What to Do about Property Taxes in Missouri

Several years ago, my colleagues and I were debating what the worst possible tax policy change could be. (I work at a think tank, so conversations like this are normal.) We settled on “exempting lottery winnings from income taxes.” While it may not be quite that bad, the current bill on the Governor’s desk, which would allow counties to freeze the property taxes for senior citizens, is a similarly misguided attempt at tax reform that will have harmful effects on our state if it becomes law.

The state legislation, Senate Bill 190 (SB 190), authorizes any county to freeze the real property taxes of the primary homes for senior citizens who qualify under the eligibility rules. Their property taxes will stay at the same amount they are when they become eligible for the plan, which for most people would be when they turn 62. The purpose of the bill is to help senior citizens stay in their homes as they age, but there are several major problems with this proposal.

This proposal is harmful simply because it reduces the property tax base. Unless local governments cut services in response to the enactment of this tax freeze for seniors, it will almost certainly lead to higher tax rates on those property owners not eligible for the freeze. This bill is every bit as much of a tax increase on non–senior citizens as it is tax relief for some senior citizens. People who live in homes of similar value with similar public services should pay similar property taxes. The young couple who has lived in their home for a year should not pay higher property taxes than their neighbor just because their neighbor has lived there for two decades.

Passage of this bill would also lead to the problematic situation in which people vote on property tax increases that they themselves do not pay. The single best aspect of property taxation is that it imposes the costs of local services on the people who use those services, unlike sales or earnings taxes that are exported in part to visitors, commuters, and others. Instituting a system in which people vote on property taxes they won’t pay breaks that beneficial connection.

Furthermore, there are important questions about the enabling state legislation. In order to receive a property tax freeze, it says you have to be “eligible” for social security. Does that include social security spousal benefits for people who are themselves not senior citizens yet? Are teachers not eligible for this program? Some Missouri public school teachers are not in the social security program. Are they not included? These are just two flaws in the state legislation that are repeated in the county bill.

For a cautionary tale about the dangers of property tax subsidies, consider California’s famous Proposition 13, which was passed in 1978. Prop 13 limited the increases in property assessments and taxes for homeowners. The measure has certainly had its intended effect of keeping property taxes low for longtime California homeowners. However, it has also reduced mobility, dramatically increased alternative taxes, limited homeownership opportunities, and caused substantial tax disparities between similar properties. This is not what we need in Missouri.

A major tenet of good tax policy is that the tax base should be broadly based. St. Louis County, for example, is considering a property tax increase for major public building construction and renovations, yet at the same time it is poised to become the first county to move forward with a local ordinance to exempt senior citizens from property tax increases (if the governor signs the authorizing legislation). In other words, it’s debating a property tax increase while also considering exempting a large swath of residential property from those same future property tax increases. In economic terms, this is lunacy.

According to data from the Federal Reserve, people ages 65 to 74 have the highest net worth of any age group. So why, if we were to pick any age group for tax exemption, would we pick the wealthiest among us? (People over 75 have less wealth than those 65–74 or 55–64, but they have a higher net worth than any age grouping under 55.) We shouldn’t be handing out property-tax exemptions to any individual, whether those exemptions take the form of corporate subsidies, developer abatements, or senior citizen tax assessment freezes.

While SB 190 would benefit some Missouri senior citizens, it would alter our property tax and assessment system in a myriad of harmful and biased ways. Property taxes work best when the assessments are accurate, the base is wide, and the rates are low. SB 190 does not move us in that direction.