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Sneak a Tax

Wait until people start getting their 2022 real estate property assessments and their new real estate tax bills. After decades of small increases in property taxes, state and local taxpayers are completely unprepared for what inflation has done even without any rate increases.

Property Taxes Are Not Indexed

A simple primer on taxes reveals that property taxes are generally “ad valorem” meaning based on value and not indexed for inflation; whereas income taxes are based on revenues like wages and investment gains, and generally are indexed for inflation.

Inflation adjustments for federal income taxes are common and necessary to keep a taxpayer from landing in a higher bracket just because his wages increased to combat inflation. Since state income taxes are usually tied to the federal regimen, they too, are indexed for inflation.

An example of the inflationary windfall for property tax assessors is Naples, Florida. In 2020 the aggregate assessed value of single-family residences in the City of Naples was $13.4 billion. In 2021 the assessed value was $14.5 billion for an 8.2% annual increase. Without any changes to the millage rate, the City of Naples will collect more than $9.0 million of additional taxes simply due to inflation in home prices.

Rear View Property Valuations

The other quirk in property taxes is they are generally assessed in arrears which means real estate taxes for 2021 are based on the 2020 assessed value.

In 2020 at the onset of Covid there was just a hint of the real estate inflation we are seeing today. The 8.2% increase in assessed values in Naples for 2022 was based on 2021 real estate values which accelerated in 2021. I am willing to bet when homeowners get their 2023 tax assessment based on 2022 fair market values there will be some pretty unhappy taxpayers, especially recent home buyers who looked at their new home’s real estate taxes in the rear-view mirror.

Sales And Use Taxes Also Sneak a Tax

As the price of new and used cars inflates at double digit rates, so do the sales taxes. My old Subaru now trades at $33,000 up by $3,000 since 2019. If I had sold it, then I would have paid $1,650 in sales taxes in Ohio. Today it would be $1,815. My car got older. I got an inflation windfall, and the tax man was a silent partner in my good fortune.
Buying a new Tesla may be good for the environment but like most electric vehicles, some battery components have inflated at double digit rates. According to CBS News reporting on March 15: “Tesla’s Model X now costs $114,900, a jump of more than $10,000. The Model S price has risen by $5,000, to $99,990; the Model 3 Performance price by $3,000, to $61,990; and the Model Y price by $4,000, to $62,990. (Source)

Again, the tax collector will be getting a windfall sales tax benefit simply because of inflation. Here is what the sales tax would be on the average price of a Tesla in four of the largest states:

State Tax Rate Avg Tesla Price Sales Tax
California 7.25% $85,000 $6,162.50
Florida 6.00% $85,000 $5,100.00
New York 4.00% $85,000 $3,400.00
Texas 6.25% $85,000 $5,312.50

As we all begin to understand how confiscatory inflation can be in a world where taxes are not indexed for inflation, it may also dawn on us that there are significant ongoing costs to letting the inflation genie out of the bottle.

The above commentary is for informational purposes only.  Not intended as legal or investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments based on conditions at the time of writing and are subject to change without notice.

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Sneak a Tax

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Rob McCreary

Rob McCreary has more than 40 years of transactional experience as an attorney, investment banker and private equity fund manager, and has spent his career in building entrepreneurial organizations with successful track records. Founder and chairman of CW Industrial Partners (originally CapitalWorks, LLC), he is responsible for developing and maintaining senior relationships with investors and portfolio governance.

This blog represents the views of Rob McCreary and do not reflect those of CW Industrial Partners or its employees. This blog is not intended as investment advice. Any discussion of a specific security is for illustrative purposes only and should not be relied upon as indicative of such security’s current or future value. Readers should consult with their own financial advisors before making an investment decision.