Tag Archives: property taxes

Unintended consequences: when property values decline, seniors with frozen property taxes pay more

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Programs that freeze the property taxes of older homeowners may reduce their taxes for a long time – unless property values decline and seniors end up paying more:

The state’s Senior Citizens’ Assessment Freeze Exemption works by capping participating homeowners’ property assessments. So even if the property’s value rises each year, a participating homeowner is taxed only at the level when the “freeze” was put into effect. In better times for real estate, participating homeowners in some suburban townships averaged as much as $38,000 reductions on their assessments, which would have reduced their property tax bills by hundreds of dollars. But instead of just losing out on the revenue, governments shift the tax burden onto property owners who don’t qualify for the freeze.

The law was intended to prevent fixed-income seniors from being taxed out of their homes since, to qualify, participating homeowners have to earn less than $55,000 a year.

“But nobody thought property values would decline,” said state Rep. David Harris, an Arlington Heights Republican who sits on the House property tax subcommittee. “Now, the issue is huge.”

Here’s why. If property values drop below the frozen level, there is no longer any benefit to the participating homeowner because he or she is taxed at that lower level.

That wouldn’t be a problem if the value dropped for only that homeowner. But when the value drops for everybody and the tax levies for all government bodies stay the same, or more likely increase, tax rates have to increase to meet the levies governments are allowed to collect.

The most important thing to me in this story: nobody assumed property values might drop. In other words, legislators and those receiving the tax help didn’t think about this possibility. So now they are stuck trying to scramble to find a fix.

While there are certainly other reasons contributing to the financial troubles of the last seven years or so, I wonder how much ignoring this simple idea – property values could decline for a while and not bounce back – contributed to the larger issues.

Argument: cities could find more revenue by taxing people who commute in

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Michael Pagano details the tax revenue issues facing American big cities and proposes a solution: tax commuters for the city services they use.

Over the past several decades, municipal tax systems have changed in many ways to try and capture the revenues needed to support essential services. But most cities continue to base their tax systems on dated notions of how local economies work and what drives income growth and wealth. Cities must be given the ability to develop tax and revenue systems that match the unique characteristics of their local economies, and that allow them to diversify revenues in ways that protect them from fiscal crises.How might that request be accommodated? Tax structures should be created that link cities to their underlying engines of growth or to income and wealth, similar in design to what the property tax attempted to accomplish two centuries ago. In Ohio for example, cities tax earnings at the place of employment and the place of residence. By taxing at the place of employment, users of city services (that is, employees who physically work at a site) contribute to the resource base for service provision.

Imagine if users of city-government services actually were required to pay for the full cost of those services? Imagine household decisions on where to live that is based on their paying the full cost of services. Imagine the decision calculus by individuals who would be responsible for paying their fair share. It could be revolutionary.

I wonder if changing the tax structure in this way would only serve to push more organizations and firms to the suburbs. Take the example of Chicago cited by Pagano. In the last few years, several companies, like Motorola, have announced they are moving workers back into the city. Would changing the tax structure make them reconsider?

The financial reasons The Woodlands, Texas does not want to incorporate

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Many communities want to incorporate so they can control land use as well as fund and provide local services. But The Woodlands, Texas has resisted incorporation for financial reasons:

For one, The Woodlands is one of the nation’s best case studies when it comes to weighing the costs and benefits of incorporation. According to Bruce Tough, Chairman of the township’s seven-member Board of Directors, his community boasts an unprecedented level of success when it comes to governance, public services, and environmental excellence. Just 20 years after it was founded, the township had won a Special Award for Excellence from the Urban Land Institute and a LivCom Nations in Bloom Gold Award. Residents enjoy more than 190 miles of hiking and biking paths. A little over 20 percent of the township’s acreage is set aside for green space, greenbelts, and golf courses…

Unlike similarly successful (and now former) townships including Irvine, California, The Woodlands has reliably refused to incorporate as either a standalone city or part of Houston, even as the issue is raised every few years by developers, residents, or the city of Houston, which provides municipal services such as waste removal, water, and local law enforcement from the sheriff’s department. Tough points to the township’s one-of-a-kind public service provider agreement with Houston and the fact that the township is run more like a business than a municipal government as the primary reasons why The Woodlands doesn’t need to incorporate. Houston agrees not to annex The Woodlands during the next 50 years. In exchange, The Woodlands continues to make service payments to Houston.

