They say that the devil is in the details. The public policy equivalent to that would be that statism is in local government policies. The big principles being discussed and fought over at the national level of politics are often put to work in our own neighborhoods; counties and cities offer some of the most interesting examples of what misguided policy can lead to, especially when it comes to mismanaging taxpayers’ money.
One example of this comes from Whitehall, Ohio, where the city is trying desperately to boost its property values. Why? Well, let’s see what The Columbus Dispatch has to say:
Bringing homeowners into Whitehall is so important to city leaders that they might be willing to pay for them. A program introduced this week would lend up to $5,000 to homebuyers for down payments, a new tactic the city is considering to tackle its decades-old problem of rental saturation.
Where does the money come from? This is a city with a $25 million annual budget, half of which is spent on public safety. And, more importantly, why are they doing this?
More than half of the occupied homes in Whitehall are rentals. Its home-ownership rate from 2006 to 2010 was 43 percent, compared with Franklin County’s 57 percent and Ohio’s 69 percent, according to the U.S. Census Bureau. “Increasing homeownership has been something that city leaders have talked about for a great number of years without coming up with something concrete,” said Zach Woodruff, the city’s economic-development director. “Everyone is recognizing this is vital to Whitehall’s moving forward.”
The answer to why the city wants to give out down payment loans to home buyers is not to be found in fluffy statements about the city “moving forward”. The reason is instead, in all likelihood, that low and falling property values depress property values and thus erode tax revenues for local governments. As I explained last year, this is a major problem in other parts of Ohio.
That does not mean that the answer is for government to get back in the property lending business. So long as the free market has a say in where people choose to live, the elected and appointed officials in Whitehall should keep in mind that there is always a rational motive involved when people choose not to buy a house in their city.
More on that in a moment. First, let’s get back to the Dispatch story and learn more about the details of this loan program:
The city council is expected to discuss the program at its meeting on Tuesday and could vote on it on Sept. 18. If the council approves the legislation, the city and its partner, Huntington Bank, will immediately begin taking applications from potential homeowners. The city would forgive the loans as long as the buyers live in their home as their primary residence for five years. If they were to rent it out or move out of Whitehall, a percentage of the loan would have to be repaid, based on how long they lived there. If they would sell the home and stay in Whitehall, the loan would still be forgiven, but they could not apply for another one. The loans would cover 4 percent of the purchase price of the home, up to $5,000. Homebuyers would qualify if their household income is less than $125,000. The buyer would have to contribute at least $500 to the down payment.
Wait a second here. Are the city officials in Whitehall going to tell us that a family making $100,000 and more cannot come up with five grand for a down payment on a house?? Are we supposed to believe that a family that has broken into the six figures needs a $5,000 gift from government to buy a property??? What kind of warped reality do these politicians live in?
If you are making six figures in this economy, you’ve done well. You are a hard worker with lots of fortitude and commitment to your career and your family. You are among the last people in this country that needs a government handout.
The ridiculousness of giving a handout to six-figure income families becomes even more glaring when we contrast the potential costs of the program against the potential gains for the city. In order to motivate why the city should give a $5,000 check to a $100+K income family, the city must count on that family increasing the city’s tax revenues by five grand within a reasonable period of time. While governments in general are not known for sound finance, at least let us expect that there is some sort of net revenue calculation behind this whole thing. If so, it would have to conclude that:
a) the taxes that a family earning $100,000 is paying would have to be big enough to exceed $5,000 within the five-year period over which the loan is forgiven; and
b) the family’s tax payments would have to be a net addition to the city’s tax revenues.
The first condition is not that hard to meet: a $100K income should yield about $2,500 in income taxes for Whitehall. The property tax revenue is a bit more murky to nail down. The city only receives about $500,000 in property-based taxes per year; four out of five general-fund revenue dollars come from income taxes. This means that the property tax share of Whitehall’s revenues is about one tenth of what it is for the average local government in Ohio; income taxes, by contrast, are twice as important in Whitehall as they are in the rest of Ohio.
Therefore, the higher the income of the in-moving family, the more likely it is that the city will get the $5,000 back. If the average property buyer pays only $1,000 in local income taxes per year, the city will get the five grand back in five years.
