Property taxes illustrate the difficulty of taxing wealth
On Monday, my colleague Tom Steward wrote about property valuations by county assessors in Crow Wing County. As house prices have surged in the last 18 months, these new valuations are no surprise, but the higher property tax bills they are likely to lead to will still come as a nasty shock to many. And they illustrate, again, the difficulty of taxing an unrealized capital gain, or ‘wealth.’
As I wrote a while ago:
You pay tax in cash, not with assets. But having assets is not the same thing as having cash. If you have a stock portfolio valued at $1 million, you might well not have $1 million in cash. To get it, you would need to convert those stocks with their notional value of $1 million into cash by selling them. If enough people did this, the price (value) of those stocks would fall as supply increased relative to demand. These assets with a notional value of $1 million might realize substantially less on the market.
This is especially true for houses, and especially so in the current inflationary climate.
If you are a homeowner, the value of your house — an asset — will have risen quite rapidly in the last 18 months. This might be rather nice, but that rise in the value of the asset doesn’t put a single cent in your pocket until you sell it. And it is dollars and cents that you need to pay taxes. And over the last 18 months, while the notional value of that asset — your house — might have increased, your income, in real terms, likely hasn’t.
Higher property taxes based on inflated, notional valuations, will fall on people whose capacity to pay is being squeezed by the increasing cost of living. The price of everything, on average, is going up; that is what is meant by inflation. Policymakers should keep that in mind as they set property taxes.