What If Property Taxes Disappeared Overnight? How States Are Racing to Rewrite the Rules of Wealth Forever

Dave:
Are property taxes illegal? You pay ’em every year, but does the government actually have a legal right to tax property that you already own as property taxes rise year after year? More people are asking this very question today, we’re digging into it. Does the government even have the right to tax your property in the first place? What role do property taxes play in our economy? Could there be relief for property owners in the future? And how can you make wise investing decisions based on our research? Hey everyone. Welcome to On the Market. I’m Dave Meyer. Thank you all so much for being here. You may remember this if you’ve been listening to the show for a while, but a few months back I did an episode about the state of Florida wanting to get rid of its property taxes. This is something they’ve been talking about a lot.
Governor Ron DeSantis has been publicly discussing this and it’s something that they’re still exploring. And after we did that show, we got a lot of great feedback on the episode, but there was this one line of feedback that I saw that I really wasn’t expecting. Honestly. There were many people that reached out to me that said property taxes are illegal or should be considered theft. And that was not a line of thinking I had really ever explored before, but it is one with massive implications for the housing market and for our economy because property taxes are one of the fastest growing expenses for investors. It impacts cashflow and in many parts of the country, it’s starting to impact the broader housing market in terms of inventory and pricing. And on the other side, property taxes make up a lot of local and state government revenue.
So this question is super important. So I decided to take a look having really no previous opinions about the topic. I did a lot of research to try and get to the bottom of this question and I have a lot to share with you about the legal status and the future status of property taxes in the us. Let’s do it. So first and foremost, let’s just set the stage. We’re going to start really simple. What’s a property tax? Well, it is the tax assessed on the value of your property. This is not the same thing as the income tax that you pay on rental income if you own a real estate investment. This is just the tax assessed on the value of the property. And this happens at either the state or the local government level. And so you’ve probably seen this before if you own a primary residence or you own a rental property, but basically your property taxes each and every year, you’ll probably get a statement for them.
It’s the assessed value of your property, which the government will send you and your tax rate, which will vary pretty dramatically from state to state and from municipality to municipality. So we’ll get into that more. For example, the average tax rate that people pay on properties in the United States is about 1% of the assessed value. So if you had $500,000 property, 1% of the assessed value would be about $5,000 per year. And the interesting thing about these types of taxes is that they’re actually not necessarily attached to the person. They’re attached to properties as a lien, meaning that the tax obligation is tied to the property, it’s not tied to the individual that owns it, which means that if you were to buy a property for example, that has a tax lien against it and a lien is just a liability. It’s basically saying that if you were to buy a property with a tax lien, that means there are taxes owed on this property.
And if you go and buy that property, you owe those taxes, not the people that owned it before. And that is one of a million reasons that you want to get a full title and lien search when you buy a property because you do not want to inherit a property with a lien on it unless you’re using that as part of your acquisition strategy. But just want to call that out. This is going to matter for our conversation today that these taxes are tied to the property and not to the individual. So this sounds simple enough, right? We have tons of different taxes in the us. We have income tax, sales tax, corporate tax, property taxes are just part of that. Well, for most of US history that has been the case. Property taxes are actually older than the United States, but it has been in the United States since its founding and really started to get widespread in the 18 hundreds as a means for helping fund state and local governments.
And that is largely still true today. It varies state by state, but nationwide, three out of every four tax dollars at a local level come from property taxes. That is insane. 75% of the money that your state and local taxes earn are from property taxes. That’s a national average. It’s going to vary state to state, but that is the average. And these dollars are of course then used to fund things like public schools, police and fire departments, roads, maintenance libraries, those kinds of things. So if this has been around for so long and it’s such an important part of the revenue structure for our state and local governments, why then is there a chorus of people saying that property taxes are illegal? From my research, there are basically two main arguments. There’s some other ones that are a little more fringe I’m not going to get into, but the two main ones with credibility that we should explore are first and foremost and the one I think that is the most common, the quote, no true ownership argument.
And proponents basically say that if the government has the ability to tax you year after year on something that you ostensibly own, then you never really own your property. So this applies if you have a mortgage, but even if you’ve paid off your mortgage and you own your home free and clear, you still got to keep paying your taxes. And if you don’t, the government can put a lien on your home. They can even go so far as to auction off your home to collect the taxes that are due. And to some people in this argument is essentially renting from the government indefinitely. They argue that once a homeowner has fully paid for a property requiring ongoing tax payments is fundamentally wrong, effectively saying the state is the ultimate owner. This is the most common argument and real property. And when I say real property, I’m talking about physical property like houses and land because your jewelry, your car is unquote your property.
