Thursday, October 18, 2018

Property tax rates in Eaton and Ingham counties (Michigan)

Eaton and Ingham counties, Michigan, are divided into 146 property tax divisions. By way of explaining a "division", consider a township with 36 square miles that sends students to three different school districts and has a small town within its boundaries. The property owners of that township would pay any one of four different rates depending on the address of the property.

On a home with a market value of $100,000 a resident of Eaton and/or Ingham county could pay as little as $1335 per year or as much as $3170 per year.

Folks who purchase properties in high tax districts will sometimes justify the purchase by claiming that the only way to "make money" on a house is to purchase one in areas with historically high appreciation rates. That is, a house in areas with many government supplied amenities and commensurate taxes.

It might be instructive to look at what selling price a home-owner must receive to break even under two different tax scenarios.

Assumptions:
  • Ten year ownership time horizon
  • 3% of market value of house is spent on maintenance...some will quibble that this should not be included in costs, but many bathroom/kitchen remodels are justified on the basis of increased selling price
  • Property tax goes up at 3% per year
  • The purchasing power of the nominal currency goes down 3% per year
  • One person purchases a $100,000 house in the high tax region
  • The other person purchases a $100,000 house at the mode of the histogram. That is, they purchase a house taxed at the rate of the tallest smoke-stack on the chart, $1550/year.

The person who purchased in the high tax region must achieve a net selling price of $213.4K to recoup the purchasing power of the original $100K investment.

The person who purchased the house in the $1550/year region must acheive a net selling price of $192.7K to recoup the purchasing power of the original $100K investment.

Net difference: $20K in favor of the lower-tax region.

The hook-in-the-worm is that the amenities in the high tax regions will disappear without a reduction in tax rates. This will happen as municipal employees retire and entities must sink funding into pension funds for people who are no longer working for the entity.

At that point, the premium paid for houses in "formerly high amenity but still high tax rate" regions will invert and houses in low tax regions will become much more desirable. That is, those houses will command a premium.

The seller will find that he funded arts, recreational opportunities, diversity festivals for a decade and then gets hammered on the back-end when he tries to cash out.

This will happen within counties and metropolitan regions. This will happen state-to-state. This will happen to broad geographical regions of the country.

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