Like pandemics and climate change, inflation is a handy smokescreen for government overreach. The modus operandi of this deception is the doctrine that “inflated property values inflate property taxes.” While that has a plausible ring to it, the property tax system in most states is actually invulnerable to inflation. If, at the stroke of midnight, inflation caused the assessed value of all taxable property to double, no one’s property taxes would increase. Incredible? Allow me to explain.
Every county in every state is home to numerous taxing districts: school districts, sewer districts, water districts, sanitation districts, fire districts, flood control districts, cities, the county itself, and sometimes even the state itself or certain state agencies.
Each of these taxing districts has a statutory authority enabling it to adopt an annual budget and to levy that budget on the district’s taxpayers as a proportional property tax.
How is it proportional? Here is how it works: The county assessor assesses the value of all the taxable real (e.g., houses) and personal property (e.g., cars) in the taxing district, and the tax law levies the district budget on the district taxpayers in proportion to their ownership of property in the district. For example, if a given taxpayer owned one percent of all the taxable real and personal property in the district, that taxpayer would be taxed for one percent of that district’s budget.
This is called a “proportional” property tax because a taxpayer owes in proportion to what he owns.
This proportional tax system is immune to inflation. Were the total value of taxable real and personal property in some taxing district to double in value at the stroke of midnight, no taxpayer’s proportion of ownership would change, and hence no taxpayer’s tax liability would change.
The tax liability formula is:
Taxpayer’s tax liability = (TAV / DAV ) BudgetD
Where:
(1) “TAV” is the “Taxpayer’s assessed value” of ownership of taxable real and personal property in the district,
(2) “DAV” is the taxing district’s total assessed value of taxable real and personal value, and
(3) “BudgetD” is the taxing district budget.
As you can see, merely doubling the value of all taxable real and personal property in the district will not change the ratio (TAV / DAV) and, therefore, will not change taxpayer tax liability. However, increasing BudgetD (the district budget) will increase taxpayer tax liability. If the budget were increased by 10%, and all other things remained constant, then the tax liability of every taxpayer in the district would increase by 10%.
That brings us to the inflation scam. If inflation is 5%, and everyone has been gaslighted to expect a resulting tax increase, the district can fulfill those expectations by simply increasing the budget by 5% and then blaming the increase on inflation.
To recapitulate, from the above tax liability formula, three conclusions immediately jump out at the reader:
(1) Proportionality. The ratio (TAV / DAV) represents the portion of the total value of the taxing district a taxpayer owns. For the sake of an illustration, suppose that (TAV / DAV) = 0.015. That means that the assessed value of all taxable property the taxpayer owns in the district is 1.5% of the assessed value of the district’s total taxable property. Therefore, the taxpayer’s tax liability is 1.5% of the district budget.
(2) Immunity. This proportionality formula is immune to inflation. For example, as noted above, if the assessed value of all taxable property in a district were to double overnight, the value of the ratio (TAV / DAV) would not be affected because the numerator and denominator both double. The taxpayer’s portion of the budget is not changed, so the taxpayer’s tax liability remains unchanged. The proportionality formula is immune to inflation.
(3) Budget-Driven. The tax liability formula shows very plainly that what really drives tax liability is the district budget. If the budget increases by 10%, then all taxpayers’ tax liability increases by 10%. This is actually good news because the taxing district budget is a political action. The district directors, who are elected officials, create the budget, so their decisions can, ideally, be subject to property owner influence at the polls.
I assume that, at this point, some people are objecting to the above analysis because their state’s property tax formula is not the proportionality formula but, rather, a “value times rate” formula. That is,
Taxpayer Tax Liability = (Value) (Rate)
That formula (Value)(Rate) appears to be sensitive to inflation.
However, this formula is merely a poorly disguised form of the proportionality formula. That’s because the “Rate” in the above formula is another ratio. That “rate” is the ratio of the district budget to the total assessed value of all taxable real and personal property in the district. Thus, that rate is expressed in units of “budget dollars per district value dollars.” What this means is that the “rate” is the ratio BudgetD / DAV.
What this means is that, for the formula
Taxpayer Tax Liability = (Value) (Rate)
we note two things:
(1) Value = TAV
(2) Rate = BudgetD / DAV
If we substitute those values into the formula we see that
Taxpayer Tax Liability = (Value)(Rate)
= (TAV) (BudgetD / DAV)
= (TAV / DAV) BudgetD
If you’re math-phobic and spun off the algebra of that curve, let me give you a hint: That last equation has the same form as A (B / C) = (A / C) B. Your nearest home-schooled eighth grader may be able to help you.
The bottom line is that the “value times rate” formula is, in fact, a disguised form of the proportionality formula. Shorn of obfuscatory language, the math is the same and the political ramifications are the same, too.
The takeaway from all this is that those unfortunate enough to reside in a state that claims that property taxes are driven by inflation are being bamboozled. Their state government is hiding behind inflation as a smoke screen to obscure a confiscatory property tax practice. Colorado is a poster child for this practice.
Figures don’t lie, but liars figure. What drives property taxes is not inflation but is the budgets that taxing districts adopt.
So, the question now becomes whether anything can be done to roll back taxing district budgets or at least resist budget growth. This is difficult because the district budget lies entirely within the control of the district legislative body, which usually consists of only three commissioners.
Typically, these commissioners, during elections, stand against budget growth but, once elected, become the captive exponents of the district and its budget. What is needed is help from the state legislature. That help could take various forms, including:
(1) Statutory restrictions on the allowable percent of annual budget growth (e.g., one percent).
(2) A statutory requirement that district budgets are allowable only for expenditures clearly necessary for the district’s core purposes.
(3) A statutory authorization for district taxpayers to take legal action against a taxing district to roll back a district budget or disallow a budget increase on the basis that the increases aren’t clearly necessary. This law would include a proviso that the taxpayer plaintiff may recover his reasonable attorney’s fee.
(4) A statutory provision that, in any litigation on the issue of necessity, the district bears the burden of proof to prove necessity by clear and convincing evidence.
American Thinker
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