But when I say real property, I’m talking about land or homes. So real property sort of does stand out as this only thing that works this way. I kept trying to think of another piece of property that is taxed in this way and I really couldn’t. I don’t think there’s anything else that works in the same way. So I do think that that’s why this has drawn so much attention. That was the first argument I mentioned. There was a second argument and that is more constitutional and I read a few different legal things here, but the most common incredible challenge to property taxes in sort of a constitutional sense is that it amounts to taking of property, which supposedly violates the Fifth Amendment. The Fifth Amendment. You may be familiar with this. This is the one that says the government cannot deprive someone of life, liberty, or property without due process of law.
But it also has this takings clause which requires just compensation. When government takes property for public use or other constitutional provisions, this comes up a lot of times you may hear of this takings clause. This comes up a lot in real estate when it comes to eminent domain, if you’ve heard of that term before. That’s basically if the government needs to take someone’s land for public goods, say for utilities or for military use or for something like that, they have to provide just compensation to the landowner, to the property owner in order to use that. So people who feel that property taxes are illegal because of the constitution often cite this and say that they are taking your money for public use without just compensation. So those are the two major arguments that property taxes are illegal, but we got to look at ’em. Do these actually stand up? We’re going to get to that right after this quick break. Stay with us.
Welcome back to On the Market. I’m Dave Meyer. Diving into the topic of whether or not property taxes are illegal and if they are or not, what that actually means. Before the break, I shared two of the most common credible arguments that property taxes should be illegal. Now we’re going to look at if these actually stand up, we’ll do it one by one and we’ll start with the no true ownership argument. What I uncovered in my research is that while the US has very strong property ownership laws, they are not absolute ownership laws. And what that means is that for all property in the United States, whether that is real property, a k, a houses or land or other property like a car or jewelry, there are certain conditions that must be met for your property rights to remain in effect. In other words, absolute obligation.
Free ownership just does not exist in the United States. Our government is set up in a way that the government can implement conditions of ownership and property taxes is one such condition for the ownership of real property. In fact, during certain times in the US property ownership had other conditions like back in the day you could be obligated into militia service because you own property in the United States or there have been times or places that have implemented mandatory road maintenance labor if you own properties and taxes are what we have now, but they all come from the same idea. Again, it’s that even if you own something in the United States, the way our government has always set it up, this is since the beginning, is that that ownership is not obligation free. The government has the right to implement obligations on that property ownership. You may agree with that idea or not.
That is up to you, but that is the way that the government is set up and given this, the idea that either you own your property or you rent it from the government, which is a common thing I’ve heard that seems like this sort of false dichotomy, this false premise to me, because you can own a car and you still need to pay the registration fee, right? You buy a drone, you still can’t fly it everywhere you want. There are conditions of that ownership, and that does not mean that the government owns it and is renting it. Instead, it means that you own it, but the government is implementing obligations on that ownership. And I’m not saying that you have to like this, that a lot of people are going to disagree with this, but this is just how our system of government is set up.
And the fact is this has been litigated many, many times and the courts have backed this up many, many times. I have found court cases going back to 1916 backing up, and as recently as 2023, the Supreme Court again supported the idea that the government can collect owed taxes via foreclosures. So just time and time again, you see the courts back this up and say that this is in fact how it works. So while I get the idea that property taxes may make it feel like the government owns your property, the law makes a distinction between ownership and conditions ownership. So property taxes are not illegal on these grounds. But what about that second argument talking about the constitution? Well, generally speaking, the power of government to levy taxes including on property is also very well established. But as I said, many say that the Constitution prohibits specifically property tax.
And this sort of led me down this whole rabbit hole, and here is where I came out. There is no law that prevents property taxes in the Constitution, but the federal Constitution originally required any direct federal tax on property to be apportioned by population, a rule that made it extremely difficult to implement. And that was intentional. And I admit I spent a lot of time researching this. I don’t fully understand why it actually made it’s so hard to implement it, but every legal document I read said that it was intentionally made difficult in order to purposely leave the question of property taxes to state and local governments. So the result in the US is that we do not have a federal property tax, and it does seem that that was the intention of the people who framed the Constitution. Now, they did leave it open to this very specific onerous difficult way that it could happen at some point in the future.
But it does seem that in the US we’ve sort of adopted, the original intention was that we do not have a federal property tax, but we do have property taxes at state and local levels. So is it constitutional for the federal government to have a property tax? Only if it’s done in this very specific difficult way, which is why we don’t have it. But does the Constitution say anything about stopping local governments from implementing property taxes? No, they absolutely have allowed that, and that’s what states and local governments have done. Some states, however, have imposed limitations on property taxes, but that’s at their local lawmakers discretion. That is sort of how these taxes are implement the scope, the scale of these taxes, not a blanket ban. For example, Texas prohibits a statewide property tax. The state government itself cannot impose one openly, local entities can.
