I am anticipating some commentary from JT on the radio tomorrow about property taxes so I thought it appropriate to reiterate some of my earlier thoughts on taxes. The approach of local area policy makers matters when talking about taxes and tax relief. The typical way I am asked the question is whether or not people in North Dakota, or at least Grand Forks, will see tax “relief?” The answer depends on several factors.

First, how does the local area go about this process? Do they sit down and decide what revenue needs are for the year and then set the tax rates? If they do, then a transfer of money from the state, because that is really what is happening, should buy down your taxes. How much? Well since we are dealing with property taxes there is some issue here. Is this a change in the rate? Or is the taxing entity going to divide the funds up in some fashion and provide taxpayers with a lump sum amount off their taxes? Again, I have not seen information that tells me exactly what is happening with this. Why does it matter? Well if my home stays the same value (which I cannot imagine is happening for too many in ND right now) then I should see the full amount of tax “relief”. If my home increases in value, the amount of relief I see is likely to be less. As a side note you often see this in vacation areas.

One way government in vacation and resort areas keeps the tax burden low on their local population is to increase valuations on the vacation properties while keeping the valuations for locals low. I can remember talking to my uncle about this years ago and thinking what an interesting scheme it is to control both the rate and the assessed value simultaneously.

Back to the situation at hand. Let’s look at this in two opposite ways. City A decides on the amount of revenue they need and then looks at the amount of money they receive from the state. If they deduct that from the amount they need they can tax the local residents at a lower rate. City B looks at the amount of revenue they need and view it as an addition to their pool of revenue, and as a result they expand their spending plans. It is my suspicion that many cities end up somewhere between these two extremes. Which brings me back to my counter-question:

Do I care how I receive tax “relief?”

A dollar coming to me whether from property taxes or sales taxes or income taxes will be treated pretty much the same. My colleagues and I have had numerous discussions about this and from a purely economic point of view it really is the total dollars transferred to people and not necessarily the source. If I had my preference I would look at income tax refunds as a preferred mechanism because it has the positive effect of potentially encouraging work. It is also more transparent because people are very used to filling out those forms every year. Check a box and receive this year’s refund. Seems simple to implement and people likely understand it better.

We will see what direction this goes on the radio tomorrow, but I doubt my thoughts on this will change too much.

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