Are Property Taxes a “Wealth Tax” on the (Mostly) Non-Wealthy?

In my recent entry Dear Homeowner: If You’re Paying $260,000 in Property Taxes Over 20 Years, What Exactly Do You “Own”?, I questioned the consequences of high property taxes. Some readers wondered if I was saying all property taxes should be abolished. The short answer is no–what I was questioning is local government reliance on property taxes to the point that owning a home no longer makes financial sense because the property taxes consume any appreciation other than the transitory “wealth” generated by a housing bubble.

In effect, local tax authorities are capturing all future appreciation for themselves. Note that applies to areas with high property taxes–in excess of $10,000 annually, not locales with annual property taxes of $2,000.

State and local taxes–sales, income and property–tax very different events. Sales taxes are based on consumption, and are typically highly regressive, as low-income households pay a higher percentage of their income on sales taxes than higher-income households.

Income taxes are typically progressive, as the higher one’s income, the more income tax one pays.

Property tax is not based on consumption or income, but on the presumed wealth and income of property owners. In effect, property taxes are a wealth tax: if you can afford a house, you can afford property taxes.

The fallacy in this assumption is that homeowners’ incomes do not automatically rise along with housing valuations. Consider the 35% increase in the Case-Shiller 20-City Index since 2012: in a four-year period that officially experienced a mere 4% inflation, housing leaped 35%.

Meanwhile, real median household incomes rose a paltry 5%. Local tax authorities love housing bubbles because rising valuations justify higher property taxes. But the homeowners’ income needed to pay higher property taxes may well have declined during the bubble due to layoffs, shortened hours, medical emergency, reduced bonus, etc.

Real estate professional EB described the consequences of this mismatch of earnings need to pay property taxes and soaring property taxes:

You are correct that property taxes are an oft-forgotten cost of homeownership that many buyers fail to properly evaluate when determining how much house they can afford over the long term.

Perhaps a better way to view property taxes is as an inefficient proxy for income taxes — state and local governments assuming that people who can afford a home of a certain value, must have sufficient income to pay ad valorem taxes and per foot and per parcel charges at a given rate.

In a volatile economy, that assumption is often invalid. When the Fed runs out of monetary games to play, and asset values across the economy normalize, both state and local governments and homeowners will all be in a pinch — governments because the valuation-based portion of the tax base will crash, and homeowners because the fixed charges will no longer fit within their diminished incomes.

This is already occurring in suburban Chicago, where annual property taxes can approach 10% (!) of property values.

In a recession, earnings can decline very quickly indeed. Meanwhile, property taxes are “sticky”: they only decline grudgingly (if ever), and only if homeowners pursue bureaucratic appeals based on the declining value of their home.

Owning your house free and clear (no mortgage) is no guarantee you’ll be able to live there once property taxes are $1,000 per month. One of the emotional triggers of Prop 13 limitations on property tax increases in California was the stories of elderly pensioners having to sell their homes because they could no longer afford the skyrocketing property taxes.

A wealth tax based on housing valuations applies equally to homeowners with diminishing income, i.e. the decidedly non-wealthy.

As pensions dry up and blow away under the relentless erosion of the Federal Reserve’s zero-interest rate policy (ZIRP), unaffordable property taxes may well start evicting homeowners from the “asset” they mistakenly thought they “owned.” If your Social Security pension can barely pay your property tax, never mind your Medicare, healthcare costs, food and other living expenses, then what exactly do you own?

As I noted before, as far as the tax authorities are concerned, all you really own is an obligation to pay property taxes and an option to profit from the next housing bubble. If the bubble pops in a recession that also costs you your job, well tough luck, Bucko–your “asset” reverts to the state/county as payment for property taxes you can’t possibly pay.

If politicos and tax authorities think people will passively watch their neighbors lose their homes to sky-high property taxes, they will soon discover their mistake.

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  • MrLiberty

    All forced taxation is essentially slavery. Government is an entity that is too afraid of its ability to compete against others for business so it simply STEALS the money to pay for its operations. There is ABSOLUTELY NOTHING that government does that could not be done more efficiently, more cost-effectively, etc. by either private individuals or businesses operating in a competitive, free, and completely open marketplace. OF COURSE there are services that are required. A bash on government failure and a bash on the violence-based mechanism of taxation are NOT a denial of the reality that garbage must be removed, streets must be maintained, etc. but there is NO reason why every individual in society cannot simply pay for the services they ACTUALLY want versus the services the government decides we need based on political reasons, etc. Government’s goal is to perpetuate its existence and justify its continued theft of monies from the people. Business’ goal is to deliver a product or service in a manner and at a price that keeps the customer happy and continuing to purchase their goods. They rely on the VOLUNTARY exchange of the marketplace (unless of course they have “purchased” the power and violence of the government on their behalf – as did the insurance companies with Obamacare, etc.).

