Some areas have legislation that prevents property taxes from increasing at too fast a rate. In those regions, the formula is changed a bit so that newer residences are charged at a high initial rate.
Except in States that have property tax and no income tax, the appraised value is close to the sale value, usually slightly under.
So in a 500k example, the appraised value is something like 450k (or more). Then your property tax might be 2% of that appraised value, which results in a $9,000 property tax bill every year, even when you retire.
If speculative buying drives up the price over 10 years, it also drives up the appraised value and also your tax bill
I'm not sure I support land taxes etc. but this at least deals with your objection.
Someone else should pay the taxes for them?
Either your tax would come entirely from income - huge handout to homeowners / cost to non-homeonwers - regressive. OR your sales tax would be so crushing that no one would ever buy anything in your community.
Or you could live in a fantasy land.
There are many ways to fund the local area. UK has explicit “council tax”, based on property value, but not as a fixed percentage, rather more linked to the percentage of the house value - so your tax bill doesn’t double just because other peoples houses appreciated. These are paid for all houses, and go to the local government. I think this is indeed one of the main sources of income for local councils.
But for example for capital gains tax, which goes fully to the central government, primary residence is excluded.
This means that people buying property as investments end up paying CGT but not ordinary house owners. If investment properties are rented out, it is the renters that pay council tax, as the actual inhabitants of the properties.
There are so many ways to skin a rabbit with taxes, you could tailor it pretty well to discriminate between homeowners and investors.
In the long run it probably will though, since higher land values will probably cause increases in wages and other costs. But it does not have to be proportionally as much as the land value increase.
In every state I have lived in, the first factor of that "property tax formula" is always "Assessed Value" of said property, and then the formula continues from there based on a slew of criteria (property type, exemptions, etc.).
So you are correct that "Property taxes do not have to go up because the assessment goes up." but it is misleading since property tax is generally going to go increase if assessment increases and all other factors are held equal.
I have seen tax rates drop from 1.25% to 1% and the opposite also happens when the tax collections come up short.
I can give an example. I used to have land in NJ a few years ago, and the total property tax went up year after year. If I recall, the tax rate went from ~1.5% to slightly above 2%, and the assessment barely went up. The property tax went up due to government expenses coming in higher than expected due to all the debt NJ is in that was not counted as debt (underfunded DB pensions). In fact, I lost money on that land because it was worth less since prospective buyers know the property tax will continue to rise, so they have to budget for that.
On the other hand, I had land in FL at the same time, which has appreciated a lot and was assessed for more. But the total property tax paid stayed more or less the same, since the tax rate came down since the government’s expenditures did not move as much, and/or were offset by new payers.
The property tax formulas have more to do with what proportion of the government’s expenses is each land owner liable for, but the total tax collected does not need to rise in step with total land value increase.
The government always needs more money.
Why would your property taxes not continue to go up endlessly?
IIUC, you're arguing that we should expect that ^^^ outcome, because of the political/economic dynamics you mentioned earlier.
My understanding is that, except in towns/cities undergoing gentrification, U.S. municipal property taxes are pretty constant (modulo inflation).
So it sounds like the outcome predicted by that theory probably isn't happening. Wouldn't this cast doubt on the theory?
Yes, except for places experiencing increasing real property values, real property taxes aren’t increasing.
But the discussion was about places with sustained real property value increase, so that generality is irrelevant.
The scare scenario is still wrong, but for different reasons.
Unless you're referencing the California instances in which Prop 13 protects homeowners from increases of more than 2%, I'm not sure what you mean. Nationwide property taxes increase over 5% YoY, while general inflation was far less [0]
[0] https://www.marketwatch.com/story/homeowners-are-facing-the-...
[1] https://www.statista.com/statistics/244983/projected-inflati...
In fact the evidence is that property taxes don’t go up endlessly they are actually highly stable when adjusted for inflation. Further many states don’t have property tax, or expressly cap them.
Finally everyone always needs more money, individual and companies included. Why should government be any different. Governments are just human organizations like any other. They just have a different role and responsibility.
I do expect them to go up endlessly, but I expect for everything else to also go up endlessly (in nominal terms).
I was very surprised when I learned other places charge you some fixed fraction of the property value; and as that value goes up the budget of the municipality goes up.
Therefore, just keeping the depreciation of your house at bay ends up becoming expensive. If you are lucky enough to enjoy DIY work like I do, you can avoid this somewhat, but the moment you need to do any major renovation that you don't have the time and skills to do yourself, it costs about the same as a purchase.
Actual asset values increasing aren’t a harm, and there is basically no place in the US with property taxes high enough that them increasing due to market value can possibly offset the utility (and realizable benefit) of the increase in value, even without the (common, if not usually as ridiculously low as California’s) caps on annual assessment increases that assure that properties that don’t change hands are systematically undertaxed when rapid sustained market increases occur.
