Killer Arguments Against LVT, Not (395)

Emailed in by Sackerson, a load of self-pitying drivel (repeated here):

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.

People shouldn't 'own' land (more accurately, the rental value of land) any more that they 'own' the right to vote. The right to a share in the rental value of land or the right to vote should be shared out as equally as possible. Luckily, actual vote-buying is uncommon; if people want to occupy more than their pro rata share of land, they have to pay a bit extra.

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.

That's like saying "buying food" or "running a car" makes no financial sense. Consumers don't make a cash profit from these things but they benefit from or enjoy their own spending.

In effect, local tax authorities are capturing all future appreciation for themselves.

It would be good if they did, but they don't, not even in US states with high property taxes.

Note that applies to areas with high property taxes--in excess of $10,000 annually, not locales with annual property taxes of $2,000.

Why the caveat? Even under full-on LVT, there would be plenty of homes with a bill of $2,000 or less.

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.

Agreed.

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

Income taxes are progressive relative to income. Higher earners tend to live in more expensive homes, so property taxes are progressive too, putting Poor Widows In Mansions to one side.

Property tax is not based on consumption or income, but on the presumed wealth and income of property owners.

No they are not based on presumed anything; they are based on the rental i.e. enjoyment or use value of the plots which people choose to occupy, so they are very much a consumption tax - but unlike sales taxes/VAT, they are not a disguised tax on production.

In effect, property taxes are a wealth tax: if you can afford a house, you can afford property taxes.

In that case, all tenants are liable to privately collected wealth tax. Does that seem morally justifiable? And of course, in economic terms, the tax was borne by whoever sold you the house. What you pay in LVT comes off the price or your mortgage payments.

The fallacy in this assumption is that homeowners' incomes do not automatically rise along with housing valuations.

In individual cases, no. In the grander scheme of things, very much yes.

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.

Nice bit of Doublethink there. Is he describing a growing economy or one in recession?

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."

Shifting from income/sales tax to LVT is not supposed to increase people's tax bills, it merely changes the timing. So more people put away a bit of surplus in the good times. Is that not considered to be a desirable outcome?

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.

Then push for more up to date and accurate valuations. With less tax on income and production, recessions would be much milder.

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.

And again, Poor Widows In Mansions. Defer until death or later sale. Sorted.

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

See above.

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?

Oh, so you like the idea of taxes to pay for social security pensions and Medicare?

As I noted before, as far as the tax authorities are concerned, all you really own is an obligation to pay property taxes...

Don't buy one then.

... 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.

With higher LVT, bubbles would be very much dampened so all his waffle about fluctuations in values is otiose.

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

Save up in the good times, take out unemployment insurance, trade down if you must, take in a lodger, roll up and defer etc. Or alternatively, passively watch as somebody who is prepared to pay the rent/LVT moves in next door instead.

And why the adjective "sky-high"? Why is $1,000 a month property tax "sky-high" when $1,000 a month payroll tax isn't?