Reappraising property tax rates at point of sale--is this a thing?

Great Debates
1

Our community has a common problem, but turned up to eleven: property tax rates are driving low-income families from our community, while they’re too low to support strong local services like schools, firefighters, and infrastructure repair.

The problem is gentrification.

As wealthier folks move into the community, housing costs skyrocket. Our house has, according to an independent appraiser, quadrupled in value in the past 22 years. If we were taxed at this much higher value, it’d be difficult for us to remain in our house–and that’s with our dual-worker middle-class income. For folks trying to afford a house on a service industry income, it’s out of the question.

Our local government is aware of this problem, and has dealt with it in three ways. First, they’ve repeatedly lowered the tax rate to account for rises in valuation, so people end up paying the same amount. Second, they’ve delayed reappraisals. Third, they’ve used formulas that undervalue a lot of properties.

As a result, tax rates are much lower than they’d otherwise be. Low-income residents don’t have this pressure, so the ones that already have houses aren’t forced out; but folks without houses still can’t buy them. Meanwhile, our local services are vastly underfunded compared to similar areas across the state.

So what I’m wondering is this: could properties be reappraised only when they change hands? It’d be the homeowner equivalent of rent control. As long as you stay in a property, you won’t see your taxes skyrocket, but as soon as you sell it, the new purchaser, able to pay the higher value, will also be responsible for the higher taxes. Heck, maybe the tax valuation could be equal to the purchase price last time the house was sold.

This seems obvious to me, but I’m sure it has problems. What’s wrong with this approach, and are there ways to tweak it to avoid the pitfalls?

2

It already works that way in many jurisdictions. With all the predictable problems.

People stay in houses that no longer fit their needs because they couldn’t afford to downsize in the same area. Which crimps the supply of houses for sale.

You can’t sell because nobody can afford to pay for your house and the soon to be much higher taxes. IOW, this crimps the demand for houses for sale.

etc., etc.

There is no free lunch; we’re just shoving the toothpaste around inside the tube.

3

Isn’t this what Prop 13 did in California?

4

Having recently sold a place in California, and bought a new one. Yes.

5

This is pretty much Prop 13 in California and it was voted in for that exact reason. The elderly were being taxed out of their homes. It created a different kind of inequality.

The guy next door bought his house in 1960 and pays $800/year. I bought my house in 1993 and pay $4200/year. The guy who bought the house down the street during COVID pays $21,000/year.

If I were to move to a different county and downsize to a home half the value of mine, I’d pay over $10,000/year. The same would be the case for a younger person wanting to downsize and moving across town. You keep your basis if you’re older and stay in the same county.

6

Right and another long-term result has been…California cities eventually have become underfunded. As that tax ratchet benefit pushes people not to move, property tax rates tend to stagnate. In CA they actually increase up to 2% a year, but that is wayyy below inflation over decades, so local government tax coffers have slowly hollowed out over time. The cost to local government since 1978 was estimated at literally a trillion dollars by 2024.

This causes more attempts at various special bonds and assessment elections to try and cover shortfalls piecemeal. But Prop 13 also mandated that voter approval for new taxes and municipal bonds requires a two-thirds yea vote and voters mostly hate voting for new taxes. I’ve seen many a tax/bond proposal get to 62 or 63%, solid majority support, and still lose because it is just that hard to get two-thirds of people to ever accept an extra dollar in costs for government (or anything else).

Prop 13 has created massive wealth inequalities and worse problems than it solved. I’ve been a beneficiary, but I can’t say I’m a fan.

7

That’s really interesting–thanks, all! Not quite the genius solution I hoped it was, but that’s why I asked.

8

I once failed economics, so I may not know what I’m talking about. But don’t all those efforts by your local government to mitigate the effects of property appreciation prevent the market from responding?

If I have a lot of money, why shouldn’t I speculate on all the available land I can find, and just sit on it and live off my appreciating equity? That doesn’t help anyone but me. In fact I can make a corporation to hold the land in perpetuity, and then rent it out, so the tax rate never increases. But I can charge rental rates that track with regional trends and pocket the difference.

If I’m poor, I will never be able to afford a house because nobody in their right mind will ever want to sell.

Maybe the ideal solution is for you to choose between paying 4x the tax and downsizing/moving. Because when every homeowner faces that choice, that’s a significant number of people who will ask their employers for more pay, and all sorts of other effects from the market signal. People currently sitting on land will want to sell. Local govt. will have more money for services. Etc.

~Max

9

In many (most?) states there’s a thing called “homestead” or “homestead exemption”. Which is designed to prevent the situation of someone being taxed out of the ability to afford their house even if it’s paid for. Which typically affects seniors on fixed incomes. Who not coincidentally are a powerful voting bloc.

The basic idea is that you can file a document with your county tax assessor stating that [this address] is your primary residence. At which point your assessments (or actual taxes, depending on the state) are capped to grow at no more than some small rate, typically 2% per year, but sometimes even less. Regardless of interest rates, inflation rates, or house price appreciation. You typically do however get full participation in any tax reductions which may occur.

