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The Insidiousness of Property Taxes
Over on this thread, there is a discussion on whether the elimination of the property tax deduction would be a good thing. Any time the subject of property taxes comes up my hackles raise, my blood pressure skyrockets, and my wife flees the room so she doesn’t have to listen to the tirade again.
When the state levies property taxes you never truly own your home. Since private property is often considered a fundamental principle of a free society, this is a serious problem for me. My wife and I “own” our home. The state of Texas only charged us $325 per month to live in it this year, but that amount is expected to go up every year for the rest of my life. It does not matter whether I make $30k per year or $130k per year, it still costs me $325 per month to keep what I supposedly already own.
What makes property tax so insidious is that many people don’t even know how much they’re paying. Their mortgage company conveniently packages it up in an escrow all year long so all they see is one monthly payment for principle, interest, and property tax. They never realize that 25 percent of their payment is going to taxes. Oh, and did I mention the best feature of property taxes? They’re self-raising. Mr. Representative doesn’t even have to vote for a tax increase. He gets one automatically any time the housing market improves.
I despise property taxes. Give me an income tax over a property tax any day. At least then people have to file a tax return every year and are forced to see how much the government is taking from them. I truly pity those of you who live in states with both income and property tax.
Published in Domestic Policy
Property taxes are what allow you to “own” your local community. If you want a say in local governance, you have to pay local taxes. If you want your state government running things (your schools, your police departments), by all means, lobby Texas to abolish all property taxes.
California does what you want. Care to guess what effect it’s had on housing costs? Why is it fair to push the tax burden onto new arrivals (or even people upgrading to a new home in the same neighborhood)? Of course that isn’t what happens in practice; in practice, city governments in California go hat in hand begging to Sacramento for a share of income taxes. And we all know what happens when a higher level of government “gives” income tax revenue to a lower one.
Holy Hannah, Gaijin – where do you live?
I encounter them every time a school bonding issue is on the ballot – as it is this year in our little town. “Yes For Kids” read the yard signs, when “For The Education Bureaucracy” would be more truthful.
Man, I despise the “it’s for the children” appeal…
I’m on the other side of this.
Let’s say you had a community where every house was the second home of residents that lived elsewhere (ie, the community was unable to collect income taxes since it had no residents, as legally defined). The only way to fund the local police and fire are through property taxes.
Property taxes do mean you are renting your property from the government, property taxes are simply one way of funding the local services you consume.
What I found interesting in the state of Washington is that when the value of my property decreased during the early years of this century, my taxes did not decrease. In fact, the rate simply increased, so that they could continue to increase my taxes despite the decreased value of the house and land. Now that the values are rebounding the taxes are also increasing. I do know the amount I pay. I pay it directly to the county every six months. As a retiree on a fixed income I thought they might cut me a break on the increases, but you have to be at or below the poverty level for that consideration. The only thing I like about them is that they are deductible from my federal income tax, at least of the time being.
It was inthe ’60’s in south Texas my father in law would laugh because he wouldn’t pay his property tax, periodically he’d get a warning and a notice of penalty. It kept growing until sometime the next year it just magically reset. Don’t know what finally happened.
I did have grandparents that wouldn’t pay and the state took the property after they died. The value was a lot less than the taxes would have been.
it always bothered me that the people who wanted to raise my taxes didn’t pay property taxes – at least not directly.
Aren’t the tenants renting the homes shopping in the city and paying sales taxes? My city gets a 1% cut of the 8.25% sales tax. Or how about a rental tax? The owner would pass it on to the tenant but he’d only be paying the rental tax as long as the home was bringing in income.
And if I quit paying property taxes what will happen? I’ve never tested it but I assume a lien on the home at a minimum. If I can’t sell something when I want to having my name on the title doesn’t mean a whole lot.
I thought voting is what gave me a say.
The school district gets a cut of the property tax. I don’t know why they couldn’t just as easily get a cut of the sales tax. Or if you want to tax the residents just tax them. You live in the city? We send you a tax bill every year. I don’t understand why it has to be tied to the value of my home.
The underlying issue I think is what do we want to allow government to take from people who can’t afford to pay the arbitrary taxes we say they owe.
By the way, I appreciate all the thoughtful comments on this post. I guess no one has posted specifically on property taxes lately. I’d like to respond to some of the other comments but it will have to wait until tomorrow.
They put a Tax Lien on your house that stays there forever. “This tax lien gives the courts the power to foreclose on the lien and seize the property, even if its ownership has changed. The property then will be auctioned and the proceeds used to pay the taxes” So if you sell the house, the lien stays with the house, but Texas law requires you to declare the lien to the buyer.