    If your property is being taxed and can be seized from you for non-payment of those taxes, then the property IS NOT YOURS…PERIOD. The only solution is an end to government and a restoration of a free and open marketplace of services including security, justice, etc.

    • Jay

      That’ll be great when Comcast runs the DMV. It’ll cost as much as a citizen-sponsored organization that does the same thing, plus more, for profit. If you run into a problem, you can vote people out of Comcast just like you do now. What, wait . . . that’s right. You *can’t* vote anyone out of a necessary monopoly “service.” It would be taxes under a different name, but without any accountability. You’d have Exxon regulating whether gas pumps pump the correct amount. Banks adjudicating whether all those extra fees they take are reasonable. Gee, ever notice how “mistakes” never favor the consumer? You could have free market competition and consumers could educate themselves, and we know that companies never collude with each other about prices and policies. No, they’d never do that. With the FDA out of the way, if you lose a child who drinks listeria-laden milk, you will now know not to trust that dairy company any more with your remaining child! If you want to sue the dairy company, instead of courts, we could have mandatory arbitration, with the judges paid for by the deep-pocketed people who killed your child–it would be very streamlined–take your choice: you lose, or they win. It would be a wonderful place to live, where there is no government to go after corporate criminals, nothing ever works, and no one but the wealthy have any recourse. A Libertarian Paradise, just like Haiti.

      • MrLiberty

        Wow. The box you think in is pretty small isn’t it? In the first sentence you list a failed government monopoly and then assign operation of that monopoly to a private business and think this has ANYTHING to do with what I was talking about. Then you list off countless REAL crimes of fraud, murder, etc. and think there could be nothing to address this unless government was involved. How pathetic. You continue to think that banks would retain the power they have without the government protected monopoly they enjoy, and cannot appreciate how open competition is the KEY factor in keeping businesses delivering quality and accountability – not government. When I first came to this blog most of the postings were from folks who had bothered to educate themselves beyond the lies of the government monopoly schools and the government-controlled mainstream media, but now it is heavily populated by the economically ignorant who throw out examples of “anarchy” like Haiti and Somalia (two countries heavily controlled by the government and the military). What a shame that so much wonderful educational material concerning voluntary, private alternatives to the failed government monopoly have gone unread by so many who seem to be too afraid of getting out from under the jack-boot of the parental surrogate the government has become for them.

      • MrLiberty

        And please explain how the DMV is a “necessary…service?” Do you have an altar in your home to more easily enable your worship of the state? Seriously?

    • Tim Chambers


  • Jay

    I find this argument disingenuous. The idea of property taxes is to prevent wealth inequality. Those who have nothing are taxed nothing; those who own 80 percent of all wealth in a country are taxed to the point where their command over the economy and political economy are no more or less than any other citizen. When you get a wealth imbalance like we have now, disproportional wealth becomes unproductive, or destructive to a nation’s economy at large. Take for instance investments in private equity, which strip-mines assets from companies and leaves them bankrupt, leaving employees without jobs and creditors without their dues. Once this and the many, many other shenanigans of the well-to-do become the norm, the wealth imbalance becomes parabolic. To say nothing of the politicians they buy and sell like so much pork belly and frozen orange juice concentrate on the Chicago Mercantile Exchange. The wealthy should not want this, because it is politically destabilizing and erodes the legitimacy of the government and the laws that the wealthy require for their station in our society. But they are so greedy, so shortsighted, so bloody-mindedly conceited, that they would rather be like Lords Fauntleroy in a country like Haiti, than to give up a single iota of their privilege and station. Anyone who has survived layoffs and the increased workloads that always followed, or who has not survived a layoff and had to accept starvation wages, has heard the sage advice: Suck It Up. Well, the wealthy need to pay their taxes. The wealthy have to stop complaining about “uncertainty,” “over regulation,” and “paying your goddamn taxes.” The wealthy need to Suck It Up. There have been dire consequences for everyone else in this economy, and it’s time for the wealthy of this country to sit down to the banquet of consequences they have set for the rest of us. We simply cannot trust anyone whose fundamental base issue is, and always has been, anti-tax for the past forty years. Such persons do not scare elderly homeowners about property taxes out of the goodness of their hearts. They scare elderly homeowners for no other reason than that the Warren Buffets of the world would be severely hobbled if they had to pay property taxes on holdings in bank accounts (heh, offshore too), stock holdings, and whatever other property they held.

    • diogenes

      “Those who own 80 pecent of al wealth in a country are taxed to the point where their command over the economy and political economy are no more or less than any citizen.” Oh? What country is that? Talk about “disingenuousness”! What are you smoking? Or is this a smokescreen?

      A Tobin tax of 1% on securities transfers would be an excellent substitute. Or 10%. Why are most of us compelled to pay sales tax on our toilet paper and the oligarchs who are bleeding America to death pay nothing on their financial paper? Because the oligarchs own and operate America, Inc. Let’s end that before it ends us.

      • Jay

        I was explaining how a property tax would work. Is what I’m smoking.