Provided, of course, that we can meet the second condition as well. Which is a bit tricky. If someone buys a property, then reasonably someone else is selling that property. This also means that the property buyer, an inbound taxpayer, replaces a property seller, an outbound taxpayer. In order for the city to get its money back on the property purchase handout program, the inbound taxpayer must pay $5,000 more in income taxes over five years than the outbound taxpayers. (We assume that the property tax revenues will stay unchanged – Ohio does not have an acquisition-based property tax assessment system, and therefore there is no re-assessment when a property changes hand.) This means, plain and simple, that the inbound taxpayer must make $40,000 more than the outbound taxpayer.
Is this at all a realistic calculation? According to Sperling’s Best Places, a city comparison service, the average household income in Whitehall was $35,682 in 2010. This means that for the Whitehall property purchase handout program to fund itself, the inbound taxpayer has to make on average $75,000 – provided the outbound taxpayer has an average income.
A $35,000 annual income is a low income, while $75K is a high income. Why, now, would low income families leave Whitehall and high-income families move in to Whitehall? Has the city made any drastic changes that would allow it to compete with other suburbs of Columbus for the high earners and high taxpayers?
It is fair to say that the answer is “no”. First of all, this calculation assumes that the inbound taxpayer, which has to make more than twice what the outbound taxpayer makes, will move in to the same neighborhood that the outbound taxpayer is leaving. But it is very rare that a family making $75K buys a house in a neighborhood where people make $35K and houses are of a standard that meets a $35K budget. More likely, the home buyer will be someone who makes roughly the same as the home seller.
Furthermore, how likely is it that a family making $75-$100K, thus having the means to choose where to live, would buy a house in a high-crime neighborhood? Again according to Sperling’s, Whitehall has among the highest crime rates in America: the city scores a 9 out of 10 in violent crime and a 10 out of 10 in property crime. You have to travel to notorious Camden, NJ to find a place with higher crime (though I would not recommend a trip to Camden…).
This property purchase handout program is an extremely risky financial gamble. If the city ends up trading inbound and outbound taxpayers in the same income bracket, it will not gain a dime from the program. On the contrary, it stands to lose up to $5,000 per property that changes hand in the city. If 100 properties change hands in Whitehall over the next year, and all qualify for this program, the city will lose as much money on this program as it takes in on property taxes. Given that, according to realtor.com, there are 155 three-bedroom properties for sale in Whitehall today, this is not a far-fetched scenario.
It is understandable that the city officials in Whitehall want to revive their community. But instead of giving every new home buyer $5,000 the city should perhaps focus on reinforcing its core functions: the protection of life, liberty and property. It is not a good answer to say that the city is already working hard on that – the high crime rate shows that their efforts have not paid off yet. Until crime is down significantly, Whitehall won’t be able to attract the kind of residents it wants.
On the other hand, when crime is down the city will become attractive without having to bribe people to move there. That makes a lot more sense, both financially and morally.
In light of the European crisis, it is fair to ask how much better America is doing. We know, e.g., that California, New York and Illinois are in really bad shape, but they are not the only states with agonizing budget problems:
- Recently Maryland raised its already high income taxes in an effort to close its budget gap;
- Oregon is under siege from tax-hiking statists who prefer draining taxpayers for more blood to the slightest of spending cuts;
- A hailstorm of tax hikes is heading for Wyoming;
- The recall effort against Governor Scott Walker in Wisconsin was, fundamentally, an effort to preserve big-spending government.
Even when the debate is leaning toward tax cuts, as in Ohio, there is fierce resistance from friends of big government.
These examples illustrate well how our state governments are still on the wrong side of history. They are making the same mistake as national governments in Europe, struggling hard to maintain their big, costly welfare states.
This does not mean that they don’t recognize the risks of budget deficits and debt pile-up. While it is extremely unlikely that our state legislators in general have realized that Europe’s fiscal mess is on its way Stateside, they have taken some precautions that, they hope, will help when their budgets go into the red. These measures are often referred to as “rainy day funds” and supposed to provide cash when tax revenues fall short of what government wants in order to keep spending.
The entire idea of a rainy day fund is wrong. It is based on false fiscal theory and only serves to preserve an inherently unsustainable welfare state. But before we elaborate on these points, let’s get a bit more acquainted with the rainy-day fund phenomenon. A new report from the Tax Foundation has this to say:
Most states have created budget stabilization, or “rainy day,” funds to draw upon when economic conditions create a severe or sudden drop in tax revenues. However, these cash reserves were for the most part inadequate in coping with the recent economic downturn. For all intents and purposes, only Alaska and Texas have sizable rainy day fund amounts remaining, although many states have begun to rebuild their balances.
