The Government Passes A Renters Tax!

In good old fashion political jockeying, the House finally agreed to a budget and unknown to many, they also passed a Renters Tax!  The idea is for all Americans to participate in our simple tax system and shore up our huge deficit.  The new law states that starting October 1, 2011 all renters shall pay a Renters Tax equal to half the value of their rented home as determined by the government every year.  Landlords equally pay the other half.

Example: A nice 3 bedroom, 2.5 bath property is assessed at $500,000.  A taxation of 1.2% = $6,000 must be paid once a year.  Since the renter benefits from living in the home as well as the public parks, roads, libraries, and schools, the renter writes a check for $3,000 to the local state county tax board.  Meanwhile, even though the landlord does not enjoy any of the benefits of living in the home, s/he receives rental income, potential long term asset appreciation, and the option to move back in at his or her choosing.  As a result, the owner pays for half the annual property tax by sending in a check as well.  Perfect equality.  Both renter and owner have “skin in the game” and look to better their surrounding community.

THE GOVERNMENT BELIEVES WE SHOULD ALL PITCH IN TOGETHER

Are all renters pissed and shocked for having to chip in and help out our debt-laden economy yet?  Well don’t be, this is my April Fool’s post!  One of my most unpopular posts, “Renters Should Pay More Tax” engendered a lot of criticism from renters who say they already pay taxes.  My response was of consistent stubbornness to not recognize that landlords charge a rental price that bakes in all costs, or at least tries to.

One could argue that renters pay more than their fair share of property taxes because landlords pass their entire costs to tenants if they are at least cash flow break even. Although I physically write the check to California for my rental property taxes, I definitely charge a rent that covers all costs and then some to reward me for the trouble of landlording. Otherwise, I might as well put all my money in CDs in kick back.

I’m sure I got many of you riled up due to my stubbornness.  I have to admit, that was kind of the point.  I aimed to create an understanding, and perhaps an empathy that singling out any particular group to pay more taxes than they already are is a very offensive and annoying thing to do.  To vote to raise taxes on individuals in the 33% and 35% tax bracket, while you yourself aren’t willing to pay more taxes is wrong. It’s especially wrong since the top 25% of earners pay 87% of all taxes already!

A GOOD PERSPECTIVE

Jason from My Money Minute had a great comment which cuts to the point:

Stop calling it a Renters Tax, and just label it an Occupancy Tax, like governments do on hotels. Hotels factor in their property tax into how much to charge to rent a room for the night, then the government tacks on 10% or more to the renter to occupy the space.

So if you want a “Renters Tax”, then charge 1% of rent and have it collected by the landlord each month.

I don’t even think Sam is for a Renters Tax. What he’s probably for, is all citizens feeling the hurt of paying taxes. When we buy goods at a store, we physically SEE the added sales tax. When we register a car, we FEEL it when we write a check each year. But when taxes are “included” in a cost (rent, for example), that ‘hurt’ is absent, making it easier to blame or pass responsibility for taxes on to another subset of people (the “rich”, property owners, etc.).

If renters had to physically SEE property taxes they are paying each year separated from their rent, they have that proverbial “skin in the game” mentality, and would be less apt to endorse raising taxes on property owners, the ‘rich’, and any other group of people they feel can afford paying more taxes.

I think Sam’s point is the “skin in the game” argument — More people who have to contribute to each type of tax (sales, income, property, use, vehicle, etc.) = Less class warfare, less nanny-state reliance, less pass-the-buck mentality, and greater empowerment of the individual.

The bigger the government, the smaller the individual. “Skin in the game” empowers individuals while decreasing the role of government.

Am I on to something here, Sam?

Very good perspective Jason!  It’s about everybody pitching in and visibly seeing where their money is wasted.  It’s also a lot of semantics. In the end, know that it is ludicrous to try make others pay more to the government when you aren’t contributing more yourself.  Stop finger pointing at others, and just focus on what you can do to contribute more.

Sorry for winding you guys up!  I’m against tax increases in general, except for those who consistently make money and don’t have to pay anything.  That’s just ridiculous.  Just think though, you can always argue whichever way you want.  That’s why there’s always so much gridlock in the government!

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Best,

Sam

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.

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Comments

  1. CreditDonkey says

    Indirect tax is still tax. It’s just a good way of hiding it. Tax is imposed upon the concept of jure regalia where in the situation of occupancy the renter passes as somebody who’s using the facilities of the landlord where the landlord is using the land of the nation. Makes sense? But it’s double taxation. It should never be passed. The end user will suffer because the landlord will always pass the tax while they make more money beyond breakeven.

