States and Cities Should Raise Property Taxes – It’s Progressive!

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Economist Polly Cleveland argues that states and cities must raise property taxes on the wealthy to deal with the financial crisis, but even Democratic governors are afraid to do it. Polly joins Paul Jay on theAnalysis.news podcast.

Transcript

Paul Jay

Hi, I’m Paul Jay, and welcome to theAnalysis.news podcast. Please don’t forget there’s a donate button at the top of the webpage.

Economist Polly Cleveland wrote me a few weeks ago saying she thought my guests on economic issues were not paying enough attention to the need for more taxation of the wealthy and relying too much on the ability of the Fed to create money. So, I invited her on the show; so, here we go: Mary Polly Cleveland is an economist focusing on wealth distribution and a long-time activist for social justice. Her blog Econamici — if I’m saying it right; pardon for the crappy Italian accent — also appears on the Dollars & Sense website. She serves on the board of Dollars & Sense, and she’s now an adjunct senior research scholar at Columbia University’s School of International and Public Affairs.

Thanks for joining me, Polly.

Polly Cleveland

Oh, you’re welcome. I’m honored.

Paul Jay

Thanks. So, what was your reason for writing? You know, I’ve been doing quite a few economic interviews and people have been talking a lot about the big stimulus package and so on.

And you were right, I thought, that we hadn’t talked enough about the issue of taxation. There’s sort of this feeling that the Fed can just create money, and because of the various factors, inflation doesn’t seem to be much of an issue. So, why focus on taxation?

So, pick it up from there and then we can talk about what kind of taxation you have in mind.

Polly Cleveland

Yes, the Fed is creating lots of money, money which will eventually cause liability for taxpayers, but we don’t think about that at the moment because it’s an emergency. However, the way the Fed spends that money also makes an enormous difference. And what the Fed has been doing and did in 2008 was to try to bail out the large banks and the large property owners. They are trying to prevent a collapse of the banking system, which would happen if it became widely known that the banks had a lot of bad investments on their balance sheets. Which, of course, is precisely what happens in a bubble.

So, the Fed has been mostly trying to bail out the big banks. And what the big banks do when they get the money is they use it to buy back their stock. So, of course, there’s no inflation because the money is not getting spent on buying goods and services. It’s being used to bail out people with bad balance sheets.

Paul Jay

Not just banks, a lot of private corporations, too.

Polly Cleveland

Oh, yeah, and a lot of big banks and a lot of private corporations who have made a lot of bad investments. I mean, I’m thinking about Boeing, which can no longer design an airplane to save its life.

Paul Jay

Or to save its passengers lives.

Polly Cleveland

Or to save its passengers. Exactly. So, in 2008, the Fed again focused on saving the banks rather than the homeowners whose mortgages should have been written down to market and were not. So, you know, millions of people lost their homes in any case.

There’s been a tremendous focus on what the federal government can do. Only the federal government can create money. But once you get down to the state level, the states have to rely on taxes. And if the federal government, at the moment under Trump, certainly, is not willing to help the states, what are the states going to do? Well, at the moment, Cuomo, is sitting there, you know, with his fingers crossed, hoping that Biden will win and that eventually there will be money to bail out the state.

But, you know, the states have an option — even localities have an option.

Paul Jay

With states in trouble, it means cities are in real trouble. And all the services cities provide are really at stake right now because the cities can’t afford the teachers and the firemen and the cops — although some people would rather less money goes to the cops anyway. But that being said, all the social services cities provide are seriously at risk.

Polly Cleveland

Absolutely. I talked to a friend last night who was on the board of the MTA here in New York City, and they are waiting for some 15 billion or million, whatever it is, a huge amount of money that is owed to them by the Transportation Department and which Trump has been holding back. And they are going to have to seriously cut back the subway system if they don’t get that money shortly.

Paul Jay

So, you are saying the state — and I guess this also applies to cities? —

Polly Cleveland

Mm-hmm.

Paul Jay

— that really, they should be having a far more serious look at property taxes. And, you know, as unpopular as it’s claimed that property taxes are, in fact, it’s a very — what’s the word? — not regressive. It’s a very equitable form of taxation.

