A Pre-Civil War Tax Would Shrink the 21st Century’s Wealth Gap

When Americans hear “property tax,” they tend to think taxes on houses and other real estate, and for good reason. While property taxes are often levied on motor vehicles, and occasionally on business net worth, the vast majority of property taxes in the US today apply only to real estate.

It wasn’t always so. The historic “general property tax” applied to almost all property, including intangibles such as stocks, bonds, cash on hand, accounts receivable, and interest in a partnership. Once a mainstay of American public finance, the general property tax helped finance the nation’s early industrial growth.

These broad wealth taxes gradually were whittled away to become the narrower property taxes we have today. These selective wealth taxes apply to the kinds of wealth that make up a large share of middle-class families’ net worth (such as homes and cars), but usually exempt most of the net worth of the wealthy (such as business equity, bonds, and pooled investment funds).

The rationale for this pared-back approach to wealth taxation has grown weaker as inequality has worsened, the share of wealth held outside of real estate has increased, and the tools needed to administer a broad wealth tax have improved. Reviving this American tradition in some form is worth a closer look.

General Property Taxation

In the immediate aftermath of the Civil War, US property taxes included real estate as well as real personal property such as valuable possessions (vehicles, livestock), and intangible personal property (value of debts, business equity, intellectual property).

Local general property tax receipts grew for decades—to 5% in the 1920s from about 2% of gross domestic product in the 1850s. These collections were substantial; in 1902, local revenue was close to state and national revenues combined. By the 1930s, cracks were beginning to show in the system as states had trouble enforcing their taxes.

Pre-Civil War, southern states’ definition of taxable property was inflated through the inclusion of enslaved people. After chattel slavery was abolished by force, the general property tax base in southern states declined to levels more on par with the base in non-southern states. Today, the regions of the South where slavery was most prevalent, and Black Americans generally, both have far lower levels of wealth than in the rest of the country.

Pivoting to Income Tax

The early 20th century was a pivot point for American tax policy. Shortly after the Civil War, US property tax administration was less formal than it is today.

Real property—acres of land, barrels of bourbon, head of cattle—was on relatively public display, but markets were smaller and less liquid, and therefore assets often were difficult to value. Although property taxes did raise significant revenue, assessments were less than comprehensive, constrained as they were by the technology of the day.

The classic contemporary objection to the practice is surely Edwin R.A. Seligman’s 1890 broadside against a general property tax, which said it put “a premium on dishonesty and debauches the public conscience.” The tax was “the cause of such crying injustice that its abolition must become the battle cry of every statesman and reformer,” he argued.

The views of people such as Seligman ultimately prevailed and were helped along in 1913, when progressives won the 16th Amendment to the Constitution, which gave Congress “power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.”

Ultimately, the demise of the general property tax was partly the result of an understandable but misguided belief that new forms of personal income taxation made wealth taxation duplicative. However, as we know now, the income tax—while still a powerful tool for progressive taxation—often isn’t adept at reaching the fortunes of the very wealthy.

The Case for Taxing Wealth

Wealth inequality has increased considerably since the middle of the 20th century when the general property tax was being hollowed out. Progress toward addressing racial wealth inequality, measured as the difference between White and Black per-capita wealth, began to stall out around the same time.

Our current system of selective wealth taxation through the property tax is largely neglecting—and in some ways even worsening—these problems. The bottom 90% of families have more than half their net worth tied up in real estate, whereas the top 1% have just 13%. A similar pattern is present across race and ethnic groups: White families hold just 27% of their wealth in real estate while Black and Hispanic families hold 40% and 58%, respectively.

At the same time, real estate has been declining as a share of total net worth, meaning that today’s narrow property taxes apply to a shrinking share of overall wealth.

In other words, wealthy families—particularly wealthy White families—have a far lower share of their net worth subject to property taxation than other groups. They also have a lower share of their wealth being taxed today than they did just a few decades ago, as intangible assets have grown in prominence.

Given our nation’s high level of inequality, and the unequal opportunities it affords based on race and class, a return to a broader system of wealth taxation is worth a closer look.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Eli Byerly-Duke is a state data analyst at the Institute on Taxation and Economic Policy. He models tax proposals and conducts long-term research with a focus on Appalachia and California.

Carl Davis is the research director at the Institute on Taxation and Economic Policy who has advised policymakers, researchers, and advocates on tax policy issues in nearly every state.