Most homeowners believe the current property tax system is inherently regressive, meaning the middle class heavily subsidizes the rich. Others think it's the most significant annual harassment they have to endure. Rich folks owning expensive homes are not too bothered as the system favors them. It is more or less the opposite of the income tax system, where the top 1% pays 40% of all federal taxes.
Property tax is one of the main reasons seniors and minorities are uprooted from their neighborhoods. Unfortunately, single-family residences ("SFR") are the most significant investments for most Americans, and local governments usually control them via their primary revenue tool, property tax.
So, what are some of those middle-class-friendly progressive replacement revenue sources?
1. Introduce Million-dollar Home Sales Surtax. Since the upscale and expensive homeowners would be a big beneficiary of the phase-out (followed by no property taxes), the million-dollar home sales must carry additional progressive surtaxes. It must not be a one-size-fits-all blanket rate; instead, it must be progressive because of the savings – for example, sale price $1M to $2M @2.00%, $2M to $3M @2.25%, $3M to $5M @2.50%, $5M to $10M @2.75%, $10M+ @3.00%, etc., etc. While eliminating property taxes will make the high-end housing market more liquid, introducing sales surtax (coupled with higher short-holding transfer taxes) will gradually de-incentivize gamers, stabilizing this volatile segment.
2. Introduce Higher Transfer Taxes for Gamers and Flippers. At the point of sale, shorter holding periods (say, up to 2 years) must carry much higher transfer taxes, so the traders and flippers are separated from the homeowners. It's a clear moral hazard case when the local assessors treat primary homeowners and gamers alike. While gamers are entitled to compete and buy, they must be treated as investors if they sell within the shorter window. Of course, certain consumer exceptions (e.g., job-related relocation, medical emergency, etc.) must be factored in as long as the home's use as primary residence could be proven.
3. Introduce Higher Sales and Transfer Taxes on Income-producing SFRs. Regarding sales and transfer taxes, single-family homes occupied as primary residences must be treated differently from investor purchases for conversion to rentals. At the point of sale, those investors must pay higher sales taxes (add-on sales surtax). During the last recession, many institutions bought and converted millions of single-family homes into rentals, creating a new "SFR Rental" industry. Unlike people's primary residences, these are income-producing properties and must be treated as such. Even during the years of property tax phase-out, they must be treated as a sub-class of the multi-family, paying higher sales, property, and transfer taxes than the primary residences.
4. Counties must Claim their Share of Taxes from Airbnb. Like Uber, Airbnb has become mainstream and competes with the commercial lodging industry, potentially lowering the latter's occupancy rates and, consequently, the government's hotel tax revenues. Under these circumstances, states must ensure that Airbnb collects and returns all taxes to their respective states and, in turn, to the originating counties. Given the rising popularity of Airbnb, this tax revenue will grow exponentially in the coming years. This new-found tax revenue will far exceed the lost hotel tax revenue, but it will also generate new taxes in smaller markets where hotels/motels are generally in short supply.
5. Implement Surtax on Luxury Durable Goods. To save $5K to $150K on property taxes at the front end and capped SALT deductions at the back end, homeowners would be amenable to the proposed durable goods surtax. Unlike involuntary property taxes, consumption taxes are more humane – families can budget and plan for these expenditures. Since the basic, durable goods impact the middle class, the rate must be lower, say 2 to 3%, followed by the luxury and ultra-luxury durable goods, with progressively higher rates. While counties would be allowed to charge different rates, non-resident tariff provisions must exist. Countries with lower rates must collect the differentials from the non-resident purchasers (from the reciprocating counties) with higher rates.
Lastly, massive savings will be generated from the closure of Assessment offices. Hundreds of employees work in large cities and counties (Assessor's office, Assessment Review, Data Collection, Mapping, Valuation and Valuation Modeling, Customer Service, Exemptions, Public Relations, Outreach, Attorneys, etc.). Eliminating those high-paying jobs will save local governments tens of millions in salaries and benefits. Additionally, those offices' closures will save significant sums in rent, utilities, security, maintenance, IT, web, telecom services, etc.
So, it's about time we phase out this mostly unfair and inequitable property tax system and replace it with a series of middle-class friendly progressive consumption taxes, thus freeing homeowners from local government control clutches.
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