City governments do get a cut of sales taxes (at least in most states). The problem is that, while sales taxes are a powerful means of raising revenue, they aren’t enough, at least not in practice. And trust me, nothing good comes from having your town leaders go hat in hand to the state government to beg for income tax dollars. The state can attach all sorts of conditions.
City governments, like all other levels of government, are involved in many things they should not be involved in. They need more money because they spend too much on programs, agencies, and enforcement of laws that need not and should not exist. The Leviathan exists largely because we tolerate the tax schemes that support it.
Furthermore, any sales tax would undoubtedly increase to compensate if other taxes were abandoned.
I appreciate the theoretical effect of property taxes to discourage idle ownership, though the effect is probably weaker on the wealthy individuals and corporations most responsible for waste. But the “free” market cannot be engineered without costs. Benefits to the larger economy should not overshadow abuses and loss of individual liberty. Structural incentives are opportunities for endless mischief.
Sometimes it seems the people most fond of touting free enterprise are also the people most determined to manage the economy. Many conservatives represent Reagan’s warning about someone is “from the government and here to help.”
$325 a month is $3900 a year, not all that different from $6000.
When I said second homes, I meant weekend homes, not rental properties. The owners of these weekend homes would probably bring their supplies from their primary residence. It is admittedly an extreme example, but it illustrates the point. Homeowners of second homes still want police and fire protection even though it isn’t their primary residence.
Sales taxes are simply not a great way to fund hyperlocal services because it is so easy to buy all your goods outside that jurisdiction (in a lower tax community). For example, Cook County recently added a “sweetened beverage” tax. To protest, my wife and I did almost all our grocery shopping in the next county.
The advantage of a property tax is that its impact on behavior is minimal. The disadvantage is that local funding depends on property values and ownership so poor areas must be subsidized or are underfunded. The reason we hate them is that we know much of what local government does is unnecessary, most of us no longer have kids in public schools or put them private schools or home school, because so many public schools are awful. Moreover, we see and pay the tax every month. If we pay for these out of general revenue we may complain less but will then be even more over taxed and over governed. So as much as we all hate them, they’re better than income taxes ( I’m way over taxed and when I sell to get out of this overtaxing place, I’ll pay a tax on the real estate sale moreover I can’t itemize because I have almost no mortgage) So what’s the alternative? Schools should be funded out of general revenues and converted to school choice. The whole public school system is an abomination and should be radically reformed, turned over to parents and teachers through vouchers and elimination of the educational bureaucracy at all levels. Services should be paid for through service fees the rest and other local government could come from sales taxes, also visible but not as visible but can be partially avoided by consuming less and saving more. The problem is overspending, waste, bloat, excess government, and the pain of unpopular taxes is the only thing that might get us off our behinds and into active opposition. This is also the reason we should not want federal funding of anything and the reason big government folks want Washington to fund everything.
I’ve thought this for years, and have come to the conclusion property tax is the biggest administrative enemy of freedom out there. It is borderline evil, in the sense that the government has a permanent lien on your home. Imagine if there was a Federal property tax . . .
Next on my list of hated taxes is the estate tax. Here you have money, investments, or property (or a combination) where taxes have likely already been paid, now retaxed when it is passed on to one’s heirs just because it’s over a certain amount. Small businesses and family farms have been devastated by this tax. Of course, there are many, many legal vehicles set up to get around these laws, no doubt my the Congressmen and Senators who do not want to be impacted by the tax personally.
While I want a flat-rate income tax, I’ve become a proponent of the Fair Tax. Having studied the available literature on the subject, every objection has a logical counter-argument. To me, the biggest pro-Fair Tax arguments are the elimination of having to do taxes every year (putting your legal status in jeopardy once you sign the form), and getting the IRS out of my personal business (e.g. How I earn a living).
As to the property tax deduction, why should my share of the national debt be increased because you live in a state with high property tax (the same goes for state income tax, or any other tax deduction). By having a federal tax deduction on state & local taxes you make it easier for local politicians to increase taxes. The deduction should be eliminated.
Nothing raises my hackles more than a home ownership fetish. Don’t you own your paycheck, your savings account, your stocks and bonds, automobile and other chattels? All taxes are property taxes! Please explain how it is possible for you to be taxed without reference to the value of some of your property? (I view myself as the core of my property, so even a head tax is a property tax.)