Modern financing provides plenty of ways to access equity, so this is very much a non-issue. Though its an issue the property-rich like to pretend is real, because it supports policy that cuts them more breaks and makes things that much worse for everyone else, e.g., CA Prop 13.
How I know you don't live in California.
You would love Prop 13 then that has capped the amount that property taxes can increase per year.
Be careful though, your public schools and other services paid for by property taxes are going to suffer as the cash flow dries up....
He’s making the argument that what you observe is a direct effect of Prop 13.
You may disagree, but it’s very much not a strange argument.
Prop 13 kneecapped the ability for municipalities to fund themselves in the way they traditionally do in the US, and public services got vastly worse.
If you don't have cash, take out a small mortgage on the house to pay the property taxes. You'll still come out ahead in the end.
Also, with low/zero IR, PV of tax payments is infinite, it's not like increasing house price is offsetting that.
In practical terms though, property taxes aren't infinite -- they're only for as long as you're alive. And you can realize your increasing house price while you're alive too (or your kids can). And I know people who have come out very much ahead in that equation in certain gentrifying areas, e.g. turning a $30K investment in 1985 into an $8M sale in 2020.
So within reasonable "non-infinite" time frames, an increasing house price can be very, very, very much offsetting property taxes. That's just a fact.
Not really. You’re saying it is no issue that tax goes up proportionally to house value, I’m saying it is much more onerous than, say, your income tax increasing with income.
Also, if the end objective is “pay tax to local government and make it so that wealthier people pay more”, there are tons of ways of doing it without this anti-feature. Slice of income tax, tax depending on property size (not price) etc.
I say it is unjust for a fixed income senior citizen or disability insurance recipient to have their property tax base grow to a point where they must flee their home of decades. The callus answer is to force the person to sell and take their gains and move so a younger person with higher wages can afford their once-home. I think it is unjust to remove an older, less abled, and less employment-opportunitied person from their environment.
Any senior citizen who owns their home (mortgage all or mostly paid off) can take out whatever size mortgage necessary to pay property taxes. Since it's backed by the house's larger value itself.
Who's making them "flee their home"...? That would only happen if it's already mortgaged to the hilt, but then they're already on the verge of losing it anyways.
In addition, California (and I suspect other states) have a means tested property tax postponement program that allows low income homeowners to defer taxes until they move out, sell, refinance, or die as a substitute for obtaining a private loan.
Not particularly, if every other house is too expensive for a normal person to afford.
If your taxes are going up dramatically as values rise, that's either a sign of issues with equalization rates (the county/town/city needs to periodically reassess), or that other areas in the jurisdiction are declining relative to value. You often see that in cities where property values often mirrors the old "redline" maps... gentrification gets you million dollar condos, but two blocks away some tenement is declining in relative value.
It never happens because it the math just doesn't work out. State/local revenues boil down to: property taxes, sales/use taxes, excise taxes, fees and income taxes. The big revenue streams are property taxes (schools, towns), sales taxes (county/state), and income taxes (state). Fees mostly sustain individual programs and have limited revenue potential - you can't make a fishing license $1000.
So when you get rid of property taxes, you get rid of local control of the levy, which sounds great until Little Rock doesn't want to provide state funds to pay your football coach $200k. Even in a middle of the road state like Arkansas, the pressure to meet Medicaid and other other state program dependencies would make it difficult to fund local government. You'll have a revolt if try to levy a 20% sales tax.
The talk radio answer is "shrink the government!". That means layoff cops, firemen, close schools and libraries, eliminate school sports and close public resources like parks, libraries and suspend things like street lighting. That will make reactionaries happy, but employers will leave.
Nonetheless, the content of what you said seems reasonable and sound. Thank you for helping me understand this.
[1] https://learn.roofstock.com/blog/states-without-property-tax
(Wow, I don't understand the public sometimes.)
California politicians were working on solutions to the property tax problem for years. The same year prop 13 was on ballot, something else was on ballot to fix the problem, which would have done a much better, targeted job - but unfortunately big money poured into prop 13 and that got passed.
My parents bought a new house in 73, and by the time prop 13 passed it was worth around 3x the purchase price. They both worked in tech and were close to having to sell their house (they had 4 kids).
It was a real problem, prop 13 was just a bad solution.
Imho the problem was that the politics of the day got it passed to cover commercial properties too, when it really should just cover primary residences. And not secondary homes or rental properties.
Prop 13 is $30B (billion!) per year. Surely there are cheaper ways to fix the "red tape" and "awareness problems",
Prop 13 leads to perverse outcomes like subsidizing slums and trust fund kids while penalizing new homeowners and people improving their property. It's also simply unjust for two neighbors with similar properties to pay different rates based on their age or even ancestry.
Take the concept of a homestead exemption and make that for everyone's first house so people have shelter once they pay off their house that's not constantly threatened to be taken from them at the whim of government property assessors.
Investment land and whatever else can be taxed.