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.
Connecticut Gas Taxes: Playing Politics with a Serious Crisis
The Connecticut House and Senate each approved a bill early Thursday morning that adds to the state’s existing $150 million deficit by cancelling a scheduled increase in the state’s tax on wholesale earnings from gasoline sales. Governor Rell is expected to sign the measure. The bill prevents what would have been a 0.5% increase in the petroleum wholesale earnings tax, which industry lobbyists are claiming would have increased prices at the pump by about 5 cents.
The estimated cost of this bill has been pegged at $25 million. It may at first seem odd that Connecticut lawmakers have decided to make cutting taxes a top priority when the state is facing a budget deficit and numerous counties have been forced to scale back vital public services whose benefits almost certainly outweigh their costs. Even in the face of these serious budgetary issues, one of the first reactions from Democratic House Speaker James A. Amann was that “We didn’t raise taxes, so we’re pretty proud of what we’ve done.”
What’s going on here? Why is restricting revenues such a priority when it couldn’t be more obvious that state and local governments need more funds to provide the services Connecticut families have come to expect?
The answer: It’s an election year! Republican legislators, outnumbered 44 to 107 in the House and 13 to 23 in the Senate, have opted for a strategy of supporting viscerally appealing, though often fiscally irresponsible plans designed to gain some positive publicity and win votes in November. The majority of those plans have been ignored by the Democrats in power (for the most part with good reason), though with gas prices as high as they are, the Democrats decided not to take the political risk associated with appearing uninterested in the effects of high fuel costs on Connecticut families.
This isn’t at all surprising. Many state lawmakers across the nation have latched on to the headlines being generated by high fuel prices by proposing gas tax reductions much better suited for winning votes than for actually helping anybody in need. This plan in Connecticut is no different.
Even if we put aside our skepticism of the petroleum industry’s figures and accept their estimate that this bill will prevent a 5 cent increase in the price of gas, few observers could seriously suggest that avoiding this increase will do anything to improve the financial situation of Connecticut families. During the brief debate that occurred earlier this year over a proposed suspension of the 18.4 cent federal gas tax, that plan was heavily criticized for only providing the average driver with a $30 tax cut. The Connecticut bill would save drivers less than a third of that amount, though it would play a noticeable role in driving the state government millions deeper into debt.
Well aware that this bill would only provide a negligible tax cut for the average family, one legislator insisted, in typical election-year fashion, that it is important to “let our citizens know that we are very concerned about what they’re up against”.
That’s what makes this whole debate so discouraging. The problem is not just that Connecticut lawmakers are shamelessly hunting for votes – it’s that in the face of a serious crisis for lower-income families, lawmakers have decided that “letting our citizens know we’re concerned” is more important than actually doing something meaningful to help them.
Even if Connecticut legislators wished to avoid a needed restructuring of their state’s regressive tax system, this does not change the fact that much better options exist for providing real assistance to families hurt by high fuel costs. Instead of offering across-the-board tax relief that benefits both Connecticut’s wealthiest, as well as its poorest families, a targeted low-income gas tax credit of the type enacted in Minnesota could have distributed more gas tax relief to lower-income families at a similar cost. Alternatively, Connecticut could have given consideration to enacting a modest Earned Income Tax Credit (EITC) or a meaningful low-income, refundable property tax circuit-breaker. Admittedly, an EITC or circuit-breaker would cost more than a gas tax cut or gas tax credit, but if legislators are genuinely “concerned”, wouldn’t it be worth it to find the money somehow? Until legislators readjust their priorities from winning votes to improving the lives of those struggling to make ends meet, Americans shouldn’t expect any relief beyond the kind of poorly targeted and gimmicky tax cut passed in Connecticut.
Nevada: Tax Hikes in Special Session Possible
The Reno Gazette Journal reports that tax increases may be on the agenda for next week’s special session of the Nevada legislature. Among the candidates, according to Assemblywoman Sheila Leslie, D-Reno, is raising the business payroll tax and hiking the hotel tax, popularly known as the “room tax.”
