Thursday, November 2, 2023

Wealth Taxes & Property Taxes (Versus Income Taxes)

A tax on wealth or property isn't really a fair tax.

Years ago, I moved to Alexandria, Virginia, and was chagrined that I had to pay taxes - every year - on my car.  Not a sales tax or even a title fee, but an annual "personal property tax" that could be $1000 or more on a new car.  Over time, the tax decreased as the car lost value - which incentivized people to hang on to old junkers, as the staggering cost of the annual tax on a new car discouraged trading-in.

And yes, you had to pay the tax on a leased car as well. Leasing a car is not renting it.  It is only buying a car with a complicated contract that requires you to trade it back in after so many months.  It sucks.

What was really unfair about this tax was that it targeted the poor and middle-class.  Every day I would take a shortcut through Old Town, past expensive rowhouses with private garages. A garage door would open up and some rich guy in a Mercedes - with District of Columbia tags - would pull out and cut me off.  Since he had an office in DC, he would use that as his "address" for registering the car, and avoid thousands of dollars in annual taxes. Meanwhile, the tax enforcement guy would cruise the parking lots of the apartment buildings and issue tickets to folks who didn't have tax stickers - even if your car had out-of-state plates!  Particularly if your car had out-of-state plates!

They have since abated that tax, as it was unfair. It was a great way to tax the poor and middle-class while keeping real estate property taxes low. The very rich win again.  That fancy townhouse had lower taxes thanks to the $1000 a year I paid on my Camry.  Seems fair, right?

Anyway, that "car tax" was a vast improvement over previous years.  A decade earlier, you had to pay "personal property tax" on everything you owned.  So you had to pay tax on your couch - every year - and your lamp, and your chair, and your rug and your clothes and your appliances and the cans of Campbell's soup in the cupboard.  You could tote all that up and try to figure out what the real value of a decade-old couch was, and then calculate your taxes, or pay a flat rate based on the value of your home.  Most people chose the latter.

And perhaps this was a holdover from the racist old days of the old South - where poor people would have to pay taxes on things they'd owned for decades - which would reduce taxes on the very rich.  Since the very poor outnumber the very rich by more than 10 to 1 (or 100 to 1 these days) a few dollars from a lot of the poor means huge savings for the very rich.

Taxing possessions makes little or no sense.  You buy a couch for $1000 and if you pay a 4% property tax on it every year, even assuming it declines in value every year, you end up paying as much again in property taxes, over time, or at least a significant chunk of the value - 50% or more.  What's more, there is no income stream tied to the couch to offset the taxes.  You can easily find yourself in a situation where you have to sell off your possessions to pay the property taxes on them.

You think I am kidding, but this is a real thing with real estate property taxes, particularly in high-tax States like Florida or New York.  We knew people in New York who had to sell off a lake cabin that had been in their family for generations, as they could not afford the $20,000 annual property taxes on it.  Most of the surrounding land was taxed at agricultural rates or had homestead exemptions of one kind or another.  So the tax authorities hammered anything on the lakefront, which meant five-figure tax bills.   You can own something outright, but still not afford it.

Similarly, Governor DeSantis recently told an interviewer they should move to Florida as there are "no taxes."  And while it is true there is no State Income Tax, there are onerous property taxes easily in the five-figures, even for a modest house.  Since you can "homestead" your home, your taxes are locked in. So, for example, Mark's parent's house was taxed at $3000 a year for decades, as it was homesteaded.  When they died, the taxes jumped to $15,000 right off the bat (and went up yearly after that) as the homestead exemption is not transferable.

Bear in mind that that house in Florida had the same market value as our house in Jekyll, which is taxed at $2500 a year or so.  No income tax in Florida, to be sure, but my income tax bill in Georgia was a few hundred dollars last year (and I got a $500 rebate, making my tax burden negative).  If we had moved to Florida, we would have paid $12,000 more in property taxes (and another four grand in insurance) and then pay more income taxes on the additional money we would have to tap from our 401(k) to live there.  No thanks, Mr. DeSantis!