  2. The College Investor says

    I agree with you about tax increases in general, but we seem to be running into a catch-22 everyday: people want services from the government, but they don’t want to pay the taxes to fund them.

    Politicians can’t cut spending because they would be unpopular and lose their jobs. Politicians also can’t raise taxes because they would be unpopular and lose their jobs. So what do they do? Next to nothing…

  3. Moneycone says

    It is actually a clever idea! May be not half but one-third? Hey, not many are buying homes and more and more are opting to rent. Tax money has to come from somewhere!

    To be fair, tax the renters AND remove tax breaks for oil companies.

  4. krantcents says

    I am opposed to this kind of tax because it it unfairly targets lower income individuals. An occupancy tax targets people who rent hotel rooms. Most of us may periodically use a hotel room but many do not. No doubt, it is a choice. People who rent versus own, in most cases do not have a choice.
    Raising taxes should not target lower income earners. Close loopholes, take away subsidies for oil companies, tobacco, etc In other words fix some of the problems before raising taxes.

    • Financial Samurai says

      What makes you think renters are lower income individuals? I think many renters would find offense to that, as they believe they are doing quite well. Many renters live the good life, with big screen TVs, 3 laptops, and a new $60,000 BMW (my last tenant). I also know what they make, and they’re doing great!

      • krantcents says

        You can find exceptions! The tenant you describe may be high income, but may lack the down payment because he spend his cash on the BMW and other toys. I am sure you can find renters who high earners, but they are the minority. A really savvy renter would live in a very small apartment and have his money (assets) working for him or her. That would be a real rarity!

  5. traineeinvestor says

    While I agree that everyone (or at least most people) should contribute to the tax net and a tax on renters is as good a means as any, I would be reluctant to give the government more money – they have an absolutely outstanding track record of spending more than they generate in tax revenue (either immediately or in the form of future promises or both). Odds are, if you give them more money, they’ll just waste it.

  6. Funny about Money says

    Now that was scary, for a few seconds there!

    Surely some states or municipalities must have taxes of this sort. When I was a kid and rented an apartment here in Phoenix, I had to pay a 3% surcharge that was billed as a tax. Don’t know whether that’s still in place, though — haven’t rented in decades.

    One of the problems we face as we feel sorry for high-income folks is that in fact few of them do fork over 30% or 35% of their income in taxes. All those loopholes in the tax law were put there so that people who have money coming in from a variety of sources and who can afford a good accountant can get out of paying taxes. And they do.

    Remember the time George Bush was reported to have paid exactly 0 taxes in Texas? Well… The man’s an oil millionaire. Why should he get away without paying nothing when the rest of us are paying confiscatory taxes on much, much smaller incomes?

    • Financial Samurai says

      Actually, most everyone I know in the the 1-5% DO pay 30-33% total effective tax rate Federal + State.

      It’s only the Top 0.1% of income earners who garner most of their revenue from long term dividends and investments who regularly pay less than 30% effective.

      You shouldn’t be scared to help pitch in more as a renter. The country needs you!

      • Funny about Money says

        Thing is, renters are already paying most or all of the property tax. If, for example, we were to rent our downtown house, we’d try to get enough to cover the PITI, even though the thing is underwater. From what I’m told, we probably could get it, in the current market. So it seems kind of unfair for the renter to have to pay still more tax on top of that.

  7. 20 and Engaged says

    Renter’s tax just wouldn’t be feasible for me right now. I’m renting because I can’t afford to own a home. Adding an additional tax could definitely put me in the poor house.

  8. Jackie says

    You had me worried there for a little. I have to admit a renter’s tax would hurt us a whole lot. We are feeling the crunch of todays economy. I think the idea of raising taxes or making a new tax put everyone on the defensive.

    • Financial Samurai says

      Now you understand why thousands and thousands of hard working Americans who make over $250,000 a year find it outrageous that the government wants Yo pay 3-4.5% MORE tax on top of the 33-35% they are paying already while half the population pays zero!

  9. Mike Hunt says

    I am in favor of a renters tax and a national VAT. I think it is time to get the bottom 50% to start paying their fair share. If we all have skin in the game we can agree to make choices and prioritize together.

    Otherwise we wast time fighting an imaginary class war.

    As it is all of us are getting whacked because of the declining value of the US dollar, so we might as well share the pain of paying taxes and then work together to get behind policies that eliminate the deficit. The first step is for all citizens to pay something into the system- we are all in this together.

