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Property taxes illustrate the problems with ‘wealth taxes’

Minnesota homeowners have been receiving their preliminary estimated property tax bills for 2020. Many of them are unhappy. Star Tribune Editorial Board member Patricia Lopez tweeted

Those of an uncharitable frame of mind might point out that if you continually endorse candidates who say they will put your taxes up you can’t get upset when they put your taxes up.

But things might not be as bad as all that. As the Star Tribune reports,

In St. Paul, the preliminary bills are calculated using the 22% maximum tax levy hike that the City Council approved in September as a way to pay for organized trash collection if voters threw out the current quarterly billing system. Since St. Paul overwhelmingly voted to stick with the system, the actual levy increase will probably be under 6% when the council approves it in December, said Council President Amy Brendmoen.

Well, we’ll see. But, even so, 6% is quite a hike.

Wealth is not the same as income

Property taxes are a form of ‘wealth tax’, they are levied based on some assessment of the market value of an asset you hold. In this case it is your house, but it could be bonds or equities.

But you cannot pay your tax liability with these assets – the authorities will not accept $3,000 worth of bricks from your house in settlement of a $3,000 property tax bill. Your tax liability has to be settled in cash. And, while your assets may have increased in value by 6% – and according to Zillow, Ramsey County home values have gone up 3.1% over the past year and are forecast to rise only rise 1.8% within the next year – there is no guarantee that your cash holdings will have increased at a similar rate. Indeed, as Figure 1 shows, in no year since at least 2000 has the Median Household Income for Ramsey County increased by 6% in either real or nominal terms. Any year that your property tax increases at a greater percentage rate than your income, your property tax burden is increasing, irrespective of what happens to your house price. Given this, even a 6% property tax increase is likely to rest pretty heavily on St. Paul’s pocketbooks.

Figure 1: Percentage change in estimate of median household income for Ramsey County, MN, nominal and real 2018$

Source: Census Bureau

Property taxes illustrate the problem with ‘wealth taxes’ more generally. They seek to raise cash based on an assessment of the notional value of assets but your access to cash is not always congruent with your access to assets.

John Phelan is an economist at the Center of the American Experiment. 

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