October 27, 2006

Merry Property Tax Holiday for Taxpayers?

With Halloween and Thanksgiving just around the corner it's no surprise that state lawmakers are in the holiday spirit. However, Wyoming policymakers have taken the holiday mood one step too far with a "property tax holiday" proposal.

The plan put forward by Wyoming Governor Freudenthal is simply a gimmick that does little to address the real failings of the property tax. He is proposing a one year property tax holiday that would reduce property tax rates by 12 mils. Apparently the state doesn't need to generate property tax revenue next year because surpluses are expected. Policymakers in Wyoming would be better off to go back to the drawing board and develop real reforms that would address the shortcomings of the property tax.

What exactly compels politicians to put forth such gimmicky and overly simplistic ideas to address property taxes? To answer that question, it’s helpful to know more about the property tax and just why it’s so unpopular (and why some feel that a holiday is in order).

When polled, Americans say they hate property taxes more than any other tax. This article from the Arizona Republic shows that if given the choice Mesa, Arizona residents would rather vote for a sales tax increase than a property tax increase.

State and local property taxes across the nation are on the chopping block for reform in about ten states according to USA Today. There are several reasons for this nationwide property tax revolt. First, property taxes are paid in lump sums and therefore payments are quite visible to a taxpayer’s checkbook. They are also incredibly complicated so that the average homeowner can’t even read her own property tax bill.

There is also a view, which is quite true in some states, that property taxes simply aren’t fair. For example, in California because of Proposition 13 property taxes are generally lower if homeowners have lived in the same house for a several years; while new homeowners can face truly burdensome property tax bills.

It would be helpful if property tax rates depended partially on income, but they don’t. If a homeowner loses her job her property tax will remain the same even though her income is drastically reduced. Property taxes are regressive, meaning that poor and middle income taxpayers pay a higher share of their income in property taxes compared to the wealthy.

Despite property taxes being so unpopular and sometimes flawed they remain a major source of revenue for public schools. Funding education is obviously a priority and in most states a constitutional requirement. Simply not supporting schools isn’t a practical alternative. Academics, analysts, policymakers, and others are considering a broad array of alternatives that could reform the property tax to correct some of the flaws outlined above.

October 20, 2006

A Patently Absurd Tax Avoidance Strategy

Keen observers of the corporate tax-avoidance practiced by the biggest Fortune 500 companies know that these companies generally aren't ashamed of, or even bashful about, their practices. Rather, they see it as their fiduciary duty to use all available loopholes to reduce their tax liability. And to the extent that these loopholes are the creation of Congress rather than of creative accounting by tax professionals, they've got a point.

But when tax-avoidance strategies are brought to life entirely by the creative efforts of accounting experts looking for loopholes in the law, that's nothing to be proud of. Such loopholes generally only exist until Congress can get its act together and get rid of them. But as Floyd Norris documents in today's New York Times (read it here if you subscribe to NYT online), some companies–in an extraordinary display of chutzpah--are using an obscure 1998 federal appeals court ruling to patent their creative tax strategies. According to Norris, the Patent Office has actually issued 49 patents for corporate tax strategies, following the logic of a 1998 court ruling that business methods can be patented.

This is, of course, absurd. A basic test of a fair tax system is that its provisions treat similar taxpayers the same way. If a legitimate tax break is available to one company, its competitors should be allowed to seek the same tax breaks-- as long as they satisfy the legal requirements for the tax break. As Norris points out, allowing this precedent to stand could transform our tax laws in ways that anyone would recognize as [sorry, bad pun] patently unfair:
[I]f it is legal, the mind boggles at the possibilities. Could I get a patent on taking a deduction for dependents, so that every parent in America would have to pay a royalty to me to take advantage of the tax law passed by Congress?
Like the loopholes themselves, the ability to patent tax dodges is (one would hope) a short-lived phenomenon that will hopefully be reversed by the next Congress. But in the anti-tax environment fostered by our current political leaders, in which the IRS has been hamstrung in its enforcement efforts by budget cuts, seeking a monopoly on tax avoidance strategies is almost a logical next step.