Polly Cleveland

Well, property taxes are intrinsically very progressive and in fact, intrinsically much more progressive than income taxes just because property ownership is so much more concentrated than receipt of income.

And I have some numbers up here from an article I wrote a while ago [i.e., in 2011], if I can find it. There we go: the top one percent had 17% of income, 34% of net worth and 42% of non-home wealth — that’s stocks and bonds and anything else; business property. The top ten percent have 42% of income, 72% of net worth, and 81% of non-home wealth. And by the time you get to the top twenty percent: 57.8% of income, 84.6% of net worth, and 92.5% of non-home wealth. And it’s gotten a lot more unequal since then, especially with the more recent surveys.

But in any case, the point is that even a flat level tax on property is going to be more progressive than a tax on income because it’s only hitting people who have property.

Paul Jay

And these revelations about Trump [i.e., his taxes] are kind of a good example: where he can find ways to reduce his income through business losses to practically nothing. But he owns a lot of property.

Polly Cleveland

You got it. He owns a lot of property. And there was a famous story way back when, believe it or not — Governor Ronald Reagan of California [i.e., 1967-1975]. Somebody figured out that Governor Ronald Reagan of California was paying no income taxes, but they checked and he had a big fat ranch and he was paying heavy property taxes on his ranch.

So, if you look carelessly at the data on income taxes and property taxes, you’ll say, “Oh, my God, property taxes are a huge burden on the poor,” when in fact, you know, they’re the only taxes many rich people pay because their income tax is negligible due to loopholes.

And that goes for Trump with a vengeance because, well, he’s obviously a pretty reckless and incompetent business person, so he has huge losses, which means that he doesn’t pay any income taxes. But I’ll bet he pays all sorts of property taxes.

Paul Jay

Now, when you say a “flat tax,” is that going to mean that working-class house-owners are going to see a tax rise? Because why wouldn’t there be sort of a progressive rate depending on how much you own or some kind of line beneath which there wouldn’t be taxes? 

I know in San Francisco, they passed a measure on land-transfer taxes and there was property that was above a certain amount — I can’t remember what the amount was; I think it might have been half a million or a million, maybe even higher. But whatever house or land transfer was worth more than that got hit pretty hard. And they used it to pay for, I believe, free college for people in San Francisco. 

Would you do something like that?

Polly Cleveland

Well, let me tell you what I would say. What most states that have property taxes do is they either exempt or postpone property taxes on owner-occupied homes, or there’s no tax below a certain value, or the tax is postponed until the owner dies or sells the home. So, that pretty much in most places protects small homeowners.

Nonetheless, don’t forget that, you know, small homeowners are better off than people who have no property. But nonetheless it is very popular to protect homeowners. And of course, homeowners vote, which is why homeowners, especially single-family homes, tend to be relatively under-assessed, putting more of the burden on like apartment buildings.

But in general, again, just the fact that property is so unequally owned makes property intrinsically – 

Now something else that has happened over the years is that property taxes at the state level — the states used to be all financed by property taxes — but property taxes at the state level have been pretty much eliminated, except for New Hampshire, and replaced by sales and income taxes.

The result of this transfer has been to leave school districts relying on property taxes. And you get the situation where a rich district can provide good schools at low rates and a poor district can provide lousy schools at high rates. And people say, “Oh my God, the property tax is a terrible, regressive tax. It’s a burden on the poor.”

Well, that would be equally true of any kind of local tax. If you had a local income tax or a local sales tax to finance schools, you’d have the same result.

Paul Jay

Now, this is within a city, I guess it wouldn’t be the same problem if you had some districts of a city that had higher property values. The city could decide to use some of that money in a poorer area of the city. But when you get into the suburbs, you start getting this real inequality where the suburbs, generally speaking, don’t have that much poverty. And so, they wind up with way better schools than the inner cities.

Polly Cleveland

It’s actually mixed. There are older suburbs now that have turned into slums. I mean, you know, some of the worst — what was the — where the kid was killed by the cop? Oh, god, I’ve forgotten the name of it.

Paul Jay

Ferguson.

