A few weeks ago, legacy and social media outlets were abuzz with Kamala Harris’ latest attention-grabbing policy proposal: a tax on unrealized gains.
The blowback was swift.
Like other proposals the Harris camp has floated during her coronation campaign, the unrealized gains trial balloon rapidly deflated before it got too far off the ground.
While it may not have caught on, it did cause some Texans to wonder if we are already paying an unrealized gain tax.
In a state where income tax has been constitutionally outlawed, Texas has relied heavily on property taxation to fund government functions.
The taxation on that property isn’t levied when it’s sold but rather annually, based on a perceived increase in value—that’s what might be called an unrealized gain.
Unrealized gains are the theoretical increases in an asset’s value that haven’t been realized through a sale. Texas property taxes, levied annually based on the appraised value of a home, function similarly.
Homeowners are taxed not on their income or actual gains, but on the current market value of their home, even if they have no intention of selling it.
This is akin to taxing someone for the increase in their stock portfolio without them ever selling a share. The rising home values in Texas mean that many homeowners see their property tax bills soar, even though they have not “realized” any profit from their property.
As property values increase, so do the taxes.
And the impact of consistently rising valuations and inflation is staggering over the lifetime of property ownership. Over the lifetime of a 30-year loan, a property owner can be expected to pay the initial value of the mortgage in property taxes alone.
Retirees or fixed-income households, in particular, may find themselves “house rich, cash poor.” They own a valuable home, but the property tax obligations may exceed their ability to pay comfortably. This is effectively taxing them on the presumed wealth tied up in their home—wealth they have not accessed.
The property tax, unlike a sales tax, is morally defunct. It’s arguably worse than an income tax since it’s levied regardless of an individual’s ability to pay.
A homeowner could see the value of their home increase by thousands of dollars but have no actual cash to pay the corresponding property taxes, particularly if their income does not increase at the same rate as their home’s appraised value.
Republican politicians have long run on ending the property tax, but they’ve been cowed by local interests into watering down or abandoning these promises.
Escalating property taxes can push people out of homes they’ve owned for years and create a disincentive for long-term ownership, mirroring the behavior associated with high capital gains taxes on investments.
Recent efforts to cap appraisals and offer limited relief are steps in the right direction, but they don’t address the core issue: homeowners are being taxed on theoretical, not actual, wealth.
Lawmakers have pledged to again lower property taxes when they return to Austin in 2025.
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