Tuesday, January 22, 2008

The Daily Herald does it again in this OPED piece. It is a must read.

Tuesday, 22 January 2008
Should property tax hikes be limited?
Daily Herald
If the people were asked directly about property taxes, we're willing to bet that they'd tell their representatives to limit increases by law, just as California did in 1978 with Proposition 13.

Plenty of Utah homeowners experienced "sticker shock" last year when they opened their property assessments or tax bills. Their reaction has just as much to do with philosophical questions of fairness and government power as they do about dollars.

California's Proposition 13 required that "the maximum amount of any ad valorem tax on real property shall not exceed 1 percent of the full cash value of such property." Its passage resulted in a cap on property tax rates in the state, reducing them by an average of 57 percent.

In addition to lowering property taxes, the initiative also contained language requiring a two-thirds majority in both legislative houses for future increases in all state tax rates or amounts of revenue collected, including income tax rates.

The measure received an enormous amount of publicity throughout the United States, and its passage presaged a "taxpayer revolt" that contributed to the election of Ronald Reagan in 1980. Thirteen similar measures passed that year alone.

Behind Proposition 13 was the sentiment that older people should not be priced out of their homes through ever-rising taxes. It has been called a "third rail" (meaning untouchable) in California politics, and it is politically risky for any politician to attempt to change it.

We wonder whether Utahns would support a similar measure. Our guess is that they would in large numbers.

Utah, for all the rapid changes of recent years, cherishes its frontier spirit. People moved out here, whether on a wagon in 1847 or in an SUV in 2007, to control their own destinies. But no person can do much about many of the factors that affect the value of his home, or the resulting tax penalty imposed by government.

A home is an investment, the largest that most people will ever make. Yet, unlike virtually any other investment -- whether gold or euros or securities or stocks -- the government can tax your property higher year after year based on an alleged "market value" that is influenced by commercial real estate professionals. Never mind that the real estate industry benefits by increasing values.

With other investments, you pay taxes after a transaction. You can hold the investment without tax until the day you sell. You don't pay more because somebody says it's "worth more" while you're holding it, just because you were wise enough to buy when the price was low.

When you make a profit on your investment, then you pay tax. And that is fair. But ongoing property taxes are fundamentally unfair in this respect. They go up even though no transaction has taken place.

It was different in past centuries. Property owners were the wealthy, and property tax was a way of generating revenue in a mainly agricultural economy. Today, it's hard to make a case that most homeowners are wealthy. If anything, a home is a money pit. The last thing most of us need is a mid-stream tax hike.

Most taxes are based on a transaction. Not so with a house you bought 20 years ago and raised your family in. You pay the government more money just because. You pay just because you made an investment and the government wants a piece of it. You pay just because you were wise enough to look to your retirement future.

If you sell your home for a big profit, it's fair that the investment income be taxed. But under the current system, the government wants your money in advance. And if your income doesn't rise with rising taxes, you can literally be taxed out of your home.

Some suggest that if sales tax arrived in annual bills, to be paid in lump sums, property tax would quickly slide to third place on the list of detested burdens. But this makes our point: Each instance of tax is based on a specific transaction, and everybody can do the math. There's no dispute about the value of a sales transaction.

By contrast, an increase in property tax is based on nothing but opinion. It's like paying sales tax based on what the government thinks you might spend on goods and services, or like laying a tax on the stock certificates in your bank's safety deposit box.

In this view, sales taxes are intrinsically fair. Property tax is intrinsically unfair -- an increasing burden placed upon people for no other reason than the fact that they hold an investment over time.

Some Utah lawmakers are working up bills to cut property tax or ease its impact. Sen. Wayne Niederhouser, R-Sandy, has proposed that government must hold an election to authorize any tax increase over the rate of inflation. Rep. Wayne Harper, R-West Jordan, has proposed that assessors in the 10 most populous counties use a computer-assisted mass-appraisal system to update values.

