Who will pay unfunded state pensions?
The latter was a modest proposal, in the Jonathan Swift tradition. Despite Crain’s Chicago Business instantly labeling it “foolish,” “inhumane,” and “the dumbest solution yet, the first article points out its inevitability. If indeed courts will insist that benefits may not be cut, then state governments must raise taxes, and this is the only one that can do the trick.
States can try to raise income taxes. And people will move. States can try to raise business taxes. And businesses will move. What can states tax that can’t move? Only real estate. If the state drastically raises the property tax, there is no choice but to pay it. You can sell, but the new buyer will be willing to pay much less. Pay the tax slowly over time, or lose the value of the property right away in a lower price. Either way, the owner of the property on the day the tax is announced bears the burden of paying off the pensions.
There is a an economic principle here, the “capital levy.” A government in trouble has an incentive to grab existing capital, once, and promise never to do it again. The promise is important, because if people know that a capital levy is coming they won’t invest (build houses). If the government can pull it off, it is a tax that does not distort decisions going forward. Of course, getting people to believe the promise and invest again after the capital levy is… well, let’s say a tricky business. Governments that do it once have a tendency to do it again.
In sum, a property tax is essentially the same thing as the government grabbing half the houses and selling them off to make pension obligations. And unless a miracle happens, it is the only way out.
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