Polly Cleveland

Ferguson-like suburbs are desperately poor because the property is old and crumbling. The white, middle-class, higher-income people have left. You have a substantial minority population and no way to fund the local government, which is why the cops are going around arresting people for having a broken taillight. You get these awful predatory local governments trying to extract fees from their poor residents. And, you know, you’re going to have terrible schools in areas like that because the property tax base has evaporated, along with the relatively well-to-do people who used to live there. Which, you know, is an argument as to why schools and generally public services like that ought to be substantially financed from the state level.

Paul Jay

In your article that you wrote about this, you mentioned that there’s an organization called Citizens for Tax Justice, which is supported by unions, and they’ve been campaigning against raising property taxes. What’s what is their logic? Why would the unions be against this?

Polly Cleveland

Partly, I think it’s a certain amount of short-sightedness. But it’s understandable because from a narrow point of view, you have, you know, middle- or upper-class — not “upper-class,” but, you know, middle-class, solid union members, the kind that we used to have lots of 50 years ago and are now a dying species. And, you know, they have earned enough working for General Motors or whatever to buy a nice home, live in a nice neighborhood, have comfortable lives, and, you know, two weeks’ vacation.

And what is the biggest tax that they pay? By far, it’s the property tax on their house. It comes in one awful lump every year and people hate it. So, if you’re just looking narrowly at the interest of middle-class homeowners who are faced with this lump-sum tax every year, yeah, they hate it. Now that can be mitigated if it were paid on a monthly basis. I mean, seriously, it’s because it comes as a big, uncomfortable, unpleasant lump. But sure, union people hate property taxes on their houses.

Paul Jay

But if this is really designed as a kind of wealth tax, then there’s no reason why most working-class houses certainly wouldn’t see a rise. In fact, if there was a serious increase in wealthy houses’ property tax, it’s not impossible to even lower property tax on working-class housing.

Polly Cleveland

Where you have property below a certain level being owner-occupied and [thus] being exempt, it’s not as big a problem. But people don’t like that lump-sum tax and they don’t have a broader perspective that says, “Hey, what is the alternative if we get rid of this lump-sum tax?”

What’s going to happen is what happened in California, which is you had a horrendous decline in the quality of the schools and of localities. This was Prop[osition] 13 back in ’78, ’79, which was a referendum. People voted for it because they said, “Oh, boy, this is nice. I won’t have to pay all of these taxes on my house.” And so, Prop 13 rolled back property taxes, froze them, and California within a few years went from having among the best schools in the country to having among the worst.

And of course, the other thing that was really wrong with Prop 13 was it rolled back everybody’s property taxes. So, it rolled back property taxes on business, it rolled back property taxes on oil companies. There was a scandal: Standard Oil of California saved $25 million in annual taxes.

Now, this year in California there’s something — I think it’s Prop 15 — which would restore the property tax on commercial property, but leave the Prop 13 freeze on homeowners. So that would definitely be an improvement. And I think it’s probably going to pass. I don’t know.

Paul Jay

Now, in your article, you talk about Cuomo and, you know, one of his campaign promises was to cap property taxes. And that’s kind of pushed as if it’s to help out ordinary people. But as you said, it’s really the wealthier you are, the more property you own. So, you’re going to get more affected by the tax. But why is this up to the state? Because isn’t this more a city thing?

Polly Cleveland

Well, it’s both, but, well, in New York in particular, most of the power is in Albany. This is a particular peculiarity of New York state, that the city is virtually controlled by Albany. And this is why you’ve got this continuing war between Cuomo and de Blasio, because Cuomo can override de Blasio pretty much whenever he feels like it.

So, that’s history: that comes from the financial — you know, New York almost went bankrupt in the 1970s and had to borrow a lot of money, and the price of having to borrow all of that money was that the state essentially got almost total control over the city.

Paul Jay

How does this property tax proposal differ from an Elizabeth Warren or Sanders wealth tax? Or does it differ?

Polly Cleveland

I think it differs very substantially. They are all proposing taxes on personal wealth. And if you think that there is a problem with taxes on income, with identifying people’s income, self-reporting people’s income, which is very easy for salaried people because, you know, it’s all in the business records. But, you know, the billionaires or even the multimillionaires are already avoiding a lot of taxes through real estate loopholes, through putting their money in the Bahamas or in Panama or wherever else. So wealthy people are already avoiding a lot of income taxes through various devices.

