July 06, 2005

A Cautionary Tale from Maryland

Last week’s Washington Post has this article about poor enforcement of Maryland property tax breaks. Maryland, like almost every other state, gives property tax breaks to homeowners. But, also like these other states, Maryland imposes one condition: you have to live, basically full-time, in the house to get the tax credit. If you own a Maryland home as an investment property which you rent out to someone else, you don’t get the credit.

But, funny story: turns out Maryland tax collectors are not devoting a lot of resources to enforcing this rule. It’s not clear from the article who’s to blame—state tax administrators are pointing the finger at local tax folks, and vice versa—but for whatever reason, both the state and Montgomery County governments are giving this tax break to people who don’t actually live in their house.

So what’s the lesson from this story? This may well be another case of underfunded tax agencies simply not having the resource to enforce tax compliance. But the fact that some private citizen blew this story open with a spreadsheet in his spare time sheds some doubt on this. The real object lesson here is a broader one. Every special tax break carries a hidden price: the cost of enforcing the distinction between those who are eligible and those who are not. The more lawmakers load up the tax system with special tax preferences, the more resources the government’s tax enforcement agencies will need in order to make sure that everyone’s claiming only those tax breaks for which they are eligible.

As the resourceful guy in this article shows, sometimes it’s not all that hard to make sure that everyone’s behaving properly. When you’re talking about a visible, widely understood tax break that affects normal people in predictable ways, a guy with a spreadsheet can check on things pretty easily. But the under-the-radar tax breaks going to big businesses are a lot harder to police, not least because the average taxpayer isn’t even aware of them. As Congress quibbles over how much funding to give the IRS’s enforcement activities for the next fiscal year, lawmakers should remember that they’re the reason all this police work is necessary.


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