The homestead exemption creates a weird situation where one house is taxed very low and an identical house across the street is taxed at ten times that amount, simply because one person lived there a long time, and another recently bought.  Since so many houses are taxed at a low rate, the few that don't qualify for homestead exemption (snowbirds, for example) are screwed royally.  And for retirees, this can be a nightmare, as they end up paying far more in Florida property taxes than they did "up North" in income taxes.

Of course, that is better than the double-whammy of New York, New Jersey, and Connecticut, where you pay staggering property taxes and income taxes to boot!  Thank you very much Tony Soprano!

States try to fix this with elderly tax relief - they realize that a pensioner or someone living off their 401(k) can end up broke or homeless, if their tax bill skyrockets.  Like I said, for the 401(k) generation, you have to take more money from your 401(k) to pay increased property taxes.  This, in turn, increases your income tax burden.  So you take out yet more money to pay those taxes, and so on and so forth.  It becomes a death spiral.  You end up selling your house, even though it is paid-for.

Income taxes, on the other hand, at least have an income stream to support them.  You make a hundred grand, you have a hundred grand to draw from to pay those taxes.  But if you have a house with a property tax bill of $20,000 and a Social Security income of $30,000 you will be tossed out of your house, eventually.   Taxes should be tied to income streams, not mere possessions.

There are other problems with real estate property taxes.  Two houses sit side-by-side. One is all fixed up and painted nicely and has many improvements.  The neighboring house is owned by a slumlord and has junked cars on the lawn and the house is falling apart.  The nice house is socked with a huge tax bill as a penalty for being in good shape.  The falling-down-home gets a small tax bill as a reward for looking like a slum shack.

I ran into a classmate of mine from school a decade after graduation.  She had married and she and her husband built a small home down by the creek.  It was nicely done, but one side was all tar-paper with no siding on it.  I asked her about this and she said that according to the local tax code, the house was not "finished" until all the siding was on it.  So they left the siding off on that one wall for three years to avoid paying onerous New York property taxes.  After three years, the tax man declares the game to be up and the full taxes are assessed and they put the siding on that last wall.  But during those three years, the house was assessed as a vacant lot.  Pretty crazy situation!  Pretty crazy rules!

You see how taxes incentivize people to make their houses look like shit.  The person who fixes up their home is punished for his work.  Some urban planners have studied this issue and proposed changes to tax laws to tax only land and not improvements.  If only the land is taxed, the slum shack is taxed the same amount as the mansion next door, provided they have the same acreage.  The idea is that it incentivizes the slum-shack owner to either sell his property to someone who will fix it up, or motivate him to improve his property - and not penalize him for doing so.

When we lived in the DC area, I read an article in the WaPo about a slum-lord who owned dozens of row houses that were uninhabitable and a blight on the neighborhood.  Junkies were breaking in and squatting in them.  He never paid the property taxes and DC was lax in collecting them or auctioning off properties for back taxes.  As I discussed before, it is hard to acquire a property for back taxes, as even if you "win" the auction, the owner can pay the back taxes and take it back from you. And since the taxes on dilapidated houses were low, he could pay the taxes occasionally on one or two properties, if they were threatened with tax foreclosure.  So this slumlord played this game for years and eventually a developer approached him to buy the properties and knock it all down to build an office building - and he made millions.

If those properties had been taxed based on land value (and the tax laws enforced) he would not have been able to afford to play this game and someone would have bought the properties and improved them.  But again, that's another unintended consequence.  If you have an "historic" property that cannot be torn down due to its significance, you can still destroy it through sheer neglect.  You merely let the place fall part until the roof leaks and the rafters rot and one day, it collapses or is condemned and you end up tearing it down, cultural significance or not.  A convenient house fire caused by squatters is another way.