Texas does not charge you for the privilege of living in your home. You’re charged for the roads that give you and others access and egress to your home, the water and sewage lines that run to it, the sewer systems that drain it, the policy and fire departments that protect it, the schools that the occupant’s children are entitled to attend and a host of other local services. By what criteria do you contend that these services are better paid for through an sales tax, income tax, value added tax or other basis of taxation rather than the value of your real property?
One additional thought. In my perfect world, your highest taxes are paid at the most local level, the next highest taxes are paid at the state level, and the lowest taxes are paid at the national or federal level (just.
One of the things I like most about property taxes is that it is very easy to self-select the ideal combination of taxes paid and services paid. From my current house, I can move approximately a half a mile north or a half a mile west and get two very different combination of property taxes and available services than I currently enjoy. If you extend the radius to 5 miles or so, I can add another 4 to 5 different combination of taxes and services.
Each combination of taxes and services has an impact on housing value. If you could pick my house up and move it to a different location within that 5 mile radius, the value would range from half as much to probably not quite twice as much for the exact same house.
I don’t have the ability to uniquely tailor my tax burden and services at the state or federal level in the same way. Sure, I could potentially move to Indiana or Wisconsin, but that would add multiple hours a day to my commute at a substantial cost both personally and finanically.
Clearly taxes, by definition, are taking something that belongs to you. But in the case of an income tax, they only take a portion of what I actually earn. If I’m out of work for 6 months and living on savings, my income tax decreases proportionately. The city never takes 100% of the value of my income. At my current property tax rate, the government will have taken 100% of the purchase price of the property after I’ve been in the home about 35 years.
If we’re going to argue that the tax is just paying for services rendered, then send every resident of the city a bill at the end of the year. Total city expenditures / # of residents = same bill for everyone. I assume not many people will go for that so let’s be honest with what we’re actually doing. The value of your home is used as a proxy for your ability to pay taxes and the portion of your home required to pay the taxes is put up to the government as collateral every year. Why stop with your home? Many people have savings accounts, 401(k)’s, multiple vehicles, jewelry. Why not base your tax rate on all of your wealth? Then the government can just take anything it wants.
I’m not in favor of people being able to dodge taxes by tying up all their wealth in a home, but none of the responses thus far have made me any more comfortable with the idea of the government forever owning a portion of your home. It’s sort of like how I feel about hunting licenses. I get the practical need for them. But there’s something fundamentally wrong with requiring a private citizen to pay a fee to the government to shoot a non-endangered animal on his own property for his family’s personal consumption.
Over 35 years, the government has taken several multiples of the value of my home.
Given the steep progressivity of the Income Tax system, your income tax decreases disproportionately.
Between 2009 and 2010 my taxable income dropped by about half, and my federal taxes were less than a third of what they had been the previous year.
I am going to respond to this sensible part of your comment and then address the rhetoric. What we are actually doing is trying to figure out the most appropriate way to pay for these services. There are many factors that might go into this. So you might choose to assess taxes on the basis of real property values because:
Real property taxes aren’t appropriate for every service; that’s why we have different types of taxes at different levels of government. While there may be gains from simplifying taxes, there are diseconomies when the tax is wholly unrelated to the value or cost of the services. One size fits all doesn’t work for taxes any more than for most other things in life.
The problem with the “I don’t really own” whatever is used to calculate a tax rhetoric is that it distracts from a more serious consideration of what services governments should provide and how we, collectively, should pay for them. If you want to advocate a head tax (expenditures/residents) go right ahead. But if you lose at the polls and end up with a bill you cannot pay, realize that the government could foreclose on your home for back-taxes. Or you could move to a lower tax district. But don’t pretend that you’d somehow “own” your home any more under that system. Your bank account, not your home, pays for property taxes.
Let me solve this dilemma once and for all, in a 225-word comment:
This is an excellent point, but it highlights a political conundrum. Education is a private good, but failure to educate children creates an public externality when people don’t have enough education to support themselves and fulfill their duties as citizens. (Although there are low information voters despite (because of?) public education.) Similar externalities arise when people fail to save for retirement or take care of their health. Making people do as they should is politically unacceptable. (Thou shalt set aside $X to school your children, $Y for preventive care and health insurance and $Z for retirement.) So we pretend that private goods are public goods (public schools, social security, ACA) and try to tax the amount that people should be setting aside for these purposes. This invariably leads to redistribution of income and wealth. Once everyone has a “right” to an education, pension, etc., then the public has an obligation to pay for it. Or, in our case, we borrow the money to pay for it and leave it for the next generation to pay.
I proposed something very similar in the past. The current system taxes you more for improving your house, which strikes me as counter-productive.