Among residents, the question of incorporating is primarily a financial concern. Research indicates that becoming a standalone city could raise property taxes in The Woodlands from 32.5 cents up to anywhere from 58.14 cents to a staggering 81.5 cents per $100 valuation. (By comparison, the property tax rate in Houston hovers around 63 cents.) The costs would include road maintenance, setting up new sewage and water provisions, and establishing a separate police department. Estimates for just those few basic services reach into the hundreds of millions, costs residents fear would be added to their annual tax bills…

For now, The Woodlands residents can relax. For its population, the township has one of the lowest tax rates in the United States but more and better services than similar counterparts. There is no local income tax charged in The Woodlands, and Texas is one of seven states without state income tax. The bulk of their tax money comes from sales tax levied against visitors who flock to the downtown promenade and amphitheater.

This is an interesting case but it sounds like the primary reason The Woodlands has not incorporated is because it can afford not to. In other words, it can afford to contract with Houston for municipal services and it can rely on visitors to provide a lot of revenue rather than having to tax its residents at a higher rate. The community of over 93,000 residents has a median household income of $103,229, is 88.4% white, a poverty rate of 5.1%, and 59% of residents have a college degree. Many communities do not have this luxury.

Study suggests US gov’t loses $71 billion a year because of tax exempt religious institutions

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A new study suggests tax exemptions for religious institutions cost governments $71 billion a year:

How much money does the U.S. government forgo by not taxing religious institutions? According to a University of Tampa professor, perhaps as much as $71 billion a year.

Ryan Cragun, an assistant professor of sociology, and two students examined U.S. tax laws to estimate the total cost of tax exemptions for religious institutions — on property, donations, business enterprises, capital gains and “parsonage allowances,” which permit clergy to deduct housing costs…

If history is a guide, the Free Inquiry article and any call for tax reform it may engender are not likely to have much effect. Since the 1950s, there have been several attempts to quantify religious tax exemptions — all of them wildly varied in their conclusions — and only a handful of legal challenges to those exemptions. Most were unsuccessful…

States bypass an estimated $26.2 billion per year by not requiring religious institutions to pay property taxes.

This seems like a lot of money but here are a few thoughts about this:

1. You would need to put the cost of these exemptions versus other areas of the tax code in order to know how this compares. For example, would repealing the mortgage interest deduction bring in more money? The study itself makes some of these comparisons:

To put this into perspective, the combined total of government subsidies to agriculture in the United States in 2009 was estimated to be $180.8 billion.38 Religions receive at least 40 percent of the subsidy that agriculture does in the United States. Another way to illustrate the size of the subsidy may be to illustrate how much tax revenue would increase at the state level if religious institutions had to pay property taxes. In Florida, where the state government’s budget was $69.1 billion in 2011, the amount of tax revenue lost from subsidizing religious property was $2.2 billion or 3 percent of the state budget. The additional revenue would have mostly prevented the $1.1 billion cut to firefighter and police retirement plans and the $1.3 billion cut to public schools.39

So is this a battle worth fighting instead of fighting agriculture subsidies?

2. I think we may see more calls for things like this during this period of economic troubles. The federal government as well as state and local governments need money so they are looking for ways to find “easy” money.

3. It could be interesting to look at how this affects local municipalities, particularly ones with more religious congregations that consequently don’t get the tax dollars they might if that land was occupied by homeowners or businesses. For example, a community like Wheaton, Illinois has a large number of churches (including a claim that the suburb has “more churches per capita than any other town in America”) and could have more tax revenue if that land was put to other uses.

“More U.S. cities set to enter default danger zone”

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A Reuters story suggests more municipalities are having trouble keeping up with their debt:

Bond defaults were $25.355 billion in 2011, or nearly five times the value of defaults in 2010, according to Lehmann. In 2012’s first quarter, defaults totaled $1.245 billion, or more than double the $522 million of last year’s first quarter.

Municipal bankruptcies, such as last November’s landmark, $4.23 billion Chapter 9 filing by Alabama’s Jefferson County mainly because of its excessively expensive sewer system mocked as a Taj Mahal project, have picked up, too.

Chapter 9 municipal bankruptcy filings doubled to 13 in 2011 from six in 2010, but still remain rare among the more than 60,000 issuers, with only 49 of the 264 cases since 1980 being towns, cities, villages or counties, according to James Spiotto of Chapman and Cutler LLP. States are ineligible for Chapter 9.