October 19, 2006

Colorado: House Candidate Backs Away from National Sales Tax

Another contested House race, another tiff over whether the Republican candidate supports a national sales tax. Last night, incumbent Colorado House member John Salazar and his Republican challenger, Scott Tipton, tangled briefly over this issue: and the GOP challenger backed away from the proposal. Here's the Pueblo Chieftan's coverage:
Salazar faulted Tipton for supporting a national sales tax, saying it would shift more of the tax burden onto middle-class families. He also said the cost of the war had fueled the national debt to $8.7 trillion, or $28,000 per person in the U.S.
"For the first time, we are borrowing money from China to pay for this war," he said.
Tipton countered that he was not endorsing a national sales tax, but insisted that he had "the courage to explore it."

This would be funny if it weren't so exasperating. Many tax reform ideas can be made to sound attractive in sound-bite form-- but with the very bad ideas, the wheels fall off of public support for the idea as soon as you get past the sound bites to look at the details. Confronted with the harsh reality, Tipton is basically retreating to the sound bite.

A 2004 ITEP analysis showed that imposing a national sales tax would likely increase taxes for middle-income Coloradans by an average of $2,884. Check out the analysis here.

October 18, 2006

Senate Candidates Talk Taxes

Tax issues are playing a role in all of the most closely watched Congressional races this year. Republican candidates, hoping to distract attention from problems in Iraq and ethics questions on the Hill, are desperate to make voters believe that Democrats will raise their taxes significantly. Democrats calmly assure the public that their main beef with GOP tax policies are the tax breaks flowing to the wealthiest Americans, although they’re often vague on what exactly they mean.

Citizens for Tax Justice research has found that the tax breaks enacted over the past six years have been skewed towards the wealthiest Americans, so a shift towards a more balanced tax policy would certainly be welcomed. After accounting for the debt accumulated under President Bush (which we all will eventually have to pay off) only the richest one percent of residents in each state actually come out ahead under the GOP’s tax and fiscal policies.

The following is a summary of how the tax debate is being played out in specific Senate races.

In Virginia, incumbent Republican Senator George Allen has leaped on Democratic candidate Jim Webb’s comments that some of the Bush tax breaks should expire. Allen’s campaign has
“extrapolated” that this means Webb opposes all the Bush tax cuts, while Webb says tax breaks for the wealthiest families and corporate loopholes should both be reigned in. Webb also cited a report from CTJ finding some Fortune 500 Corporations pay no federal taxes at all.

Like Webb, New Jersey Democratic Senator Bob Menendez argues that he is in favor of allowing tax breaks to expire for the wealthy but is accused by his opponent of supporting tax increases for everyone. Surprisingly for a fairly progressive state, the Republican candidate, Tom Kean, Jr., supports all of the President’s tax breaks and supports full repeal of the estate tax. Kean has not fully explained how he would pay for the costs of making the Bush tax cuts permanent. For more, see the Talking Taxes
blog post on the New Jersey Senate race.

In Missouri, incumbent Republican Senator Jim Talent has accused Democratic candidate and state auditor Claire McCaskill of supporting “higher taxes for everybody” because she opposed the President’s 2001 and 2003 tax cut legislation. McCaskill has her
own plan for unpaid-for middle-class tax breaks, including a $3,000 first-time homebuyers’ credit, doubling the child care credit for middle-income families and a simplified deduction or credit for college tuition and expenses.

In Tennessee, the two candidates locked in a close Senate race are busy
accusing each other of favoring tax increases. Democrat Rep. Harold Ford, Jr. has criticized Republican candidate and former Chattanooga mayor Bob Corker for increasing the city’s property taxes by 24%, a measure Corker says was necessary because of the financial problems left by his predecessor. Corker, who was the Finance Commissioner for Republican Governor Don Sundquist from 1995 to 1996, was also accused by Ford of having played a part in Sundquist’s ill-fated (although much-needed) proposal to bring Tennessee an income tax. Corker, for his part, criticized Ford for opposing Bush’s 2001 and 2003 tax cut bills.

In Montana, Democratic Senate candidate Jon Tester says he supports making permanent expanded child tax credits and marriage penalty relief but would not vote to extend other components of the Bush tax cuts, which incumbent Republican Senator Conrad Burns supports. Burns accuses Tester of wanting to increase taxes while Tester accuses Burns of handing out favors to his allies and supporters.
Tester, as president of the state’s Senate, did support several tax increases which mostly failed to pass. Many of those measures would have lowered taxes on homeowners and small businesses and shifted the tax burden in a more progressive direction. Tester also would like to enact new middle-class tax breaks including a homeowners’ credit, a new college tuition credit, a credit for veterans and a deduction for elderly care. Tester says he would pay for these by cracking down on tax evasion (which does result in hundreds of billions lost each year).

