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.
Florida: The Case of the Missing Tax Break
In the past year, Florida lawmakers (and voters) have ratified a couple of measures designed to reduce property taxes, by forcing local government tax rates downward and expanding homestead exemptions. So one would expect homeowner taxes to “drop like a rock” (to steal a phrase from Governor Charlie Crist) in the wake of these changes, right?
Well, no. As the Pensacola News-Journal’s Michael Stewart points out, for many homeowners part of the tax savings from the previously enacted tax cuts is getting eaten up by an arcane “recapture rule.” In a nutshell, the recapture rule says that if a home’s market value falls, its assessed value will still rise by up to 3 percent.
If this rule sounds screwy, it’s not– or, at least no screwier than the “Save our Homes” tax break that is entirely responsible for it.
Here’s the problem: since 1995, Florida has had in place a cap on the amount by which a home’s assessed value can grow each year. It’s 3% or inflation, whichever is less. This cap is known popularly (and with a touch of drama) as “Save Our Homes.”
Of course, when market values are growing and the assessed value is not allowed to grow along with it, the result is a gap between what a home is really worth and what the tax system says it’s worth. This gap is an inequity– it takes the tax system further away from being fair and measuring things properly. The recapture rule is designed to undo this inequity. Simple as that.
An example: suppose you bought your house in 1995 for $100,000. Between 1995 and 2006, your home value doubles to $200,000. A properly functioning tax system would take account of the fact that your home is worth a lot more. But Florida’s tax system only allows your home’s value to grow at 3 percent a year. At this rate, the assessed value of your home in 2006 would only have risen to $138,000.
So in this example, your home is worth $200,000 and the tax system is treating it as if it were worth $138,000– the tax system is basically pretending one-third of the value of your home doesn’t exist. And all you’ve done to “deserve” this tax break is to not sell your house. Doesn’t matter if you’re rich or poor. Doesn’t matter who you are, just that you didn’t sell your house.
If you treat this $62,000 as basically an unearned, incorrect tax giveaway, then a mechanism that reduces the size of that giveaway seems like a good idea.
And that’s what the recapture does.
Palm Beach County Appraiser Gary Nikolits knows this perfectly well, which is why it’s a laughably political move when he writes a letter to the governor expressing shock that this sort of thing could happen. As Stewart reports:
“Can you imagine the outcry when they open their (tax notices) in August to find that while their market value may have decreased, their taxable value increased?” Nikolits stated in the letter.
Nikolits (and other appraisers around the state) have plenty of reason to be politically nervous about the impact of the recapture rule, but that doesn’t make this rule wrong.
Put another way, anyone who thinks the recapture rule is “unfair” has got it exactly backwards. The true “unfairness” is in the Save Our Homes break, which creates a huge gap between market value and assessed value. The recapture rule is a perfectly acceptable way of mitigating that unfairness.
This lesson holds true, of course, in any other state that has similar caps on assessed value. Caps inherently create inequities, and require mechanisms like the Florida recapture to help reduce these inequities. Complaining about the recapture process amounts to missing the forest for the trees. That means you, Michigan!
California: Smart Sales Tax Reform Isn’t Dead Yet
When it comes to sales tax reform, the policy answers are pretty straightforward: Unless you’ve got a really good reason to do otherwise, whatever people buy should be subject to tax. It shouldn’t matter where you buy it (on the ‘net or in a store); it shouldn’t matter what color or size it is. Individual purchases should be subject to sales tax. Period.
So from a policy perspective, it’s not especially surprising to see this sort of idea emerging from California: Judy Chu, the chair of the state’s Board of Equalization, is recommending expanding the state sales tax base in a way that could yield up to $10 billion a year.
From state lawmakers’ perspective, the main reason for doing this is adequacy. Since $10 billion is the ballpark estimate for next year’s state budget deficit, anything they can find to plug that hole will be welcome.
But Chu is telling a story that’s much more about consistency and fairness– and she’s right:”We tax exercise equipment, but we don’t tax health club services. We tax movie rentals, but we don’t tax movie admissions,” Chu said.
Of course, tax reform isn’t just about the policy– it’s also about the politics. And judging from recent experience in Maryland and Michigan, the politics are a lot murkier than the policy on this issue. In each of these states, recent efforts to expand the base have been almost immediately repealed. Our Tax Justice Digest takes a quick crack at explaining why reform efforts failed in these states here. For more details on how to broaden your state’s sales tax base, check out our policy brief here.
