Janet Yellen, Secretary of the Treasurer, has proposed a tax on unrealized capital gains.
That means if you buy a stock for $1,000.00 and it rises in value to $5,000.00 but then drops back to a value of $1,000.00…you will pay taxes on the $4,000.00 you never “realized”.
I think I know where she got this counter intuitive idea that doesn’t make sense: the current property tax structure in most of the country.
Here’s how it works:
You buy a house for $100,000.00 and pay the annual property tax on the estimated market value of the house…proven by the purchase price.
In a few months after you purchased your house, real estate agents sell comparable houses for $20,000.00 more than you paid. The property taxes on those houses are based on their estimated market value…proven by the purchase price.
The local property tax assessor then looks at similar properties…yours included…and concludes that you should pay more tax on the new estimated market value…based on those similar houses. That seems to me to fit the description of a tax on unrealized capital gains.
The counter argument would be that the price of your house will never fall so your house will have more value when you sell it thus the logic for the higher property tax. That argument has merit since real estate agents will always push for the highest price when selling houses since they rely on a commission based on the selling price. Even if you give any merit to this argument, it is still nothing more than a tax on unrealized capital gains.
Here’s where the word obfuscation comes into play:
In my case, there is a homestead exclusion as well as “other excl/deferrals” noted on my property tax bill. Regardless, the property tax “estimated market value” is still more than $40,000.00 over the amount I paid for the house in the five years I’ve lived here.
The taxing authority uses what is called a mill rate to determine the tax on the “estimated market value”: Mill rate is a tax rate—the amount of tax payable per dollar of the assessed value of a property. Mill is derived from a Latin word meaning thousandth. As used in property tax, 1 mill is equal to $1 in property tax levied per $1,000 of a property’s assessed value…based on the estimated market value. It’s still a tax rate no matter what label that’s applied.
Now add in the additional obfuscation called classifications and the need for the tax assessors to search through the real estate records to determine prices of all the houses as well as factoring in new construction. In Dakota County MN, there are forty of these tax assessors with an annual budget of $4,550,000.00 to create the new “estimated market value” of all of the houses in the county.
Here are some of the numbers these 40 tax assessors work with:
There are 170,000 housing units in Dakota County with a median “estimated market value” of $291,000.00. That’s $49,470,000,000.00 in “estimated market value”. Using the mill rate (tax rate) of 1.08%, the tax should bring in $534,276,000.00 if all property was taxed equally using “estimated market value”. The Dakota County mill levy of 1.08% this year resulted in $144.6 million (property tax) income.
The average county budget during this time is about $450 million. State, Federal, Fees for Service make up the non-property tax income because the property tax brought in just $144 million. Property tax on the actual value of the houses in Dakota County could have brought in almost $100 million more than the entire budget. Population is 430,000 and a median income of about $88,000.00. Those numbers lend credibility to the “estimated market value” and number of houses in MN’s Dakota County.
Fixed income retirees are now faced with rising property tax based on the rising market value of their house…in some cases, triple the tax assessment than the price they paid for their homes. The Real Estate industry, enjoying commissions as high as 7% of the selling price of houses, are now offering reverse mortgages because seniors are being forced out of their homes because of the rising taxes. Though the median age of Dakota County residents is about 38 years, that still leaves hundreds of retired citizens with the problem.
A simple answer (anathema to politicians?) would be to freeze property tax assessment at the price paid rather than the “estimated market value”. Tax revenue would grow when the house sells again and the property tax then based on the new selling price. This could eliminate the entire arbitrary tax assessment process and the legal battles that retirees pay lawyers to fight. It would also streamline the governmental property tax process.
The $4.55 million budget (and expertise of the 40 assessors) for the tax assessment department could be better applied to finding out why current property tax revenue is well below the actual numbers and value of the housing units in Dakota County. Other departments, such as the information within building permits, could be incorporated into the process.
The tax assessors are the “boots on the ground”. If anyone can make sense of the system, these are the people our politicians should work with in fixing what is, in my opinion, a tax on unrealized capital gains.
My thanks to Mike Slavik for digging out some of the numbers. He is the Dakota County Commissioner for my district and was very prompt in responding to my inquiries and provided comments, suggestions and corrections. Any inaccuracies are mine though I encourage everyone to spend the time questioning, not only how taxes are collected, but what the government does with the money.
My calculator is exhausted so here’s a challenge for you:
State transportation revenues currently come from three sources: the gas tax, vehicle registration fees (tabs), and the Motor Vehicle Sales Tax. The average annual per capita use of gas in Minnesota is 528 gallons. The population of Minnesota is 5.7 million. The excise tax on gasoline in Minnesota is 28.6 cents per gallon not counting the additional 18.4 federal gas tax and 24.4 on diesel. That comes to $151.1 per capita annually raised in Minnesota from a Minnesota tax.
This figure does NOT include any federal funding for transportation. The 18.4 cents per gallon federal tax totals $98.00 per capita paid by MN drivers as a tax on gasoline.
2016 stats: MN DVM 3,028,038 trucks 2, 081,723 cars 229,377 motorcycles 19,179 buses
Your challenge: update and verify the numbers and then…
how much money is involved?
Where did it go?
And a chuckle for you: