Insights & Advice


Property Taxes are Making Home Ownership an Endangered Species

“For Sale” signs are more prevalent than flowers this spring along the by-ways and highways of America. The housing bubble has burst. Sub-prime lending horror stories are causing a buyer’s strike while prices are plummeting. And yet, if you live in New York, or anywhere else in the Northeast, you are paying more than ever in property taxes.

New York ranked second after Washington, D.C., as the highest taxed state in the nation, according to the 2004 U.S. Census Bureau, followed by Connecticut. Massachusetts ranked sixth. For many, especially those in or close to retirement, the onus of ever-increasing property taxes are threatening our single, largest retirement saving, our home.

The property tax is by far the largest tax imposed by local governments. In New York, for example, it represents 79 percent of all local taxes outside of New York City, which is 49 percent higher than the national average and it gets worse. Excluding New York City (which skews the numbers because the five boroughs have lower property but higher everything else taxes), “upstaters” pay a whopping 73 percent more than the average American as a percentage of personal income.

I live in bucolic Hillsdale, New York. My property taxes doubled last year while this year the market value of my home declined substantially. My monthly mortgage payments are now lower than my local taxes. All those who are in the same situation, please raise your hands.

Property taxes statewide grew by 60 percent between 1995 and 2005, more than twice the inflation rate. Most of that growth occurred in the last five years when property taxes increased by 42 percent compared to inflation of 13 percent.

I asked myself what was I getting in return for these taxes? Well, my dead-end dirt road is maintained occasionally and ploughed after snowstorms but my water and sewage systems are maintained at my expense, as is trash collection. In over twenty years, I’ve never seen a law enforcement vehicle or fire truck on my road save for the three times my house has been robbed. My child was raised and educated elsewhere so I have no need of the school system. Am I really paying $13,000 a year to have my road ploughed?

Fortunately, I can afford to pay (right now) but what about those who can’t? A common complaint is that property taxes are unfair. They are regressive, meaning they hit lower income taxpayers harder than the wealthy. No argument there, it’s true. Another issue is that booming land and home values do not accurately reflect an owner’s ability to pay, particularly for senior citizens or a community’s farming or lower-income population.

STAR, the $2.5 billion state-funded property tax exemption program, was created to mitigate some of the impact of the taxes. It shelters the first $30,000 of every homeowner’s property value ($50,000 for lower-income senior citizens) from the taxman. The problem with STAR, however, is that it simply transfers the tax burden from homeowners paying local school property taxes to taxpayers statewide. The more STAR exemptions in a particular locale the higher the local schools tend to spend since taxpayers elsewhere have to pick up the bill, according to a recent report by Alan Hevesi, the New York State Controller.

Big money is involved and since the state is powerless to compel local assessors to use acceptable appraisal methods, assessments are subject to “interpretation” on a county- by -county, assessor by assessor basis. As a result, cynicism abounds as to the fairness of the individual assessments.

Bottom line: property taxes are killing us. Our homes are our nest eggs and if taxes continue to increase we won’t be able to afford them on a retirement income. So let’s say that happens. You retire and are forced to sell the home you planned to live in the remainder of your life. You move to a smaller place in a different state. At least you get to stash the profits you made on the sale, right? Not necessarily. In my case, if I retired in ten years I would need my house to appreciate by $130,000 or $13,000 a year just to break even but housing prices are falling fast and who knows when that turns around. I would also be gambling that my taxes remain the same over the next decade. Anyone want to take that bet?

Posted in Macroeconomics, The Retired Advisor