Property tax hikes show the problems of wealth taxation

A couple of weeks ago I wrote about the ridiculous proposal to impose a tax on unrealized capital gains in Minnesota. If the value of, say, the shares that an individual owns goes up, that does not mean that that individual has more money. They will not have the extra money from the increase until they sell the shares, i.e., when they realize the capital gain, at which point any profit is taxed as income. Taxing unrealized capital gains is literally taxing money that doesn’t exist.

A couple of people pointed out that we already impose a similar tax on the unrealized capital gain on an individual’s house: When the market value of someone’s house is assessed to have increased, their property tax goes up regardless of whether they have additional money. I agree, and this is a point I have made numerous times before.

Indeed, this similarity illustrates the difficulty of wealth taxation. As the Star Tribune wrote recently in a story titled “Rising home values behind big property tax increases for some in Washington County“:

Some Washington County homeowners will see double-digit jumps in their property taxes this year, including a few communities facing some of the largest increases in the metro area.

Among them: Afton, West Lakeland and Baytown Township, a small community where property taxes could jump by 22% this year. In all three communities, the tax increases are driven by local levies, rising home valuations, and newly approved school bond referenda.

In Baytown Township, west of Bayport, taxes on a median-valued home are expected to rise from $5,526 last year to $6,742 in 2024.

A big driver in those changes? Home valuations there climbed nearly 19% last year, rising to $818,300 for a median-value home. By comparison, median home values were up by about 8% overall across Washington County.

But of course, the fact that property valuations in Bayport Township are up nearly 19% over the year does not mean that the people in those properties have 19% more money. They may, or they may not, in which case the increase in property tax will eat up more of their income.

Every home owner is aware of the problems around property taxation. Local services need to be paid for, of course, but linking local tax increases to inflation rather than property prices seems an obvious improvement.

And whatever problems with taxing the unrealized gains in property assets, they will be greater when it comes to trying to tax the unrealized gains in more liquid assets like shares, whose value can fluctuate greatly from one day to the next. Property taxes — which need reforming in any case — illustrate some of the difficulties a wealth tax would face, and even then, only in a small way.