Outsized pension-deficit payments and other liabilities, as well as depressed local economies or failing government projects such as Harrisburg’s trash incinerator, often herald crises, according to Ciccarone.

While much of the focus has been on the national debt and national figures (such as unemployment, jobs created, where to set the tax brackets, etc.), all of this is trickling down to the local level. Since many municipalities and local taxing bodies are heavily dependent on property taxes, a decrease in housing values and a continued sluggish housing market suggests many communities will struggle to find revenue. In other circumstances, local bodies might be able to look to states and the federal government for monetary help but they have their own issues during this economic crisis.

I would love to see experts speculate on where this all will end up in five or ten years. Are we legitimately in danger of a lot of municipal governments defaulting? If so, how will this affect local services? How will residents respond to what will be more fees and taxes even as their services might decrease? Could the wealthier people respond with their feet and move to more financially solvent communities?

Odd statement: “Only 2.8% of your property tax bill goes to DuPage County”

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Two days ago, our household received the quarterly newsletter from DuPage County. While the front page of the DuPage Review trumpets “DuPage County Cuts $10.7 million from 2012 Budget,” the back page had this interesting statement: “Did You Know? Only 2.8% of your property tax bill goes to DuPage County.” See the figure below:

What exactly is the County trying to convey here? Pointing out this figure means: (a) you should not be concerned at all since this is a small amount (b) you should not care much if we ask for a little more (c) you should be impressed that we use such a small percentage, particularly compared to other taxing bodies. .

The focus here is on the small number (only 2.8%!) but it might also lead a lot of people to ask what my wife asked: why does the County need 2.8% anyway? The rest of the newsletter offers some hints: taking care of county roads, dealing with stormwater, and facilitate things like senior services and electronic recycling. The county budget for 2012 is $434.7 million and you can find more specific details here.

I wonder how many DuPage County residents know what goes on at the county level. Outside of occasional local issues, how many people actually have to be concerned about what the County does? Add in the fact that Illinois has the most local taxing bodies in the country (outpacing second place Pennsylvania by over 2,000) and it can be really hard to figure out how the County, township, Forest Preserve, Park Districts, municipalities and the other taxing bodies fit together and utilize property tax money.

Residents still benefit in paying taxes for schools even with no children

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These days, you can find plenty of people who make this argument: I don’t have any children in school so why should I have to pay high property taxes? A sociologist counters this common argument:

In their study, Neal and co-author Jennifer Watling Neal, assistant professor of psychology, analyzed the data from a Gallup survey of more than 20,000 people from 26 U.S. communities from Michigan to Florida to California. As part of the survey, participants were asked how satisfied they were with their communities and to rate the overall quality of their public schools.The researchers found a strong relationship between those who were satisfied with their communities and quality schools. This finding was not affected by gender, age, race, employment status or whether the participant owned or rented a home or had children in school…

Neal said this is likely due to two major reasons:

  • Public schools offer amenities to the entire community such as adult education courses, after-hours computer labs, workout facilities, auditorium space for churches and other groups, and more.
  • Public schools have the more indirect benefit of promoting relationships among neighborhood residents. These relationships lead to issues getting solved – such as broken streetlights, unplowed streets or crime problems – that benefit everyone.

Additionally, good schools are often seen as markers of a good community. I think this is often tied to ideas about class and race: if the schools are good, people think this is due to being in an upscale, quality community.

I would be interested to see if these researchers controlled for the socioeconomic status of the community. Are communities that are wealthier more or less likely to reject additional funding for schools? Are residents who are more able to pay for increased education funding the ones who are most resistant to it?

If all residents do benefit from better schools, what is the best way to pitch educational funding increases? Perhaps you could throw a study like this at them but I don’t think that would be enough…

KPBS San Diego on Proposition 13

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The great property tax revolt of 1978 in California has had a big impact on American politics. KPBS in San Diego put together a number of reports on the history and legacy of Prop 13. You can also find a number of other interesting videos if you search YouTube. The Wikipedia entry gives a decent overview.

When I showed one clip to my American Suburbanization class, I was struck again by how much of the rhetoric from both sides matches current political discussions: a desire to cut lard from the government and save the middle class versus providing needed money for social services and asking people to pay their fair share. This is an issue that still hasn’t been decided and is particularly pertinent today in an era of budget shortfalls.