Minnesota: Senate Candidates Spar on Tax Reform

Minnesota has a open US Senate seat up for grabs this fall. This past weekend, Tim Russert moderated a debate between Republican candidate Mark Kennedy (currently a House member) and Democratic candidate Amy Klobuchar. Here are some tax-related excerpts:

First, a question for Kennedy, in which he makes it clear that the solution to the nation's growing budget deficit must be spending cuts, and emphatically opposes tax hikes even on the wealthiest Americans:

MR. RUSSERT: Mr. Kennedy, Ms. Klobuchar said that we should roll back the Bush tax cut on those making over $200,000 a year, because the federal debt is now $8 trillion, and we have to get our finances in order, and this is a way of raising revenue.... [W]hat about rolling back the tax cut on those who make more than 200,000?
REP. KENNEDY: We have had six million new jobs. The economy was flat on its back after 9/11. We passed tax relief to reward, and people--to let them keep more of their hard-earned money. Families, small business, those that take risk and create jobs. Six million new jobs have been created. We cannot be raising taxes, putting this economy back on its back, and also not growing jobs.[...]
MR. RUSSERT: A Republican House, a Republican Senate, you have a $250 billion deficit, an $8 trillion debt.
REP. KENNEDY: There's no question that I would like the president to take a little bit more leadership on spending. There's no question that we have had obstruction in the U.S. Senate that has bogged down not only our ability to take
further steps on fiscal responsibility, but many other things as well. We do need to push forward and make sure that we have strong fiscal measures to keep spending under control.

And here's Klobuchar on her plans for reducing the deficit:

MR. RUSSERT: Ms. Klobuchar, 57,000 households in Minnesota make over $200,000 a year. A lot of small businesses, people who create the jobs. And you want to come along and pound them with a new tax increase by taking away their tax cut. Why?
MS. KLOBUCHAR: Let me talk about why this is important to me and important to the people of our state. Right now we're in a situation where our debt is approaching $9 trillion, where this administration and this Congress took a $200 billion surplus and turned it into $250 billion deficit. Why does this hurt the people in our state? It's not just some chart on a wall. One out of 12 of the federal tax dollars that they're paying goes to interest on this debt.
And this is my solution: I'm the only candidate in this race that has come out with a plan to balance the budget. First of all, let's look at those $70 billion that's being sheltered in the Cayman Islands and Bermuda for multi-millionaires. That report came out August 1. Get rid of those shelters. That takes in 70 billion. Next, look at capital gains. Not changing the rate, but having a third-party validator like brokerage houses post those because there's underpayment. That brings in $17 billion. Roll back the tax cuts to the Clinton levels, to the top 1 percent, the Clinton levels when we had record jobs produced in this country. That brings another $56 billion in.
The glass-half-full way of evaluating this statement is to say that Klobuchar is at least expressing willingness to look at both sides of the ledger. The glass-half-empty approach would be to point out that Klobuchar is taking a pretty timid approach to evaluating the Bush tax cuts: basically she's saying that what Congress and the Bush administration have done to the tax code the last six years is just fine as it affects those earning under $200K.

The problem with this is twofold: first, the tax hikes she's identified here are obviously not enough to offset our current budget deficits. Second, at some point policymakers will have to translate this general promise--repealing tax cuts for those over $200K-- into a policy prescription, and it's hard to see how that happens. If this is campaign code for "bring back the estate tax," that's fine. But that's not what she said here-- and one of these days someone's gonna have to figure out what it really means.

Maybe it's absurd to expect a candidate to mention specific tax changes in a debate; maybe the "$200,000" thing is the level of specificity you can have without putting people to sleep. But repealing big chunks of the Bush tax cuts is a VERY defensible goal-- and it would be nice to see candidates will to say so in a way that tells people something specific.

On the spending side of the ledger, both candidates were pretty timid. Here's Klobuchar on her suggested spending cuts:
MR. RUSSERT: Discretionary spending, what programs do you cut?
MS. KLOBUCHAR: And you--well, let's start with the one the congressman voted for, the bridges to nowhere, the rain forest in Iowa, the waterless urinals in Michigan.
This exchange follows on the heels of Kennedy's spending-cut prescriptions:
I'm the author of the line-item veto. I don't understand why we want to build a bridge to nowhere in Alaska, a rain forest in Iowa.
So the main difference between the candidates on the spending side appears to be that Kennedy has an idea (if an incorrect one) about how to stop building the often-lamented "bridge to nowhere."

