Property Taxes - How We Got Here

The Messy City Podcast

This episode of The Messy City Podcast explores the historical evolution and current challenges of property taxation in the United States, f

Key takeaways

• Property taxes have evolved over millennia, originally tied to land production rather than market value.
• The current property tax model is not universally applied—variations exist across states based on local governance and revenue preferences.

Main topics

• History of property taxation
• Comparison between current systems and land value tax models

Notable quotes

"We cannot say that our current system is the best system. We cannot say that it is not. And that is where the whole conversation is based on."

Conclusion

The episode concludes with a call to move beyond ideological rhetoric and engage in informed,

Transcript preview

Speaker 3 (0:00) Welcome to the Messy City Podcast, where we talk with the people who design, plan, build, develop, or even just think about how to create beautiful, successful, and humane cities and towns. Let's learn from each other and create places we truly care about. Speaker 3 (0:46) Welcome back to the Messy City Podcast. This is Kevin Klinkenberg. One of the issues that has been in the news a lot, especially I would say the last couple of years, has been the whole question of property taxes and property taxation. And rightfully so, because in many communities, we've seen a real explosion of costs related to property taxes. And a lot of concern and controversy surrounding that. And it's kind of inspired a whole lot of varied responses across the political spectrum, across the ideological spectrum about like what to be done about all this. Is this a good thing? Is it a terrible thing? You know, what could possibly be done? I think I'm probably going to spend, I'm probably going to have a few podcasts where I dive into this issue. with some different perspectives, but I'm really grateful today to have Jaime Azurieta on the show. Jaime has been on here before. He has a terrific firm called Storefront Mastery. But beyond his work with helping cities and downtown districts and others succeed, he's also just a really brilliant and deep thinker on a variety of issues and has a great sub stack. called the vertical sidewalk. Is that vertical sidewalk? Is that right? Yeah. And he is, he's somebody that I've known and talked with for a while on a variety of things. And I'm really, we're here to talk property taxes and we'll get into why shortly, but Jaime, welcome back to the show. Speaker 1 (2:25) Thank you so much. As always, great to be here. Sadly, we're not in Kansas City, so we cannot go, you know, food hunting, but Speaker 3 (2:32) let's Speaker 1 (2:33) close and this is good. Speaker 3 (2:34) Well, you'll be back soon enough, one of these days. So what really inspired me to reach out and have Jaime back on the show, you may remember I had him on last year when we were talking about, especially about retailing and trends in retailing and downtown and experiences. But he wrote a piece recently on his sub stack, The Vertical Sidewalk, that's called When the Levee Breaks, that he says, the subtitle, A Few Facts I'd Like to Throw into the Dumpster Fire Discussion on Property Taxes. This is an incredible deep dive and thorough analysis, really, of kind of how we got to where we are today on property taxes. And I found it incredibly fascinating, some really interesting history on what led to the system that we have now today. And so I wanted to talk about that because I think it's important to have the historical background before you can start to think about different ways forward. And so, Jaime, I think I'm going to throw it to you right now and say, let's talk about why did you, first of all, why did you want to write this piece? Speaker 1 (3:48) Okay, that is a wonderful question to start. Why do I want to write the piece? First of all, I try to question things from the outcomes perspective, not from the intentions perspective. And so we have this. Speaker 1 (4:08) system that is the system that is allowing us to fund cities and to fund good things that cities can offer their residents. And then there's this story in the city where I live, which is Montclair, New Jersey, that had an interesting Speaker 1 (4:32) pit of money that they found, $20 million in debt for the school district. And the only solution that they found was asking the taxpayers if they would want to increase their taxes to pay for one time for whatever was already spent and to increase their taxes permanently for new spending. that was already committed. And paying all taxes won, paying the new taxes forever did not win. And so we start thinking about $20 million doesn't just appear from one day to the other. $20 million is a lot of money for a school district to have committed in one of the school districts that spends. a lot of money per pupil. I think it's over $26,000 per pupil that they spend here. And so you start questioning. You start questioning the responsibility, not of individual school board members who are, by the way, elected democratically here. You don't start questioning their decisions. You start questioning the Speaker 3 (5:48) mechanisms. Speaker 1 (5:51) that send taxpayers money to a decision-making machine that sometimes doesn't have the best interest. Or I shouldn't say that because they probably do have the best interest in mind. But make decisions without knowing all the facts, probably. That's probably the gentler thing to say. When you start questioning that, when you start questioning and thinking that... I, not me, but people pay a lot of taxes and they would want to see that money go to the best possible places to be allocated in the best possible ways. And that doesn't happen all the time. So I'm thinking of all these things and I'm thinking of the big conversation that we've had for a while on the difference between property taxes as we have them now and land value taxes as a more efficient way of. of levying, of charging taxes, and also the initial thought about LVT that would be the tax to replace all taxes. So there's been a lot of conversation of different ways of taxing people. Some places tax people for sales, and this is how they fund schools. In Michigan, I believe there's a statewide system that turns sales taxes into school taxes, so they are not tied to homeowners' taxes. There's other states where this also happens. I started digging and I found some incredibly interesting historical facts about property taxes. And I said, OK, if we question things. and we talk about things and we open painful and difficult conversations, we might end up at the same place where we are now. But the place where we end up will be a very informed place. So the decisions that we make have to be informed. If we are making the best ones right now, that's awesome. But I think there's a lot of information we do not have. And we should have and we should include in the conversation. Speaker 1 (8:04) We don't know what the answer is going to be. We