If I asked you to consider the following, how would you react: at the margin, someone who lives in San Francisco is no happier/better off than someone who lives in Gary, Indiana. To a non-economist this might be shocking given the mental image we have of the city by the Bay as it compares to the flaming smokestacks of the Lake Michigan industrial town in decline. But to an economist the idea would be completely pedestrian.
Well, for much the same reason that you should not expect a case of Budweiser to sell for $30 in New York and only $8 in Pennsylvania. Since people are always looking for a deal, folks would quickly snap up PA beer and bring it to NY until it was no more advantageous to get beer in one place or another. The same happens in housing, job choice, or in any other market. So, if at the margin living in San Franciso was MUCH more attractive than living in Gary, then migration would move that way. In fact, the prices in San Francisco would rise to capture this and the prices in Gary would fall to capture this so that it would make no difference at the margin for a person to live in one or the other.
Again, I think this seems unobjectionable to folks once they grasp the concept of arbitrage. The same idea applies to how house prices adjust to “compensate” us for living near dirty air, or to “compensate” us for living near beautiful amenities.
With that in mind, I’d like to propose that the level of property taxes in your town does not (cannot in fact) alter your well-being at the margin. You hear a lot of people (me in particular) that gnash their teeth about oppressively high property tax rates and the burden it places on a typical person. But think about the indifference principle again. Take my town of Bushnell’s Basin, where the average home probably costs about $200,000 and the average taxes are $7,000 per year. People make housing decisions (ignoring the quality of public amenities) with their total costs of living in mind. If the property taxes in my town were dropped to zero dollars per year, would that mean each and every one of us would end up with $7,000 additional dollars in our pocket each and every year? Not a chance. Now, living in Bushnell’s Basin would be at the margin more desirable than living in other places. People would here until again, they were no more happy being in Bushnell’s Basin than they were before the tax decrease. In other words, prices would rise to well over $200,000 leaving me no better off than I was before the tax decrease (ignoring the one-time gain to current homeowners, which would be offset by one-time losses to homeowners in places of decreasing demand).
So, perhaps paradoxically, in this very limited view of the world property taxes do not matter. Our well being is no different in a world with $1,000 annual taxes and one with $7,000 annual taxes. There are of course many good reasons to be skeptical of extending this claim beyond this post – such as discussing the efficiency costs of the tax system itself, how productively the localities put the money to use (surely better than the state and surely better than the feds), the public choice aspects to having large amounts of government employment and government contracting, the principle that I can spend my own money, etc. But ignore that for now. If we accept that the long term real rate of interest is something like 3%, and that we get no benefits for every $1 of government spending of our tax revenues (update: I originally miswrote my assumption as $1 for $1, but I intended to make the argument against anti-property tax / anti-gov types) then if my taxes were lower by $6,000 per year, that is the equivalent of being given an asset that pays me $6,000 every year. How much would you pay for such an asset when rates are 3%? How about $200,000! So, what you should expect to see in this world is that home prices in my town would rise from $200,000 to $400,000 to compensate for the lower taxes – leaving me no better off.
Of course there are interactions with tax policy that matter and there is a question about what the real rate of interest really is, but this is meant for illustrative purposes. You can certainly argue that taxes are evil or bad or make you worse off, but you are going to have to try to make a far more sophisticated case than, “taxes take money from me, I am worse off when money is taken from me, therefore taxes are bad.” That does not exactly follow.