Neither side is saying anything even remotely brave on the spending side. And in this light, Klobuchar's recipe for restoring tax revenues seems pretty gutsy. [Check out this post for more on the $70 billion Cayman Island loophole she talks about above.] Let's hope that if she wins, she shows more willingness to take a hard look at every facet of the Bush tax cuts.

October 17, 2006

Michigan Businesses React to SBT Repeal

These days the lesson for many Michigan businesses is to be careful what you wish for.

For years, Michigan's business community sought the repeal of the state's major business tax the Single Business Tax (SBT). The tax was established in 1975 and in recent years has come up against enormous opposition. Business leaders across the state including the Michigan chapter of the National Federation of Independent Businesses lobbied for the complete repeal of the tax. During this debate many claims were tossed around by business interests claiming that some businesses were leaving the state and that others would never move to Michigan because of the SBT.

Some pretty vicious back and forth between the legislature and Governor Jennifer Granholm ensued. The tax was scheduled to be repealed in December of 2009. However, an initiative was placed on the ballot and the legislature passed an early repeal of the tax that would take place less than a year from now. Because the initiative was slated for the November ballot and the Legislature passed the proposal, Governor Granholm's approval wasn't necessary.

Repealing this tax leaves a $1.8 billion hole in the state's budget. There are also no firm proposals regarding what type of business tax will be enacted to replace it. Now some fear that businesses won't be inclined to locate in Michigan because of the uncertainty surrounding Michigan's business tax structure. Businesses appreciate, need, and expect some consistency when it comes to paying their bills. The big gap in the state budget created by the repeal of the SBT will have to be filled somehow. Thanks to the SBT repeal, businesses leaders are right to hesitate before deciding whether or not to move to Michigan.

For more on the long term impact of short-sighted tax policy decisions like this one, check out Tax Cuts on Layaway: The Short- and Long-term Fiscal Implications of 2006 State Tax Actions from the Center on Budget and Policy Priorities.

Minnesota: House Candidate Tarred with National Sales Tax Brush

Democratic candidates in competitive US House districts clearly see opposition to the national sales tax as a winning issue for them. We noted yesterday that Georgia Representative John Barrow is accusing his opponent, Max Burns, of supporting a national sales tax. The same dynamic has unfolded in Minnesota, where an open seat is at stake.

In a new TV ad, Democratic candidate Patty Wetterling says her opponent, Michele Bachman, supports the national sales tax idea. You can watch the ad here. (The data she cites appears to have come from this ITEP analysis!) As in Georgia, the Republican "supporter" of the national sales tax is running away from the national sales tax idea as fast as she can. On the other hand, one critical difference in Minnesota is that it's not entirely clear Bachman wanted to enact a national sales tax in the first place. Her "support" for the national sales tax appears to have been of the George W. Bush variety-- expressing interest in the idea without actually endorsing it.

But the headline of this story is that in both cases, the GOP candidate is doing their best to avoid being tarred with the "national sales tax supporter" brush. And it's always good to see people running away from bad ideas.

October 16, 2006

Georgia: National Sales Tax Idea Crops Up in House Campaign

A Democratic member of the US House of Representatives has taken a step, in his most recent TV ad, that many Republican office-seekers wouldn't dream of taking in this fall's political climate: allying himself with President Bush. On one issue, at least.

Barrow's ad (not yet posted anywhere on the web that I can find; will post a link when it's up somewhere) focuses on the national sales tax proposal introduced in 2003 by a bunch of Congressman, including Barrow's 2006 opponent-- Max Burns. (In 2004, then-incument Burns lost his House seat to Barrow-- so this year's general election is a rematch.) After explaining that Burns wants to enact such a tax change-- and that Barrow opposes it because it would hike taxes on middle-income families-- Barrow notes that "I agree with George Bush on this one."

The implicit argument he appears to be making is that since a 2005 tax reform commission appointed by President Bush chose not to recommend a national sales tax, Bush must not like the idea himself, either. Of course, Bush has said positive things about the merits of a national sales tax before, back during his 2004 campaign:
I'm not exactly sure how big the national sales tax is going to have to be, but it's the kind of interesting idea that we ought to explore seriously.
And, of course, a starry-eyed optimist would dismiss outright the notion that a Bush-appointed tax reform commission would simply say whatever the President wanted to hear, although hard-headed realists predicted early on that it would do just that.