So with this second question of is property tax illegal in the United States based on the constitution? No, it is not. It has been tried in court many times and in many venues and legally it’s always been held up. Again, not saying that you got to like property taxes, you can choose to vote against them in your local elections, but the fact is they are legal If you want to fantasize about them being illegal, go ahead. But as of today, that is not the case. However, they are also not required and municipalities are thinking about doing away with them altogether because clearly people in a lot of areas are not very happy with property taxes and would prefer a different system. This is becoming especially acute right now because as property values have soared over the last couple decade, decade and a half, property values have gone up with them.
And there’s this thinking that this is unfair because you’re getting taxed more and more and for some people their income is not going up at the same rate, and so this is taking up a higher and higher proportion of their income. And as a result, we’re seeing a lot of proposals for property taxes either more commonly be curtailed or limited in some way, but in some cases be eliminated altogether. Just for example, in Ohio there’s something called citizens for property tax reform. It’s a grassroots group. They’re collecting signatures for a November, 2025 ballot initiative to amend the state constitution and abolish property taxes entirely. They want to detach government funding from property ownership. We’ll talk about whether that’s realistic or not in just a minute, but I’ll just show you other examples. In Pennsylvania, a state representative has introduced a proposed constitutional amendment again to the state constitution to end property taxes.
He cited that argument saying that it was paying rent to the government. Again, Florida, we’ve talked about how governor DeSantis and some of his allies are exploring full banning of property taxes. State is also considering some rebate checks, some homestead exemptions for people on their primary residences and caps on property assessment hikes as interim measures. So those are some of the main examples. But other states like Iowa, Kansas, Colorado, North Dakota, are all exploring reforms ranging from sort of those caps on assessment growth to full elimination. I think we’re going to see a lot of these ballot measures come up in 2025. More about that after this break.
Welcome back to On the Market. Today we are addressing head on the question, are property taxes illegal? So is this a good idea? Should we be getting rid of or limiting property taxes? I mean, I think there are probably good arguments for and against this. We’ll start with the against. So the main argument here is similar to the first one, it’s that you’re paying taxes on something that you already own, and even though that’s not illegal, maybe it shouldn’t be something that the government relies on to make money. That is the primary argument that I hear. The other thing that I hear is that it’s creating a lot of stress for families, right? Because again, the tax assessments just look at property values. They don’t account for the homeowner’s ability to pay, and this can disproportionately hurt older folks, people who have maybe lived in their home for a really long time, maybe they’re on a fixed income and their property value’s going up, but their ability to pay those taxes becomes and more burdensome and that can be a problem.
It also can hurt folks in gentrifying neighborhoods because their tax burdens increase without necessarily a corresponding increase in the homeowner’s ability to pay. And so in some, I hear a lot of people say that this hurts this group of Americans that are asset rich. They have a house that’s going up in value, but cashflow poor where they don’t have income and that’s a problem. Then the third argument is there are just some people who are anti-tax in general and they just want to pay as little tax as possible and they want to reduce property taxes. So those are the main arguments I hear against property tax. On the pro side, people just say that property taxes are essential to funding government services, and the thing that a lot of people point to that’s positive is that by having these property taxes at a state and local level, that money stays in the community.
It’s not sent to Washington where it’s reapportioned to all these million different things. It’s money that stays in the community and therefore is subject to more accountability. This money that you’re paying in property tax, it goes to the things immediately around you like the schools and the roads and the sidewalks, and you can hold your government more accountable for how that money is used than you can at a federal level. That’s the argument, at least there are some other arguments that I saw that I think some people will consider pros. Some people will consider cons. So I just want to put this in a third bucket of depending on who you are, you might see this one either way. The first one is that it’s considered a progressive tax. That doesn’t mean it’s like a left-leaning democratic tax, although some people might see it that way.
What a progressive tax means is that it disproportionately impacts higher wealth families because they generally own property and it generally helps lower income families. So that is sort of like a well-established part of property tax is that it is a progressive tax. Again, you might see that as a pro or a, the other thing that you might see as a pro or a con is that it’s very different locally, and so some people might see this as pro because you can vote on it and you have the ability to more directly influence what your property taxes are on a local level. The other thing that’s kind of nice about this, this is not for everyone, but if you really don’t like your property taxes, you can get up and move. If you’re in New Jersey and you don’t like your 2% property tax rate, you can move to Alabama.
