Question

1. How does property taxes in the US relates to micro economics?

2. how does the reliance of property taxes revenue for the local government relates to micro economics?

Answer 1

Answer1 and 2:

When the value of land rises, it's generally not because of something the landowner has done. The resulting rents and other monetary gains, are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. This makes the landowner, an excellent target for taxation.

This favorable view of taxes on land -- especially if levied just on the unimproved value of that land, regardless of what has been built on top of it -- has resonated with economists.

Most taxes, stifle productive behavior. A tax on income reduces people’s incentive to earn income, a tax on wheat would reduce wheat production, and so on. But a tax on the unimproved value of land is different.

If designed well, such a tax could actually encourage productive behavior by goading landowners into getting the most out of their property by, for example, putting bigger buildings on it. An proposed  land-value tax as a solution to the housing squeeze besetting cities in California and elsewhere, arguing that such a levy "is an efficient and fair way to take a city that now works only for lucky prosperous landowners, and turn it into a place where the working class can afford to make a decent life."

However:

1. Property tax bills can rise without property owners doing anything, and
2. Rising tax bills can push property owners (homeowners in particular) to make economic decisions they might prefer to avoid.

People can adjust their spending, and often their income. But they can't help it if, say, house prices go up 80 percent in just three years -- as they did in California from 1975 to 1978. Well, actually, they could help it, by going to the polls in June 1978 and approving Proposition 13, a set of restrictions on property tax rates and assessments that have shaped the state's economy and government ever since.

They've almost certainly misshaped it. Proposition 13 has starved schools and local governments of funding, and left the state too dependent on volatile income tax revenue. By holding assessments steady until a property changes hands, it has also created a big disincentive for long-time homeowners to sell, exacerbating the state's housing shortages.

But while it would surely be better for the state's economy if empty-nesters weren't given such an incentive to stay in their four-bedroom houses instead of downsizing, pushing old people out by raising their property taxes is not what you would call a plan with political legs.

When taxes rise because of rising land values, they put pressure on those who bought back when land was cheaper to sell or come up with new ways to generate enough revenue to pay the bills. Again, either move would be better for the economy than staying put. But for the homeowner (or her neighbors) it can be a pain.

In the U.S., property tax revenue fell in the U.S. in the 1970s and has been pretty flat since. But its share of GDP is still high compared with the rest of the OECD, possibly because property taxes here are used mainly to fund local governments and schools.

So that's where things stand. Taxes on land seem to make lots of economic sense, but not much political sense.

If rising land prices pushed renters back into the majority, though, the political equation could change.