The best thing I can say about Barrow's assertion RE his agreement with Bush is that it's pretty clever. But Barrow is right on the facts of the national sales tax: low- and middle-income Georgians would get the shaft from such a proposal. An ITEP analysis released in 2004 found that the poorest 80% of Georgians would see, on average, a tax hike under a national sales tax.

Of course, there's plenty we don't know about how a national sales tax would actually work. Even its stauchest advocates don't seem to have a clear idea of exactly how broad the tax base would be-- and of course, you can't know the appropriate rate until you know what base you're applying it to. But the inexorable math of the thing is that wealthy Americans would see big tax cuts, while lower- and middle-income Americans would see a hike. Whatever Georgians may think of Barrow's cute "agreement" with Bush, it's hard to disagree with his take on the inherent unfairness of a national sales tax.

The latest from CTJ...

CTJ's Congressional Tax Report Card
See how your Senators and Representative voted on the big issues of tax fairness and responsible fiscal policy.

Over the past six years, Congress and President Bush have made major changes to the federal tax system, dramatically affecting tax fairness, revenues and budget deficits. This Congressional Tax Report Card looks at the five key tax votes in the House and Senate that have produced these changes, plus one additional vote on an important recent tax bill that Congress narrowly rejected. http://www.ctj.org/pdf/reportcard2006.pdf

The Tax Report Card details how members of Congress voted on these six bills, and grades each member on the combination of his or her votes. The grading system is based on the combination of two criteria: tax fairness and fiscal responsibility - principles that all sides of the political debate at least pretend to honor.

Spread the Word About Your Legislators' Records

By clicking here you can write a letter to your local paper drawing attention to your members' voting records on these issues. It only takes 30 seconds and can help people in your state stay informed about who's a Friend of the Taxpayer - and who's not.

October 13, 2006

New Jersey: Bush Tax Cuts Are Focal Point in Senate Race

In New Jersey, incumbent Senator Bob Menendez and challenger Tom Kean Jr. are on opposite sides of the fence on the issue of whether the Bush tax cuts have been a good thing. The Bergen Record's Herb Jackson has good coverage here.

Kean (Jr.) thinks that the Bush cuts have been a great move, plain and simple, and wants to make them all permanent. Kean has signed Americans for Tax Reform's Taxpayer Protection Pledge, which means he won't hike tax rates, and won't eliminate tax loopholes unless the money is used to reduce tax rate.

Menendez wants to repeal some of the Bush cuts, namely those "for the very wealthy," but hasn't been too clear on what that means.

CTJ's summary of how the Bush tax cuts affect New Jerseyans at different income levels is here. A handy guide to what the Bush tax cuts actually did (and when it all happened) is here.

October 11, 2006

Bush on Pelosi

President Bush is trying hard to inject tax issues into the November elections, in his own way. Speaking at a rally for a Republican House candidate in Georgia yesterday, here's what Bush had to say about would-be House Speaker Nancy Pelosi:
Recently, the top Democrat leader in the House made an interesting declaration. She said, "We love tax cuts." Given her record, she must be a secret admirer... It's not just the so-called tax cuts for the rich she opposes. When we cut taxes for everybody who pays income taxes, she voted against it. When we reduced the marriage penalty, she voted against it. When we cut taxes on small businesses, she voted against it. When we lowered the taxes for families with children, she voted against it. When we put the death tax on the road to extinction, she voted against it. Time and time again, she had an opportunity to show her love for tax cuts -- (laughter) -- and she voted, no.
While it's painful to waste even a sentence debunking such an argument-- IE, if she really loved tax cuts, she would have voted for mine--here it is:

Take the estate tax. Bush has been pretty clear from day one on what he wanted to do with it-- complete repeal. And Dems (including Pelosi) have said quite clearly they think reform, rather than repeal, would be smarter. So in April of 2001, when Congress was evaluating specific components of Bush's tax plan and put complete estate tax repeal before the House, Pelosi voted against it. Here's the roll call vote to prove it. But when Charlie Rangel introduced what most people saw as a better approach to estate tax reform-- increasing the estate exemption to $5 million to help ensure that only the very wealthiest estates would owe tax-- Pelosi voted for it. Again, here's the roll call vote.

