Wednesday, August 1, 2012
Property and Taxation
There's been some public discussion in a number of places about the levies coming up in cities around the country. This talk is not only about the worthiness of these efforts (or lack thereof), but about the levy process itself. At issue is whether those not owning property, and therefore not paying their share of property taxes and their associated levies, should even have the right to vote on taxing their fellow citizens. While having pointed out a number of occasions that many of us not currently owning property do in fact pick up some incremental cost in these taxes (for they cannot be honestly called anything else), I can easily understand and agree with the point of view of someone saying that non-owners do not bear the same burden. Something about the discussion kept nagging at me however, and I was forced to continue puzzling it out long after it ended.
The source of my discomfort was realized when I understood that levies, like property taxes themselves, are part of the over all annual tax burden that citizens in this country are extorted to pay under the threat of fines, seizure, and imprisonment at the hands of our own government (with the able assistance of its myrmidons at the IRS). As such there are advantages and disadvantages to the status that we hold where each form of taxes are concerned.
Earn a high salary and you are likely to pay a higher tax rate. Cash in stocks or sell property that those less fortunate don't own, and you'll pay a capital gains tax on the profits of such a sale. Die rich and you'll be hammered with a large estate tax to add insult to the permanent injury. In each of these situations however, the tax code (which started out at 504 pages and as of 2010 had grown to almost 72,000) is likely to provide you something in the way of a loophole or two if you've got a good enough accountant to find them. In other words, there is often an offset achieved in some part between what has to be paid and what gets a pass.
My discomfort was the dirty little secret that no one talks about when this disparity in taxes is discussed .... the Mortgage Deduction. You see while a homeowner makes a mortgage payment and a lessor his rent, the interest on a home mortgage is tax deductible. For those buying the biggest place they're allowed to by the company financing it, mortgaging as much of it as they can possibly get away with, and staying less than seven years in the home purchased; in fact most of what they will make in the way of a mortgage payments will be interest on the loan and therefore tax deductible. No part of the rental payment a lessor makes to his landlord during the same period will carry a similar deduction.
Imagine if you will that two people went to a car dealer to obtain identical new vehicles. Both handed over the same down payment money and both agreed to make monthly installment payments, but one purchased the vehicle and the other leased. The person leasing may have reduced his monthly payment through his down payment, but that money was now gone forever and at the end of the lease there will be nothing to show for either it or his monthly payments; though the payments themselves would be less. The person purchasing also reduced his payment through a down payment and established equity in his purchase. Monthly payments made, though higher, would increase the equity in the purchase. At the end of the loan, the purchaser would in fact own a car with some intrinsic value and the renter would own nothing.
Both would be freely made choices and the results of agreements fairly established however; in overall effect they would be virtually equal and neither would have the advantage. Now consider these two people and add in a tax break for the interest on a car loan and ask yourself if the deals are still equal and you are likely to conclude that they are not.
So when we go back and look at the overall annual taxes paid by the property owner and non-owner, we can see that the property tax burden of the homeowner could be offset in some part (if not all) by the savings obtained on the income tax side of the equation. The non-owner, while paying less of the property tax / levy burden; would pay a higher percentage of income tax on the money he earns, since there is no corresponding deduction to reduce their tax rate.
This is not to say that property taxes are not an egregious burden on citizens; and that the continuing and increasing abuse of levy requests aren't adding insult to injury. Living in a state that forces its residents to pay property taxes on vehicles before they can be legally licensed can't help but point that out to even those of us who rent. Understanding however that as a renter I am able vote on levies (turning most of them down by the way), still seems reasonably fair to me in spite of the limited impact I bear from from. After all, no one has yet offered me the chance to vote on limiting or removing the mortgage interest tax deduction and you haven't seen me bitching about it (even here).
One might even add that the practices involved with the mortgage interest income tax deduction, coupled to the government encouraged sub-prime lending practices under which most 'too big to fail' lending institutions operated, and fed to borrowing public who has been told for years to buy the biggest barn of a home that they could and mortgage it to the hilt because real estate is one of the best and safest investments that they can make; largely fueled the bubble whose bursting caused the current economic downturn.
And while there is still much discussion of government-subsidized refinancing for underwater mortgages which will further burden ALL TAXPAYERS, I haven't heard even one call to consider those locked in a lease and whose fortunes have likewise suffered. You know, it might just be that it's we who aren't paying our 'fair share' property taxes who should be righteously pissed off.