Herein lies a clue to what is wrong with the very concept of a rainy day fund: maintaining it takes precedence over reforming away spending. In order to build up a rainy day fund, government needs to charge us more than $100 in taxes for every $100 it spends. After several years of paying, say, $105 to get $100 worth of government services, we hit a recession during which government covers lost tax revenues with rainy-day fund money. Once the recession is over government resumes charging us, e.g., $105 for every $100 it spends.
In other words: the rainy day fund builds in excessive taxation into the government budget. This has very important consequences for our economy.
More on that in a moment. For now, let’s get back to the Tax Foundation report.
Generally, U.S. states are required by their constitutions or by statute to contribute to their rainy day funds according to a formula or rule up to a preset limit or cap. At a minimum, most are required to deposit some portion of year-end surpluses into their rainy day funds during good years. … The size of rainy day funds is typically benchmarked against annual appropriations or general revenues. … According to the National Conference of State Legislatures (NCSL), 16 states require a legislative supermajority (three-fourths, two-thirds, or three-fifths) to withdraw from their funds. Other states permit drawing on the fund only after an economic trigger, such as a drop in personal income or an increase in unemployment. While there is currently no consensus on how large a state rainy day fund should aim to be, bonding agencies and state budget officials generally target 5 percent as the appropriate amount. If the fund is too large, there are opportunity costs with the funds being tied up in reserve, as well as a worry that it would reduce incentives for careful expenditure planning.
Again, the rainy day fund forces excessive taxation – one example is a budget surplus that is not returned to taxpayers – but even more importantly, the fund protects the very spending that causes the need for the rainy-day fund in the first place.
The reason why a government runs a deficit in a recession is simple. Tax revenues depend on how well taxpayers are doing, primarily in terms of personal income (which pays for income, sales, use and addiction taxes; even property taxes, actually). Government spending, on the other hand, depends on formulas for entitlement programs that are entirely politically determined. There are no ties between government spending and the ability of taxpayers to pay for that same spending; if taxpayers are suffering in a recession, the people who are entitled to government handouts and services are not going to give up any of their goodies.
When was the last time you heard Medicaid enrollees say “Hey, it’s a recession, go right ahead and cut away some of our health benefits that you’re paying for”?
Furthermore, many government spending programs by design cost more in a recession.
Because of this discord between tax revenues and government spending there will inevitably be deficits in recessions. A rainy-day fund protects that spending and thereby serves as a validation of the entitlements that cause the need for that same fund in the first place.
Back to the Tax Foundation report:
Recent scholarly research has studied past recessions to develop rainy day fund rules of thumb based on the average revenue shortfalls during an economic downturn. Wagner & Elder, for example, found that “the typical state can expect a revenue shortfall equal to 13 to 18 percent of revenue during a normal downturn. To achieve this during a typical period of economic expansion, states would need to save between 2.4 percent and 2.8 percent of each year’s revenues during good economic times.
In other words, you have to pay $102.80 for every $100 worth of services you get back from government. In a state like Ohio, this means that taxpayers have to dole out $660 million per year that they get nothing for, other than the maintenance of already big, bloated government spending programs during a recession.
Nationwide, a 2.8-percent rainy-day fund annual deposit would cost American taxpayers $19.7 billion in excessive taxation. This is a net drainage of money from the private sector that maintains government spending and protects government employees while costing the private sector 142,000 jobs every year.
Rather than being concerned with government’s ability to maintain spending that is already too big, too costly and too intrusive on the economy, our state lawmakers (and my peers at other free-market think tanks) should focus their efforts on developing models for permanently dismantling the welfare state. No other economic issue is even close in importance to this one. For every day we keep trying to save our welfare state, we draw one day closer to the day when Greek-style austerity comes down on us, with all its disastrous consequences.
The property tax is a staple of American government. It is more important here than in Europe. Historically, our reliance on the property tax has been for the better: it has built close ties between taxpayers and the government that spends our money. However, over the past half-century government has gradually outgrown the property tax: local and state governments have piled on new spending programs at a far greater pace than taxpayers have been able to keep up with. As a result, we have gotten new taxes on top of the property tax, but property taxes have also spun out of control. (See these articles for an overview.)
