Property Taxes Banned? States Imagine a Tax-Free Future

0:00Are property taxes illegal? You pay them every year, but does the government actually have a legal right to tax property that you already own? As property taxes rise year after year, more people are asking this very question. Today, we're digging into it. Does the government even have the right to tax your property in the first place? What role do property taxes play in our economy? Could there be relief for property owners in the future? And how can you make wise investing decisions? based on our research.

0:36Hey, everyone. Welcome to On the Market. I'm Dave Meyer. Thank you all so much for being here. You may remember this if you've been listening to the show for a while, but a few months back, I did an episode about the state of Florida wanting to get rid of its property taxes. This is something they've been talking about a lot. Governor Ron DeSantis has been publicly discussing this, and it's something that they're still exploring. And after we did that show, we got a lot of great feedback on the episode, but there was this one line of feedback that I saw that I really wasn't expecting, honestly.

1:10There were many people that reached out to me that said property taxes are illegal or should be considered theft. And that was not a line of thinking I had really ever explored before, but it is one with massive implications for the housing market and for our economy. Because property taxes are one of the fastest growing expenses for investors. It impacts cash flow. And in many parts of the country, it's starting to impact the broader housing market in terms of inventory and pricing. And on the other side, property taxes make up a lot of local and state government revenue. So This question is super important, so I decided to take a look.

1:53Having really no previous opinions about the topic, I did a lot of research to try and get to the bottom of this question, and I have a lot to share with you about the legal status and the future status of property taxes in the U.S. Let's do it. So first and foremost, let's just set the stage. We're going to start really simple. What's a property tax? Well, it is the tax assessed on the value of your property. This is not the same thing as the income tax that you pay on rental income if you own a real estate investment. This is just the tax assessed on the value of the property. And this happens at either the state or the local government level.

2:35And so you've probably seen this before if you own a primary residence or you own a rental property. But basically, your property taxes each and every year, you'll probably get a statement for them. It's the assessed value of your property, which the government will send you, and your tax rate, which will vary pretty dramatically from state to state and from municipality to municipality. So we'll get into that more. But for example, the average tax rate that people pay on properties in the United States is about 1 % of the assessed value. So if you had$500 ,000 property, 1 % of the assessed value would be about$5 ,000 per year.

3:12And the interesting thing about these types of taxes is that they are actually not necessarily attached to the person. They are attached to properties as a lien, meaning that the tax obligation is tied to the property. It's not tied to the individual that owns it, which means that if you were to buy a property, for example, that has a tax lien against it, and a lien is just a liability. It's basically saying that if you were to buy a property with a tax lien, that means there are taxes owed on this property. And if you go and buy that property, you owe those taxes, not the people that owned it before.

3:50And that is one of a million reasons that you want to get a full title and lien search when you buy a property because you do not want to inherit a property with a lien on it unless you're using that as part of your acquisition strategy. But just want to call that out because this is going to matter for our conversation today that these taxes are tied to the property and not to the individual. So this sounds simple enough, right? We have tons of different taxes in the US. We have income tax, sales tax, corporate tax. Property taxes are just part of that, right? Well, for most of US history, that has been the case.

4:23Property taxes are actually older than the United States, but it has been in the United States since its founding and really started to get widespread in the 1800s as a means for helping fund state and local governments. And that is largely still true today. It varies state by state, but nationwide, three out of every four tax dollars at a local level come from property taxes. That is insane. 75 % of the money that your state and local taxes earn are from property taxes. That's a national average. It's going to vary state to state, but that is the average. And these dollars are, of course, then used to fund things like public schools, police and fire departments, roads, maintenance, libraries, those kinds of things.

5:12So if this has been around for so long, and it's such an important part of the revenue structure for our state and local governments, why then Is there a chorus of people saying that property taxes are illegal? From my research, there are basically two main arguments. There are some other ones that are a little more fringe I'm not going to get into, but the two main ones with credibility that we should explore are, first and foremost, and the one I think that is the most common, the, quote, no true ownership argument. and proponents basically say that if the government has the ability to tax you year after year on something that you ostensibly own, then you never really own your property.

5:57So this applies if you have a mortgage, but even if you've paid off your mortgage and you own your home quote unquote free and clear, you still got to keep paying your taxes. And if you don't, the government can put a lien on your home. They can even go so far as to auction off your home to collect the taxes that are due. And to some people in this argument is essentially renting from the government indefinitely. They argue that once a homeowner has fully paid for a property, requiring ongoing tax payments is fundamentally wrong, effectively saying the state is the ultimate owner. This is the most common argument.

