August 19, 2008

Florida: The Case of the Missing Tax Break

In the past year, Florida lawmakers (and voters) have ratified a couple of measures designed to reduce property taxes, by forcing local government tax rates downward and expanding homestead exemptions. So one would expect homeowner taxes to "drop like a rock" (to steal a phrase from Governor Charlie Crist) in the wake of these changes, right?

Well, no. As the Pensacola News-Journal's Michael Stewart points out, for many homeowners part of the tax savings from the previously enacted tax cuts is getting eaten up by an arcane "recapture rule." In a nutshell, the recapture rule says that if a home's market value falls, its assessed value will still rise by up to 3 percent.

If this rule sounds screwy, it's not-- or, at least no screwier than the "Save our Homes" tax break that is entirely responsible for it.

Here's the problem: since 1995, Florida has had in place a cap on the amount by which a home's assessed value can grow each year. It's 3% or inflation, whichever is less. This cap is known popularly (and with a touch of drama) as "Save Our Homes."

Of course, when market values are growing and the assessed value is not allowed to grow along with it, the result is a gap between what a home is really worth and what the tax system says it's worth. This gap is an inequity-- it takes the tax system further away from being fair and measuring things properly. The recapture rule is designed to undo this inequity. Simple as that.

An example: suppose you bought your house in 1995 for $100,000. Between 1995 and 2006, your home value doubles to $200,000. A properly functioning tax system would take account of the fact that your home is worth a lot more. But Florida's tax system only allows your home's value to grow at 3 percent a year. At this rate, the assessed value of your home in 2006 would only have risen to $138,000.

So in this example, your home is worth $200,000 and the tax system is treating it as if it were worth $138,000-- the tax system is basically pretending one-third of the value of your home doesn't exist. And all you've done to "deserve" this tax break is to not sell your house. Doesn't matter if you're rich or poor. Doesn't matter who you are, just that you didn't sell your house.

If you treat this $62,000 as basically an unearned, incorrect tax giveaway, then a mechanism that reduces the size of that giveaway seems like a good idea.

And that's what the recapture does.

Palm Beach County Appraiser Gary Nikolits knows this perfectly well, which is why it's a laughably political move when he writes a letter to the governor expressing shock that this sort of thing could happen. As Stewart reports:
“Can you imagine the outcry when they open their (tax notices) in August to find that while their market value may have decreased, their taxable value increased?” Nikolits stated in the letter.
Nikolits (and other appraisers around the state) have plenty of reason to be politically nervous about the impact of the recapture rule, but that doesn't make this rule wrong.

Put another way, anyone who thinks the recapture rule is "unfair" has got it exactly backwards. The true "unfairness" is in the Save Our Homes break, which creates a huge gap between market value and assessed value. The recapture rule is a perfectly acceptable way of mitigating that unfairness.

This lesson holds true, of course, in any other state that has similar caps on assessed value. Caps inherently create inequities, and require mechanisms like the Florida recapture to help reduce these inequities. Complaining about the recapture process amounts to missing the forest for the trees. That means you, Michigan!

August 13, 2008

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.

August 12, 2008

Cutting through the Tax Rhetoric Clutter

Some great fact checks have recently been run by several news organizations and watchdog groups decrying the distortions of Obama's tax plan in several advertisements run by the McCain campaign.

First from and Newsweek:
A TV spot claims Obama once voted for a tax increase "on people making just $42,000 a year." That's true for a single taxpayer, who would have seen a tax increase of $15 for the year – if the measure had been enacted. But the ad shows a woman with two children, and as a single mother, she would not have been affected unless she made more than $62,150. The increase that Obama once supported as part of a Democratic budget bill is not part of his current tax plan anyway...

The TV ad claims in a graphic that Obama would "raise taxes on middle class." In fact, Obama's plan promises cuts for middle-income taxpayers and would increase rates only for persons with family incomes above $250,000 or with individual incomes above $200,000.
And on separate Spanish and English-language radio ads:
A Spanish-language radio ad claims the measure Obama supported would have raised taxes on "families" making $42,000, which is simply false. Even a single mother with one child would have been able to make $58,650 without being affected. A family of four with income up to $90,000 would not have been affected...

The [English-language] radio ad claims Obama would increase taxes "on the sale of your home." In fact, home-sale profits of up to $500,000 per couple would continue to be exempt from capital gains taxes. Very few sales would see an increase under Obama's proposal to raise the capital gains rate.
Lots more analysis from FactCheck and Newsweek here (under "analysis").