One of the first reactions was the Proposition 13 revolt in California almost 35 years ago. It put a cap on the cost of the property tax, but since it was not coupled with any meaningful spending restraints, the school districts, cities and counties in California simply went elsewhere for more revenue. As a result, the governments of California have squeezed every drop of blood they could out of their taxpayers; they have maxed out income taxes, sales taxes and just about every other tax out there.
Proposition 13 bought California taxpayers time, but not more. Taxpayers in other states, who are looking to contain their property taxes, are well advised to keep this in mind. A property tax reform cannot be isolated from other taxes, and especially not from government spending. As reported in an article by the Obama Press Office, property-tax reform advocates in North Dakota seem to have yet to learn this:
Since Californians shrank their property taxes more than three decades ago by passing Proposition 13, people around the nation have echoed their dismay over such levies, putting forth plans to even them, simplify them, cap them, slash them. In an election here on Tuesday, residents of North Dakota will consider a measure that reaches far beyond any of that — one that abolishes the property tax entirely. “I would like to be able to know that my home, no matter what happens to my income or my life, is not going to be taken away from me because I can’t pay a tax,” said Susan Beehler, one in a group of North Dakotans who have pressed for an amendment to the state’s Constitution to end the property tax. They argue that the tax is unpredictable, inconsistent, counter to the concept of property ownership and needless in a state that, thanks in part to wildly successful oil drilling, finds itself in the rare circumstance of carrying budget reserves.
Ms. Beehler is right in principle: since the property tax – outside of California – is entirely unrelated to a person’s income, it can wreak havoc on people’s personal finances for no other reason than the fact that they live in the same house they have owned for many years. The California model indirectly ties the cost of the property tax to a person’s income: instead of a market-value based levy, the California model locks in the property tax at the time when you buy a house. From that day on the tax can never increase by more than two percent per year.
The theory behind the California model is that the price of the house you buy is proportionate to your income. The theory is correct, but the outcome is effectively that property owners in California just pay another income tax.
As for Ms. Beehler’s comment about North Dakota’s severance tax revenues, let me – as a resident of severance-tax rich Wyoming – make clear that the severance tax is one of the dumbest ways to fund government. It floods the state coffers with seemingly free money, which makes politicians and bureaucrats spend like drunken sailors with unlimited credit at the liquor store. Case in point: Wyoming has the largest government bureaucracy in the country, a fact that escapes the superficial observer since we have no state income tax, no wealth tax and no death tax.
So what to do about North Dakota’s property taxes? Well, first let’s hear more from the Obama Press Office:
“When,” Ms. Beehler asked, “did we come to believe that government should get rich and we should get poor?”
Herein lies the key to what to do. More on that in a moment.
An unusual coalition of forces, including the North Dakota Chamber of Commerce and the state’s largest public employees’ unions, vehemently oppose the idea, arguing that such a ban would upend this quiet capital. Some big unanswered questions, the opponents say, include precisely how lawmakers would make up some $812 million in annual property tax revenue; what effect the change would have on hundreds of other state laws and regulations that allude to the more than century-old property tax; and what decisions would be left for North Dakota’s cities, counties and other governing boards if, say, they wanted to build a new school, hire more police, open a new park.
How about curtailing spending first? How about closing non-essential government spending programs? How about downsizing North Dakota’s governments, from the state down, to fit within tax revenues that are $812 million smaller?
Local governments in North Dakota get about 31-32 percent of their revenues from property taxes. It is not very hard to find spending programs amounting to one third of local goverment budgets that can easily be replaced with private solutions. In the 2012 budget for the city of Bismarck, there are items worth $8.9 million – out of a$30.8 million budget – where privatization is a serious alternative:
- The finance department, $2.7 million;
- Combined Communications Center, $1.8 nillion;
- Public Health, $1.6 million;
- One-time Spending, $1.4 million;
- Community Development, $1.2 million; and of course…
- Cable TV promotion, $282,000.
It is worth noting that the city’s expected total tax collections in 2012 amount to $11 million, which leaves this 29-percent budget reduction well within the realms of what the city currently can afford even if it does away with all its local taxes.
