Sunday, May 14, 2017

 

Homeownership and Angry Voters


I’ve been thinking a lot about Matthew Desmond’s latest piece in the New York Times.  In many ways, it’s a followup to his outstanding book Evicted.  It traces the regressive effects of housing policy on the distribution of wealth among families, with a particular focus on the mortgage interest tax deduction.

Desmond points out, correctly, that the impact of the deduction is higher as the size of the mortgage gets bigger, up to a million dollars.  Home buyers factor the deduction into buying decisions, which means that it acts effectively as a price support for upper-middle-class homes.  That’s great if you already own one; folks who do can be expected to fight vigorously any reduction in the deduction.  But if you don’t, it amounts to a tax giveaway to people who make a lot more money than you probably do.  It only works because it’s largely invisible.  The folks who get it don’t think of it as government aid, and the folks who don’t get it are often only vaguely aware that it exists.

There’s a lot of truth in that.  In fact, it gets worse.  As William Fischl pointed out over ten years ago in The Homevoter Hypothesis, for most homeowners, their house is the single largest value item in their portfolio.  They’re well advised to do what they can to maintain or increase its value.  While it’s easy, and often accurate, to criticize NIMBY behavior, it comes from somewhere.  If you look at most homeowners as undiversified investors, some of their behavior makes sense.  The Great Recession taught us what happens when home values go “underwater” -- it’s not pretty.  Attacks on the mortgage interest deduction, or even the property tax deduction, can be expected to generate waves of righteous anger among people who made major life decisions under one set of rules, only to see those rules change..  

Property taxes seem to be more despised than other forms of taxes, and it makes sense that they are.  They don’t vary according to ability to pay.  I’ve had years with across-the-board pay freezes, but my property taxes went up anyway.  Given how illiquid real estate is, property tax increases can feel like theft in a way that income tax or sales tax increases often don’t.  Income taxes vary with ability to pay, and they often get deducted from paychecks before they’re even seen.  Sales taxes are more visible, and regressive, than income taxes, but it’s still possible to calibrate one’s own exposure to them.  If I live where I live, and my taxes abruptly go up by a substantial amount in a year when my salary is stuck, I just have to suck it up.  

To the extent that local governments are funded through property taxes, that spells trouble for public higher education.  At least with K-12 districts, as Fischl pointed out, there’s a correlation between the perceived quality of a school district and the home values there; savvy advocates can sell property tax increases that fund K-12 as a sort of property value insurance, to a point.  (If the taxes get too high, of course, they can reduce the value.)  But the same doesn’t hold at the county or state level.  

Hostility to taxes is part of what has been behind the shift of costs from taxpayers generally to students specifically.  Higher ed has the mixed blessing of multiple revenue streams, which makes it easy for certain parties to free ride on others.  

Shifting our funding from property taxes (directly or indirectly) to income taxes would usually imply a shift of venue.  With some exceptions, income taxes are usually collected at the state level, rather than the county or municipal level; property taxes tend to be much more local.  To the extent that community colleges are local creatures -- more so than any other sector of higher education, though varying by state - that makes sense.  Moving the funding stream “upward” would also involve moving control “upward,” which brings issues of its own.  (I’ve worked in both systems.  In Massachusetts, there is no local funding; only the state makes an appropriation.  In New Jersey, the state and the county are supposed to share the appropriation.  Neither is foolproof.)  

The great tragedy of community colleges as public goods is that they don’t come close to capturing the value of what they produce.  They aren’t supposed to; that’s the point of a “public” institution.  But it means that they’re constantly scrambling to prove a small fraction of the value they actually provide, so they can keep providing it.

Wise and worldly readers, do you know of any scholarly studies showing the tax system most likely to lead to sustainable and adequate funding?  I haven’t found one yet, and Desmond’s piece suggests that too cavalier an approach could lead to some very angry voters.

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I don't recall any studies like that, but I'm no political scientist or economist. I do know the systems are all over the place. Our public schools are funded by a mix of property taxes and sales taxes, including local-option sales taxes. The latter seem to be favored as less painful because they are less obvious, but bonds are paid by a dedicated millage.

Property taxes have all of the problems you list, but they do hold up during a major recession as long as the homeowner is on the property. However, things change once the mortgage goes into default. I don't think the bank has to start paying the taxes until they own it (post foreclosure). There can be years when taxes get the very last lien on the property and there is seldom money left over to pay them if the bank buys it for the price of its mortgage debt. Even the IRS gets hung out to dry in that case.
 
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