MillageRate.com

(Updated for the 2009-2010 legisative session)

Proponents of assessment caps like HB-517 and HR-1 argue that it is not “fair” for property owners to be taxed on “unrealized gain,” which they define as the increase in the property’s value which is arbitrary (they argue) imposed by some mindless bureaucrat from the county assessor’s office. A person should not be taxed on something that he does not “possess.”

It’s a plausible argument, but fails on closer scrutiny. The “unrealized gain” argument is flawed and illogical.

First, the argument presumes that you are being taxed on something that you possess “on paper” but not yet realized nor obtained– namely, the increased value of your home.

In fact, the increased value is real because it is, by law, based on the actual sale of comparable residential properties. You could most likely sell your property for the appraised value or higher; at least, in a normal economy. You HAVE obtained the increased value of the property just like you have obtained the purchase value of the property. The increased value is yours to enjoy or convey to another just like the baseline value.

Second, the argument presumes that it is wrong to be taxed on something that you have not yet realized. In terms of cash in your pocket, though, every DOLLAR of your property’s value is “unrealized”… both the value below the purchase price and the appreciation. It is, however, no more wrong to be taxed on the value above the property’s purchase price than it is to be taxed on the purchase price itself.

It is disingenuous to argue against taxation of the amount above the purchase price but accept taxation of the purchase price itself, but that is exactly what proponents of this line of reasoning do.

Here is the foundational flaw in the “unrealized gain” argument… appreciation in the assessed value is not dollars and cents; it is VALUE.

In that respect, the property’s entire value– the purchase value and the appreciation– is “realized” in that you possess it. It is yours to convert to dollars and cents whenever you choose.

There is, therefore, NO difference between the value ABOVE the purchase price and the value constituting the purchase price. If there is no difference, there is no “unrealized gain” in terms of value and taxability.

We are taxed on VALUE, not on dollars and cents.

“Value” is nothing more than a standard of taxation. It actually doesn’t matter WHAT standard is used as long as the standard is equitably applied.

We are taxed on 40% of our real property’s assessed value. But we could all be taxed on 20% or 60% or 100% of assessed value and our tax bills would be exactly the same at each level.

This sounds illogical, but it is easily proven mathematically and the realization of this truth is very enlightening. Just about any standard would work. For example, all adults could be taxed on the number of freckles on their face. As long as all adults were charged the same amount for each freckle– in other words, as long as the cost of government was spread evenly across every freckle– the tax system would be equitable.

The real property ad valorem tax is actually more appropriate than a “freckle tax” or other standard. The owners of real property draw on the services of government quite often, as well as receive benefit from its mere existence. Although it might have made more sense in an agrarian society to tax land to pay for government, it is still reasonable and appropriate today.

As long as the ad valorem tax is part of our tax system, “Fair Market Value” is a valid and reliable standard.

The problem with the property tax system is not “unrealized gain.” It is that not everybody who draws on the services of government owns real property. In truth, there is no single tax standard that will encompass all who benefit from government. That is why we advocate not the elimination of the property tax but a combination of taxes with property tax being the “tax of last resort.”