Delaware: A Property Tax Reform Everyone Can Agree On

Every now and then you hear a silly argument made that doesn't seem silly on its face-- until you think about logical extensions of the argument. For those still trying to understand why it's not smart to put caps on the allowable growth of homeowner assessed value, the Washington Post connects the dots for us here by looking at the extreme experience of Rehoboth, Delaware.

It turns out that Rehoboth property tax administrators have not reassessed area homes since 1968. Not surprisingly, a lot of houses are worth more now than they were in 1968--but tax administrators don't care. Delaware is one of a very small number of states in which local governments don't have to regularly reassess properties-- so Rehoboth isn't doing it.

City officials are quite candid about admitting this makes no sense. Here's City Manager Greg Ferrese:

"It's crazy. Everyone knows it's crazy... Something like this could go for up to $5 million today," Ferrese said, nodding toward a small mansion with a blue-tiled roof and glass windows all along its oceanside view. The home last sold for $3.1 million in 2001, but as far as the city's concerned, it is still worth $143,680.

Imagine if your income tax bill for this year was based on your income in 1968 (or, for the younger set, 1995). This would seem unfair to most of us, since our past earnings have little or nothing to do with our ability to pay taxes in 2006. But that's exactly what Rehoboth has done with its property tax. The changes in home value that have happened since 1968 have generated big-time windfalls for long-time Rehoboth homeowners who have cashed in. But the property tax system ignores these windfalls, instead asserting that every Rehoboth owner is about as able to pay property taxes as they were in 1968.

The property tax is notoriously insensitive to "ability to pay" considerations-- if you lose your job, your income (and income tax) will go down, but your property tax may not drop at all. The value of your house can be a deceiving measure of your ability to pay taxes for this reason--but an accurate measure of your home's value has to be the starting point for a fair property tax. When you don't reassess properties regularly, you're not even getting to this starting point.

When lawmakers and anti-tax advocates propose capping the allowable growth of assessed values, they're making an argument that sounds good: just because your home value goes up 30% doesn't mean your ability to pay taxes went up by the same amount. But capping assessed value growth is not the best solution to this problem, because it creates a gap between a home's actual value and its taxable value that's just like what we see in Rehoboth. All tax caps lead toward an inequitable, Delaware-style outcome.

How Property Taxes (Don't) Work: Indiana's $400 Million House

Porter County, Indiana faces a bit of a fiscal jam this year due to a monumental goof in the county's property tax assessment computer program. The Chicago Tribune has coverage here.

In general, local property taxes work like this:
1) First the assessor figures out how much all the property in a district is worth.
2) Then elected officials figure out how much property tax revenue they need to raise that year to fund public services.
3) Last, lawmakers figure out the necessary tax rate by dividing their revenue goal by the value of all the property. If you've got $1 billion worth of property in a town, and you need to raise $10 million, then a 1 percent tax on all properties will cover it.

What went wrong in Porter County was that one particular home was accidentally valued, for tax purposes, at $400 million. The glitch wasn't discovered until everyone else's bills had been sent out. Following the (made up) example above, Porter County thought it had $1 billion worth of property to tax, but it really only had $600 million. Since the property tax rates were predicated on there being $1 billion of property worth to tax, the rates as applied to the smaller, corrected property values will bring in a lot less money-- and there's nothing Porter County can do except to figure out a way to do without the lost revenue.

If there's a lesson here, it's that the basic "best practices" experts usually recommend for modernizing property tax systems--including regular property assessment and a computer-based system for assessing properties--are no guarantee that dumb mistakes won't be made. It's important to ensure that your district is valuing property accurately-- but it's equally important to ensure that whoever does the data entry isn't all thumbs.

Gas Tax: Equity & Adequacy

Here's an interesting article out of today's New York Times about raising the national gas tax. The core findings of the article are from a poll taken by the New York Times and CBS:

Americans are overwhelmingly opposed to a higher federal gasoline tax, but a significant number would go along with an increase if it reduced global warming or made the United States less dependent on foreign oil, according to the latest New York Times/CBS News poll.

