Friday, April 1, 2011

Are Property Taxes a Perpetual Liability?

I thought this was interesting..

Economist Mish Shedlock published an email correspondence with a reader, where they discuss the concept of property taxes being similar to a mortgage you can never pay off.

Imagine the perpetual loan, a loan that no matter what you do, you can never pay off. To help conceptualize the idea, think of it as a perpetual interest-only loan in which you are forbidden to completely pay off principal.
As preposterous as that deal may sound, it is highly likely you are in one.
If you own a house, you are in exactly that deal, except it conveniently not called interest. Instead it's called a property tax.

It’s a thought provoking discussion, but I’m not sure they’re looking at all angles..

My Viewpoint:

Property Taxes are just another option our government(s) have of raising the funds they need.  If they don’t have property taxes, the funds will come from somewhere else, such as increases in sales or income taxes.  In addition, they aren’t necessarily a penalty against homeowners, because renters live in a home which is still “owned”, even if by somebody else.

What would happen if the local government decides to raise property taxes aggressively?

The first round or two of property tax increases won't make a big difference.  (and that's assuming they can even get passed when put to a vote.)  Eventually though, higher taxes will make owning a home noticeably more expensive.  This will cause 1 of 2 things to happen:

1) Property owners (landlords) pass this increase on in the form of higher rents.  If this happens, nothing changes in the rent vs buy discussion, and the city/state gets their extra revenue.

2) Renters refuse to pay the higher costs - either by moving to less expensive housing or by finding a landlord who isn't trying to pass on the extra cost.  (renters have more flexibility to move on shorter time horizons.) If this happens, the gap between renting and buying will grow, and home prices will fall.  Falling home prices reduces the property tax valuation, so the city/state ends up without any increased revenue - a scenario with the same deficits but less ammunition to fight them (and a host of angry homeowners.)

In normal times, outcome #1 is feasible.  Today, I'm leaning towards #2.

Your would prefer lower taxes Realtor,

Chris Butterworth