There is nothing wrong in fighting for less taxes, quite the contary. And I applaud the efforts to do away with the property tax in North Dakota. I am just worried that it will lead to a situation similar to that in California after Proposition 13: there is no reform to government spending which sends politicians scrambling for other revenue sources. A better approach is therefore to couple the elimination of the property tax with dollar-for-dollar structural reforms to government spending that permanently remove spending programs from state and local budgets.
It’s that time of the year again. Tax time. What better time to be reminded that taxes are still going up in America? Sad to say, there is a trend of state and local tax hikes, from Rhode Island to California, from Kentucky to Washington state. The trend is so strong, in fact, that we might almost call it a silent epidemic. Let’s take a tour around the country and see for ourselves.
Get the rest of my column at the Conservative Daily News!
Technically, it is illegal not to pay your taxes, and we should all follow the law. But when it comes to tax evasion, the problem gets more complex than simply one of what is legal and what is illegal. So long as the law says we need to pay a certain amount in taxes, we should do so, but we should also keep in mind that tax evasion differs from crimes of property and violence in that it does not inflict harm on individuals.
On the contrary, from a moral viewpoint the tax is itself a crime of property. In his book Anarchy, State and Utopia – a must-read for all friends of freedom - Robert Nozick provides a carefully designed, very solid moral case for the minimal state. His book, written in part as a response to John Rawls’s poorly argued Theory of Justice, puts a firm limit on government at the gates of redistribution. Government can and should provide protective services for life, liberty and property (though Nozick does not concentrate his argument to those three terms) but if government tries to take from one person what he has rightfully acquired and give to another who has not rightfully acquired that money (or other resource) then government violates that person’s sacrosanct liberty.
Compared to the size of government we are dealing with today, almost 40 years after Nozick published his book, it is fair to say that there is an astronomical distance between our daily lives and the ideal society that Nozick has in mind. But his principles, derived from John Locke’s justice-in-acquisition theory as put forward in Second Treatise on Government, are timeless. They provide a strong moral argument against taxation per se, and are worth keeping in mind every time the issue of tax evasion comes up.
In addition to the moral problems with taxation there is also the economic side of governmental intrusions into our daily lives. Taxes stifle businesses and distort consumer behavior. The higher the taxes, the worse the economy performs.
The problem with tax evasion is the tax, not the evasion. Let us keep this in mind as we listen to the following complaint about tax evasion in California, brought to us by the Sacramento Bee:
As Californians put the finishing touches on their income tax returns, tax collectors say the state’s $9.2 billion deficit would drop to zero if all taxpayers submitted what they owe. That means every resident claiming the market value of tattered jackets donated to charity. Every business reporting every dollar of income they receive even when paid in cash. Every service worker reporting every tip. And every resident paying use tax on Internet purchases. But full compliance does not occur. In a new estimate, the Franchise Tax Board says that $10 billion in state income taxes go unpaid each year, often when workers receive payments under the table, businesses skirt reporting requirements or people take deductions for which they do not qualify. The state Board of Equalization says an additional $2.3 billion in sales and use taxes go unpaid.
The unpaid taxes correspond to approximately five percent of total state government spending in California. This money obviously remains in the hands of the private sector, and by rough estimate 80 percent goes toward private consumption. The part of this spending that is covered by sales and other consumption-based taxes then generate revenues for the state as well as local governments. In other words, it is a misrepresentation of facts to say that the state completely loses out on whatever taxes Californians evade.
And who knows? Some of the evaded taxes may even go toward paying property taxes, a major burden on families in the Golden State.
There is a reality behind tax evasion that is rarely recognized. While tax evasion is illegal and – again – we should of course always pay our taxes, it is important to keep in mind what the money thus withheld from government actually does for the economy. When people do not pay the full amount owed in taxes they do not just stash the money in the mattress. An auto repair shop that fails to report all its earnings and thereby keeps a bit more money than it otherwise would, can afford to keep another mechanic on its payroll. A trucking company that takes some load without reporting it can offer a small business somewhere a cut on the shipping rate and allow that business to keep its doors open. When the breadwinner of a low-income family gets some of his pay under the table he can afford to pay the lease on their apartment and they can avoid being evicted.
I am the first to recognize that tax evasion also distorts competition between compliant and non-compliant businesses. This is why I continue to stress that we should all obey the law. But when it comes to remedies for tax evasion, it is essential that we acknowledge what people do with the money they do not pay in taxes.
