Many people would be elated to hear their home had roughly tripled in value over a mere 12 years. But when you have no plans of selling any time soon, and your tax bill is based on your property’s assessed value, the emotion can be rather the opposite.
This is the situation Steve Reinke and his son Scott are facing in Isanti County, Minnesota, a rural county just north of Minneapolis. The family is suing the county for assessing their land at what the family says is an unreasonably high value, creating a hefty property tax burden.
The family bought the 18-acre property back in 2015 and built a small home on it along with a large garage. The land and materials together cost roughly $130,000. The assessed value of the land has since skyrocketed, and the county now claims the land will be worth about $484,000 in 2027. The taxes associated with that kind of property value are approaching the amount of the mortgage payment, the family says.
“We built it to keep the costs down because it was all he could afford,” said Steve Reinke, referring to his son. “Now it’s getting to the point where they’re taxing him out of it.” Reinke says the value of the land should be closer to $380,000, and one third-party appraisal put the current value as low as $270,000. Despite the large acreage, the family says 80 percent of the property is wetlands that can’t support building.
The county has not been amenable so far. “When we went to try to sit down with them, they passed us over another sheet that they’re going to raise it to 484 in ’27,” Reinke said. He’s hoping things will change by the court hearing, scheduled for May 7, where he plans to bring evidence supporting a more reasonable appraisal.
While the Reinkes are facing an extreme case, disputes about tax assessments are not uncommon. Property owners are often frustrated with the amount of tax they owe and appeal their home’s assessed value. These grievances are not frivolous. According to the National Taxpayers Union Foundation, 30–60 percent of taxable property in the United States is over-assessed.
Part of the problem is appraising property is a highly subjective activity. As the economist Murray Rothbard noted in his 1970 book Power and Market, “since an actual sale of property has usually not taken place, there is no way for assessments to be made accurately.” All assessments are thus “arbitrary” and open the possibility for “favoritism, collusion, and bribery.”
Of course, it’s entirely possible disputes reflect nothing more than a genuine disagreement about the value of the property. But even then, how does one begin to adjudicate which assessment is more accurate in the absence of any objective criteria? Ten different assessors might come up with ten different numbers. Shall we simply take the average?
One way Minnesota could reduce the subjectivity inherent in the current system — and the costly disputes which accompany it — would be to adopt something like California’s Proposition 13. Passed in 1978, Proposition 13 caps property taxes at one percent of a property’s assessed value and stipulates that the assessed value can only increase by a maximum of two percent per year unless the property changes hands, in which case it resets to the amount the property was sold for. The law is designed to prevent precisely the kind of situation the Reinkes are facing: a sudden, unexpected hike in property taxes due to sharply increasing property values.
Proposition 13 has been highly controversial ever since it was passed. Proponents like the fact that it keeps property taxes modest and predictable. Opponents say it starves governments of the resources needed to provide important public services. “It’s not an overstatement to draw a straight line from Proposition 13 and related anti-tax measures to California’s crumbling roads, struggling schools and reduced social service programs,” read a November 2020 editorial in The Los Angeles Times.
That may seem intuitive, and indeed, local government property tax revenue dropped by about 60 percent after Proposition 13 came into effect. But many have pointed out that, despite Proposition 13, California is hardly lacking in tax revenue overall. “Examining real (inflation-adjusted) state and local revenue and expenditure per capita trends reveals that California had already passed its pre-Prop. 13 peaks by 1989,” writes economist Gary Galles in response to the Times and similar commentary from others. “By 1990, real per capita expenditures for welfare, police, and fire were higher than their pre-Prop. 13 peaks, and education was only slightly lower. And those trends have not been reversed since.”
Whatever one thinks of the policy’s effect on social services, it at least seems to do a good job of reducing the number of tax disputes. Nico Tsatsoulis, a libertarian who is running for the Assessor position in Cook County, Illinois, which covers Chicago, notes roughly 27 percent of assessments are appealed in his county, compared to just one percent in Los Angeles County.
“The current system is fundamentally broken,” he wrote in a recent column on the property tax system in Illinois. “It relies on government bureaucrats attempting to replicate market values through arbitrary assumptions, resulting in the chaos and inequity we experience today.” He argues Illinois should adopt a policy similar to California’s Proposition 13.
“The one percent cap on a market-recorded value offers something the current system cannot: indisputable fairness and absolute predictability,” he writes. Tsatsoulis says homeowners and businesses “face wild swings in taxes based on opaque computerized mass appraisal formulas.” He proposes “anchoring taxes to the acquisition price,” to reduce the subjectivity of assessments and improve the predictability of investments. A firm cap, he argues, is the only way to restrain the “appetite of profligate spenders to take owners and renters to the cleaners.”
While Proposition 13-style legislation seems to offer many advantages for those who want predictability and lower taxes, advocates should be mindful of its other possible impacts. For instance, if a property’s value can only be reassessed when the property is sold, that contributes to considerable inequity in the tax system. Property owners who bought their land more recently would pay far more in taxes than their neighbors for identical services (assuming property values are increasing). The reassessment rule also creates a “lock-in” effect, where property owners are incentivized to stay in their current location longer than they otherwise would.
Another concern is that reducing the funds that can be raised by localities invites the state to take a larger role in funding government initiatives, leading to more state rather than local control. As a 2011 piece in The Economist put it, “for all its small-government pretensions, Proposition 13 ended up centralizing California’s finances, shifting them from local to state government.”
Proposition 13 is an excellent case study of what Bastiat famously pointed out in 1850: most laws give rise to a wide series of effects, many of which are only visible to those who take the time to look for them. States thinking about adopting similar legislation would do well to study California’s experiment thoroughly before moving forward.
For free-market proponents, Proposition 13 is certainly alluring, as it’s a shining example of a bold restraint on government. Its mystique is heightened by the fact that it comes from a most unlikely place: California’s otherwise dreadful tax environment.
But Proposition 13 is no panacea, and it would be a mistake to hold it up as the end goal. For those who believe in free markets, the only real solution to unnerving tax surprises and subsequent disputes is to reduce the role of government to such an extent that taxes become predictable. Starve the beast of responsibilities, not just resources. At least, the prospect of being taxed out of your own home will be unimaginable.