Same thing on the marriage penalty, which had been voted on the month before. The Republican bill, embodying Bush's vision of "marriage penalty relief," was seen as unnecessarily expensive and poorly targeted by most Dems (including Pelosi), and they said so in this roll call vote. But again, Rangel had introduced a more sensible alternative, which Pelosi supported.
The sort of "analysis" of voting records the President is engaging in here is, sadly, par for the course in House and Senate races. But shouldn't we hold the President of the United States to at least a slightly higher standard?

October 10, 2006

South Carolina: New Tax Cuts are Bad for Business

It hasn't been a good year tax-wise for South Carolina lawmakers, who quarreled for weeks over how to deal with the state's rapidly growing property taxes. The unnecessarily expensive (and regressive) tax shift they came up with (eliminating most homeowner property taxes for schools, and making up some of the revenue loss by hiking the sales tax rate) prompted justifiable complaints from the business community almost immediately upon its passage.

Now bond rating agencies are weighing in. State economist Bill Gillespie warned last week that agencies are likely to drop the state's credit rating because this year's property tax "reform" increases the state's reliance on an eroding revenue source (the sales tax) even as it makes the sales tax more unstable (by cutting the sales tax rate on groceries).

It's hardly a news flash when economists and bond rating agencies recognize tax policy goofs that legislators don't. But Gillespie's most interesting prediction is that even lawmakers are going to figure out quite soon that what they've done is unsustainable:
[C]hanges both enacted and proposed are likely to make businesses pay more. Gillespie said he did not know the solution to the problem, but he said the S.C. General Assembly is likely to make changes in the new law when it feels its effects. “They’re not going to let the process harm the business community. I think there will be a reaction.”
The glass-half-full way of looking at this is to note that South Carolina lawmakers will likely get another shot at doing the right thing-- something they flirted with earlier this year. But to hear Gillespie tell it, we'll likely find out whether the glass is half-full or half-empty as early as this winter, when lawmakers convene for the 2007 legislative session.

October 09, 2006

Three Studies Debunk Tax Migration Myths

In recent years some have tried to link state tax policy and migration flows between states. Americans for Tax Reform (ATR) claims that in the late 1990's "migration flows began to accelerate as higher-income taxpayers and an aging population moved to lower-tax jurisdictions." ATR claims that the elderly and the higher income will basically move solely to take advantage of a state’s tax climate. A simplified version of their theory goes something like this: people living in the 41 states with broad based income taxes are in a great big hurry to move to states without income taxes like New Hampshire, Alaska, Florida, Nevada, Wyoming, Washington, South Dakota, Tennessee, and Texas.

On its surface this seems like a pretty silly argument. Do people really think about tax structures before they pick up and move to another state? Don't family relationships, job availability, climate and proximity to adequate health care impact migration more?

Three very interesting studies from the Iowa Policy Project, New Jersey Policy Perspective, and Policy Matters Ohio debunk the "tax structure causes moving" myths. If state legislators decide to cut taxes (or not increase taxes) in order to attract new residents they are making incredibly poor public policy decisions.

Policymakers concerned about their state's population growth, would be better off to invest in state parks, libraries, education, and health care instead of cutting taxes.

School Funding: A Tale of Three Taxes

In 1997, Vermont joined the growing number of states that moved away from a purely local property tax toward a statewide tax that shares revenue between poor and wealthy taxing districts. This is a good move for those seeking to make the property tax a more equitable funding source. But property taxes are as unpopular in Vermont as in many other states, and the state-wide property tax is starting to become an election issue.

A number of anti-tax lawmakers are proposing to repeal the statewide tax--which provides two-thirds of the funding for public education--but have yet to propose a replacement funding source. The Vermont League of Cities, taking a slightly more responsible tack, announced this week that it also favors repeal of the statewide property tax, but endorses replacing at least some of the lost revenue with an increase in the personal income tax. The League also debated the merits of expanding the sales tax to cover services, and using the revenue generated to help pay for schools. Meanwhile, the property tax debate has spilled over into the gubernatorial election, with incumbent Governor Jim Douglas proposing a cap on local budget growth. A helpful overview of the Vermont property tax debate is here.

Replacing the statewide property tax with local income tax revenues could make the Vermont tax system more progressive. However, many questions remain about the proposed income tax. Would the tax have a single- or multiple-rate? A multiple-rate tax means that higher-income individuals pay a higher percent of their income than do lower-income individuals, making the tax progressive. However, multiple rates might be too complicated for a local income tax. Similar points of contention surround the proposed sales tax base expansion. Taxing services as well as goods would provide a larger tax base, making the tax slightly less regressive while allowing a lower rate. Some city leaders are opposing the move over worries that expanding the sales tax would hurt local businesses.