    -Mike

    • Financial Samurai says

      The secret to a whacked dollar is to borrow as much as you can and go buy some REAL assets such as property in the US or elsewhere. Take advantage of funny money and own something real.

  10. UH2L says

    It’s about time I unsubscribe from your blog. Many of your views infuriate me and they show that you have no idea how hard it is to be poor. You’re out of touch with the reality for most people in our country. It’s not about who earns the most and pays the most taxes. It’s about who has the means to pay taxes after taking care of basic living expenses. Instead of “the top 25% of earners pay 87% of all taxes already,” the stat that’s most important and pertinent is this, the Top 1% control 34.6% of the country’s wealth. They should pay a similar proportion of the taxes. When you say, “singling out any particular group to pay more taxes than they already are is a very offensive and annoying thing to do,” remember that the idea was just go back to the tax rates we had before the tax cuts. The economy was fine and I don’t think any rich people were struggling. To all the Reagan lovers, the tax rates for the rich were much higher under his presidency. I advocate a tax system with a huge (something like $40,000) standard deduction (plus $10,000 for each dependent) and then a flat rate for income beyond that of 30% with no loopholes. Loopholes and deductions tend to favor the rich.

    Income disparity has grown immensely; the rich keep getting richer while corporate profits go up without job creation. Real unemployment is much worse than official stats show because many have given up on searching for a job. No society or economy can sustain itself with runaway wealth inequality. The unemployed make bad customers and an extra $50,000 for a millionaire helps the economy less than an extra $10K for each of five lower class families.

    And I’m not some low income person looking for handouts. I believe I’m upper middle class according to most definitions. I’m willing to pay more taxes to help this country out of its mess. I benefited from the services and infrastructure provided by the government more than the average person so I feel privileged and grateful. Richer people should feel the same. At least some wealthy people like Bill Gates and Warren Buffet aren’t as selfish as most wealthy conservatives as they admit they should pay more taxes. And I’ve never met a person who said I’m not going to work as hard because I don’t want to make it to the next higher tax bracket.

    http://motherjones.com/politics/2011/02/income-inequality-in-america-chart-graph

    • Financial Samurai says

      It would be sad to see you go, as I enjoy reading differig view points, by do what you got to do.

      I’ve always fought for equality, and I know that angers a lot of people. Unfortunately, equality is what sets us free in the long run and makes us work for the betterment for all. When you create an equal platform for all people to compete fairly on, everybody wins.

      I encourage you to return to your hometown and do something about the poverty with your MBA. Use all the good youve learned and taken away from the US and permanently help others back home. I think that would be great. Read Prahalad’s book to get inspired.

      PS If I were a billionaire, I’d encourage us all to raise taxes. You raise Buffett’s tax to 99%, and Buffett is still 99% richer than everyone else in the world.

  11. MacroCheese says

    I’m torn.

    I don’t like the thought of anyone paying more taxes. I also don’t like a disproportionate taxation system.

    But on the other hand, the bottom 50% simply can’t afford a tax hike like much of the top 50% can.

    There’s a certain amount of money needed to live a reasonable lifestyle (food, shelter, etc.)
    More than that amount covers luxuries (cable TV, cell phones, etc.). The top 50% has more comfort and can afford a higher tax bill when it comes down to it.

    But on the other, other hand. Some tough choices need to be made at all levels. In an ideal world, all tax rates would be lower but the beast that is the government has been fed such a fattening diet over the past thirty years that something drastic needs to be done to slay it. I’m a much bigger fan of cutting spending, but the beast needs to eat.

    And you can forget a national VAT as it is far too easy to circumvent. People will just start “bartering” for everything. This could partially work with an online sales VAT though.

  12. Little House says

    Scared me there for a moment! I’d be fine paying 1/2 or 1/3 property tax if my monthly rent was reduced. Since my rent is already factoring in property tax, I’d have to see the base rent reduced, then the tax added so the monthly amount would remain about the same. It wouldn’t make sense for my rent to increase since I would then be paying more than a property owner. The benefit with renting is you pay a little less than owning property, no? You just end up not earning any capital over time as a property owner would. And not all renters are broker; some of us are just fine renting for a while- we like the flexibility.

    • Financial Samurai says

      I agree. It’s foolish to assume that all renters are in the lower income group. Renting provides flexibility and usually a lower cost of living expenses, which is a valuable asset if one doesn’t exactly know where one wants to live for the long term.