WHAT’S THE BUZZ? TELL ME WHAT’S A HAPPENNIN’ –
* Kay Bell reports in her post “
California Tax Refunds on Hold” at DON’T MESS WITH TAXES that “the state’s controller says that if lawmakers don’t come up with a way to cover California’s $42 billion budget deficit, on Feb. 1 he will put a 30-day hold on tax refunds and some other payments”.* Another reason not to rely on tax software, such as Turbo Tax, if you don’t know what you are doing. Kay Bell reports in her post “Geithner — and TurboTax — Grilled Again” that “Geithner acknowledged that he had used TurboTax”.
The “Turbo Tax Defense” doesn’t work in Tax Court – but apparently it works in Congress.
* Kay Bell also writes on taxes for Bankrate.com. She has begun a daily series of tax tips. Friday’s tip – “Second Chance for Economic Stimulus Check” – included the observations and insights of two of her fellow tax bloggers – Bruce the taxguy and yours truly.
* Fellow twit Cindy Morus gives us “Top 10+ Ways to Jumpstart your New Year’s Finances!” over at MEND YOUR MONEY. The list includes – “Set up an appointment with your tax professional early”. Only not too early – make sure you have all your “stuff” before you see your tax pro!
While it is not on the list, an earlier post from Cindy suggests that you “Update Your Beneficiaries”.
* If you missed the online-radio interview with Kristine McKinley of EBIZ TAX TIPS conducted by the “eBay Selling Coach” you can click here to listen.
Also appearing on an online radio program this week was TAXGIRL Kelly Phillips Erb discussing Small Biz Taxes. Click here to listen.
* Peter Pappas of THE TAX LAWYER’S BLOG suggests that we “Repeal the Corporate Income Tax and Bring Those Jobs Back Home”. Be sure to read my comment.
* June Walker provides an excellent and creative answer to a question from a psychiatrist who was confused by the Turbo Tax software treatment of psychological software he purchased in her also excellently titled post, “
Software Cannot Replace Experience”. The highlights below are mine.“Dear Dr. Mark,
You see, I’ve been feeling really depressed. Suicidal actually. I bought this software program Mind-Mend. Says it has taken 20+years of psychiatric experience and rolled it up into this software program. There are 10 steps to avoiding stress. One step says do 15 minutes of meditation each day. Another step has me stand on my head for 10 minutes so that my circulation increases. My gym instructor says I should not stand on my head because of an old army injury. I am confused, what should I do?
As a doctor you might tell me that stress and suicidal tendencies call for different levels of treatment as well as different levels of urgency and that I should speak with a professional. You might also say that there is no way that 20 years personal experience could be put into a software program and have the same success rate as weekly visits with a therapist when treating something as complex as suicide.
This is my round-about of saying what I have said on this blog many times before: A software program written for the simple world of employees cannot replace a tax pro experienced with indie tax situations.”
* Professor James Maule has some interesting comments on depreciation in his post “Just Because It Didn’t Work the First 50 Times Doesn’t Mean It Will Work Next Time” at MAULED AGAIN.
”The depreciation provisions . . . have contributed to the current economic mess by allowing taxpayers to compute taxable income as though their economic position declined when in fact it remained the same or improved”.
Jim agrees with what I discussed at TWTP in my post “Here is Something to Think About”. He discusses the idea in more detail in “Instead of More Favorable Depreciation Deductions, Eliminate Them?
”.Goose the Tax Dog (I am assuming Goose is the name of the Dog) also adds his 2 cents on the topic in his post “Real Estate Depreciation” at THE TAX STUDENT.
I would be interested to hear your comments on what I propose in this post.
* TAXGIRL Kelly Phillips Erb points out that it seems that somewhere someone from the press is giving out bad information on BO’s stimulus package in her post “Ask the taxgirl: Don’t Look for a Second Rebate Check in the Mail!”.
Read my, and Kelly’s, lips – THERE WILL NOT BE ANOTHER “STIMULUS” REBATE CHECK! While he didn’t take my advice regarding refundable credits, at least BO listened to me about rebates.
* Right on Prof Daniel Shaviro of START MAKING SENSE – “Happiest word in the English language {is} ‘Ex”, when placed with a dash in front of the words ‘President George W. Bush’.”
* A great Q+A post from Gina Gwozdz at TAX TIPS BLOG on “
1099 vs W2?” She makes the excellent point – “Your employer does not get to decide if they can pay you as a W-2 employee or a 1099 contractor. The law determines your classification.”* Trish McIntyre of OUR TAXING TIMES provides the word on the economic “stimulus” rebate you did or didn’t receive last year in her post “Stimulus Rebate-Taxable This Year?”. The answer, of course, is NO – for both federal and state returns.
