Property Tax Relief as one Tool for Beginning to Fix the Foreclosure Crisis
With any issue as visible and complex as the recent mortgage foreclosure crisis, you can expect a vast array of proposals for addressing the problem to arise. Unfortunately, at least at the federal level, many of those proposals have left much to be desired.
One of the more bizarre ideas to come out of Congress is an expansion of the “net operating loss carryback” provision. This proposal would allow companies taking a loss in either of the next two years to deduct that loss against taxes already paid at any time during the last four years (currently the deduction is limited to the previous two years). This is an inefficient and poorly targeted approach to the foreclosure problem because the deduction would be available to all companies – not just homebuilders and other housing-related businesses. It is also a troubling proposal because the breaks it provides have no strings attached to them. If there isn’t a demand for new homes, there isn’t going to be a demand for homebuilders regardless of whether or not the company gets a check from the federal government.
Another idea Congress proposed is a no-interest loan in the form of a refundable tax credit for first-time homebuyers that must be paid back over 15 years. Unfortunately, the credit will not be available to the buyer until after the downpayment has already been made, so its usefulness is seriously constrained.
Other tax changes are discussed in the link above, but overall it seems clear that Congress has missed the mark. Their collection of proposals raises one interesting question in particular: why are so many of the approaches to this crisis centered around tax cuts when nobody is arguing that the problem is a result of high taxes? As Bob McIntyre, director of Citizens for Tax Justice, recently said, “If we gave this issue to the agriculture committees, they’d probably give us farm subsidies, so if we give this problem to the tax-writing committees they give us tax breaks because that’s what they do. I’m pretty sure we have committees in Congress to deal with housing.” It’s always good for politicians to be able to offer up tax cuts, though.
But while for the most part Congress’ proposals are nothing more than the result of an over-eagerness to cut taxes, another one of their proposals actually did touch on one potential solution involving taxes. Property taxes are not the cause of the foreclosure crisis, but lowering property taxes on those homes most at risk for foreclosure seems like a sensible component of any broad strategy for reducing the number of foreclosures. Unfortunately, but perhaps unsurprisingly, even Congress’ efforts at providing property tax relief aren’t tremendously helpful – an income tax cut of no more than $350 per spouse (or roughly $150 under the Senate bill) for all homeowners who do not itemize is all they could muster. Additionally, since the cut comes in the form of a deduction, it’s value increases for better-off homeowners in higher tax brackets who are presumably at less risk of foreclosure.
In contrast to this meager amount of relief proposed in Congress, a bill introduced in Michigan (where the foreclosure crisis has been particularly devastating) takes works the property tax angle more aggressively (and arguably more productively) by offering a full exemption from the property tax for homeowners earning less than 200% of the federal poverty level. Homeowners earning up an income limit to be determined by the taxing district are eligible for a 50% reduction of their property tax bill. Taxpayers possessing assets worth more than an amount to be determined by each locality will be excluded from the relief, as will taxpayers whose homes are worth more than 300% of the median home price in their district.
By providing extensive relief to those least fortunate homeowners most vulnerable to foreclosure, rather than only offering more minor relief to a broad swath of taxpayers, the Michigan legislature has before it a bill much more likely of meaningfully impacting the foreclosure crisis. And by introducing a degree of progressivity into the property tax, this bill could make life just a bit easier for those individuals most likely to be impacted not only by the foreclosure crisis, but also by the recent economic slowdown in general.
Notably, this emergency bill is in addition to the state’s property tax circuit-breaker that provides tax credits to lower- and middle-income families based on the share of their income they are required to pay in property taxes. The emergency relief, then, isn’t something that even needs to be made permanent. A circuit-breaker is the preferred method for assisting those in need of relief in a normal housing market – but under the current, very abnormal housing market, this additional relief could play an important role in a broader plan designed to address the needs of Michigan homeowners.
As an interesting aside, one of the other primary benefits of this bill would be a standardization of the process for providing need-based property tax relief. Detroit has recently been plagued with reports that their “Hardship Committee”, appointed to decide who is in need of property tax relief, has been awarding tax benefits to wealthy, well-connected homeowners. The state bill would offer local committees less discretion in deciding who can see a tax reduction. This investigation into Detroit’s “Hardship Committee” by The Detroit News provides a very interesting read that discusses a stunning example of tax fairness being thrown out the window.
$13 Billion Down the Drain
George Bush just spent $13.4 billion of your money to kick the automaker mess into the Obama Administration. Funny how easily so many billions slip through our fingers these days.
Seemingly unable to decide whether to let Chrysler and GM reorganize in bankruptcy or engineer a full-blown government bailout of the deeply troubled automakers, President Bush tried to split the difference. He is offering a $17.4 billion loan–$13.4 billion upfront and another $4 billion in February. The deal is filled with demands for cosmetic concessions such as limits on executive comp and corporate jets—none of which are financially meaningful in any way. The White House calls this a loan, but don’t count on a dime ever being repaid.
This plan is supposed to give the automakers time to restructure themselves. It won’t. In truth, besides getting Bush out from under the mess, this plan won’t accomplish a thing. Bush says it would be dangerous for the auto companies to fail while the economy is in crisis. Does he think things will be any better in three months? Unless the economy miraculously turns around in the first quarter of 2009, Detroit’s collapse won’t be any easier to take.
As far as Chrysler is concerned, its majority owner, the private equity firm Cerberus Capital Management, has reportedly refused to put up any additional cash to help save its own investment. The Cerberus investors understand better than anyone the futility of doubling down now. But they are perfectly happy to let taxpayers do it for them. Chrysler is a goner. It will either be acquired (for little more than the value of its access to a government loan) or it will die.
GM may survive, but only as vastly restructured and downsized company. That will mean throwing tens of thousands of employees out of work and drastically cutting the wages of those who stay. It will require the company to offload dozens of underperforming lines and cut loose hundreds of dealers. Bush insists that plans for all of this be in place in 90 days. He, of course, will be gone in 30.
GMs loudest objection to bankruptcy has been its claim that consumers won’t buy cars from a company in Chapter 11. But why would they be any more likely to purchase from a producer living hand-to-mouth on a short-term government loan, with bankruptcy still far from foreclosed. Bush is only prolonging the uncertainty.
It was not surprising that GM stock rose on the Bush announcement. This is the new game for speculators: betting on whether or not Obama will let these companies go. In the end, shareholders, who would presumably lose everything in a bankruptcy but not in a government rescue, may be the only winners in this game.