Property Taxes are Immoral

Todd Thurman

September, 2023

In the heart of the Lone Star State, there's an ongoing debate about property taxes in Texas. It's been discussed for years, but the debate has been supercharged due to the recent dramatic increases in property values which have led to some changes awaiting approval of voters in November. There is no state income tax in Texas and the state doesn't directly provide funding to schools and local governments so the burden of financing these services falls primarily, especially in the case of schools, on property owners. This leads to tax rates that often exceed those in many other parts of the country.

The primary purpose of these taxes is to fund public education, a subject that opens up a whole new can of worms, but let's put that aside for now and focus on property taxes themselves. There is a lot of nuance in this debate, but I want to make a simple, but important argument: Property taxes are immoral and should not only be reformed, but made illegal.

Ownership, Taxes, and a Fundamental Question

Ownership of private property lies at the core of the American free-market economic system. I recall a conversation I had with a Chinese friend who was intrigued by the concept of private property, something that doesn't exist in China. He asked about taxes, and I did my best to explain the system. His follow-up question was simple: "What happens if you don't pay your taxes?" I explained that, ultimately, the state could force the sale of the land and recoup the unpaid taxes from the proceeds. His response was this: "If you have to pay someone else to keep your land, you don't really own it." It's a hard point to refute.

Arbitrary Government Appraisals

Property taxes are almost always based on government appraisals. My father always says, "something is worth only what someone is willing to pay for it." In this case, the government arbitrarily decides what your property is worth, and they are not inclined to back that estimate with a cash offer – believe me, I've asked, and they will laugh at you. While appraisals serve as a useful tool, they often fail to reflect the actual value of the property. In hot markets, properties often sell for more than the appraised value, while weak markets may see properties sold for less. Furthermore, an annual appraisal doesn't capture the market's fluctuations throughout the year, and sometimes, markets move swiftly.

The Injustice of Taxing Unrealized Gains

Here's the crux of the matter: property taxes are levied on unrealized gains. Consider a scenario where a young couple bought a house for $45,000 in 1975. Fast forward to 2023, and the widow, who is now living in that same house, finds it valued at $400,000. That's excellent news for her estate, but she hasn't actually pocketed the cash. Nonetheless, she must continue to pay property taxes based on that valuation. Her monthly property taxes are likely significantly higher than her original mortgage payment. In far too many cases, individuals are coerced into selling their homes or resorting to reverse mortgages to cover the property taxes. This shouldn't happen in a free country that supposedly cherishes private property rights.

The Absence of Refunds

Imagine this scenario: you purchase a home for $250,000, and it appreciates steadily over the years, eventually reaching a value of $1 million. However, an economic recession hits, you lose your job, and you're forced to sell your home due to financial constraints or a job relocation. You've been paying taxes for years on a property "worth" $1 million, but now it's only worth $600,000. Do you receive a refund for the taxes paid on gains you never actually realized? Absolutely not. Does it work the other way as well? Sure, a rapid increase in the property value might allow you to capture the short term gain without the pain of higher tax rates but property values tend to rise over time and a seller is less likely to be forced to sell in a time when short term markets are rising rapidly.

Reform or Remove?

In an attempt to address some of the issues highlighted earlier, limits on tax increases have been introduced. For instance, in some areas, property taxes cannot be raised by more than 10% in a single year. While this does provide some relief for property owners in rapidly growing markets, the process of increasing appraisals doesn't stop. Usually, the baseline resets when a property changes hands or the mortgage is refinanced, resulting in property taxes jumping, sometimes dramatically, for the new owners or, in the case of the refinance, the previous owners. In essence, the house becomes more valuable to the current owner than to the incoming buyer. Sadly, prospective buyers may not always be aware of this. They often just look at the taxes paid by the previous owner, which is usually on the listing, and assume they'll pay a similar amount. Real estate agents should advise their clients of this, but they have a strong disincentive to disclose this information given that they earn their commissions only when properties change hands.

There are certainly some things that can be done to reform the system. The current proposal is to increase the homestead exemption which will reduce the taxes for most homeowners, but the fundamental issues I've discussed remain largely unaddressed even if the proposals are approved by voters and implemented. Tinkering around the edges does not address the issue. Property taxes should be abolished completely. Governor Abbott has indicated his support for this idea and we should hold him and the legislature responsible for delivering.

What Now?

This article is arguing that property taxes are immoral. Offering an alternative is not mandatory and I certainly don't have all the answers, but I have a few ideas to throw out. I certainly want to be able to fund schools and other local government functions.

So, what could replace property taxes? Obviously an income tax is a potential solution, but that would be highly unpopular in Texas and income taxes, especially progressive systems like we have at the federal level are of dubious moral quality as well. One rather obvious alternative could be an increase in sales taxes. Another is the creation of a real estate sales tax that is triggered only when you sell the property and is based on actual capital gains. Yet another would be the legalization of gambling and marijuana. Both are now legal in bordering states and significant amounts of money leave the state every day for both reasons. There are a variety of ways to replace property taxes with more moral taxes and there is the obvious option of cutting taxes and prioritizing spending.

It's time to rethink the morality and legality of property taxes in Texas. While they serve a purpose, the current system imposes unfair burdens on property owners, penalizing them for unrealized gains and relying on arbitrary government appraisals. It's time to develop alternative solutions that better align with the principles of property rights and economic fairness, ensuring that Texas remains a land of opportunity and freedom. Let's open up the dialogue for change and work toward a fairer and more morally justifiable tax system.