Study finds property taxes hit the poor hardest, not necessarily used for supposed ends

LAWRENCE – For many people, especially those who are not wealthy, their home is their most precious possession. But what happens when a person sells this asset? Are they taxed? If yes how much ? A study from the University of Kansas found that municipal taxes on real estate transfers in Illinois hit low-income homeowners the hardest.

David Simon, visiting assistant professor at KU Law School, analyzed municipal taxes on real estate transfers in Illinois and found that communities with the lowest median incomes applied the highest transfer taxes on real estate. Conversely, municipalities with higher median revenues charged less. In his study, published in the University of Illinois Law Review Online, he argues that the findings raise serious questions about fairness and fairness.

“I noticed that some of my low-income clients tended to pay taxes that some of my other clients didn’t,” said Simon, who practiced law in his Chicago law firm before entering the firm. academia. “I was curious if there was anything in my intuition that some demographic groups had to pay municipal transfer fees while others paid none, or much less. “

To dig deeper into the matter, he downloaded data from the Illinois census on town hall income and compared it to real estate values ​​and other data. The results revealed three “bands” of municipal property transfer rights: the highest was between 2% and 6% of the municipality’s median income; the middle bracket between 1 and 2%; and the lowest was less than 1%. Most municipalities were in the middle category, but 70% of the highest-taxed areas were communities in which resident incomes were lower than the state’s median income.

In Illinois, these real estate transfer taxes must be paid to obtain proof of a valid deed transfer, and these tax rates are imposed by state, individual counties, and individual municipalities. The municipalities which collect transfer taxes set their own rates. This is what makes the phenomenon discovered by Simon so strange: the municipalities that impose the highest tax rates have residents who tend to be the poorest.

“I don’t think policymakers necessarily deliberately impose taxes on the poor,” Simon said. “The question, then, is why do we have these taxes? One of the reasons is that we want to make sure the properties are safe before they are sold. The second is that taxes help collect bad debts. Tax, in other words, is a way to get people to pay their bills because they cannot validly transfer their property until they do.

There are issues with both arguments, Simon said. In the case of property improvement, the argument is that the money will be used to improve the properties, ensuring that they are safe for habitation and do not fall into disrepair. Taxes, along with fees for inspectors who examine properties before they are sold, will help to ensure public safety, are the most common justification given. Yet the revenues are not intended to improve housing stock, pay inspectors’ salaries or prevent dilapidated properties.

“It could certainly be that the poorest communities are in need of housing improvements the most. The problem is, it’s hard to prove that these improvements are happening and, if they are, that the transfer tax is the reason, ”said Simon.

The second argument is that the tax prevents bad debts. Before someone can sell a property, they must pay unpaid utility bills, city fines, or other similar debts. Transfer tax ensures that a seller’s bad debts are paid before a property can be sold. Yet while cities can make a sale conditional on payment of such debt, and some in fact do, it can be done without charging a tax, Simon wrote.

Questions naturally arise as to the destination of the tax money. In Illinois, the law requires that state transfer taxes be applied to property-related projects. However, counties and municipalities generally deposit the funds in the general treasury. The fact that municipalities and counties set their own property transfer taxes and do not allocate them for property improvement purposes gives the impression that the taxes are being used to generate funds for local governing bodies, Simon said. .

Evidence suggests that policymakers and lawmakers at local and state levels should take a close look at their transfer tax rates and how they are used to ensure that those who can least afford to pay such taxes are not not unduly charged by them. More research would be needed to draw more general conclusions or to determine if this is a similar problem at the national level, Simon said, but it raises questions of fairness.

“It appears that lower income communities are more likely to impose these taxes, but there does not appear to be any evidence that low income people will be able to afford them,” Simon said. “What is worrying is that it is the municipalities with the lowest incomes which impose these taxes. I don’t think it is the state that tries to deceive its citizens, but it affects the less fortunate the most. “

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