SAN FRANCISCO, April 15, 2015—The parcel tax has advantages over other types of taxes as a source of discretionary revenue for local governments. It is a useful fiscal tool that can help California’s diverse localities tailor services to meet the needs of their communities. These are among the findings of a report released today by the Public Policy Institute of California (PPIC).
In recent years, an increasing number of local governments have responded to Proposition 13’s limits on property tax revenue by turning to the parcel tax to fund services such as police and fire protection, parks, and libraries. Between 2003 and 2012, cities, school districts, and local districts put 691 parcel tax proposals to fund services on the ballot, and 53 percent received the two-thirds vote required for passage. Most of these taxes were relatively small. The median was $60 for cities, $96 for school districts, and $68 for special districts.
In light of this growing use, the PPIC report evaluates the parcel tax based on standard principles of taxation and finds it has advantages over other taxes. The parcel tax also has shortcomings, but these can be addressed through design.
Unlike a sales tax that discourages consumption or an income tax that discourages working, the parcel tax is based on land, which is immobile and limited in supply. A well-designed parcel tax—one that is the same regardless of how the land is used—tends to have a neutral effect on the economy.
Most parcel taxes currently being levied are flat taxes, even though this discourages the subdivision of large parcels, which may in turn discourage residential development. A better way to design a parcel tax would be to base it on the size of the parcel.
“A tax on square footage, applied uniformly on all parcels, is simple, fair, and equitable, compared to the relevant alternatives,” said Jon Sonstelie, PPIC Bren Fellow, professor of economics at UC Santa Barbara, and author of the report.
Such a design does have one disadvantage, however: a levy based on lot size might make it uneconomical to own large parcels of vacant land. This can be addressed by taxing unimproved parcels at a lower rate, Sonstelie said.
The parcel tax is equitable because landowners are the ones who primarily pay for improvements in public services and benefit from the higher housing values that likely result.
In addition, the parcel tax is preferable to sales and income taxes because it is less costly to administer, stable over time, objective, and easy to understand.
The report is titled Parcel Taxes as a Local Revenue Source. It is supported with funding from the Donald Bren Foundation.
PPIC is dedicated to informing and improving public policy in California through independent, objective, nonpartisan research on major economic, social, and political issues. The institute was established in 1994 with an endowment from William R. Hewlett. PPIC does not take or support positions on any ballot measure or on any local, state, or federal legislation, nor does it endorse, support, or oppose any political parties or candidates for public office.