Trish points out that you could get an additional rebate added to the refund, or subtracted from the balance due, on your 2008 Form 1040 or 1040A – “For example, the full stimulus rebate a married couple with one child could receive was $1500. A child born in 2008 qualifies the couple for an extra $300.”
The 2008 “stimulus” rebate election year bribe caused tons and tons of confusion last year, completely overwhelming the IRS – and I expect the confusion to continue to apply to 2008 tax returns. As was the case with the last rebate check, there will be millions of errors on 2008 federal returns.
* I came across an interesting bit of information in my “wanderings” on Thursday – “The Association of Chartered Certified Accountants, the global body for professional accountants, views the U.S. tax regime as one of the world’s most complex, according to Chas Roy-Chowdhury, London-based head of taxation.”
* In item from Freep.com (Detroit Free Press) titled “Tax Rebate Impact on Economy is Weak” we learn “Two University of Michigan economics professors have some advice for President Barack Obama about how not to design his economic stimulus package. Their advice: Don’t make tax rebates a big part of it.”
The professors confirm what I have been saying all along – “Onetime payments from the government are a weak economic stimulus”.
Some statistics from the article – ”The U-M economists found that only 20% of U.S. households mostly spent their tax rebates, while about 48% used their rebate mostly to pay debt and roughly 32% mostly saved their rebate checks.”
* Always leave ‘em laughing – you will find some good parenting advice from BUSINESS PUNDIT in the post “
Always Check Your Child’s Homework Before it Gets Turned In”.TTFN
FileYourTaxes.com
January 21, 2009 by Tax Blog
Filed under Federal Tax, Softwares, State Tax
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Michigan of the East
“Poor little Rhode Island, smallest of the 48” goes the old song, whose lyrics give away its age. The Ocean state is suffering from a 9.3 percent unemployment rate, almost as high as its 9.7 percent peak in 1982. That’s second only to Michigan and has much the same causes, according to a Washington Post article.
Manufacturing jobs have left for friendlier places and, unlike its neighbors, the state has failed to shift into more promising prospects. Decades ago, textiles decamped for the Sunbelt, the costume jewelry trade headed overseas, and the Navy sailed from Newport to Norfolk. Many residents found employment in job-rich Massachusetts but those opportunities are drying up as the nation’s economy heads south—in more ways than one. And the state has failed to develop abandoned resources—the Navy’s tremendous deep-water port facilities, for example, stand idle in Newport harbor.
Part of the problem is Rhode Island’s work force: the state ranks sixth from last in the percentage of adults with high school degrees. That shortcoming cannot be fixed overnight. Michigan, by contrast, stands 20th among the fifty states.
Job loss has led to a budget crisis—the state faces a deficit of $357 million, the country’s largest relative to spending. And two-thirds of that shortfall comes from falling tax revenues. When the jobs go, so do the taxes.
The stimulus program that the new administration is putting together may help Rhode Island. The state has the highest percentage of bridges in need of work in the nation; the stimulus plan’s infrastructure funding could address that concern while providing much needed employment. In the long run, however, Rhode Island needs to focus on developing both its workforce and its business infrastructure to attract new firms and permanent jobs.
Canary in the Budget Coal Mine
States have reported worsening budgetary situations for months now and governors, faced with annual balanced budget requirements, have ordered repeated rounds of fiscal belt tightening. On Monday, a New York Times story revealed another symptom of states’ financial problems: the depletion of funds to pay unemployment compensation.
Thirty states are within a few months of exhausting their funds (see Times graphic). Indiana’s fund went belly up last month and the state has already borrowed twice from the federal government to cover benefits. Michigan, the poster child for economic collapse, has used federal funds to pay unemployment compensation for years and is on the hook to repay more than half a billion dollars. More states are lining up at the federal borrowing window.
Funding problems stem in part from poor planning. Many states cut unemployment taxes when the funds were flush, reducing surpluses. Now some states are boosting taxes on employers at a time when many firms are already hard-pressed to meet their obligations. By raising firms’ labor costs, higher taxes could cause even more job losses.
Funds financing unemployment compensation are separate from states’ general budgets and states do not move money between the two uses. But as states struggle to balance their budgets, unemployment-compensation funds may serve as the canary in the budget coal mine where state finances threaten to implode.