It’s like less than half a percent. So you do have that option. Some people probably see that as a con. I would imagine people in super high tax states, some of them at least feel that they are paying more in taxes than people maybe who just live a town or a county or a state away. So again, you can interpret those as you want, but just two things that you should think about when you’re considering this issue. So that’s sort of the things to think about. But wherever you fall on this spectrum, I think it’s important to understand these things and to understand if some of these limitations go into place or these outright bans go into place, there would be probably a pretty big impact on the housing market because if all of a sudden your cost of ownership dropped by let’s just say several thousand dollars a year, if you eliminate it all together, it’d be several thousand dollars a year.
That would give people more buying power. It would reduce your cost of ownership. It could even increase net migration. People might want to move to a state or a county or a city that doesn’t have property taxes. That would be pretty appealing. That in turn, you could play this out, could send property values up a lot and sort of negate some of the affordability improvements over time. But I think that would be sort of the short-term impact. Of course, though there is a flip side to that. It would mean less tax revenue for the government, which some of you might be okay with, but that will come with consequences one way or another. It’ll either come with consequences in the form of fewer services. They would have to cut back on government services that they couldn’t pay for, or the government would probably try and make up that revenue shortfall with other taxes like a higher income tax or a higher sales tax.
So that’s just something to remember. I think in a lot of states, whether they have limited these things or gotten rid of them, you just see it come back in the form of other taxes. But my recommendation, and there’s some great websites that actually put out this information, is to look at the total tax burden of where you live. That adds up your income tax, your property tax, and your sales tax to just understand what percentage of your take home income is going to state and local taxes. Looking at the big picture between those three buckets, I live in Washington, a perfect example. We have no income tax here on Washington. So people say, okay, that’s great. We have a super high sales tax here. I mean, our property taxes are pretty high. They’re not crazy compared to the national avids, but we have a really high sales tax, for example.
Or if you just go one state down to Oregon, there’s no sales tax, so it’s just like a totally different, or in Texas, they have super high property taxes, no state income tax. So you sort of have to look at the total picture, and I think it’s sort of nice to think about, Hey, there’s no property taxes, but if the government’s just going to make that up somewhere else, I don’t know if it will have the benefit that everyone is looking for. So my take, while I think it’s nice to dream about lower property taxes, they are definitely not going away because they’re illegal. That is just not going to happen. Some states could choose to do away with them, but I have honestly yet to see a credible plan for how a state would make up the tax revenue from other taxes like I was just talking about, or how they would reduce spending to accommodate lower tax revenue.
So I think the outright overall elimination of them are unlikely, but I do think we’re going to see some limitations go in place. To me, I think we will see some gaining momentum around this idea that your assessed value of your property cannot go up more than X percentage or X dollars in a given year because it’s just too shocking and detrimental to many households. So I do think we will probably see some states and some municipalities pass those kinds of legislation because that’s sort of like an interim measure that could help homeowners without an outright ban and sort of giving up all this potential government revenue, and that in itself could have an impact on the housing market. Of course, that’s going to be proportionate to the ban and how much that’s going to help out homeowners. It’s probably not going to help out in the midterm.
It’s sort of like a promise for the future that it won’t hurt homeowners more in the future, but that is something to keep an eye on, especially as we go into November and some of these things go on the ballot. As an investor, I think the thing to remember is that the nice thing about property tax is that you can choose where you want to invest. You can invest in lower property tax states generally as a strategy to increase cashflow, or you can invest in high property tax states, which some people believe lead to higher appreciation rates because the tax revenue is reinvested into the community, making it more appealing, which brings up demand and property values. I should mention, I did look into that theory because I was curious if that’s true. Higher tax states have higher appreciation rate. I did not find any evidence of that.
There was no studies or anything that showed that to be true, but I did find some studies that showed that it led to less price volatility, so maybe higher tax states have less swings, ups and downs, but take that for what you will. Either way. I think as an investor or homeowner, the increasing cost of taxes and insurance is just something that we need to pay attention to more than ever before. It used to be that you just paid your principal and your interest and the other things were just kind of afterthoughts, but now it’s super important because property taxes are not likely to go away. In my opinion. Growth might be capped in the future, but I don’t think they’re going away from the point where they are now. So make sure you are including them in your underwriting, including potential increases because that’s going to be super important and make sure that you’re thinking about tax rates and potential increases in tax rates in the municipalities you choose to invest. That’s going to be super important going forward. That’s it. That’s what we got for you today. That is my assessment of property taxes, whether or not they’re illegal, less likely to happen, and what you should be thinking about going forward. Thank you all so much for listening to this episode of On The Market. I’m Dave Meyer. See you.