Of course, taxes on real property are not a real problem, if they are reasonable. And not long ago, property taxes across America were pretty low - to the point where it was a rounding error on your mortgage payment. You paid Principle and Interest on your mortgage and that was the big deal.  Insurance was a few hundred a year and taxes maybe a thousand.  Today, both insurance and taxes are measured in the thousands of dollars, particularly in places like Florida, which not only has hurricanes but corrupt politicians, roofers, and lawyers, all acting in concert to rip-off homeowners (and their roofs) and the insurance companies (who in turn always pass on costs to homeowners, or failing that, leave the State).

If you want to move to Florida, bring money, because you'll need it. Other than an uninsured trailer home in the baked middle of the State, much of Florida is now staggeringly expensive, even for relatively modest houses - which is one reason many are leaving the State of Florida for Georgia and the Carolina's.

But getting back to property taxes, some on the far-Left have proposed a "wealth tax" on wealth itself, not just income.  The idea, I guess, is to somehow "level the playing field" and take away money from some people and then give it to others - and they are quite plain and clear on this.  Take away wealth - not just income - from Person A and then give it to Person B in the form of "guaranteed annual income" or some other form of balderdash.

The problem is, of course, that if you taxed "wealth" at, say, 10% per year, in ten years, the "wealthy" person is broke, and those "guaranteed annual income" people still want their checks cashed.  Oh, and there is now one more of them to pay.  Taxing income makes sense - the more you make, the more you pay. Or that is the way it should be (but isn't). Taxing wealth is like the car tax - you have no corresponding income stream to tap from.

That is, by the way, the reason why we have the "depreciation deduction" in the first place.  If you won a rental property that brings in $12,000 a year in rent, and has expenses of $12,000 in the form of taxes, insurance, repairs, and mortgage payments, you are breaking even in terms of cash-flow.  However, since part of that mortgage payment pays off the balance on the loan, in financial terms, you have a net profit.  Problem is, there is no income cash-flow to pay the taxes on that profit. You literally could go broke while breaking even.  So they allow this "depreciation deduction" (where nothing is actually depreciating) to even out the score.  You will still pay taxes on capital gains when you sell the property, but a tax deferred is a tax denied and capital gains rates are lower than "ordinary income" rates.  And since the depreciation deduction is too generous, you can convert ordinary income into capital gains.

Now, some point out that having so many taxes is too complicated - property taxes, income taxes (State and Federal), sales taxes, and so on and so forth.  One of the most ridiculous taxes I never paid was the "Gross Receipts Tax" of 4.5% that the City of Alexandria wanted me to pay.  Not a tax on income, but sort of a sales tax on whatever I billed.  "Just raise your rates by 4.5%!" they said.

Nice try, but in many transactions, the government fees outweigh mine.  For example, I pay a "maintenance fee" of $1000 for a client and add my service charge of $250. The total due is $1250 and I have to pay 4.5% taxes on the entire amount, not just my fee.  So now I have to charge the client an additional $45 just to let $1000 pass through my hands.  In addition to the accounting nightmare, it was just a grab for cash for the City, which already was collecting a lot in taxes (such as the car tax mentioned above).  I decided that working from home as a "contractor" was far easier and more profitable and also lowered my profile from the tax man.  Having a brick-and-mortar storefront is just putting a target on your back.

So yea, a simpler tax system would be cool, but it ain't likely to happen.  My rich friends love their low capital gains tax, and they fund the re-election campaigns of the GOP who promises to criminalize abortion and lower taxes (for them, not you!).  The patchwork method of collecting taxes insures that we don't realize how much we are paying in taxes overall - although we pay far less than other Western countries.

But property taxes?  Wealth taxes?  If they exist at all, they should be modest enough to make paying them an easy chore.  When your house tax is over ten grand a year, something isn't right.

Doya hear me, Governor DeSantis?  I doubt it.  He's convinced Florida is a "tax-free" State!