don't know what the final solution or final answer is going to be. But whatever that answer is, is going to be an informed answer. This is why I wrote the piece. Speaker 3 (8:14) Yeah, and it parallels other conversations we've had related to things like zoning and transportation funding and all of these things where, you know, we have a way of doing things now that when you grow up with it, you exist with it. You just kind of think, well, this is just the way it is. And this is probably the way it's always been. Or it's this way for a variety of good historical reasons. Speaker 3 (8:43) And so we tend not to question a lot of the underlying thinking behind the way things are. And I think it's also worth noting, you know, kind of as you allude to there, there's no one universal approach for property taxation. In the United States, anyway, there are some states that are very heavily reliant on property tax and very minimal on sales tax. And there are some places that are the opposite. There are some states that are very flexible that have home rule that allow, you know, a wide variety of solutions. So there's not a one size fits all. There are some pretty common practices. But why don't you start talking about some of the things that you learned when you looked at like the history of the system that we have now and kind of trace a few of the steps that got us to where we are. Speaker 1 (9:34) I think the first thing we need to establish is that we are having two conversations, two different conversations when we talk about funding cities. One of the conversations is... How do we raise revenue to fund for whatever the city is going to do? This is where property taxes actually come. When we fund cities, we can do a wide variety of things, one of which is levying property or the value of property and getting revenue from there. And then the other conversation, which is related, but it's not the same conversation, is how are we going to provide those services? How are we going to provide the schools? How are we going to provide? Speaker 1 (10:24) I don't know, sewers and streetlights and roads and all these things. It's two different conversations, related but not the same. And this is more or less the framework to the story, the historical account that I would like to make. So for probably the past 5,000 years, taxes have been levied. on the production of land and this is very important distinction right now they are levied on the market the assessed market value of a property where whether that property is where you live and it's your homestead or uh whether you have it for just to make money with it with to rent or to have your business there, or to have some sort of manufacturing production, whatever, in that land, it may have an output or it may not have an output, but it is assessed on the value of that land. For the past 5,000 years, it was not like that. It was assessed on the production. How much does your land make? I will take some of what your land is making. This is how it started in Mesopotamia, in Egypt, in many, many places. I think the first... Speaker 1 (11:57) times when when we started levying taxes according to the assessed market value of the property was in Chicago in the 20th century I believe so I'm trying to look right now to exactly what the what the uh what the date was. And of course I can't find it, but yeah, I will find it because I have the piece pulled up here to remind me of any numbers that might be relevant. So the whole idea was that when the US started, it was mostly privately developed. Most of the roads we have right now that connect cities that right now are internal roads in our suburbs, and many of those which are still today named turnpikes, these were private roads. These were private toll roads that were, yes, they had a charter from the city, state, county, whatever, but they were privately built and they were funded with tolls. And the vast majority of roads were built this way. And there's a number that I will give you right now, which is between in New York state, between 1790 and 1821, the state spent about $620,000 on roads and bridges. And conversely, private investors spent... where is it, $11 million into turnpike companies, which built roads and about a million dollars in bridges. So you see that it was a disproportionate way of private spending. And these were for profit. These were not, you know, saintly, priestly, non-profit organizations that did this for the goodness of their heart. These were... motivated by profit. And most of the roads that we have right now are following those initial roads because they were, of course, carved through the easiest places that connected different cities. And those were reliable. Those allowed people to expect things, allowed business owners to plan things, and were dependable. And so they could... They could make plans in the long term. And when you make plans in the long term, there's a way of creating wealth and growing the economy and doing all these things. And this was way before we had centralized authorities that planned and built roads. The U.S. only has an income tax, for example. from 1913. Before 1913, there was no centralized income tax and there were roads and most of those roads were privately built. And there's so many instances that are similar. The New York City subway, for example, about 70 % of the track miles that they have right now currently were built when the system was private. Then there was a little bit of turmoil and the system was absorbed. by a government company, and then the government company became the government agency, which is what they have right now. But initially, it was built for profit. In Seattle, there's a very interesting area in Seattle, and you have two neighboring train stations because they were built by two different rail companies that were private and were working for profit and had two different railways. So there's... Tons of examples of things that were built and that started and that were funded before we had these levies on the market value of properties. So if Speaker 3 (15:52) I look at your piece, it looks like it was 1818 was Illinois adopted the first state constitutional uniformity clause requiring property to be taxed by value. And then you noted by the end of the 19th century, there were 33 states that had adopted similar uniformity clauses. And by 1902, property taxes comprised 68 % of combined state and local revenues. So just really about 120 years, 120, 130 years old, the system that we have right now. Speaker 1 (16:27) Correct. It's not an old system. Speaker 1 (16:32) The incredible growth, I think, and you will correct me if I am wrong, that the time where the U.S. had the most growth was between Reconstruction and the First World War. Yeah, that's right. This is this insane growth that the U.S. had during this time. And this is when these uniformity clauses were being adopted and property started to be. levied by its assessed market value. What happened during this time is that, of course, labor started to be divided