6:33And real property, and when I say quote unquote real property, I'm talking about physical property like houses and land because your jewelry, your car is quote unquote your property. But when I say real property, I'm talking about land or homes. So real property sort of does stand out, right, as this only thing that works this way. Like I kept trying to think of another piece of property that is taxed in this way. And I just I really couldn't. I don't think there's anything else that works in the same way. So I do think that that's why this has drawn so much attention. That was the first argument.

7:07I mentioned there was a second argument, and that is more constitutional. And I read a few different sort of legal things here, but the most common incredible challenge to property taxes in sort of a constitutional sense is that it amounts to, quote unquote, taking of property, which supposedly violates the Fifth Amendment. The Fifth Amendment, you may be familiar with this. This is the one that says the government cannot deprive someone of life, liberty, or property without due process of law. But it also has this takings clause, which requires just compensation when government takes property for public use or other constitutional provisions.

7:48This comes up a lot of times. You may hear this takings clause. This comes up a lot in real estate when it comes to eminent domain. If you've heard of that term before, that's basically if the government needs to take someone's land for public goods, say for utilities or for military use or for something like that, they have to provide just compensation to the landowner, to the property owner in order to use that. So people who feel that property taxes are illegal because of the Constitution often cite this and say that they are taking your money for public use without just compensation. So those are the two major arguments that property taxes are illegal.

8:27But we got to look at them. Do these actually stand up? We're going to get to that right after this quick break. Stay with us. Are you looking for a simpler way to find your next investment property? Lenar Investor Marketplace is a free platform built for real estate investors. Create an account and get access to investor-ready new construction homes, plus real-time data on projected rents, returns, and neighborhood insights. Everything is one place, so there is no need to piece together information from multiple sites. There's also support for financing and property management to help make the process easier from start to finish.

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11:31Welcome back to On the Market. I'm Dave Meyer, diving into the topic of whether or not property taxes are illegal and if they are or not, what that actually means. Before the break, I shared two of the most common credible arguments that property taxes should be illegal. Now we're going to look at if these actually stand up. We'll do it one by one, and we'll start with the no true ownership argument. What I uncovered in my research is that while the U.S. has very strong property ownership laws, they are not absolute ownership laws. And what that means is that for all property in the United States, whether that is real property, aka houses or land, or other property like a car or jewelry, there are certain conditions that must be met for your property rights to remain in effect.

12:23In other words, absolute obligation-free ownership just does not exist in the United States. Our government is set up in a way that the government can implement conditions of ownership, and property taxes is one such condition for the ownership of real property. In fact, during certain times in the U.S., property ownership had other conditions. Like back in the day, you could be obligated into militia service because you own property in the United States. Or there have been times or places that have implemented mandatory road maintenance labor if you own properties. And taxes are what we have now.

13:03But they all come from the same idea. Again, it's that even if you own something in the United States, the way our government has always set it up, this is since the beginning, is that that ownership is not obligation free. The government has the right to implement obligations on that property ownership. You may agree with that idea or not. That is up to you. But that is the way that the government is set up. And given this, the idea that either you own your property or you rent it from the government, which is a common thing I've heard, that seems like this sort of false dichotomy, this false premise to me, because you can own a car and you still need to pay the registration fee, right?

13:44You buy a drone, you still can't fly it everywhere you want. There are conditions of that ownership. And that does not mean that the government owns it and is renting it. Instead, it means that you own it, but the government is implementing obligations on that ownership. And I'm not saying that you have to like this. A lot of people are going to disagree with this. But this is just how our system of government is set up. And the fact is, this has been litigated many, many times, and the courts have backed this up many, many times. I found court cases going back to 1916 backing up. And as recently as 2023, the Supreme Court again supported the idea that the government can collect owed taxes via foreclosures.

14:32So just time and time again, you see the courts back this up and say that this is, in fact, how it works. So while I get the idea that property taxes may make it feel like the government owns your property, the law makes a distinction between ownership and conditions of ownership. So property taxes are not illegal on these grounds. But what about that second argument talking about the Constitution? Well, generally speaking, the power of government to levy taxes, including on property, is also very well established. But as I said, many say that the Constitution prohibits specifically property tax.

15:10And this sort of led me down this whole rabbit hole. And here is where I came out. There is no law that prevents property taxes in the Constitution. But the federal constitution originally required any direct federal tax on property to be apportioned by population, a rule that made it extremely difficult to implement. And that was intentional. And I admit, I spent a lot of time researching this. I don't fully understand why it actually made so it's so hard to implement it. But every legal document I read said that it was intentionally made difficult in order to purposely leave the question of property taxes to state and local governments.

