Property Tax Cut Lets Count The Teeth In States Gift Horse
Written by Michael Lewis on April 26, 2007
By Michael Lewis
Hands outstretched, we eagerly await our cornucopia from the Legislature: smaller local government and lower property taxes. Hooray!
We love something for nothing, be it a tax cut or the ability to move our property tax-cap savings from house to house. The more the merrier.
The goal is admirable, but is it all free? Despite legislative unanimity that big trims are essential — carving into local governments, not the state — what are likely to be the real costs, and do the savings outweigh them?
The short answer is, nobody knows. No one offers impact studies. They can say how much might come out of one government pot or another or how much less taxpayers might pay initially, but they do not detail the reverberations throughout our economy of those changes.
The plan itself remains a moving target. As the May 4 end of session nears, new iterations are rolled out daily without the vital analyses that could guide decision-making.
Even the Governor’s Council of Economic Advisors is silent — it went dormant when Charlie Crist replaced Jeb Bush in the governor’s office.
So questions of who will benefit how much and who will feel how much pain in any of the evolving cascade of tax-cut actions are destined to remain open until the Legislature acts.
Then, the vital questions will echo.
Start with a big one: What would be the total impact on Florida’s economy of each plan?
One might cost local governments $5.8 billion the first year, another $1.1 billion. Taxpayers theoretically would save identical amounts. But what other changes would follow?
If local governments did cut spending, fewer dollars would circulate and fewer people would work, not only in government but in spinoff jobs. Would consumer and business spending of tax savings compensate for all of that?
The Miami-Dade County Commission this week was to consider a job freeze to prepare for taxes it could lose. But a freeze doesn’t cut spending: It just means no additional people will be working, not that present employees won’t get big raises and more benefits.
Would governments sustain current spending by gobbling up cash reserves? In any economic downturn, might that push cities toward bankruptcy? Remember, a decade ago, the City of Miami ate up its reserves and nearly went broke.
Alternatively, governments might cut only where few would protest. They might stop building roads and water and sewer infrastructure, annoying work that digs up rights-of-way but upgrades quality of life and paves the way for inevitable growth. Few scream for sewers, but without them, a community stagnates.
Some plans exempt redevelopment districts. Could an entire city become a grid of appointed redevelopment bodies that could substitute their taxing and spending for overall city efforts, circumventing the tax cut?
If there is a way to tax and spend, government can find it — which might in fact be vital for community wellbeing. Thus, an unintended consequence of tax-cut legislation might simply be to place appointed officials rather than city commissioners in the tax-and-spend role.
So any massive change in taxing rules could affect everything else.
Portability of tax breaks that reduces tax collections could, for example, eat into school funds, decreasing what’s available even as the state tries to bolster education — another unintended consequence.
Yet another: Though legislators aim to shore up an eroding residential real estate market, portability could introduce new wrinkles.
For example, one resident might use tax portability to stave off higher taxes of $8,000 a year when moving and thus could afford to bid $50,000 or $60,000 more for a home than an outsider who has no such savings. How might that affect the willingness, or ability, of outside buyers to enter Florida?
A 5% or 10% advantage to a resident is a powerful wedge. In a state that depends heavily on visitors who eventually buy homes and then become major investors, is disadvantaging outsiders wise?
The parallel is a sales tax increase, a part of some plans for property tax cuts. A massive sales tax hike would collect more from visitors and thus lighten residents’ overall burden. But is it smart to lean on visitors when they are so vital? If a sales tax increase slowed tourism, collections from sales taxes to replace real estate taxes could slide and the whole plan could fail.
Higher sales taxes could also hammer retailers. With sales taxes near 10%, tax-free Internet purchases would become alluring, as would out-of-state buying trips, and Latin Americans who flock here to shop would find us less attractive.
Another potential consequence: Governments might create fees and charges to replace property taxes. It could be as simple as high fees for copies of government documents or massive fines and penalties for everything imaginable. If there’s a way into your wallet, government can find it.
How about the property tax cut itself? Owners would save, but how about renters? Is it certain that all landlords would cut rents if they paid less tax? Or would investors who reluctantly rent at below carrying costs condos they’d hoped to flip for big profits cut their losses by pocketing the entire tax savings?
When property taxes fall, the owner’s costs fall and thus the true economic value rises. So do prices. If assessments eventually reflected that true value, property collections would rise again even though the tax rates themselves were reduced.
It’s not entirely clear who would win, and who would lose, in any of the tax change plans that on the surface appear to be bonanzas for all. Underlying all is the key question: Would they improve or lessen the state’s ability to attract investment?
They might help, they might not. Without studies, it’s a crapshoot without odds.
A two-month legislative session compresses everything. Vital deliberations become overnight negotiations. Talk replaces studies.
So when legislators hand us our tax-cut bonanza and head home, we may be forgiven if we look the gift horse squarely in the mouth and start counting teeth that the Legislature didn’t examine.
Then, we can pray they don’t come back to bite us.