So long as we have a government larger than Nozick’s minimal state we will have to put up with taxes. But those taxes should be as low as ever possible, the code should be simple and transparent and the entire design should be based on the one-stop principle: you only pay taxes once on every dollar you earn. This would vouch for a user-friendly tax code which in turn would minimize evasion and do wonders for our economy.
For totally understandable reasons, property taxes are a concern to many Americans. Outside of California, most property owners pay property taxes that have no relation whatsoever to their income. Even people who are in a strong phase of their career and can advance their incomes by six, seven, even ten percent per year may have problems keeping up with property assessments. (And let’s keep in mind that most Americans are lucky these days if they see a salary advancement of 2-3 percent per year.) Therefore, it comes as no surprise that property tax assessments often become the target of either new laws or lawsuits. The latter happened recently in Nevada where property taxpayers claimed arbitrariness in property assessment methods. The Reno Gazette-Journal has the story:
The Nevada Supreme Court is requiring the State Board of Equalization to stage public hearings over creating a uniform way for all Nevada counties to assess property values. The action is the result of a unanimous court decision on Friday in favor of Incline Village property taxpayers, collectively known as the Village League to Save Incline Assets. In July, the property owners won a separate legal case against Washoe County, resulting in $40 million in property tax refunds to about 8,700 property owners in the North Lake Tahoe community.
That is almost $4,600 per property owner.
The justices agreed the county had used unconstitutional property assessment methods about a decade ago. This latest decision stems from Incline Village residents who live in Washoe County paying more in property taxes than other Lake Tahoe residents who have similar homes near Lake Tahoe, but live in adjacent Douglas County. Washoe County officials, in turn, say it’s possible the Douglas County residents don’t pay enough.
It is always disconcerting to hear a government bureaucrat or elected official tell taxpayers that they “don’t pay enough.” But if this is the result of some errors in property assessments, the question is more one of assessment methods than one about government revenue greed.
As the Reno Gazette-Journal explains, this seems to be a question of property assessments:
[Justices] said it is the state that is not performing its duties under Nevada law, namely ensuring Nevada’s 17 county assessors are valuing properties using similar standards. … In their decision, the justices wrote that the Board of Equalization, “has not held a public hearing during which taxpayers could air their grievances with the equalization process, nor has it affirmatively acted to equalize property values.” … [The] long-simmering issue of equalizing property assessment methods statewide could get a public hearing sooner rather than later. The issue will be a challenge, considering the state’s demographic differences between its urban populations in the Las Vegas and Reno areas, where the vast majority of Nevadans call home, and the remaining 15 rural counties.
More than that, though, this should be a reason for Nevada’s property taxpayers and the elected officials in the state to reconsider the role that property taxes pay in The Silver State. The state only collects about six percent of its in-state sourced revenues from property taxes, but local governments get almost a quarter of every revenue dollar from that same tax. The national average for local governments is that they get 29 percent of their tax revenues from property taxes, and in outliers like Connecticut and Hawaii property taxes represent 58 and 47 percent, respectively. However, this does not make the burden of property taxes easier for Nevada’s property owners.
Hopefully the state supreme court ruling can initiate a property tax reform in Nevada similar to the one that started California’s Proposition 13 revolution. What got Californians going was, primarily, frustration with what they felt were arbitrary property assessment methods. Today California has an acquisition-based property tax assessment model, as opposed to the market-value based model used almost everywhere else. Since the acquisition-based model basically aligns property taxes with the owner’s ability to pay, it is the more sustainable model of the two. It also applies to the entire state, as it is part of The Golden State’s constitution. This is a good opportunity for Nevada to move in California’s direction.
Welcome, once again, to a new issue of The Liberty Bullhorn Economic Newsletter! This issue is bigger than normal and takes a closer look at one of our most fiscally troubled states: California.
In a sense, California is the canary in the fiscal coalmine. The way California goes, the way America will go. This is why it is so important to understand the mechanisms behind California’s fiscal crisis. That is what this issue of The Liberty Bullhorn Economic Newsletter provides.
In my recent article about property tax assessments in West Virginia I pointed out that property taxes are unethical because…
…they can drive people from their homes. Law abiding citizens can be forced to sell or give up their homes for no other reason than that they could not give government what government demanded.