And now you think if you have a personal wealth tax that they aren’t going to manage to hide? They were already hiding their wealth in the Bahamas. So, the difficulty of fairly taxing wealthy people is multiplied if you’re trying to tax their wealth as opposed to their income. So, you know, it’s a nice idea. I’m all in favor. I don’t think, as a practical matter, it’s going to be very easy to do because of the loopholes and the hidden wealth.

Paul Jay

I’ve always thought the most effective wealth tax — and this is before I read your piece on property, which is persuasive — but one way to get at the wealth is through inheritance taxes.

I did a look once at Wisconsin when the protests were taking place, when people had occupied the legislature in Madison. I looked at the number of billionaires on the Forbes billionaire list that live in Wisconsin. And I looked at the size of their fortunes and what would likely be the inheritance and looked at what the inheritance taxes had been even just, like, in 1990, if you went back to there. The amount of money that would have been recouped by the state of Wisconsin, the state’s share of the tax in 1990, was not only enough to pay off the annual deficit, but the entire debt of Wisconsin — nevermind just paying off the increased health care costs, which is what they were trying to unload on public sector workers at the time.

What’s your view on the estate tax? Because I never quite understand why that doesn’t get more attention amongst progressive economists.

Polly Cleveland

I mean, I am all in favor of restoring the estate tax back to the levels it used to be. In fact, as part of — well, I’m a member of United for a Fair Economy, and there is a project called Billionaires for Bush. And we testified and we marched and we dressed up as Billionaires for Bush to protest cuts in the estate tax.

However, the same objections to a personal wealth tax also apply to an estate tax. If you’re moderately wealthy, yes, you’re going to have to pay an inheritance tax to have whatever property you have title to switched over to your heirs. If you’re moderately wealthy. If you’re super-wealthy, you know, again, your wealth is hidden in the Bahamas or Panama or wherever else. And you can manage to transfer that wealth to your heirs just fine without it having to go through probate.

So, you know, yes, let’s increase the estate tax, but don’t expect it to get very much out of the super-billionaires.

Paul Jay

But I think back in the day when the estate taxes were much higher, a lot of money — I can’t remember the numbers I was looking at in Wisconsin — but it was a significant amount of money. Because there’s only so much you can hide, especially if you own shares. You’ve put money into some of the big asset managers like BlackRock. I mean, a lot of the billionaires depend on what they have in the U.S., not just property, but especially in the stock markets and such.

Polly Cleveland

Well, I think they hide a lot more than you imagine. Don’t forget, if you have assets, like in Panama or whatever little tax shelter, you can borrow against those assets and live very well without having your wealth, the titles to your wealth, be in the United States. Now, you got to be super-rich to do that.

Paul Jay

But for whatever it’s worth, it’s illegal if you don’t declare it, right? I mean, Americans have to declare global income. It doesn’t matter where it is.

Polly Cleveland

Yeah, but they don’t declare it because it’s hidden and they borrow against it. You know, this is wealth and they borrow against this wealth in order to pay their bills and pay the property taxes on their five houses. You know, you can live very well while keeping your assets, as it were, semi-hidden on the Isle of Man. That’s another nice tax shelter.

Paul Jay

I guess the point is you can do both. I mean, you can do property taxes. And there’s no reason not to also do estate taxes —

Polly Cleveland

And raise the income tax rates, for Pete’s sake!

Paul Jay

Yeah. Again, even just back to levels they were, you know, 20 years ago, and further.

The allergy against paying taxes or on taxing wealthier people seems to be going away. At least it’s less than it was. I know probably the majority of Republican voters are people that just don’t want to pay higher taxes. But I think the majority of people get that now it’s really necessary that wealthy people should pay more tax. Bernie Sanders has certainly had a lot of influence on that.

I mean, I’ve never like this term “fair share” because I don’t think there’s anything fair about a system that has billionaires, period.

Polly Cleveland

I agree.