There are two factors that need to be considered when proposing a change to a gas tax: equity and long-term adequacy. Equity because gas taxes are regressive and adequacy because gas tax revenue tends to be a declining revenue source over time. The article does a good job of highlighting the equity aspect:

Because increasing the gas tax is regressive, falling hardest on those who can least afford it, Mr. Borenstein would offset the bite by lowering income taxes in a way that would "make most middle and lower income people better off." But they would end up driving less because of the rising cost of gasoline, some economists believe. By Mr. Borenstein's calculation, a 10 percent increase in the price of gasoline reduces consumption by 6 to 8 percent "over the long run."

However, the article doesn't go into the long-term adequacy of funding specific programs or projects with a declining revenue source like the gas tax. It's important for lawmakers and the public to understand that overtime, gas tax revenue is more than likely to decline overall and that policy decisions need to be made in light of that.

Working It Out

Here's an interesting form of property tax "relief" out of Massachusetts - letting senior citizens work off their property tax bill:

Seniors will earn an hourly rate of $6.75 per hour, for all positions, with a maximum abatement of $750 per fiscal year. The maximum amount of compensated hours work will be 111.11. Seniors will receive a receipt of their earnings credited against their property tax bill. Positions will be offered on the basis of eligibility, qualifications, availability, location and physical limitations. No job will require heavy physical exertion.

When you think you've seen every form of property tax relief, there seems to be something new around the corner.

Why Tax Caps Make No Sense

A lot of states are thinking about property tax caps right now. But you don't have to look very hard to find other states whose citizens are scratching their heads at the inequities of their existing caps. The Miami Herald has this from Florida:

Ron Beasley has lived in the same house since 1979, but a spike in property taxes is forcing him to sell. In January 2004, two months before his mother died, he added his name to the title. The tax bill that year? $2,500. When the property was reassessed the following January after her death, however, it doubled. Beasley, 64, appeared to be a new owner. He appealed to a special master in August 2005, after he had already paid his taxes. The special master told him he couldn't do anything about it. The law was clear.

The law in question is Amendment 10, the so-called "Save Our Schools" law that caps the allowable growth in a homeowner's assessed value at 3 percent per year.

The story's subject, Ron Beasley, has just figured out one half of the problem with Amendment 10-style tax caps: they can result in big tax hikes when homes change ownership.

But the story doesn't deal at all with the other, much more important half of the problem: for many people, these "big tax hikes" should have happened years ago. Every year that a tax cap is imposed is a year when your property tax bill doesn't reflect part of your home's true value. The longer the cap applies, the more of a tax break each homeowner gets (assuming your home's value keeps growing). So in that sense, what appears to be the tax system lowering the boom on Ron Beasley is really just the system correcting itself for a policy error that got made over a number of years.

Now, the Herald tells us nothing about whether Beasley and his mom were on a fixed income and unable to afford rising property taxes-- but that's simply because Amendment 10 doesn't care whether you're rich or poor. Amendment-10-style tax caps basically assert that for any homeowner, no matter how wealthy, you simply can't afford to have your home's taxable value go up by more than 3 percent a year. Of course, some folks truly can't afford such a hike, while others wouldn't even notice it.

No question, there are a lot of Ron Beasleys in Florida who are getting needed tax relief from the 3% tax cap there. But there are also a heck of a lot of other Ron Beasleys who would get along just find without this tax cut-- and are getting it anyway.

States seeking to provide property tax relief have better options than this. See ITEP's policy brief on circuit breakers for one. See our brief on tax caps for more on why Florida-style tax caps don't work.

Kansas: Investing in The Future and Paying More to Golf?

In recent years, Kansas has struggling with how to respond to a Supreme Court ruling which said that the state needs to commit millions more dollars to fund public education adequately. For the past month or so, legislators and the Governor have met behind closed doors to figure out a way to meet students' needs.

While these discussions continue, there's some other promising debate in the Kansas House of Representatives. The debate in the House Tax Committee is about broadening the sales tax base to include green fees for golfers who play on city or county golf courses. Adding an additional tax on these green fees could bring in an estimated $10.9 million in revenue for the state.

