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December 11, 2011

Property Tax and the Laffer Curve

We all know the Laffer curve, right? If you raise tax rates, revenue rises initially, but if you continue to raise tax rates, revenue ultimately falls. This rule is absolutely true, but there is plenty of room to argue where you are on the Laffer curve given any specific tax rate. That is, we can argue about exactly where the hump is.

Did you ever think that the Laffer curve applies to the property tax? If raising the property tax reduces the proportion of land allocated to uses that are more price sensitive but are also more capital intensive, then . . . at some property tax rate . . . revenue will actually decline as you increase the tax rate. This is long run analysis and it relates to situations well outside of the Tax Hell described in my previous post.

Where is the hump in the property tax Laffer curve? In my simulations, the hump is a lot closer to a 1% tax rate than would make most city councils comfortable. On the other hand, I readily admit that the parameters in my simulations may not be representative of any particular city, so I would like to be rather modest about any claim in this regard.

The bottom line, one more time, is that we need to be aware that we do not have the ability to increase tax revenue by simply raising rates willy-nilly.

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