A conversation over at American Debt Project got me thinking about property taxes. Now, I don’t think anyone actually enjoys paying property taxes. We may enjoy the things that government purchases with our property taxes, but the actual payment of property taxes is a bear for those paying attention.
And whether they are just taken out with the mortgage payment, you write the check when due, or it is built into your rent, the common theme is that the property taxes just don’t end regardless of payment or living situation. And that is what really gets my gord.
Let’s Talk About Property Taxes
With other taxes it feels like you have some options on whether or not to pay them. Income taxes, if you don’t make much money you likely aren’t paying them. Sales tax, you could spend less, or focus on the necessities like food, which often isn’t taxed. However, property taxes are nearly identical to the old feudal system. You rent your land from the lord, grow crops, and pay a certain value or portion of your harvest.
Property taxes are the same thing. You work, pay rent on your land to the government, and the government spends it as it sees fit. And if you don’t pay your property taxes, just like in the middle ages, guys with weapons come to your house, kick you out, and sell your stuff to cover your debt. Basically, you are a source of endless payments to the government. This is exactly like a perpetual annuity.
The Present Value
The present value of a perpetual annuity (the amount that you would be willing today to pay for an endless stream of annual payments) is the Payment divided by the interest rate (P / r). For example, if you have property taxes of $4,000 a year, and the interest rates (or inflation) were at 4%, then the present value of an endless stream of $4,000 payments today would be worth $100,000 (or $4,000 / .04). From the homeowner perspective, you would need a pile of cash equal to the present value ($100,000 in this case) to pay off the property taxes due. Of course, there hasn’t been a time in history when property taxes remained stable in perpetuity.
So unless you’re lucky enough to live in a city, county, and state that doesn’t use property tax as a revenue source, you owe the government an endless stream of payments. This is true even if you rent, as the property tax is built into the lease rate. You can move when renting, but presumably you need to live somewhere, and if you pay for that need, part of the payment is allocated to property taxes.
Property Taxes Rise
And that’s if property taxes were stable! As many homeowners know, the value of their property has decreased in the last few years. However, the government needs at least as much money as it did last year. Therefore they either increase taxes or scare the population into voting for a tax increase by saying that 911 calls will go unanswered and wild gun-toting gangs will roam the streets. The result is that property rates are increasing at a quicker rate than the value of homes are decreasing. The perverse end of this is paying more property tax dollars this year than you did last year when your house was worth $50,000 more last year. Thus, even though I said in the title you owed $100,000 than you think, it’s actually much more than that amount because it isn’t a stable stream of payments, but almost an inflation adjusted perpetual annuity.
This obviously affects how you plan for retirement too. Retirees need to reduce their expenses, but with property tax rates going up most years, those on a fixed retirement income continue to need to pay ever amounts of “rent” on their fully owned property. As such, make sure when planning for your after work years, you have a large enough pot of money to pay your properties taxes, otherwise you’ll have to pay rent a landlord again instead of the government. Luckily you have a good estimate of how much of an extra nest egg you’ll need by using the perpetual annuity formula above.
Unfortunately I don’t have an answer for you as to what to do about this problem. Absent a different funding model for the government, huge increases in government efficiencies or a reduction in pension liabilities, you’ll have to keep paying your taxes, otherwise the King’s men will come for you.
Readers, what are your thoughts on property taxes? Do you feel that other taxes are better or more fair to society? Other taxing rants? Let us know below.
Karl Nygard is the original founder of Cult of Money and created the website to share his ideas on investing, personal finance, and more.