Folks, it’s hard to make taxes interesting and I sometimes struggle with finding tax topics that will have broad appeal to readers. However, I think you’ll find today’s topic most interesting because the subject impacts the great majority of readers. I hope you will read this article to the end.
As many of you are aware, there is now pending before Congress a bill containing the most significant changes in federal tax law in the last 30 years. The proposed changes are broad and sweeping, and if passed intact, they will affect each of us. So today I want to discuss one of those proposed changes that may be of special interest to our community.
The new bill proposes elimination of the property tax deduction. That’s right folks, one of the primary sources of income to our local city and county governments, and substantial to our schools and hospitals, would no longer be deductible on our federal income tax returns.
So let’s talk about the huge impact this may have on all of us:
- The Concept of the “Fairness” of Taxes
Believe or not, the federal income tax was designed to be a “fair” tax. The idea is that income is taxed at a progressive tax rate – the more we earn, the more we pay and at higher percentage tax rates.
The property tax, however, is a very different concept. It is a flat rate that is applied to real estate that any of us own without regard to how much money we earn each year and without regard to how much any of us can afford to pay. There is often little or no connection between our income and our real estate. I have many clients who have significant real estate holdings, but virtually no cash. Likewise, I have many clients who have significant cash assets, but only scant real estate holdings.
The point is that the property tax can hardly be described as a “fair” tax.
- Importance of the Property Tax Deduction
For those owning real property, the property tax deduction is very important. It may substantially reduce their federal income taxes and thus make real estate a more desirable investment and less expensive to own. The obvious example is that of our personal homes.
This deduction is also very important to the local institutions which depend on property taxes for their operating income. Their budgets are closely tied to collecting property taxes on our real estate and depend on the increasing the value of our real estate. People are generally more willing to pay property taxes and to permit increases in the property tax rate if they can deduct the property taxes paid on their federal tax returns.
- Impact on Local Politics
But if the property tax deduction is eliminated, what would be the effect on local politics and local property owners?
As to local property owners, the value of real estate may decline, perhaps substantially in some cases. This would reduce the financial wealth and security of homeowners, real estate investors, etc. More people would own less valuable property. Some might be forced to sell their homes and properties, further accelerating the decline in values.
As to local politicians, the decline in real estate values may reduce government services through tightened budgets. The loss of the property tax deduction will create greater resistance by property owners to future property tax increases. It will reduce the likelihood of funding large bond projects. It’s no exaggeration to say that the loss of the property tax deduction will put greater pressure on local politicians and will be a cause of additional divisiveness between the public and our elected officials.
- My Take
It’s also no exaggeration to say that our local political institutions have a long history of corruption and incompetence. One can point to local elected officials who have been indicted, convicted and imprisoned for corruption. Others have been the subject of political scandals and public embarrassment. Local elections often reflect poor voter turnout and are heavily influenced by highly organized unions and others who directly benefit from the elections, such as large project bond funding, expensive retirement plans, etc. My belief is that our local leaders are addicted to spending other peoples’ money without restraint, and that they clearly lack the skills to ensure large projects are completed on time and on budget.
In my view, the repeal of the property tax deduction may be the straw that breaks the camel’s back. While each of us may relish the deduction, what if the loss of the property tax deduction generates a financial resistance to local politics as usual? What if it causes the general public to become more involved in local politics and elect new leaders on the basis of skill and ideas, rather than re-elect the often incompetent and sometimes corrupt officials who’ve all too frequently dominated our history?
Perhaps it will force government to privatize some of its services. An example of privatization that’s worked is our own bus system. Originally known as SCAT, it was corrupt and ineffective. It was privatized by hiring a large multinational transit corporation to take over management of that service. As a result, in just five years Sun Metro was ranked the top mid-level transportation program in the United States.
Perhaps it will force the local government to look realistically at its proper role in our lives. Our prior city manager was quite frank about job duties-describing them as matching “finite funds with infinite needs”. The underlying premise is that city and county government can better spend OUR hard earned money on what THEY consider to be more important community needs than our own personal needs. Maybe our collective thinking of government’s involvement in our lives needs to change.
The loss of the property tax deduction may also require a serious accountability issue–are expenses wisely spent and worth the benefit received? Government tends to be process-focused, while business and charities tend to be result-focused. Government needs to change. No matter how well intentioned local politicos may be, the reality is that business and charities are often times far more effective and efficient at spending money than government agencies are.
Please note there is no proposed change in the federal charitable tax deduction. This may be because of political opposition to repeal, but it may also be a tacit recognition that charities perform valuable services to our community far more effectively than local government and therefore should continue to benefit by encouraging deductions.
So there you have it—the possible repeal of the property tax deduction may have a very profound impact on each of us. There are some compelling reasons to keep the property tax deductions and some compelling reasons to repeal the deduction. And I think we need to carefully examine what impact the loss of the property tax deduction might have on local politicians. I have given you some of my thoughts on the subject. Feel free to add your own comments below—who knows, maybe a politician will read your comments and pay attention.
David Leeper is a Board Certified federal tax attorney with 38 years’ experience. He can be reached at 915-581-8748 or by email at email@example.com