Property Taxes Are Much Higher Than You Can Imagine….

[Tim Liston]

I’m posting here instead of in the Lakewood property tax thread that got started today. But that thread prompted this. Ready for some financial math?

Consider a simple question. Which would you rather own, (1) your home, or (2) the property taxes you pay on your home? Well I’d take (2) the property taxes in a heartbeat. That’s because I could easily sell the property tax income stream to an investor, use some of the money to buy the home, and put the rest in my pocket.

For example, let’s say you can safely earn 2.0% on your money. That’s (unfortunately!) a pretty high “safe” interest rate these days, a bit more than 5-year CDs or even 10-year Treasuries pay. Now, say your property taxes are $4,500/year. $4,500 paid once a year forever in a 2.0% “discount rate” environment is worth the same as $225,000 paid today. Trust me on that or go look up a “constant perpetuity” calculator online. Even assuming one can invest safely at 3% (which you can’t), an investor could pay you $150,000 for $4,500 paid once a year, forever. Is that house worth even $150,000, never mind $225,000?

Nope. A Lakewood house on which one pays $4,500 a year in property taxes is worth about $138,000.

But wait! There’s more! Property taxes, like the price of most things, invariably go up. So now let’s presume that you can earn that same 3% on your money without undue risk. But let’s also assume that property taxes increase at a 2% annual rate. That “growing perpetuity,” $4,500 this year then increasing 2% a year forever, is worth (get this): $450,000. WAY more than the house is worth. I can buy the house and still put $312,000 in my pocket TODAY! Of course under these assumptions it’s presumed the house will grow in value too. But who knows? The $450,000 though is a sure thing.

Bottom line…. You don’t own your Lakewood home. You never will, even after the last mortgage payment is made. Together, the schools, the county, the city, the Metroparks, etc. own your house, though after it’s paid off they let you live in it. The only factor that makes your house and my house worth more than $0 is that none of us want to live outdoors. Plus, generally speaking, we’re ignorant of how stunningly excessive property taxes really are, especially after the recent drop in interest rates.

Insofar as LCSD is considering another property tax increase, how much longer can it do so before property taxes actually collapse house values? And is it possible to incorporate a municipality without a school district, one that doesn’t offer (or charge for) public schools? The same house there would be worth well over twice what it is in Lakewood. That $138,000 house could fetch $288,000 ($138,000 + $150,000) or much more. But what would likely happen instead is that house values in school districts would drop dramatically because childless households would all move out. (I know, 100% of property taxes don’t go to schools, but you get my point.)

By the way, to make it even worse, remember that we now live in a financial environment where interest rates, the rates you can earn on your savings and other investments, are now kept artificially low by the Federal Reserve Bank. That’s done to keep government and Fed member banks solvent, at least for now. So let’s now presume that you safely earn 3% on your money, but your property taxes grow forever at the same 3% a year (not just 2%). How much is that property tax payment stream worth in today’s dollars?

Infinity. Yes, infinity. Which is a lot more than $138,000. A perpetual payment stream will always be worth infinity when the real inflation rate (not the phony government CPI numbers) matches or exceeds the “safe” interest (discount) rate, like it does now in today’s manipulated interest rate environment. Though nobody has that kind of money to invest! But it shows how extra-heinous property taxes really are. It seems all theoretical, I know. But it’s real, and an outrage. And if you got this far, congratulations and thank you....

[james fitzgibbons]

That is very interesting, a new perspective. Raising taxes is nothing to high rollers in Lakewood. My grown up children went to Catholic Schools through high school, it was not easy but I did it, and I am not sorry I did, but I do not like paying taxes for someone else. Schools should be funded some other way, like pay for your children to go school. Thanks for that.

[Lori Allen _]

Maybe they should add a few cents to the sales tax so everybody has to pay something.