For those who’ve followed Governor Jim Gibbons’ membership in the dwindling crowd of state executives who are adhering to “no new taxes” pledges, this isn’t terribly exciting news because the harsh political realities of the state suggest it doesn’t matter what tax hikes the legislature discusses:
Gov. Jim Gibbons has said he would stick to his election-campaign pledge of no new taxes. Democrats are a vote shy of being able to override a veto in the Assembly and are in the minority in the Senate. Lanni’s suggestion to raise the payroll tax from 0.63 percent to 1.23 percent and generate $246 million annually won’t go far in the special session, Senate Majority Leader Bill Raggio, R-Reno, said.“I am aware of it and have also heard from him on that and my indication is that this is not the time to start talking about raising taxes,” Raggio said. “We are in tough times and businesses are hurting and in this special session, it is something that we can’t even consider.”
Of course, depending on the outcome of the ongoing brouhaha over the size of Nevada’s budget deficit, Democrats may ultimately find it easier to override a gubernatorial veto. And it’s always possible that Governor Gibbons will back away from his pledge and start evaluating the state’s fiscal jam in a non-judgmental way.
But don’t hold your breath.
Illinois: Shortest Special Session Ever?
Yesterday the Illinois legislature held what was scheduled to be a one-day special legislative session on education funding. The goal, in theory, was to come up with new money for pay for the state’s chronically-underfunded education system.
But, as it happened, the session lasted all of 20 minutes in the state House, and not much longer in the Senate. And all the legislature agreed on was that they probably shouldn’t get a pay raise at this time.
Why the sham special session? The short answer: Governor Rod Blagojevich called the session with very clear ideas about which solutions are permissible– and which solutions are forbidden. The former camp includes privatizing the state’s lottery; the latter camp includes, well, just about every sensible tax reform one might wish to enact. Blagojevich has maintained in the past, and reiterated in advance of the special session, that increasing the state’s low, flat-rate, loophole-ridden income tax is not an option he will accept. This is especially absurd given that, as some brave observers have noted, lawmakers could make the Illinois income tax fairer and more sustainable without increasing tax rates at all.
It’s no wonder, then, that state lawmakers see no particular point in holding a special session: if the governor plans to veto any income tax hike, why should lawmakers take the political risk of enacting one?
Check out the weekly updates from the Center on Tax and Budget Accountability for ongoing info on the state’s budget crisis.
Why Virginia Won’t Hike Its CIg Tax
Earlier this week, Virginia Governor Tim Kaine proposed doubling the state’s cigarette tax from 30 to 60 cents per pack. Once upon a time, this would have been a pretty substantial hike. But with the wave of cigarette tax hikes nationwide over the past decade, this proposal would best be described as bringing Virginia’s tax more in line with what the rest of the states currently do. As the Campaign for Tobacco-Free Kids reports, the nationwide average cig tax is now $1.19 per pack.
The Republican-led House quickly announced that it was having none of this. Their reason? Economic development:
[Virginia House Speaker William] Howell and [U.S. House member Eric] Cantor argued that a cigarette tax hike would send the wrong signal to other states, which might be more inclined to raise their cigarette taxes. That could lead to job losses in the tobacco industry, especially in Virginia.
The most obvious response to this rationale is that they’re trying to close the barn door after the horses have gotten out. State lawmakers have looked–and continue to look, right now– to cigarette taxes as their favorite source of new tax revenue for years now. The idea that other states are waiting for the official sanction of tobacco-producing states before further jacking up their cig taxes is pretty far-fetched.
But the more interesting question is why Howell views the tobacco industry as the most vital component of Virginia’s economic development strategy going forward. (To say nothing of why Cantor, who after all is a member of the US Congress, not Virginia’s legislature, is weighing in on this point.) Tobacco consumption has been falling for decades nationwide. Not just on a per capita basis either– we’re just collectively purchasing fewer and fewer smokes every year, as public knowledge of the immense healthcare costs associated with smoking increases.
It’s a dying industry, a relic of the past. So why should Virginia, a state that has enjoyed a real technology boom over the past decade, want to reinforce the role of this industry in its economy? The Washington Post’s Pete Earley has a disheartening, but probably apt, answer: because Virginia lawmakers got paid to think this way. As Earley notes, virtually every member of Virginia’s tax writing committees in the House and Senate regularly take campaign contributions from the tobacco industry. You don’t have to be a Rod Blagojevich for these contributions to have a subtle influence on how you think and vote on economic policy issues.
