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.

Maine: Any Tax is a Bad Tax?

A few years ago, Maine had grand visions of providing affordable health insurance for all its uninsured residents by 2009. But five years after the creation of its Dirigo health care program, funding remains so low that even the first year’s goal of providing insurance for roughly a quarter of uninsured Mainers is very far off. The program is quite popular, especially among small businesses, but Maine simply refuses to raise taxes broadly in order to pay for it. Instead, enrollment has been capped in order to keep costs down while thousands of uninsured Mainers on the waiting list hope for an acceptable source of funding to be found.

Faced with the self-conflicting demand for better health coverage without significant tax hikes, Maine legislators earlier this year considered a fifty cent cigarette tax increase as a way to modestly expand its health program. Broad, progressive, and sustainable tax increases were still out of the question given the political climate in the state, but legislators realized they may be able to raise a smaller and less important tax. Despite being starkly regressive, cigarette taxes have become an extremely popular revenue source among states since they tend to be less controversial than hikes in income, property, or general sales taxes. But having already doubled its cigarette tax in 2005, Maine policymakers soon had to back down from this idea.

The legislature, to its credit, didn’t give up completely in its effort to find funding with which to expand health care coverage. The debate then turned toward another relatively minor tax - alcohol and soda taxes. The argument was made that these products should be taxed more heavily because of their link to higher health care costs, but the more salient reason for the proposal was undoubtedly its perceived political feasibility. Rather than making the hard decision to raise taxes broadly in order to meet the goal it set for itself five years ago, the legislature tried to take the easy way out.

But in Maine, apparently any tax increase isn’t so easy. In response to the tax hike, the “Fed Up With Taxes” coalition was formed, consisting largely of restaurant owners and other related business interests. The coalition is already collecting signatures at restaurants across the state in hopes of getting a repeal of the tax on the ballot.

Despite proceeding so cautiously in search of a revenue source that wouldn’t get them into too much trouble with the voters, the end result of this legislative session may ultimately be a failure to find any way to secure additional funding for the uninsured.

This sudden challenge to the beverage tax suggests that the blame for the lack of funding for the Dirigo health plan should not be placed on legislators – but that the root cause of this embarrassment is instead a refusal on the part of voters to take responsibility for paying for programs they believe to be worthwhile. Across the country the clear preference has been for lower taxes and better government services. These two demands cannot be reconciled, and their interaction has helped contribute to both the national debt and to the avalanche of fiscal problems at the state level.

Too often, voters unwilling to accept higher taxes point to cutting “wasteful spending” as the source of revenues from which favored programs should be enacted or expanded. While wasteful spending certainly does occur, it’s likely not of the magnitude most believe it to be, and identifying it accurately is not a simple, uncontroversial, or inexpensive process. It’s easy to blame whatever one believes to be “wasteful spending” when revenues start to fall short, but the reality is that there’s no easy solution to funding more government services.

Taxpayers either need to learn to expect less from their government, or they need to take responsibility for chipping in to pay for government services. A failure to do these things is what led to the current situation in Maine where a heated battle appears imminent over a tax hike that in the grand scheme of things is too small to substantially improve upon the health care situation in the state. If voters ever decide that they are willing to pay what is needed for government services, the result will be a climate of debate in which sensible reform of the tax system can be enacted. That situation would certainly be preferable to the current one where minor, disjointed, and often regressive tax increases at the margin have the best chance of gaining approval.