Property taxes are a primary revenue stream for the government. Furthermore, “the property tax is ideally suited as a source of tax revenue to fund local services” (McCluskey, 2018, p. 20). Thus, it should work correctly and effectively to minimize taxpayer opposition and ensure stable economic growth. The core problem of the described situation is that the property prices have declined over time, and people want to return the excess taxes, which they paid.
In such situations, the government may form a group of market agents who can accurately value the property at the market rate. This measure will help to assess the value of property fairer. More than that, the government may set a property tax revenue cap that is the limit, over which taxes could not be collected. It will help to push down tax rates when property values increase.
The best way to implement this strategy is to set the cap, which may be, for example, the ranking of interest depending on the current value of the property (Elinder & Persson, 2017). To adjust this indicator, it is necessary to review the market value of the property regularly, which will be the main function of the group of market agents. However, it can lead to a decrease in tax revenue, which is non-profitable for the authorities.
That is why the government needs to find some other measures or areas to gain extra taxes. One of the best means is to introduce a Pigovian tax, which is imposed on economic activity that creates negative externalities, such as air pollution created by a factory (Fitzgerald et al., 2016). This tax is economically efficient as it makes private actors consider the social cost of their activity. What is more, a Pigovian tax is fair because it encourages people to take social responsibility.
References
Elinder, M., & Persson, L. (2017). House price responses to a national property tax reform. Journal of Economic Behavior & Organization, 144, 18–39.
Fitzgerald, M. P., Lamberton, C. P., & Walsh, M. F. (2016). Will I Pay for Your Pleasure? Consumers’ Perceptions of Negative Externalities and Responses to Pigovian Taxes. Journal of the Association for Consumer Research, 1(3), 355-377.
McCluskey, W. (Ed.). (2018). Property tax: an international comparative review (2nd ed.). Abingdon, UK: Routledge.