At a time when we’re contemplating spending billions of dollars to prop up the US auto industry, it’s hard to get too sniffy about efforts to keep the Virginia tobacco industry going. But as Virginia confronts a major budget deficit, every dollar of tax revenue not collected from the tobacco industry is coming from somewhere else. And by refusing to consider hiking the cigarette tax on economic development grounds, Virginia lawmakers are basically asserting that any other interest that could be taxed– whether it’s manufacturers, small retail businesses, or individual wage-earners and consumers– are less vital to Virginia’s long-term economic growth than are tobacco farmers. And it’s hard to see any other explanation for this backwards approach to economic development than campaign contributions. As the late, great Mark Felt apparently never really said, “follow the money.”
IT KEEPS TURNING!
Senate Finance Committee Chairman Max Baucus (D-Mont.) has unveiled the Senate version of the tax provisions for inclusion in the
American Recovery and Reinvestment Act of 2009.They include –
· Making Work Pay Credit: an individual tax credit in the amount of 6.2 % of earned income not to exceed $500 for single returns and $1,000 for joint returns in 2009 and 2010.
· Seniors, Disabled Veterans and SSI: a one-time payment of $300 to Social Security beneficiaries and SSI recipients receiving benefits from the Social Security Administration and Railroad Retirement beneficiaries.
· Temporary Suspension of Taxation of Unemployment Benefits: federal income tax temporarily suspended on the first $2,400 of unemployment benefits per recipient.
· Expansion of the Earned Income Tax Credit: an increased credit for three or more children and additional marriage penalty relief for married couples.
· Expansion of the Refundable Child Tax Credit: increased eligibility for the refundable child tax credit in 2009 and 2010 by lowering the threshold to $6,000.
· American Opportunity Tax Credit: a $2,500 higher education tax credit that is available for the first four years of college
· Computers as qualified education expenses in 529 Education Plans: computers and computer technology to qualify as qualified education expenses
· Homeownership Tax Credit: modifies the $7,500 tax credit for home purchases that occur after 2008 and before July 1, 2009.
Hey – where’s the dreaded AMT fix?
I will provide more information as it becomes ava
ilable.Tax Credits for Electric Cars
Earlier this week, both the House and Senate passed measures establishing generous tax credits for electric plug-in cars. The Senate plan gives consumers a credit of up to $7,500 for the purchase of a plug-in car, while the House plan offers consumers a credit of up to $5,000. Under both plans, the value of the credit increases with the battery capacity of the vehicle, meaning that more efficient cars receive larger tax credits.
Brother, Can You Spare a Tax Credit?
Let it be written: If the Senate-passed financial services bailout bill turns out to save us from the next Great Depression, we will owe a deep debt of gratitude to… chicken poop. If not, we can simply say the entire proposition turned out to be little more than, well, you know.
What Will President Obama Do?
Barack Obama will be the next President of the United States and will govern with huge Democratic majorities in the House and Senate. What will he do?
In his two-year campaign for president, Obama made many promises he cannot keep, and was exceedingly vague when it came to what he would do about critical issues such as the nation’s ongoing financial crisis. However, it is possible to make some educated guesses about where he’d try to take the country in the face of some major challenges.
Will Congress Reform the Estate Tax?
When this book went to press, it was unclear if the House and Senate would be able in the near future to agree on a compromise plan to reform the estate tax. Republican-led efforts to make estate tax repeal permanent after 2009 passed the House but not the Senate in mid-2006. This was followed by attempts to enact a compromise reform plan. The House passed a bill that would reunify the estate and gift taxes starting in 2010 as part of a package that would also extend expiring tax provisions and increase the minimum wage. However, the plan did not gain Senate approval because of opposition by Senate Democrats to the estate tax provisions. The bill would increase the exemption for gift and estate tax purposes in stages to $5 million by 2015 (and then index it for inflation), and allow the unused portion of a deceased spouse’s exemption to be used by the surviving spouse. The tax rate on taxable transfers up to $25 million would be the capital gains rate and transfers over $25 million would be taxed at a rate of 40% in 2010, with the rate decreasing by 2% a year until reaching 30% for 2015 and later years. After 2015, the $25 million threshold would be indexed for inflation.When this book went to press, new efforts were underway to gain approval of the bill in the Senate, or possibly modify it in an attempt to win passage. See the e-Supplement for an update.