How To Negotiate A Severance Package

Renters Should Pay More Taxes

Dream House In Kahala, Oahu, HawaiiEvery winter and spring, millions of homeowners across America pay their property taxes. In California, homeowners have to fork over roughly 1.2% of the assessed value every year to the local government. Put it another way,  in 83 years, a homeowner will have paid 100% the value of his or her home in taxes! How sick is that?

It is the American way for all citizens to pay their taxes, except for the many who don’t. We know by now that the often cited “47%” are the elderly or those who make under $20,000 so that’s fine. If you are one of them, just don’t vote to raise taxes on the 53% who already pay 100% of all federal income taxes please! Let’s all pitch in or starve the beast instead.

So why is it that homeowners, many of whom initially struggle to pay their mortgages, have to pay extra taxes while renters don’t? Let’s explore and discuss, shall we?

RENTERS VS HOMEOWNERS: A WRONGLY PERCEIVED CLASS DIFFERENTIAL

The clearest reason why homeowners have to pay property taxes while renters don’t have to pay renter taxes is because the government perceives homeowners as Lords! The word “landlord” makes it very clear that homeowners are considered the superior class. Back in the old days, peasants had to toil in the fields to pay for shelter. They couldn’t even afford regular food, let alone pay extra in taxes to help build schools and maintain roads.

Hundreds of years later, it’s odd that this archaic term and concept still holds true, even though America has grown to become the wealthiest nation in the world.  For anybody to equate renter to poverty is just ludicrous. Sure, there are some studies that show that the average net worth for a homeowner is 40X greater than that of a renter ($160,000 vs. $4,000). But overall, many more Americans nowadays rent out of choice, not out of insufficient funds.

SPREAD THE PROPERTY TAX PAIN FOR ALL

With a typical $700,000 home in San Francisco, the homeowner is paying around $8,000 a year to the city to fund schools and maintain public infrastructure projects. That’s $8,000 more than a renter pays, yet both the homeowner and the renter enjoy the same benefits. Clearly, this is unfair.

Just looking at my bill, I see $50 going to the SFUSD (I have no idea what the hell this is), and another $205 going to “teacher’s support”, even though I don’t have kids in public school. Supposedly, a couple thousand of my property tax is going to be used to build a bullet train from San Francisco to LA too. Sweet! I’m really going to be riding that in 2020 when it’s done? No, because we all know the project won’t be done until 2030 at the earliest!

Some renters argue that homeowners got it good already with the mortgage interest deduction of up to $1,100,000. In other words, if my interest rate is 5%, I can reduce my taxable income by $55,000. Well I say $1,100,000 is not enough! The figure is totally arbitrary, and should be raised by at least double to $2,200,000. It takes a lot of work to be able to save up 20% for a downpayment on a house and have 10% left over as a buffer in my 30/30/3 rule.  Homeowners therefore deserve a reward for their fiscal discipline, rather than be punished with more taxation.

EQUALITY FOR RENTERS & HOMEOWNERS MAKES EVERYTHING SO EASY

I’m a big believer in equality, and therefore I believe renters should pay a “Renter Tax”. To calculate an equitable way to tax renters, what we do is capitalize the annual rent by a normal risk free rate of say 4%.  Say for example you pay $24,000 a year in rent.  Divide $24,000 by 4% and you get $600,000. The $600,000 is the basis where you as a renter will pay 1.2% ($7,200) every year to the city, to also pitch in and support the schools and roads.

The Renter Tax proposition is a brilliant way to shore up any budget deficit the city or state may have, while creating a fair scenario for all people. Let’s create an environment where everybody proudly pitches in to ensure a harmoniously great nation for all our children! And most of all, let’s change the perception that renters are lower class citizens and tax renters just as much as homeowners. Equality for all!

Goal: If you are a renter, are you sufficiently frustrated yet? The goal of this post is to recreate the frustration and anger homeowners and certain income groups feel for having to pay more taxes. It’s understandable to vote on legislation to spend more of other people’s money for your own benefit. However, in the long run, you just end up hurting yourself because rents will increase to reflect increased expenditure by way of property taxes. If you want more spending, please also agree to pay more taxes as well. It is wrong to raise taxes on one group of people without having to pay more yourself.

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Updated 2H2015

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship. Sam focuses on helping readers build more income in real estate, investing, entrepreneurship, and alternative investments in order to achieve financial independence sooner, rather than later.

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Comments

  1. $iddhartha says

    This is not an endorsement of the common property tax scheme, but I turned this fact to my advantage by buying a home under the median value for my area. I pay half the interest and half the property tax relative to my peers who borrowed twice as much. Although I get a slightly lower income tax deduction, I don’t consider it to be a significant factor relative to the amount I save.

    Also, I purposefully bought in an area that is known for good local schools. Otherwise, in the city I work, my kids would’ve faced a lottery to get into the good schools. Funny how government structure can have great influence on such important life decisions.

  2. estaban says

    You seem to miss one important thing about property taxes. If a person is renting they then pay the landlord. the landlord then pays property taxes. The renter’s property taxes are then baked into the rent they pay. Renters do in fact pay property taxes through the landlords.

    I am both a renter (primary home) and a homeowner (rental property) I do pay my FAIR share of property taxes. I charge my renter more because of property taxes and my landlord asks more rent because of property taxes.

    Your “goal” cracks me up. First off, find me a study where renters are demanding property owners to pay more taxes? Second, find me a study saying renters don’t expect rents to rise because of higher property taxes.

