Compensation Policy for Tax Exempt Property in Theory and Practice: Reply

Abstract

The nibbling away that Jensen discerned in 1931 has significantly reduced the United States property tax base. As a result of the dramatic growth (285 times) in tax exemptions between 1880 and 1968, current estimates of the extent of the property tax exemptions amount to $500 billion or 33% of the real property base (Balk 1971, pp. 10-19; Musgrave and Musgrave 1976, p. 350). Quigley and Schmenner have assembled data on the value of the exempt property in selected states (1975, pp. 262-63). This data indicates that the ratio of the value of all exemptions to the value of all property tends to be relatively high in states which are densely populated, urbanized areas, or which have publicly-owned open space. This is expected since densely populated, urbanized states tend to have a concentration of schools, hospitals, parks, and public buildings; and states with public domain land-parks and forests-will likely have a high percentage of land area tax exempt. The growth in tax exempt property has increased the pressure on local fiscal systems. Local governments collected 81.5% ($54.3 billion/$66.6 billion) of their tax revenues from the property tax in 1976. The presence of tax exempt land in a jurisdiction shifts the tax burden from the tax exempt land to the remaining taxpaying land-half of which is used for non-farm residences (Advisory Commission on Intergovernmental Relations 1977, p. 106). To alleviate some of the pressure, local government officials have argued for some form of compensation. This compensation would at least contribute to the public costs attributed to the land use. Any compensation policy for tax exempt property would greatly affect the federal government, the largest tax exempt landholder. After a review of the rationale for property tax exemption, this paper suggests a framework for estimating the level of compensation to local governments; compares this approach to the principles behind current compensation policy used by the federal government: and discusses some problems for public policy in this area.