But these proposals do not address the fundamental fact that a home is no different from any other long-term investment. They would maintain the property tax just because that's what we've done for decades, not because it's logical.

The Citizens' Coalition for Tax Fairness advocates a system based on purchase price in a transaction, not some amorphous market value. The group, made up of several Utah grass-roots organizations, would put the brakes on assessment increases.

We think it's time for a new look at property taxes. Perhaps they are an outmoded concept. The state Legislature should refer this matter to the people for advice. It doesn't hurt to ask, does it?


ozboy said...

Isn't the "Daily Herald" a Provo newspaper? If so, this is a very pleasant surprise coming from that part of the state, especially considering the slavish praise the Tribune and Ogden's Standard Examiner has been heaping on the idea of increasing taxes.

I think there is two pertinent items this article leaves out of their otherwise excellent piece.

One is the fact that in addition to the yearly property taxes which are predicated on some real estate professional's opinions, you also have to pay capital gains taxes on any profit if you ever do sell your home for more than you paid for it. Otherwise you get double taxed on the same investment.

The second is that you get no refund for elevated "opinion" taxes if you end up selling your home for less than what they have appraised it for in the preceding years. For example, say my property is appraised at $400,000 and they tax me on that amount for five years after which I end up selling the house for $300,000. That means for five years I have paid property taxes on a $100,000 "opinion" value which I never had and will never realize.

Don't seem very fair or American to me.

Minor Machman said...

There is much they could have said like the unexpected advantages of tax capitalization (a test question) and spending limitations on local governments along with budgetary discipline. Plus many other things but, they at least understand the concept and recognize another way of looking at the problem. And THAT is a major accomplishment. And I fully credit The "immigrants and refugees from the left coast" for spreading the word into Zion. Without out-of-Staters we would still be light years behind and paying for it. As it is we have a shot at making a change to acquisition value or baseline taxation with caps for inflation and rollback provisions within two years. Still much to do though. So let's all send in those emails and letters to our legislators weekly. They are not talking about property taxes as a major issue yet. It is up to all of us to change that.

Bonnie Lee said...

Well now MM, if'n it wern't for them damn "Left Coasters" movin in here and runnin up the property values we might not have this problem to begin with.

Minor Machman said...

Good point "Bonnie Lee"! So it is only fair that they contribute to a meaningful solution to a problem they unintentionally created then, the way I see it. And besides some of them just came back to family roots and property they already owned. And some of them are also very active in many worthwhile activities too. I won't mention names. Wouldn't want anyone to get a big head or anything....

But thanks Bonnie Lee---good point.

Viktor said...

Two points:

Ozboy, in addition to what you wrote above about double taxation on your home investment, I would like to point out that when you do eventually sell your property (investment) the taxes you have paid over the years cannot even be used as a deduction. With any other investment that requires on going maintenance (property tax) you can expense those costs.

And Bonnie Lee, even if all those California folks hadn't moved in, I am confidant enough in our "leaders" to think they could have found a way to shear the sheep anyway.

Marc Goldstone - Arizona Tax Revolt said...

My recommendation - Find a solution that the Realtors and Homeowners can agree to. And that is "Baseline" not acquisition since the latter assures that our children and grandchildren will needlessly see much higher taxes.

If you want to flood the government with property tax revenue a couple of decades down the road like has been the case in California, acquisition is what you want! Perhaps this is why if there is to be property tax reform government will pick acquisition every time!

Minor Machman said...

Thanks Marc. You are very welcome to comment on our forum. And if I can ever get your briefing slides to download I will run them for all to consider and become acquainted with. Right now we are still trying to get legislators heads turned away from our current TNT system and open to new an better systems being installed all over the Country for the past 30 years. I for one am keeping an open mind on what is best and certainly "Baseline" seems to have its advantages over AV. But the paradigm shift away from TNT is proving hard to do in just a few short months. At took Jarvis 16 years. I hope to do it in less than two with lots of help - yours included. Namaste, MM