    I love your site and I’ve gleaned some great advice from it but stick to the facts and don’t look down on those who you think pay “less” taxes.

    • Ryan says

      Estaban–Hoorah! Exactly what I was thinking. The property the renter lives on is taxed. To tax both the owner and the renter is double-dipping. And does the author really think that cost is not factored into the rent? And the owner gets the advantage of having equity from the bottom line costs.

      By the way, the management of our apartment complex clearly charges a certain amount to each renter for property tax.

    • renter says

      Exactly, my (friendly) landlord recently raised my rent. His told me that property value went up and now he is paying higher property taxes.

  3. Tom says

    Many properties that renters live in are assessed at yesterday’s or older valuations thus reducing the amount of property tax paid as a portion of rent and thus reducing the tax burden to renters, whereas most homeowners are paying today’s inflated, market rate valuations for their properties and thus are hit hard with large and rising property tax bills.

    Property taxes in California and other high cost states are outlandish and bankrupting anyway, with school bonds and special assessments constantly being added to the annual tax bill. I note that renters in general seem to have lots of disposable income whereas most homeowners are impoverished with in disposable income.

    And it is true that in various studies it has been shown that renters tend to support new school bonds and other special assessments (because they don’t directly see or pay them) whereas homeowners are much less inclined to support additional taxes. Which is why historically you had to be a property owner to vote on property taxation issues (which seems much fairer); today, not at all, so people other than those will be affected by them get to vote to raise other people’s taxes (very unfair).

    Taxation with no connection to the properties being taxed is inherently unfair. Lets go back to the old way of doing things where you had to own a property to be able to vote to increase taxes on it. Most elections for school bonds, special assessments, and add-ons would then fail, just like they used to.

    God help us struggling California, New Jersey, New York, Florida, and Texas property taxpayers as we sit in our kitchens eating rice and beans, driving 20 year old cars, and buying nothing, ever!

  4. estaban says

    “Many properties that renters live in are assessed at yesterday’s or older valuations thus reducing the amount of property tax paid as a portion of rent and thus reducing the tax burden to renters, whereas most homeowners are paying today’s inflated, market rate valuations for their properties and thus are hit hard with large and rising property tax bills.”

    When I got my tax bill as a property owner it did not matter if I owned the property as a primary user or as an investment property. My taxes increased because the property rightfully increased in value I then increased the rent to compensate. Homeowners who use their property as a primary residence get the tax assessment at exactly the same time land lords do and thus should change rent accordingly and might I add landlords don’t reduce the rent because taxes went down.

    “Taxation with no connection to the properties being taxed is inherently unfair” first an foremost this is inherently wrong.

    As I have explained before renters pay more in rent because property taxes are higher. Find me one instance that this is wrong.

    When my renter asked me recently why I increased his rent I said it was because my cost of maintaining the residence has increased because of property taxes. You know what? He was more than happy to pay more.

    “I note that renters in general seem to have lots of disposable income whereas most homeowners are impoverished with in disposable income.”

    Please give some documentation. Last I checked a landlord would be bad a one at best for charging less than what the property cost to maintain including taxes.

    By your argument we should be back to mid evil times when we had had lords “who owned land” and peasants. The peasants don’t have a voice because they don’t own land. We all know the lords were wealthy and had all of the “modern” comforts back then. The peasants were poor at best. As in they had nothing and were forever indentured to their lords. We might as well talk about your ideas and slavery. Indentured servants had no say and they lived off the land they “rented.” This is viewed as universally wrong yet this is exactly what you want to impose.

  5. Joe says

    Are you telling me, a 22 year old man who makes $12 an hour working full time, A man who makes just under $25,000 a year working full time, who has never been fired and has worked since 16, Who will have to cut down my working hours to go to school and live off of a lot less, Who forks over a third of every paycheck for a studio to live in should have to pay taxes on something I don’t own???

    God you boomers are so spoiled. I am working my ass off in an economy that worse than any you lived through and you tell me I should pay your bills? Quit your bitching, If you can’t afford your taxes then you should have worked harder.

  6. says

    Guys, just so you all know, Sam isn’t actually advocating that tenants be handed a tax increase. He’s just making the point that one shouldn’t demand that the government institute new programs–and thus new spending–without accepting the need to pay more taxes. He’s even said in another post (the one about how you shouldn’t use a Roth IRA) that one of his arguments against it is that you are giving the government more money to waste, so he doesn’t really seem like he’d suddenly be demanding more taxes.

    Personally, I’d like to see less taxes for everybody, but this would have to come with less government spending. This doesn’t necessarily mean getting rid of food stamps tomorrow, but it does mean cutting back on our mindset of “everything is the government’s responsibility”. It also means cutting back on our foreign policy; I’d rather the government spend our tax money here at home than dealing with Iran and ISIS, handing it over to Israel, destroying/rebuilding Iraq, and just generally meddling in the affairs of the Islamic world (what the hell is our fascination with the letter “I”!?).

    My point is, well, that he’s just making a point. I don’t think Sam wants to see anyone’s taxes raised. But at the same time, if you are the type to demand more programs that require more government spending (whether you are a hardcore leftist that thinks that the government should hand you a living wage worth of welfare checks or are a raging neocon that is angry because we haven’t bombed any Middle Eastern countries in the last 45 minutes), then you should be willing to accept an increase of YOUR taxes, not on someone else’s. Unfortunately, most people in this country want to see government spending increase (for both good and not-so-good reasons) and have somebody else pay for it all. No bueno.

    Sincerely,
    ARB–Angry Retail Banker

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