Folks, I think today’s article is quite interesting.  One would normally think property tax deductions would be boring, but I am hopeful this article will peak your interest and comments.  Please read it to the end and maybe let me know what you think. Thanks!

As we all know, there is now pending before Congress a bill containing some the largest changes in federal tax law in the last 30 years. The proposed changes are widespread and significant, and if passed intact will significantly affect all of us. So today I want to talk about one of those changes that may be of special interest to our community.

The new bill proposes elimination of the property tax deduction.  That’s right folks, the often times primary source 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.

Let’s put this in context:

  1. Fairness

The income tax is designed to be “fair”. The idea is that income is taxed at a progressive tax rate – the more we earn the more we pay and at higher tax rates.

The property tax is very much different.  It is basically a regressive tax. It is a flat rate that is applied to real estate that we own without regard to how much money we are earning each year and without regard to how much we can afford to pay. There is often little or no connection between our income and our real estate.  I have had many clients that have much real estate and little cash.  Likewise there are many clients with much cash and little or no real estate.

The point is the property tax is hardly “fair”.

  1. Importance of the Deduction

But for those owning real property, the property tax deduction is often 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 best example of this is 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 on the increasing the value of our real estate.  People are more willing to pay property taxes, and allow increases in the property tax rate, if they can deduct them on their federal tax returns.

  1. 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 may have to sell their homes and properties, further accelerating the decline in values.

As to local politicians, the decline in real estate values will reduce their operating income. The loss of the property tax deduction will create greater resistance by owners to future property tax increases.  It will reduce the likelihood of funding large bond projects.  This will surely place great pressure on local budgets and politics will become much more divisive.

  1. My Take

The truth is many of our local political institutions have a long history of corruption and incompetence.  Many “leaders” have been imprisoned and many more have been public embarrassments.  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. Local leaders are addicted to spending other peoples’ money without restraint and they 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 broke the camel’s back.  It  may generate a financial resistance to local politics as usual. It may cause the general public to become more involved in the embarrassing local political scene and elect new leaders on the basis of skill and ideas instead of the unskilled and often corrupt self-interest from much of the past.

It may force government to privatize some of its services. Perhaps the best example of privatization 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.

It may force the local government to reduce the scope of its services.  Our prior city manager was quite frank about job duties-describing them as matching “finite funds with infinite needs”.  The underlying premise was 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.  This needs to change.

It may also require a serious accountability issue- are expenses wisely spent and worth the benefit received ?  Government is process focused, business and charities are 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 they 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- my thoughts on the profound impact that the repeal of the property tax deduction may have on our and other communities.  Feel free to add your own comments below-maybe a politician will read and use them to make a difference.

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 leepertaxlawelpaso@gmail.com