize the economic distortions that result when businesses and individuals earn money from their labor.

Because income is taxed, the current state and federal tax laws discourage higher productivity and/or savings. Such laws actually encourage the opposite — borrowing.

This disincentive disappears, or at least declines, with taxes on consumption, that is, sales. For this reason, some have argued that Idaho should eliminate or reduce the income tax and rely on sales taxes as Washington and Nevada do.

The second economic principle directs us to consider the burden of complying with the tax laws, as this is a real cost on taxpayers. Well-designed tax policies minimize the amount of money and time spent complying with tax laws, and thus lower overall costs on society of funding government. Much is wasted when even the best and brightest among us hire accounting specialists and lawyers to complete forms and otherwise comply with the law.

What then can be said about the third choice, property taxes?

As with sales taxes, property taxes are less distorting than income taxes. Property can’t be easily moved or altered to avoid taxation. Property taxes are also much easier to calculate and pay.

But when you ask people which tax they hate the most, property taxes top the list. A common complaint is that the amount of this tax often rises no matter what an owner does. People can adjust their spending or reduce their income when other tax law changes, but can’t do anything when local property values are rising.

The conclusion from this economic reasoning is not to reform, or cap, property taxes. Rather, we need to take a look at the disincentives and inefficiencies in our income tax laws.

We hate to talk about either death or taxes, but at least we can do something reasonable about the latter.

Peter Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. prcrabb@nnu.edu

This story was originally published January 29, 2020 at 4:00 AM.