The possible shifts in the foundations of tax bases

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Governments are dependent on tax bases for revenue. Hopefully, the tax base meets financial expectations and if things are going well, the taxes bring increased revenues, leading to more spending (and saving?) possibilities. But what happens when tax bases decrease?

This is an issue facing a number of government bodies and a number of taxes are affected:

-I was reminded of this again by this piece (h/t Instapundit) which suggests that increasing income taxes on the rich may not work out in the long run as economic troubles can greatly affect the incomes of the rich.

-Property taxes are affected by the assessed value of properties. If property values are down, such as in this economic crisis where it appears housing prices will be depressed for quite a while, then tax revenue may go down. (Or they may not – can local communities really afford to have less money coming in through property taxes?)

-So called “vice taxes,” on things like cigarettes, may be self-defeating: as people smoke less, the revenue will slowly dry up.

-The gas tax will be interesting to watch in future years: as the government pushes for more electric vehicles and with higher gas prices, this could mean that less gasoline is purchased. Money to pay for new roads and maintenance will have to come from somewhere.

A couple of questions about these different taxes:

1. Is the uncertainty about tax revenues in the last few years really that different from other points in history? If not, what have people done in the past?

2. Might we expect to see some major changes in taxation in the coming years as governments look for different (perhaps more stable?) or more sources of revenue?

3. How are sales taxes or VATs affected by economic crises?

(The realm of taxes is not my area of expertise but I do know the importance of some of this to communities: limited or decreasing property and sales taxes lead to big issues with budgets which then affect services which then angers residents.)

A few comments by Joel (3/31/2011):

One way that cities and states are seeking to increase collection revenues is through enhanced sales tax enforcement.  As Amazon is finding out, for example, governments have their ways of pressuring online retailers.

Of course, to a certain extent, this is simply turning into an arms race, with businesses increasing their lobbying budgets and hiring more tax attorneys.

The new Congress marked by more suburban, rural, and small town members?

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Joel Kotkin continues to make the case that the political changes in the new Congress are marked by a city/suburb split. Kotkin explains this shift:

This contrasts dramatically with the last Congress. Virtually its entire leadership — from former House Speaker Nancy Pelosi (D-Calif.) on down — represented either the urban core or affluent, close-in suburbs of large metropolitan areas. Powerful old lions like Reps. Charles Rangel (D-N.Y.) of Harlem, Henry Waxman (D-Calif.) of Los Angeles and Barney Frank (D-Mass.) of Newton, an affluent, close-in Boston suburb, roamed…

The new House leaders are, for the most part, from small towns, suburbs and interior cities. Most GOP pickups came from precisely these regions — particularly in the South and Midwest.

Kotkin then goes on to talk about the possible consequences of the change in leadership:

This change in geography also suggests a shift in the economic balance of power. The old Congress owed its allegiance largely to the “social-industrial” complex around Washington, Wall Street, public-sector unions, large universities and the emergent, highly subsidized alternative-energy industry. In contrast, the new House leaders largely represent districts tied to more traditional energy development, manufacturing and agriculture.

The urban-centered environmental movement’s much-hyped talk of “green jobs,” so popular in Obama-dominated Washington, is now likely to be supplanted by a concern with the more than 700,000 jobs directly related to fossil fuel production. Greater emphasis may be placed on ensuring that electric power rates are low enough to keep U.S. industry competitive.

The Obama administration’s land-use policies will also be forced to shift. Sums lavished on “smart growth” grants to regions, high-speed rail and new light-rail transit are likely to face tough obstacles in this Congress.

Kotkin is not alone in discussing these potential consequences: the Infrastructurist has been tracking for a while how Republican control might threaten plans for high-speed rail, infrastructure, and green programs.

But I wonder if suburban/exurban/more rural Congressmen will really express these kinds of political sensibilities in Congress. Traditionally, local suburban politics has been marked by a lack of partisanship (with many municipal races not involving the two major parties) and an emphasis on issues like keeping property taxes low, ensuring property values, and keeping crime rates low. Do these concerns translate to a national level where everything becomes a political skirmish and politicians consider the national budget, defense spending, entitlement programs, and so on? Can Kotkin or others point to a current or past member of Congress who has exemplified a suburban or exurban approach to national government that is distinct from an urban approach?