Voting With Your Feet and the Benefit Principle

 Local government officials should focus less on “keeping up with the Joneses” and more on the core services demanded by their constituents.

Property taxes are arguably the most hated tax in Iowa, and rightfully so. The tax bill grows whether or not the homeowner has done anything to the property. Consequently, Iowans for Tax Relief Foundation’s latest poll found that nearly 67% of Iowans support limits on how much local governments can tax and spend.

Iowans work hard for their money and generally want the local government to tax them only for basic services, like public safety and roads. Residents should make these views known to their local government officials. If they can’t help but get emotional when they do so, Iowans can take comfort in the fact that their feelings toward property taxes are well grounded in economic theory.

One key idea is the principle of voting with your feet. Consumers shop around for the goods and services that best fit their demands; as homeowners, we do this when we select communities in which to live. California has been providing a clear example of residents voting with their feet by their mass exodus. They’ve all left for different reasons, but ultimately, those former Californians found communities in other states that better fit their lives.

In Iowa, we can look at migration trends within the state. Some people prefer to live in downtown communities, where people, stores, and businesses are close by, while others prefer to live in the country, with acres between themselves and their neighbors. Whatever the reasons for their preferences, people choose to live in places that fit their beliefs and lifestyles.

A second key idea is the benefit principle. In short, the people who benefit from a good or service should be the ones paying for it. When it comes to taxation, as much as possible, those who benefit more from government expenditures should pay more taxes than those who do not. For example, people who live in cities with crowded sidewalks should pay for their construction and maintenance, not residents who live where there are no sidewalks.

From this principle follows the conclusion that government expenditures should be tailored. Dense urban areas with plentiful public amenities can and should collect more in taxes than rural communities with few amenities.

Now, let’s put these two concepts together and apply them to property taxes in Iowa. We all chose the places in which we live. Some of us are in the urban core of Des Moines; some are in suburban communities like Waukee or Coralville; and some live on large-acreage properties in rural areas. We have voted with our feet.

As we did so, we chose the communities that best fit our wants and needs. According to the benefit principle, therefore, those who chose to gain access to the direct benefit of increased services should be expected to pay for them. That’s why property taxes in downtown Des Moines and Cedar Rapids are higher than those in rural areas.

If this is the case, however, you might wonder why we all hate property taxes so much. After all, we chose our communities, and local taxes fund the things that make them what they are. Therein lies the problem. Local government officials aren’t always satisfied providing the services that residents chose when they moved to the area. Rural communities in Iowa sometimes try to “keep up with the Joneses” by building amenities their residents never intended to support. Cities often give tax dollars away through tax-increment financing (TIF) and abatements to businesses that provide no direct benefit to residents’ daily lives. Some suburban communities are building recreation complexes and lavish parks within 15-minute drives of similar facilities. Small groups and special interests can pressure local lawmakers to make decisions that violate both the implied contract for which residents voted with their feet and the basic principle that consumers should pay for the services they use. Both violations drive up the property tax bills of people who did not want the changes.

Iowans across the state understand local government expenses have gone up due to inflation, and we accept reasonable budget increases. But when urban and rural property tax bills grow faster than today’s sky-high inflation, outrage is justified. Investments in public safety and road maintenance are widely approved, but when local governments spend irrationally on things that don’t fit with the community character, residents need to speak up.

Only then will local officials remember where they are and what their residents want.

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