Taxing increased property values is dubious. Only land undamaged by natural disasters and adverse neighborhood effects appreciates, and inflation causes much of that appreciation. Houses depreciate. Many purported improvements are maintenance and updating designed to mitigate depreciation. These maintenance efforts disguise housing age and deterioration as plastic surgery disguises fading beauty of aging starlets. Without maintenance improvements, houses fade as starlets fade without plastic surgery. Taxing improvements essentially taxes age.

Property taxes are taxes on capital that reduce further capital investment such as increased rental housing and favor consumption such as debauchery. Increased taxes on purported increases in property values are taxes on unrealized capital gains that do not occur in other capital markets such as the stock market. That increased tax occurs every year the owner holds the property. Any subsequent increase in purported property value elicits another unrealized capital gains tax persisting as long as the owner holds the property. With compounding interest, the sum of these unrealized capital gains taxes absorbs a large portion of the increased value of the property. When the property eventually sells, the Federal Government levies a realized capital gains tax on the difference between the sales price and the purchase price. The sum of the realized and unrealized capital gains taxes substantially reduces the profit from home ownership and questions housing as an investment.

By replacing property taxes with sales taxes, the county replaces capital revenue with consumption revenue. The free market then directs the increased capital revenue to its highest and best uses. Given high rental rates in the islands, portions of the enhanced capital revenue funds increased residential housing sought by alleged policy analysts. With increased investment in rental housing, more rental units develop and lower rental rates. Then the free market alleviates a major island problem: too few rental units at too high costs. The alleviation is not complete since other impediments inhibit a fully free market.

John Drake,

Friday Harbor