      • Joanne says

        Why do you think renters pay less than owners? It makes no sense to me since the rent must cover all expenses of the property plus a profit, to me that should be more than the owners’ expenses of mortgage, insurance, maintenance. Am I missing something?

    • Terry Pratt says

      Little House said:
      “The benefit with renting is you pay a little less than owning property, no? ”

      In the short run, yes. In the long run, hell no.

      When you start renting, it is cheaper to rent than to own. (Let’s say it’s your 18th birthday and you leave the nest and rent an apartment. Call this Year 0, and let’s say it costs you 0.8x per year to rent – where x is the cost of owning.)

      Over time, you can generally expect rents to increase, because renters must always pay CURRENT rents, and cannot lock in rents for longer than (usually) a year. A general ballpark estimate I use is 5 percent per year, although this varies widely by time and place. So by Year 10, your rent has probably gone up about 60 percent since Year 0. Put another way, while you were paying 0.8x to rent in Year 0, in Year 10 you are paying 1.3x to rent.

      If you had bought in Year 0, the cost of owning that year was x. But with a fixed rate mortgage, your mortgage principal and interest never increase, while other costs (taxes, insurance, maintenance, etc) do go up. Since the largest cost component of owning never goes up, your total cost of owning tends over time tends to increase moderately. By Year 10, the cost of owning is (probably considerably) less than the cost of renting.

      • Little House says

        I live in an area of rent control (our rent can only go up a maximum of 3% annually and normally we see either a zero increase or a 1% increase a year. I like to use Michale Bluejay’s calculator to gauge if renting or buying is better. I think that in the majority of the US buying is much better, but in large, expensive metros (like LA – where I live), renting may be better if you can score a decent rental price and invest the difference. But that’s the key – investing the difference, most renters don’t do this so it doesn’t make sense to rent for the long haul.

        • Financial Samurai says

          Out of curiosity, would you be ok if the land lord raised the tent 2.5-3% a year instead? Is it enough to make you move if u knew rent was always going to go up bythat amount?

          Thx

        • Terry Pratt says

          Most renters don’t ‘invest the difference because they literally don’t have the
          money. Median income for renters is only about 40 percent of median income
          for homeowners.

          Back in the 1980s, median income of renters was approx 55 percent of
          homeowner median income. While some people recently did buy homes they couldn’t
          afford, a lot of people have successfully bought homes in recent years who would not have been able to buy in the 1980s.

          While a lot of Americans have escaped rent slavery, the expansion of
          homeownership has left behind a poorer pool of renters. They don’t buy if
          they can’t afford to buy, which means they will pay more (to rent) in the long
          run, and could end up in the position of not being able to afford to rent.

  13. My University Money says

    I really like the balance in this plan. If people claim that the tax for rented properties are already passed on to the renters anyway then this plan really shouldn’t bother them. If what they say is true and they suddenly are taking away some of the landlord’s expenses, then a competitive market will ensure that profit margins are kept the same and they will pay a little less each month in rent. At least this way they better understand the expenses involved in having the social services and infrastructure this country enjoys.

    • Financial Samurai says

      Thanks. It really is quite balanced, and I don’t see how people can complain as it offers more transparency. However, I’m sure it won’t go over well with renters. Hopefully, people can understand the point though.

    • Terry Pratt says

      “…then a competitive market will ensure…”

      Problem is, the market for rental housing isn’t very competitive, simply because people need shelter, and therefore people will bear great burdens to keep a roof over their head. A recent report says more than a quarter of all renters pay at least half their income for housing.

      History has demonstrated time and again that big tax cuts – cost reductions – have never produced lower rents. In a competitive market, profit margins would remain the same and rents would fall, right?

      Rents didn’t fall…the profits ALL went to landlords in the form of higher profit margins and higher property values ( = higher profit at time of sale).

  14. Joe says

    Flat tax, anyone? Honestly, I don’t see the point of graduated income taxes, or the overly-complicated system of deductions and credits we currently have. Just make everyone pay exactly the same percentage of their income.

  15. Ken Faulkenberry says

    Thank you for making a great point. I believe Income Taxes are immoral and intrusive. It causes government to get too involved in our private lives. We can create an economic boom by adopting the Fair Tax (http://FairTax.org ).
    Ken Faulkenberry
    AAAMPblog

  16. Invest It Wisely says

    The whole renters tax thing was hilarious. Here in Canada the so-called conservative government is hanging out tax credits and goodies to 500 groups under the sun. Why not just reduce spending, reduces taxes and call it a day?

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