In the heated atmosphere of the election season, it is likely that the debate over taxes will continue. Between local income taxes and expanding the sales tax, Vermont has its choice of options to replace property tax revenue. When discussing the advantages and drawbacks to various tax options, voters in Vermont must remember the reason the state-wide property tax was established in the first place: Vermont must provide funding to public schools that is adequate and fair.

October 04, 2006

Florida Gubernatorial Candidates on Property Tax Reform

In Florida, both major-party gubernatorial candidates have now unveiled their plans for reforming Florida property taxes.

Democratic candidate Jim Davis wants to cut the state's property taxes by $1 billion. The mechanism? An across-the-board cut in the level of local property taxes that the state mandates local governments must levy each year. So Davis's plan won't change the distribution of property taxes-- it will simply reduce everyone's taxes (homeowners, snowbirds, and businesses) by about the same percentage. Davis' website has more here.

Republican candidate Charlie Crist has a two-pronged plan. First, Crist wants to double the state's homestead exemption, which currently shelters the first $25,000 of an owner-occupied home's value from tax, to $50,000. Second, he wants to expand the state's absurd "Save our Homes" tax cap (the defects of which we have cataloged here and here), which limits the amount by which a home's taxable value can grow in each year to 3 percent, by making it "portable."

[A little background on the "portability" concept: right now, Florida homeowners accumulate more and more tax benefits from the 3 percent cap in each year they live in their house, gradually driving a big wedge between a home's actual market value and its (much smaller) taxable value. But under the Save Our Homes rules, when you sell your house and buy a new one, the gap between actual value and taxable value goes away, and the taxable value of your home is reset to equal what it's actually worth.
This obviously means that for long-term residents, selling their home has a downside: a big hike in property taxes. The sensible answer is to get rid of "Save Our Homes" entirely, so that every home in the state would be taxed based on its actual value. Crist's answer is to say that long-term residents will get to keep their tax breaks when they move.]

Each plan has its shortcomings. Crist's plan has two big ones: it would perpetuate the biggest inequity in the existing tax system (that is, the Save Our Homes tax cap), and (as the Miami Herald's Mary Ellen Klas ably points out) is not actually constitutional right now. So even if the Crist plan were a good idea, it couldn't get implemented for several years.

Davis' plan has flaws of its own. It too would leave the Save Our Homes plan in place. Its across-the-board tax-cutting approach basically asserts that everyone in the state needs a property tax break and that no individual group is any more "needy" than the rest. And both of these are at least contestable assertions.

Perhaps most troubling is that neither of these plans would add a much-needed measure of "ability to pay" to the state's property tax system. The ultimate injustice in the property tax is that it typically depends only on how much your home is worth and doesn't respond at all to changes in your income. So if your home's value goes up at the same time that you lose your job, you'll feel a lot poorer-- but the property tax will think you're getting richer and will tax you accordingly. Effective property tax reform figures out a way to ensure that when you're really poor, the property tax system recognizes your poverty.

If there's good news in these plans, it's that both candidates would move the state away from its historic over-reliance on local property taxes. But even here, there's bad news: in the long run, local revenues have to be replaced with something. Davis, at least, has made it clear that the state will pick up the slack from his $1 billion property tax cut, and has put forth a bold idea for raising the money: bringing back the intangible property tax the Florida legislature just finished repealing. At its peak, the intangibles tax (which was an annual property tax on stocks and bonds, and which has lately only applied to the wealthiest Floridians) did bring in close to a billion a year.

But bringing back the intangibles tax is almost certainly a political non-starter given that most of the legislature voted to get rid of it just this year. Of course, proposing an improbable revenue raiser is better than proposing nothing at all, which has been the approach of Crist so far. His property tax proposal (certainly more pricey than the $1 billion Davis wants to give back, although no firm price tag exists for the Crist plan) includes no offsetting tax hikes of any kind.

The bottom line? Neither candidate is taking the property tax bull by the horns: both would leave the Save our Homes initiative largely intact. What they're both doing-- proposing big tax cuts-- hardly requires much political courage. But Davis, at least, is showing enough backbone to discuss the hard part of fixing the state's property tax mess: coming up with a revenue source to pay for his tax cuts. It's a good place to start.