This is a fairly minor follow-up to the post I wrote a few months ago about the pointlessness of the mortgage interest tax deduction. This is about the property tax deduction. Like the MITD, the PTD does a poor job of achieving its supposed policy goals, and in some cases actually works at cross-purposes to those goals.
Just as with mortgage interest, property owners are able to deduct state and local property taxes from their taxable income. Rental property, like owner-occupied housing, is also subject to this exemption. The goal of mortgage interest and property tax deductions is nominally to encourage homeownership, but by it's very nature this can't happen with rental property. Instead, all we end up doing is taking money out of the pockets of renters and handing it over to the (on average, richer) owners, with no social or economic policy victories to speak of.
Here's why:
Rents will usually be set by landlords at whatever level the market will bear (i.e., the highest level at which they can still rent all of their units). Unless competition for renters is extremely fierce, these property owners will be charging rents that cover their costs--not just their mortgage, but also repairs, landscaping, cleaning, taxes, and hopefully some profit. Renters, although they don't receive the actual bill, are the ones paying the property tax as part of their rent checks. Despite this fact, however, the property owner is the one who gets to write it off.
This means that if the property tax bill on my rental unit is $2,000 every year, I end up sending that money to my landlord (who then forwards it along to the city and state) and he deducts it from his taxable income, saving him upwards of $500. That's a pretty steep middleman's fee. The deduction is very clearly not succeeding at its goal of "encouraging homeownership". After all, I'm still renting. Maybe if I got to keep that extra $500 myself I'd be a little closer to owning a home. At the very least, we're clearly operating under an unfair system when only homeowners can deduct their property taxes even though both renters and owners pay them.
This isn't the fault of the property owners and I am not writing this with some kind of vengeance in mind for them, but if the deduction isn't helping to encourage homeownership* then why does it exist? From a government policy perspective, property and mortgage interest tax deductions are already of very questionable value for owner-occupied housing; in this case it's nothing more than a giveaway to rental property owners with nothing in return for the renter or society more broadly. No good is achieved.
As I wrote in November, there's no need for any additional incentive to purchase a home. Unless we want to find some way to ensure that the deduction finds its way into the hands of the person who actually paid the tax, we're better off getting rid of it entirely.
(I'd be interested in anyone's thoughts on how we might pass along the property tax directly to renters, or more likely give them the option of doing so. At first glance it seems too complicated to be worthwhile, and just getting rid of the deduction seems like a more realistic solution. But maybe there are some good ideas out there.)
*Other than in some perverse "force renters to overpay on their taxes until they wise up and buy a house" fashion.