My property tax bill is $6,171 on our $187,000 house, meaning that we pay roughly 3.3% of the value of our home in property taxes every single year. So, the principal and interest payment on my house (5% over 30 years) is somewhere south of $900 per month while the monthly payment for property taxes alone exceeds $500 per month. Let me ask you, are the services provided by your local government worth 55% of the value that you derive from living in your home?
We actually live in a local area where the local government functions fairly well – but for that $6,171 per year we still contract out for our own private waste disposal, we are on private septic and our children do not avail themselves of the public school services. So, we pay $6,171 to have some fire protection, some police protection (in the safest neighborhood in the area), have some potholes filled, and … well, it behooves me. We have a fantastic publicly funded community center, but anyone who lives near us knows that this facility is not filling in for some unmet production of a public good – there are dozens of fantastic private places just like it. We have roadside pickup of any yard waste you can imagine. And I am sure we pay for a whole host of things I could never imagine using or even know that they exist.
I’d remind you that it is not just “services” that I get from my local government. I am getting traffic camera surveillance in my community. I get all manner of restrictions on what I can do with my house and property. And I get a jail sentence if I don’t like the price I have to pay for all of those services. So, even if you wish to argue that I get $6,171 worth of value each year from having my lawn clipping picked up, you might conceivably discount that value by some amount due to the guns being stuck in my face.
That said, what is the value of an asset that pays a fixed and constant stream of income of $6,171 every year. One thing for sure is that this stream is relatively “risk free” – so an appropriate discount rate to apply to it would be a measure of the risk free interest rate in the economy right now. The current yield on 10-year US government bonds is 3.67%, meaning that the capitalized value of my government services is in the range of $168,000. Using a lower discount rate, such as the 2% used by the Stern review on global warming would yield a “value” of $309,000 for these government services.
Allow me to ask a simple question. If you had the freedom to choose so, would you purchase an asset for $168,000 that provides you with the same stream of benefits that my local government provides me with? How about $309,000?