Whether they implement that by capping your assessed value, or by capping your taxes paid varies. But the bottom line is over time your taxes shrink relative to inflation while your property value continues to grow inmost cases.

The act of selling [that address] triggers a “catch-up” where the property is reassessed at current market values and any rate adjustments from your homestead exemption are removed. The buyer will be paying taxes at full rate on the full current assessed value.

Assuming that buyer is buying the property as their primary residence, they can then file for homestead themselves and effectively lock in that tax going forward. They’re paying more than the previous owner now, but 10 years from now they too will be paying far less than somebody that just bought an identical house.

As noted upthread, some states have ways for people to carry the benefit of a homestead exemption forward from property to property. That’s more rare.

See also Homestead exemption - Wikipedia.

10

This does in fact happen quite a bit - paywalled NYT magazine article about wealthy people with inherited properties doing exactly that.

11

Property taxes are inherently regressive because they tax wealth instead of the ability to pay. There’s been attempts to have property taxes on a per-lot basis, or per foot basis, but these are even more regressive because they’re not even based on the value.

The only non-regressive solution is taxes based on earnings and gains.

12

That makes some sense, although wealth above a certain amount, adjusted for farms and other niche cases, deserves a tax IMO (with the proviso that when money can move more easily than humans, and when wealthy people have more fluid geographic locations than non-wealthy people, it’s distortive to have a patchwork of wealth tax situations). But all that’s probably for a different thread.

In my state, income tax has been steadily reduced, and sales tax is strongly limited, leaving property tax just about the only reliable revenue generator for local government. Figuring out how to make it fair is a major concern for local officials.

13

A lot of elderly are house poor. They are on a fixed income with a house that appreciated over decades. They could lose their homes.

14

??

I understand other problems with this proposal, but this seems like the one problem it avoids. Periodic reappraisal of value for property taxes, regardless of a change in ownership, seems to be a much greater threat to such folks than what I proposed (and what was apparently enacted in California).

15

Well, this is the problem.

Property taxes are regressive. Making them the only viable source if income for local government guarantees that local taxation will be regressive, which fuels gentrification (poorer folks can’t afford to live in areas with rising property values).

Much better, IMO, would be local income taxes and/or sales taxes. The income tax could be made as progressive as the municipality would support. Of course, that is opposed by the wealthy - my state (MO) has constant attempts to ban the two municipality earnings taxes in the state (St Louis and KCMO - both a flat 1%). Sales taxes are regressive as well, so that doesn’t help too much, but it does avoid the “too poor to afford my own property taxes” problem.

With an earnings tax you could let property values be subject to market forces without worrying about the property tax crippling your residents.

16

In California, Proposition was sold to the voters as “don’t let the big bad government tax grandma out of her home and onto the streets.” The most ardent proponents, however, were owners of rental and commercial properties, who stood to benefit the most over time, because they are way less likely to sell their properties than grandma. Eventually, grandma dies and her house gets sold, triggering a reassessment. Large scale property owners tend not to sell, and instead of holding property in an individual’s name, hold title as a corporation or other entity. Over the long haul, the property tax burden has shifted from commercial and rental properties to single family residential properties. Proposition 13 also shifted control of government services away from the local level to the state level, because property taxes stayed local, but when local governments (school districts, mostly) didn’t have enough property tax revenue to keep up, they got bailed out by the state. And the state doesn’t give out money for free, those funds have strings attached. This was a seismic shift in government funding that few understood at the time.

17

I’m still bitter because it happened between 8th and 9th Grade for me. The best 9th Grade students got to Huntington Library as a reward up until then and I was totally looking forward to it. That was one of the things cut when the budget was reduced. They also cut summer school (except for remedial students) which was cool stuff like marine biology and animation classes and it was a way for teachers to make extra money.

18

Well, remember, CA is one of the top five states in highest overall tax rate. There’s plenty of tax money.

It has also allowed many older Californians to either stay in CA or not become homeless.

Right. And there are county sales taxes in CA- which are also somewhat regressive. CA has one of- if not the highest- Income tax rates in the nation.

19

Property taxes shouldn’t be a flat rate. That’s the biggest issue. It should be progressive, like income tax.

Most homeowners shouldn’t have to pay much, if anything at all. Especially if it’s paid off, and it’s the only one you’ve got.

But landlords, second-home owners, flippers, commercial businesses and the wealthy should pay more.

As to whether that’s actually been implemented anywhere? Beats me.

20

Why do you think it matters if it’s paid off? I haven’t paid off my house for strategic reasons to do with taxes and investment. Landlords pay taxes on net income from their rental business but I am not opposed to property that isn’t a primary residence paying more.

Not sure about wealthy should pay more. How would that work? Income? Assets? Does the home itself count as the asset because if so we are back to the elderly being taxed out of the primary residence that they bought decaces ago.