Funding for schools, municipalities, and other units of local government rely heavily on local real estate taxes. As cities evolve with digital technologies, how should the property tax system change?
In an essay written for the Chicago Council on Global Affairs, Cook County Assessor Fritz Kaegi says it will take innovative tax strategies.
It is Assessor Kaegi’s position: “In the status quo, taxation favors income generated from asset-light strategies, while heaping most of the costs of local services on the shrinking share of economic activity generated by those who own and invest in physical assets.”
He further states, “The more digital an economy gets, the more unfair the distribution of costs becomes if property tax is a principal source of revenues. Taxing income generated, regardless of how physical assets are employed in generating the income, more fairly distributes the costs of investing in education and government services and does not discriminate against the kinds of commercial and residential activities that make cities thrive.”
According to Assessor Kaegi, “Illinois has the third-highest number of school systems in the nation (behind California and Texas), and the majority of public education funding in the state (63%) is derived from property taxes.”
“Funding for education relies on real property, yet this spatially rooted ‘tax base’ is under threat as economic activity becomes increasingly digital, with no fixed location and much less dependence of brick-and-mortar assets” his essay states.
Kaegi believes “Using property taxes to fund education reinforces segregation and unequal outcomes, because tax revenues vary from one district to another based on the size and prosperity of the local real estate tax base. For example, (in Illinois) communities with more affluent property owners and an abundance of businesses can afford to spend more per pupil on education, while communities with fewer resources struggle.”
In his closing remarks, Assessor Kaegi says, “It will become increasingly clear that cities and states cannot solve these problems alone. The nation, which means the U.S. Federal government is best situated to tax incomes generated by activity like digital commerce, virtual meetings, and footloose service providers. Nations will need to build fiscal mechanisms for a digital world that separates economic activity from physical space.”
Assessor Kaegi concludes, “If a digital economy puts more of an emphasis on national fiscal mechanisms, cities around the world will face new challenges in negotiating autonomy vis-à-vis national governments. The debate over who owns the city will be coming to national political conversations around the world.”