Not only would expanding the tax base to include services like green fees bring more money into the state, but adding services to the sales tax base would play a big role in modernizing the Kansas tax structure. It's a widely known fact that the country's economy is changing from a goods to a service based economy. Governments that rely on sales taxes collected on goods are seeing their tax base narrow, and revenues will eventually fall, as well.

The Institute on Taxation and Economic Policy has written on this subject in this policy brief: "Should Sales Taxes Apply to Services?" Policymakers across the country are seeing the need to tax more services-- and at a time when Kansas lawmakers are being forced to raise revenue, taxing selected services is a good place to look.

She's Got It ...

It's nice to see when politicians actually get it right. This is an excerpt from an interview that Michigan Governor Jennifer Granholm gave to the Lansing State Journal. This specific quote is the Governor's response to questions regarding the state's Single Business Tax.

Granholm: Our goal is to lower the rate, take the loopholes out, flatten the base, make it more profit-sensitive and less compensation-sensitive. And to do it without slashing public education and all - you know, the things that make the quality of life in Michigan.

I will look at anything that makes us more competitive. Everybody agrees we have to make the business taxes competitive. But I will not shift the burden to citizens ... everybody keeps talking about where are you going to shift this $1.9 billion hole (by ending the SBT). How do you shift it?

If you shift it by increasing the sales tax, then you are shifting business taxes to citizens. I'm not interested in that.

Not only does Governor Granholm understand the basic premise of sound tax policy - broad base with low rates - but also the need to offset lost revenue due to tax cuts and that cutting one specific tax while maintaining a current level of services must result in raising another tax which in turn shifts the burden from one set of taxpayers to another.

Outreach 101: Talking Up Low-Income Tax Credits in Maryland

If you provide a low-income property tax credit and nobody claims it, is it really there? In a legislative hearing yesterday, Maryland lawmakers and legislative staff discussed options for expanding the state's Homeowner Property Tax Credit. This is a laudable goal: like other states' circuit breaker-style property tax credits, the PTC is designed to provide the greatest possible "bang for the buck" by targeting property tax relief to those low-income homeowners for whom tax bills are especially large. But there is one bad thing you can say about this type of tax credit: you have to apply for it. Low-income homeowners who don't know about the credit are out of luck.

As it turns out, Maryland tax administrators take some steps to promote this credit. Gas and electric bills sometimes contain reminders that "you may be eligible for a tax credit," and the income tax forms that get mailed out to every wage earner in the state contain this full-page announcement (although to find it you have to read all the way through to the very back of your income tax instructions, behind the tax tables).
This is smart. But is it smart enough? No one knows, because no one knows how many eligible low-income Marylanders fail to claim the credit.

Most states offer a similar tax credit to their low-income homeowners (and, in some states, renters). Good-government advocates across the nation seeking to improve the fairness of these low-income credits could start by asking their lawmakers and state tax administrators the same question that came up in yesterday's Maryland hearing: what are you doing to ensure that eligible people claim this credit?

Disappointment...

Remember the President's Tax Reform Panel? If not, you're hardly alone. The President himself seems to have forgotten the panel too.

Just over a year ago the President appointed a bipartisan group of former legislators, professors, and economists to work together to come up with recommendations about how to reform our nation's tax structure.

The Panel's findings were issued on November 1 of last year - and seem to have all but evaporated.

Many of the findings weren't all that controversial. For example, the panel found that indeed the tax structure is too complicated. The Panel also worked to develop two concrete proposals for tax reform. You can read about those proposals here.

Citizens for Tax Justice and many other groups weighed in on the panel's findings. Obviously, with anything as controversial as broad tax reform there will be some debate and disagreement. But our President hasn't even engaged in the debate.

The Panel' co-chair, former Senator John Breaux is disappointed about the lack of attention the Panel's findings have received, and he's talking. Here's an article from Forbes magazine which details his opinions about the opportunity lost to all Americans because of the lack of attention the Panel's findings received.

Asking the Hard Questions

In yesterday's Washington Post, here's a warning from the former director of the Congressional Budget Office (CBO), Douglas Holtz-Eakin. The column raises important questions about the role of government, fiscal accountability, and the impact of the aging baby boom generation on the federal budget.