Really, this graph from the Urban/Brookings Tax Policy Center analysis is probably one of the best illustrations of the presidential candidates' tax proposals because it illustrates the stark difference in priorities.

Sen. Obama's tax relief is overwhelmingly focused on the lower and middle brackets while raising taxes on the wealthy (over $250,000). Sen McCain's tax plan is sharply regressive, lowering taxes the most in percentage terms for the wealthy and the least for lower and middle-income brackets.

And how will the candidates' respective proposals affect the federal budget deficit? The Washington Post ran an analysis under the misleading title "Obama's Tax Plan Would Balloon Deficit, Analysis Finds." While the article does discuss an interesting debate over whether it's better to evaluate a spending proposal against a budget baseline (assuming current fiscal policy remains unchanged) or just compare proposals to one another in terms of their effect on the national debt, the headline will leave a misleading impression for casual readers who do not delve into the details of the article. This is because it's actually the case that if all McCain's tax proposals were implemented, they would balloon the national debt significantly more than Obama's proposals.

As Media Matters for America notes:
The article stated in its third paragraph that "[a]ccording to a recent analysis by the nonpartisan Tax Policy Center, Obama's tax plan would add $3.4 trillion to the national debt, including interest, by 2018." The 10th paragraph stated that "[a]ccording to the Tax Policy Center, McCain's tax plans would increase the national debt by at least $5 trillion over the next 10 years."
So not until the 10th paragraph of the article did the Post see fit to tell its readers that McCain's plan is actually worse for the national debt. There's some "fair and balanced" journalism.

August 01, 2008

Tax Foundation Debunks Anti-Obama Tax Smear

You don't have to have a thousand unread messages in your inbox to believe that sometimes email is a bad thing. An example: apparently an anti-Barack-Obama screed has been circulating via email that lists a dozen of Obama's alleged tax proposals, all of which (in the email) amount to taxing basically every American. Each of these proposals makes it sounds like he's going to go after everyone's firstborn son.

But as the Tax Foundation helpfully points out, basically every assertion made in this email is false.

Some of the assertions in the email ("Obama would tax all capital gains on home sales at 28 percent") can't possibly be reasonably construed from anything Barack Obama has ever said or written. In other words, it's not a matter of some knucklehead doing his best to understand Obama's plan and just mis-interpreting it. Somebody went out and just lied-- made up a bunch of the nastiest stuff they could think of about Obama and called it the truth.

Hard to say how far afield this email has traveled. A quick Google search on specific phrases within the email reveals that it can be found on some very entertaining websites. For example, next time you find yourself poking around on "," you can find the email here. The Iowa John Birch Society is all over it too. While it's distressing to see it posted approvingly anywhere, the good news is that each of these web forums allows readers to comment, and sensible folks have already pointed out that the email in question is completely unsubstantiated.

More pernicious is a website with the harmless-sounding name that has posted the offending email in its entirety, in apparent approval of its contents right here. As long as this idiot wants to keep shelling out $20 a year to own this web domain, he can leave the anti-Obama email in all its unexamined glory as long as he wants.

Of course, in the end, if any American voter reads the anti-Obama email and believes it uncritically, that's their fault for being lazy. And one could optimistically hope that no one would be that lazy. But the underlying problem is that tax policy is complicated enough that it's not all that easy to verify or (as is universally true in the case of this email) disprove assertions about candidates' tax plans.

And even if people don't explicitly believe the specific assertions made in the email, the theory animating the sender was probably that if you tell a lie enough times about someone, it does affect your perception of them-- even if you don't explicitly believe it's true.

Someone I respect greatly, who is nonetheless a pessimist about human nature, once gave me the following metaphor for how elections are won and lost: presidential campaigns are like a picture window. One party has a red magic marker and the other candidate has a blue magic marker. Every time the Republicans run an ad, they're putting a red dot on the window, and every time the Dems run an ad they're putting a blue dot on the window. If, on election day, there are more blue dots than red dots, the Democrats win.

If my friend's metaphor is wrong, then this scurrilous anti-Obama email doesn't matter. But if he's right, maybe it does.

Which is why the Tax Foundation deserves kudos for taking the email apart point by point and showing that it's full of lies.