Tax “Reform,” Property Taxes, Lakewood….

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Tim Liston
Posts: 751
Joined: Sun Aug 07, 2005 3:10 pm

Tax “Reform,” Property Taxes, Lakewood….

Postby Tim Liston » Sun Nov 05, 2017 11:07 am

The tax “reform” plan that has been put on the table proposes a lot of changes. Many are well-reasoned, at least relative to the existing system. Though if I were king I’d scrap the current tax code, all of it including the IRS, and impose a national sales tax in its place, the so-called “fair tax.” The fair tax is in virtually every way a better way of raising tax money than is our current Rube Goldberg tax system. But the rationale, however contrived, for hundreds of thousands of government employees, and their beholden proxies, would disappear. So nevermind….

Regarding "reform," there is one item of interest to a small subset of Lakewood residents: the cap on itemized deductions of property taxes exceeding $10,000. Let’s consider the effect on a Lakewood resident owning a $1,000,000 home on the lake. Right now he/she pays $32,000 or so in property taxes (ouch!), deducts all of it from Federal taxable income, and presuming a 35% tax bracket, receives a reduction in his/her Federal income taxes of about $11,000. Bottom line cash money saved to spend on whatever, or invest.

Now, if the property tax deduction cap is passed into law, the deduction dwindles to $10,000, and the Federal tax savings similarly declines to $3,200, a reduction of $7,800. Clearly, if owning your home suddenly costs you $7,800 more a year in property taxes, your house becomes less valuable. Just like a big new gas tax would make your gas-guzzler less valuable. But how much less?

Of course like a lot of complicated things, it depends on some assumptions. But if the deduction cap passes and I owned a million-dollar home in Lakewood, come next summer I’d head straight to the Women’s Pavilion and tell them my formerly-million-dollar house is now only worth $750,000, because I just had to set aside $250,000 (earning 3.1% annually) to raise the money to pay $7,800 in brand new taxes. Forever. It’s pretty straightforward, actually.

Now in the short run this is arguably just theoretical. Lakefront homes won’t lose 25% or more of their value overnight if tax reform caps property tax deductions. Economic factors don’t work that fast. Somebody will probably pay you $900,000 for the house that you recently paid $1,000,000 for, before the increase in its taxes presumably diminished its value. But in the longer run its value will eventually drop to $750,000. In the long run, everything that should get discounted, reverted to the mean, costed out, rationalized, traded off, or otherwise taken into account economically, eventually does. Though it can take awhile sometimes.

There’s a big lakefront house for sale in my neighborhood, with substantial improvements at the bottom of the bluff. The owners are asking $2.5 million. (There’s no sign in front.) If the property tax deduction cap passes, not being able to deduct $70,000 of the $80,000 in annual property taxes (double ouch!), a new owner would owe an additional $24,500 in Federal income tax. At 3.1% annually it takes almost $800,000 set aside to earn $24,500 annually. Good luck with that.

I know. Rich people problems. But property taxes are heinous and not just to those who are way better-off. Because everybody has to have a place to live, property taxes are inescapable. And it doesn’t matter whether you have sufficient income from which to pay property taxes. Or don’t.

And did you ever notice that, unlike income and estate taxes, property taxes are always imposed on the VERY FIRST DOLLAR of the value of your property? There is no “standard deduction” or “0% bracket” that applies to property taxes. Property taxes are somewhat “regressive,” at least according to “Progressives.” Progressives should be appalled by property taxes with every bone in their body. But the Progressives I know, most of them aren’t all that smart. (Plus many Progressives rent and they think their landlords pay the taxes and don’t just tack it onto the monthly rent payment.)

Using my presumptions, every homeowner in Lakewood would have to set aside more money than his/her house is worth in order to pay its property taxes. The owner of a $100,000 house who pays $3,200 in property taxes would have to set aside over $103,000 earning 3.1% to pay the $3,200 annual tax. Which 3.1% by the way is impossible to earn reasonably risk-free these days. Your bank doesn’t pay that. Even 30-year Treasuries pay only 2.8%.

Property taxes are government’s way of saying f*ck you. That, at the end of the day, it’s not even about redistribution or wealth equality or helping the needy or any of that. It’s about we just want your goddamn money and it doesn’t matter how we get it. We just get it, even if we have to tax the very place you live, on the very first dollar of its value. And we get it from everybody, even if you can’t afford to pay it. Can somebody please tell me how anything could be more confrontational, destructive or arrogant than that?


jackie f taylor
Posts: 773
Joined: Thu Sep 08, 2011 8:47 am

Re: Tax “Reform,” Property Taxes, Lakewood….

Postby jackie f taylor » Thu Nov 30, 2017 5:46 pm

What bothers me is, if we notice that there is a problem, why do we have to raise hell to fix it, why don't our elected officials fix it, isn't that why we elected them, and now we have to fight with them to do what we think is right? what.
am I on Candid Camera?



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