Minnesota’s Economic News — W/E 9/22/23
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In recent decades, wealth inequality in the United States has risen. A recent paper by economist Edward N. Wolff found that the wealthiest 1% percent of American households now own 40% of the country’s wealth. This share that is higher than at any point since at least 1962. One commonly touted solution is a wealth tax. Most of the tax you pay in the United States is on your income and spending (sales taxes). What generally isn’t taxed is your wealth, the assets you own.
There are good reasons for this. 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.
There was a good example of this in the Duluth News Tribune this weekend. Property taxes are a form of wealth tax. They tax you on the value of an asset you own. As in our example, having an notionally expensive house does not necessarily mean you have fat piles of cash piled up ready for the taxman. And, just because your house has risen in some assessed value, that doesn’t mean that the amount of liquid cash you have on hand to meet the increased liability has risen.
According to the valuation notice sent to my house in Gilbert in April by the St. Louis County assessor, the estimated market value of our property is $23,200 higher than it was in 2017. Of course, the higher the assessed market value of our home and property, the higher the tax we pay on our house and land. This increase was made even though there have been no improvements to our house in the last 15 years — maintenance, yes; improvements, no.
When I called the assessor to find out why our estimated market value was raised so much, he said this: “2018 is a re-evaluation year. We’re taking a close look at things previous assessors may have missed.”
In order to find out the extent of the problem, I started talking with my neighbors about the 2018 estimated market values they received. I soon found that what I thought was a big jump in my 2018 estimated market value was small compared to my non-lakeshore and lakeshore neighbors. Several of my neighbors had estimated market value increases in the $50,000 range. Several of my neighbors had increases in the $75,000 range. Some of my neighbors had increases of $90,000 or more. Once again, these were added to the already-determined 2017 market values of the houses.
Were the previous tax assessors so inept they misjudged by $90,000 the market value of several homes?
It’s clear we property owners now have no protection from the whims of whoever it is who decides it’s time for a property tax increase. I wish the person — or group — who makes these decisions would explain the reasoning.
If by some chance the county does have nerve enough to give the public an explanation of the huge market value increases, I don’t want to hear the convoluted story about my home going up in value because of the huge selling prices of other homes in my vicinity.
When property taxes go up so much and so quickly, a lot of 70-, 80-, and 90-year-old homeowners either can’t pay the increase or have to sacrifice other things to pay the increase. Also, lots of young people with families have difficulty paying the property taxes generated by a huge increase in their home’s estimated market value.
St. Louis County Commissioner Keith Nelson, one of the finest men I have ever known, told me how he would solve the Iron Range property tax dilemma. He said he wants a “property tax freeze on the homes of people when they reach a certain age or when they retire.”
Commissioner Nelson’s tax-freeze idea is a good one. But having a state property tax assessment limit would be good for every homeowner.
This story from northern Minnesota illustrates the broader problem with wealth taxes. On paper, you might have the wealth to tax. In reality, you might not have the cash to pay it.
John Phelan is an economist at the Center of the American Experiment.
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