15:56So the result in the U.S. is that we do not have a federal property tax. And it does seem that that was the intention of the people who framed the Constitution. Now, they did leave it open to this very specific, onerous, difficult way that it could happen at some point in the future. But it does seem that in the U.S. we've sort of adopted the original intention was that we do not have a federal property tax, but we do have property taxes at state and local levels. So is it constitutional for the federal government to have a property tax? Only if it's done in this very specific, difficult way, which is why we don't have it.

16:35But does the Constitution say anything about stopping local governments from implementing property taxes? No, they absolutely have allowed that. And that's what states and local governments have done. Some states, however, have imposed limitations on property taxes, but that's at their local lawmakers discretion. That is sort of how these taxes are implement. The scope, the scale of these taxes, not a blanket ban. For example, Texas prohibits a statewide property tax. The state government itself cannot impose one. Only local entities can. So with this second question of is property tax illegal in the United States based on the Constitution?

17:19No, it is not. It has been tried in court many times and in many venues, and legally, it's always been held up. Again, not saying that you got to like property taxes. You can choose to vote against them in your local elections. But the fact is, they are legal. If you want to fantasize about them being illegal, go ahead. But as of today, that is not the case. However, they are also not required. And some municipalities are thinking about doing away with them altogether. Because clearly, people in a lot of areas are not very happy with property taxes and would prefer a different system. This is becoming especially acute right now because as property values have soared over the last couple, you know, decade, decade and a half, property values have gone up with them.

18:03And there's this thinking that this is unfair because you're getting taxed more and more. And for some people, their income is not going up at the same rate. And so this is taking up a higher and higher proportion of their income. And as a result, we're seeing a lot of proposals for property taxes either, you know, more commonly be curtailed or limited in some way, but in some cases be eliminated altogether. Just for example, in Ohio, there's something called Citizens for Property Tax Reform. It's a grassroots group. They're collecting signatures for a November 2025 ballot initiative to amend the state constitution and abolish property taxes entirely.

18:44They want to detach government funding from property ownership. We'll talk about whether that's realistic or not in just a minute, but I'll just show you other examples. In Pennsylvania, a state representative has introduced a proposed constitutional amendment, again, to the state constitution to end property taxes. He cited that argument saying that it was, quote, paying rent to the government. Again, Florida, we've talked about how Governor DeSantis and some of his allies are exploring full banning of property taxes. State is also considering some rebate checks, some homestead exemptions for people on their primary residences, and caps on property assessment hikes as interim measures.

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23:17Welcome back to On the Market. Today, we are addressing head on the question, are property taxes illegal? So is this a good idea? Should we be getting rid of or limiting property taxes? I mean, I think there are probably good arguments for and against this. We'll start with the against. So the main argument here is similar to the first one. It's that you're paying taxes on something that you already own. And even though that's not illegal, maybe it shouldn't be something that the government relies on to make money. That is the primary argument that I hear. The other thing that I hear is that it's creating a lot of stress for families, right?

23:52Because again, the tax assessments just look at property values. They don't account for the homeowner's ability to pay. And this can disproportionately hurt older folks, people who, you know, have maybe lived in their home for a really long time. Maybe they're on a fixed income and their property value is going up, but their ability to pay those taxes becomes more and more burdensome. And that can be a problem. It also can hurt folks in gentrifying neighborhoods because their tax burdens increase without necessarily a corresponding increase in the homeowner's ability to pay. And so in sum, I hear a lot of people say that this hurts this group of Americans that are asset rich because they have a house that's going up in value, but cashflow poor where they don't have income.

24:39And that's a problem. Then the third argument is there are just some people who are anti-tax in general, and they just want to pay as little tax as possible, and they want to reduce property taxes. So those are the main arguments I hear against property tax. On the pro side, people just say that property taxes are essential to funding government services. And the thing that a lot of people point to that's positive is that by having these property taxes at a state and local level, that money sort of stays in the community. It's not sent to Washington where it's reapportioned to all these million different things.

25:13It's money that stays in the community and therefore is subject to more accountability, right? This money that you're paying in property tax, it goes to the things immediately around you, like the schools and the roads and the sidewalks, and you can hold your government more accountable for how that money is used than you can at a federal level. That's the argument, at least. There are some other arguments that I saw that I think some people will consider pros. Some people will consider cons. So I just want to like put this in a third bucket of like, depending on who you are, you might see this one either way.

25:47The first one is that it's considered a progressive tax. That doesn't mean it's like a left leaning democratic tax, although some people might see it that way. What a quote unquote What progressive tax means is that it disproportionately impacts higher wealth families because they generally own property and it generally helps lower income families. So that is sort of like a well-established part of property tax is that it is a progressive tax. Again, you might see that as a pro or a con. The other thing that you might see as a pro or a con is that it's very different locally. And so some people might see this as pro because you can vote on it and you have the ability to more directly influence what your property taxes are on a local level.