Holtz-Eakin begins by pointing out weaknesses in the official budget forecasts from the CBO and the Office of Management and Budget (OMB). According to the author CBO claims that the nation's deficit will be eliminated over the next decade. However, CBO gets there by assuming that the Bush tax cuts will be allowed to expire--something Bush himself hopes won't happen, as he made clear during his State of the Union, when he said, "Because America needs more than a temporary expansion, we need more than temporary tax relief. I urge the Congress to act responsibly, and make the tax cuts permanent." Meanwhile, the OMB assumes "that the President's policies are adopted--all of them." Holtz-Eakin sniffs that "neither agency's forecast is likely to match reality next year, much less five or 10 years from now."

Perhaps it's too much to grapple with to understand why OMB and CBO operate under such different assumptions, but here's something worth grappling with and something each American should think about especially as the President's budget is introduced, "What exactly do you want your government to do?"

Inevitably policymakers will need to deal with Alternative Minimum Tax Reform and whether or not to extend the Bush tax cuts. But the ironically larger question (both AMT reform and extending the Bush tax cuts are pretty large policy hurdles) is what to do about the aging baby boomer generation.

Holtz-Eakin tells us that "By 2016, Social Security, Medicare, and Medicaid alone will consume over one-half of federal spending." These huge future expenses have many policymakers worried. They wonder something along these lines, "Is it possible to cut these popular programs? Or will we have to raise taxes to continue to provide these services?"

Before considering cutting this or that program, we need to think about the kind of government we want. Do we want a government that is equipped to assist the poor, the elderly, the disabled? Do we want a government that invests in technology, research, economic development? Do we want a government that acts to protect and defend its citizens? Do we want a government that strives to educate each and every resident? If you answered "yes" to these questions - then each of us must be willing to dig a little deeper into our pockets and paychecks in order to pay for the government we want.

The author raises a question as to whether or not Americans will tolerate these increased taxes. If we want a government that protects, defends, educates, and supports - then we must pay for these services, increased debt is not an option. If we choose a government that does less, then we should be content with less, and we will pay accordingly.

Now is not the time for political parties, our President, or the American people to "monkey around." Holtz-Eakin makes it incredibly clear that these fiscal issues are coming to a head, and sooner rather than later. So before jumping on the "tax cut" bandwagon, it's necessary to ask what type of government we want and then figure out how to fund it, in a fair and equitable fashion.

Look Before You Leap

Massachusetts Governor Mitt Romney is anxious to cut taxes because of higher than expected revenue projections:

Gov. Mitt Romney yesterday used a big increase in tax revenue in January - up 14 percent from last year - to once again push for a cut in the state's income tax to 5 percent.

However, both sides of the political isle are taking a look before they leap approach:

The Democrat-controlled Legislature has generally resisted attempts to cut the income tax, saying state finances are still on shaky ground.

And ...

But even the business-friendly Massachusetts Taxpayers Foundation is hesitant about cutting the tax rate now.

Michael Widmer, president of the foundation, said the state has long-term pension and health-care liabilities to fund - and he questioned whether the state's economy is all that strong, noting jobs growth has been disappointing. "Revenues are improving, but we can't afford both spending restoration and tax cuts," he said.

During the state fiscal crisis earlier this decade, states had to cut back on services and use other means to trim their budgets. According to a report from the Center on Budget and Policy Priorities, there's some ground that needs to be made up before any action on tax cuts should be considered:

• The current high revenue growth is taking place from a substantially depressed base; the rapid growth is more an indication that revenues have not yet returned to their normal levels than it is of strong fiscal conditions. State revenues remain below what would be required to support the pre-recession level of services states provided.
• Analysis shows that state revenues would have to grow by more than 9 percent per year between now and 2008 in order to generate enough funds simply to restore the level of services that prevailed in fiscal year 2000, before the recession.
• A budget "surplus" also can be a misleading indicator of whether or not a state's fiscal situation is strong. Mid-year surpluses occur when revenues come in stronger than the state estimated when the budget was enacted. A state that at budget time cut important services in order to bring its expenditures into balance with what later turned out to be an overly-conservative revenue estimate would still show a mid-year surplus.

Before state lawmakers take start slashing taxes solely based on early, optimistic revenue projects, they better take a good look at their budgets before they leap.