Paul Jay

But that being said, it seems to be much more popular. I mean, Biden has said that he’s going to reverse the Trump tax cuts.

Polly Cleveland

He better.

Paul Jay

Well, he should go further than that.

Polly Cleveland

I think this was partly a Reagan effect. I mean, Reagan’s statement about the most terrible thing is, I’m here from the government, and I’m here to help you. So, there’s been, you know, decades of Republican efforts to damage the credibility of government. And I’m afraid some of the, you know, leftists haven’t helped with that. I mean, you know, I worked for Ralph Nader and we were always after these government agencies who were selling out to the people they were regulating.

So, we’ve had a good 40 years of growing distrust of government, and that helps make people reluctant to pay taxes because, you know, “They’re taking my money and they’re wasting it,” or, “They’re taking my money and they’re spending it on lazy people who don’t need it,” or whatever. So, there’s been this whole history of, you know, “Government is just taking our money and wasting it.” And I think that’s changing. And certainly, people are willing to tax the wealthy.

Paul Jay

Well, I guess it comes down to I think something you said earlier. It comes down to what do you do with the money and taxing for what? And there’s good reason not to trust government because government has been so submissive to finance and corporate interests. But you see it, even when people who voted for Trump are interviewed and talk about how much they like Medicare and things like that. So, I mean, people get it when it actually does something for them.

Polly Cleveland

Well, people are more supportive of local government, at least. My daughter is very active. She lives in Mamaroneck and she’s on the zoning board and she is very active at this point, getting out the vote out in her neck of the woods.

But if people are more responsive, if they know who the local officials are and know what they’re doing. This is one of the effects of Big Tech and their monopoly has been to destroy local newspapers because all of the advertising now goes to Amazon rather than allowing local merchants to advertise.

So, there’s been a tremendous loss of information about the good things that local government is doing.

Paul Jay

One of the critiques of a higher property tax is that at least when it comes to commercial real estate, especially apartment buildings and such, if the property taxes go up, the rents are just going to go up. Is that true?

Polly Cleveland

No, it’s not. Though it would seem so, because, you know, when the city is booming, the rents go up and so do the property taxes. And look, I used to be a landlord. My husband and I had these two little bitty apartment buildings on West 68th Street. We had, like, less than twenty apartments. But if you raise the rent, what do you tell the tenant? “Oh my God, my property taxes have gone up. I mean, I’m sorry. I can’t help it. I have to raise your rent.”

But what happened in 2008? The property taxes continued to go up and the rents plummeted. So, the rents are pretty much determined by demand. And demand is higher in the summer, lower in the winter, greater on the Upper West Side, much less in poorer neighborhoods. You know, rents are almost entirely determined by demand. And you have to pay your property taxes even when your apartment is empty.

Paul Jay

Right, and if just because of property taxes, rents just go up, it can push people into neighborhoods which are cheaper, more affordable, which creates less demand in the neighborhoods that are more expensive. So maybe the rents may even have to come down a touch even if taxes go up.

Polly Cleveland

Oh, yeah. I mean, you can have taxes going up rapidly, even as rents go down or vice versa. One of the sad things that happens, actually, is when neighborhoods decline, as happened historically in Bronx, Brooklyn, some of the poorer areas, the city is very eager to keep up its tax collections so it does not lower the property taxes even as the rents fall when a neighborhood declines. And then you get a vicious circle leading to the abandonment of buildings. It’s not as bad as it used to be, but that’s what happens when the city fails to reassess or lower the assessments in a declining neighborhood. It pinches the landlords to the point that some of them actually abandon.

Paul Jay

OK, I rarely do an interview about economics where people don’t write in and object or disagree with something my guest has said. In fact, this is how this interview began, because Polly wrote in, and I’m sure some people are going to write in and disagree with Polly.

So, if you come over to the website (if you’re listening on one of the podcast platforms), theAnalysis.news, and if you do want to engage with Polly, then write some comments and she’ll respond to you and we can keep this conversation going. 

Thanks for joining us, Polly.

Polly Cleveland

Oh, thanks so much.

Paul Jay

And thank you for joining us on theAnalysis.news podcast. And don’t forget the donate button on the website. Thanks again.