Why the New Property Tax Rules in Missouri Are Bad, Part 1

This is the first in a series of blog posts about why the new property tax legislation passed in the recently concluded special session of the Missouri Legislature is harmful.

The new state law creates three types of counties for property taxes:

1)        Five percent counties: These counties are made up primarily of Missouri’s smaller, rural counties. In these counties, upon local voter approval, a homeowner’s property tax liability can go up by no more than the lower of five percent or the national inflation rate during reassessment, unless voters approve tax rate increases or the homeowner improves their property. There are 75 counties in this category.

2)         Zero percent counties: These counties are made up primarily of mid-sized and suburban Missouri counties. In these counties, upon local voter approval, a homeowner’s property tax liability cannot increase at all during reassessment unless voters approve tax rate increases or the homeowner improves their property. There are 22 different listings for counties in this category.

3)         “Unaffected” counties (my term, not language from the bill): These counties are primarily Missouri’s large urban counties or counties in central Missouri, including the Lake of the Ozarks area. These 17 counties and the City of St. Louis are not included in this legislation and their tax and reassessment system will continue unchanged. It is worth noting that Jackson County, which has had by far the worst administration of assessment and tax collection in recent years of any Missouri county, is unaffected.

There are many reasons why these substantial changes to the system are bad, but the first one is that, in general, property taxes are the least harmful tax for economic growth. So, if you want to create a tax system that encourages greater economic opportunity for all Missourians, the property tax is the last tax you should focus on. Furthermore, these changes will almost certainly lead to greater governmental reliance on income taxes (mostly through the state’s foundation formula for school funding), which is exactly the wrong way to go about this.

Here is a chart I like to share. It includes four major economic studies of tax policy. The conclusions are obvious. Property taxes, in general, are the least harmful for economic growth and income taxes are the most harmful. Why Missouri would be severely limiting property taxes in many counties in a manner that will increase dependency on income taxes is beyond me. It may make for good politics. It is not good tax or economic policy.

Not all property taxes are the same, of course. Property taxes focused on the value of the land are the best, and we need to expand that (i.e., land taxation) in Missouri. Property taxes focused on homes and buildings are next best. Missouri makes heavy use of personal property taxes on cars, boats, etc., and those taxes on mobile assets are less beneficial and should be phased out. Finally, personal property taxes on business and farm equipment are harmful, and should be ended. (The final category makes up a very small part of the property tax base, so ending it would not be difficult.)

Future posts will discuss the constitutional problems with this bill, the harmful effects of favoring current homeowners over future homeowners, a discussion of Charles Tiebout and his theories, and more. For more information, please see my testimony from the special session, these policy studies on this issue of property taxes and assessments, and related commentaries.