My article about the latest GDP data adds another angle to this problem: nationwide, investments in residential buildings – apartment buildings, single-family homes and everything in between – has been falling for six years in a row. This means that the downward pressure on residential properties is continuing across the country. Rising property values and homes moving fast on the market are exceptions, not the norm.
This depressed housing market has a direct effect on property tax revenues for local governments. As the aforementioned story from West Virginia indicates, the reaction from government is to try to jack up assessments – or millings to be precise – and squeeze cash-strapped taxpayers for even more money. But just because the government determines that my house is worth more one way or the other, does not mean that I have more money to spend on taxes. In fact, all it means is that I will spend less money in local stores and thereby contribute to lower sales tax revenues for the very same government that just raised my property taxes.
Now the property tax issue is heating up in Ohio. The Dayton Daily News reports of dramatic revenue losses for school districts in Montgomery County:
Four Dayton-area school districts and two townships will lose significantly more property tax revenue in 2012, due to falling values, than was originally reported this month. Centerville schools’ loss is projected at $922,586 for 2012, more than $650,000 higher than was listed in a Jan. 15 chart in the Dayton Daily News. The data for that chart was provided by the Montgomery County Auditor’s Office, which now confirms that it sent the newspaper out-of-date information. … As reported earlier, local jurisdictions will lose millions from falling property values this year.
There is a not-so-subtle hint in this story that part of the problem is a piece of legislation that protects property owners from the unethical side of property taxes that I referred to above:
And a little-known piece of Ohio law permanently caps many of those jurisdictions’ levies at new, lower levels.
Then the story goes on to list the losses from lower property values that are spreading through the Dayton area:
Of 57 Montgomery County taxing agencies, 56 will lose revenue in 2012 (Perry Twp. will see a $1,857 increase). The total loss is $29.3 million. … Kettering schools’ loss is $593,727 worse than was listed — meaning 2012 tax revenue will actually be down $1.72 million from 2011. Trotwood schools’ loss is $385,265 worse, meaning 2012 revenue will drop $866,000 from 2011. Washington and Miami townships also fare significantly worse than was listed, as do Oakwood schools.
There is little doubt that this will cause protests against coming cuts in school spending. But when that happens, it might be worth remembering that local governments are not exactly innocent in this drama. If the county and the cities and townships involved showed better stewardship of their own spending they could actually help fill the gaps in the budgets of their school districts. A good example is the city of Dayton, which has a tragic spending record that I pointed to in July last year:
The city of Dayton could easily reduce its spending … All it needs to do is reduce or eliminate: $4.1 million for “Downtown”; $22.3 million for “Community development and neighborhoods”; $15 million for “Economic development”; $41 million for “Leadership and quality life”; and $17.1 million for “Corporate responsibility”. These fluffy and non-essential spending items cost the city $99.5 million in 2009. They exceeded by far the $29.8 million budget deficit the city ran that year, and they are a perfect starting point for slimming down city government.
At the heart of the problem is of course the prevailing myth that government is the only venue for educating our children. But even if we maintain a public school system largely as it is today, the example from Dayton shows that there is a lot of unnecessary, sometimes outright wasteful things that local governments can eliminate from their budgets. Thereby they can free up money for essential and semi-essential government functions (assuming public education belongs in the latter category).
It remains to be seen what will come out of this emerging fiscal panic in Montgomery County, Ohio. A safe prediction is that the school districts will try to get state or even federal funds to compensate for the revenue losses. Let us hope that both jurisdictions are prudent enough to say no. School funding should always be a local matter, and eventually strictly a matter for the parents. Instead of desperately seeking more revenues, the politicians who are elected to run the school districts in question should take this as a learning experience. It is, in fact, a good opportunity to rethink the size, scope and purpose of government, in this case public education.
Welcome to another issue of The Liberty Bullhorn Economic Newsletter! This issue analyzes a rarely mentioned but very important trend in government: our counties, cities, towns and school districts are becoming more than more dependent on state governments – and the federal government – for their budgets. In plain English: your vote in the local election is made meaningless by fiscal fiat.
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America is in dire need of lower taxes. Our corporate taxes are punitively high, and even income taxes are taking a heavy toll on families around the country. When combined, federal, state and local taxes can claim more than half of a person’s income on the margin. But perhaps the biggest problem on the tax front is the property tax. It is a long-lasting cornerstone of American taxation and is as deeply rooted in our way of funding government as the notion of public education, which is not a coincidence since property taxes was an original source of funding schools. Today, though, government has sprawled in all different directions. Local governments are involved in everything from housing to sports arenas and convention centers. They are also taking on more and more responsibilities for spending programs that are jointly funded with states and the federal government. Consequently, their budgets have exploded and their need for revenues has become insatiable. It is therefore no coincidence that whenever there is talk about tax reform, especially property tax reform, cities and counties get worried. The current efforts to reform property taxes in Iowa is a case in point. From the Des Moines Register:
Reactions to Gov. Terry Branstad’s version of commercial property tax reform were largely the same as those heard on a competing House Republican proposal. In short, businesses like it, but cities, counties and school districts have concerns. Those views were aired in a House subcommittee this morning — the fourth hearing on property tax reform so far this session, and perhaps the last in which members of the public will have a formal opportunity to express their views. … The process of unifying the governor’s plan and the one put forward by House Republicans must balance several competing concerns. Not only do the two bills vary substantially in their details, but neither has been embraced by the Iowa League of Cities, the Iowa State Association of Counties or other organizations representing local levels of government.
It is easy to see why Iowa’s local governments are worried. Their spending record is not exactly fiscally conservative. The U.S. Census data for local government spending shows that Iowa’s counties, cities, towns and school districts expanded their budgets by more than 13 percent in the two years, from $12.8 billion in 2007 to $14.5 billion 2009 (latest year available). In fairness, this is less than the 17.8-percent expansion of state state government spending in Iowa during that time, but this does not make it easier for taxpayers to keep up with the growth in government.
The people who pay for this government spending spree are, ultimately, Iowa’s families. How many of them saw their income grow eight, seven or even six percent per year in the last years before the Great Recession?
But questions about who is going to pay for all this government spending seemed to be shoved to the side when (tax-funded) lobbyists for the local governments in the Hawkeye State had their chance to comment on the proposed property tax reform:
On Tuesday, representatives from those groups described their concerns, focusing on the bills’ limitations on municipalities’ ability to raise revenue through property taxes and the uncertain impacts the reforms could have on their budgets. “We do see some concepts here that are trying to help cities absorb the loss. …” League of Cities lobbyist Jessica Harder told the subcommittee. “We at least appreciate the movement toward that, although overall we still are opposed to bill because it is a significant revenue cost to cities.”
I am not a state legislator in Iowa, and maybe that is a good thing for both me and the Iowans. But if I were, I would throw a question back at this lobbyist: How about reviewing where all that extra spending went that you took on back in the heydays before the recession?
The laments from the local governments are even more difficult to understand when we take into account the details of the two proposals for tax reform:
The governor’s bill rolls back assessments on commercial and industrial property taxes by 15 percent over three years, and could ultimately reduce the value on which a property is taxed by 40 percent over eight years. To offset the cost that decrease in taxes would represent to local governments, the governor provides for state aid increasing from $50 million to $150 million over three years and perhaps rising to $240 in subsequent years. His bill also limits the amount that residential and agricultural property tax assessments could increase or decrease to 2 percent per year, and limits the annual amount cities can levy in property taxes based on inflation. The House bill similarly reduces the tax burden on commercial and industrial properties, and also ultimately achieves a 40-percent reduction, although it does through a different calculation mechanism and over a 14-year period. The House plan also limits the growth in residential property tax assessments, and requires the state to take on a higher share of student-instruction costs to offset the cost that reduced property tax revenues will mean to school districts.
Even when the reform leaves the local governments with a nicely padded cushion they still complain loudly. This is the same exhibition of insatiability, spendoholism and utter self-centeredness that runs through almost every legislature, almost every government bureaucracy in the country.
There is one major flaw in the proposed tax reform: it is an isolated incident of fiscal conservatism. If the bill was tied to structural reforms that would relieve counties and cities of spending mandates imposed from the state, it would be a lot easier for those local governments to cope with this proposed reform.
Tax reform only works over the long haul when tied to spending reform. The best lesson on this is from California’s classic Proposition 13, which tightened the stream of revenue increases from property taxes without imposing an equally strong cap on the growth in government spending.
Best of luck to the tax cutters in the Iowa state legislature. They have not made their own work easy, but there is still time to correct the errors and get this one right.