A tax on both their houses

December 8, 2011

By Gregg Easterbrook
The views expressed are his own.

New York Governor Andrew Cuomo just struck a deal with his state legislature for a long-term tax increase on the well-off, while California Governor Jerry Brown recently said he wants a November 2012 voter referendum aimed at raising the state’s top tax rate.

Conservatives predictably are in a tizzy, liberals in a transport of delight. Moderates might simply be glad to learn that California and New York are dealing with budget deficits on their own, rather than demanding a bailout.

Both states are moving to raise their top-rate taxes on personal income, making the rates border on confiscatory when one combines it with the federal and local taxes. Yet both are holding property taxes down. In June, Cuomo persuaded the New York state legislature to impose a cap on property taxes. California is entering its fourth decade of property taxes capped at a low level for most homeowners, under Proposition 13, passed in 1978.

Here’s the problem: Personal income is mobile — it can leave State A for lower rates in State B. Real estate cannot move: it must stay in State A.

Cuomo’s plan will raise the New York top rate income tax to 8.82 percent (a temporary “surcharge” about to expire was slightly higher). Meanwhile, across the state border, Connecticut’s top rate is 6.7 percent. For a well-to-do household, a move to the Nutmeg State might be very attractive.

On the other side of the country, Brown’s plan would raise California’s top rate income tax to a stunning 11.3 percent. Meanwhile, Nevada, right across the California border, has no state income tax.

But top earners may not have to actually uproot themselves to a lesser taxed state because courts can broadly interpret state residency rules. Former White House adviser Rahm Emanuel was able to spend many years living in Washington, D.C., and also satisfy the residency requirement for running for mayor of Chicago by telling a court he had “intended” to move to Illinois.

Think about a Hollywood mogul or Silicon Valley executive who makes $5 million a year, which would mean a $565,000 annual state income tax under Brown’s proposal. In theory, that person could buy a pied-ἁ-terre in Reno, use the address to stop paying California income taxes, and if pressed legally, say he or she “intended” to move to Nevada.

These New York and California examples assume that the rich will be completely honest with their taxes. But the higher state income tax rates are, the greater the incentive for a wealthy flier to hire a tax attorney who can make income appear to be earned in some other jurisdiction.

The actions by California and New York might bring a short-term revenue boost. However, long-term, high top-rate taxes may drive income to lower-tax states, leaving the Golden and Empire states worse off.

So, are the governors of two of the nation’s largest states crazy? No, they are pandering to the number-one voting bloc in the United States: senior citizens.

Seniors don’t pay much in income taxes. Even affluent senior citizens rarely reach top-rate territory for earned income. Instead, they tend to receive their income as interest, dividends and capital gains. But seniors do hold real estate, and complain vociferously about the property tax.

Last month the Pew Research Center reported that seniors are the best-off large cohort in America. Those over 65 years have a median net worth of $170,000, compared to $102,000 for those 45-54 — traditionally the peak earning years — and young adults have a median net worth of just $4,000. Seniors are also the only large group in the U.S. to receive federal income supplements via Social Security: an income-transfer program funded mainly by taxes on the young.

Political proposals to cap or hold down property taxes while raising top-rate income taxes sound like populist crusading against the rich. But this is just cynical politics, disguised as idealism.

Photo: Caroline Meeks, M.D., teaches a laughter therapy class to a group of seniors at the Clairmont Friendship Center in San Diego, California November 17, 2010. LAUGHTERYOGA REUTERS/Mike Blake

24 comments

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Mr. Eastbrook, you raise a valid point. The very well off can elect to hold official residence anywhere and can actually live somewhere else. So the State tax rate, as you say, is likely to be just a short burst of revenue. It also does appear to be pandering to Seniors. But actually it is not. In this climate of bipartisanship, you take what you can get and we can’t get a more progressive tax rate at the national level.

The real irony here is what federal Republican Senators and Representatives are doing with payroll and income taxes. Their actions would have you believe that they are willing to allow payroll taxes to rise but unwilling to let income taxes for the rich to rise. They are willing to cut government jobs at a time of high unemployment. At a time when the rich are doing very well and the 99% are hurting, their regressive policies are likely to hurt rather than help our economy.

The State policies are simply a response to the failure of the Republicans to do what is right for this country.

Posted by LEEDAP | Report as abusive

So true, LEEDAP. Nailed it.

Posted by chadem311 | Report as abusive

A good time to increase property taxes should be when the RE market starts appreciating again.

An increase right now would kill an already ill market.

As far as “intending to move” to another state, here in California the residence definition is pretty strict and no much of a way to escape.

Besides I would not move to the desert for 1% less taxes anyway and 10% is what we have been paying for many years already.

Posted by robb1 | Report as abusive

LEEDAP,

Republicans have passed a bill through the House that extends the payroll tax. Democrats may or may not go along with it because it includes allowing the Keystone pipeline to go forward. Something that would cost no money and create, at the minimum, tens of thousands of jobs.

As mentioned in the article the rich often times don’t pay taxes on “income”. Instead a tax increase on someone making over $200,000 raises the taxes of the boss of a 8 man company. It raises the taxes on a doctor whose income is delayed by years and comes with hundreds of thousands of dollars of debt as well. According to the CBO the effective tax rate of the top 1% is over twice as high as that of middle income earners. Paying twice as much for every dollar earned isn’t their “fair share”? Then what is? How much of their income do you think you are entitled to? It is their greed though right.

California and New York don’t have debt problems because of their inability to tax their citizens. They have an inability to control their spending. State/local government spending as a percentage of GDP for the state of California went from 17% in 2000 to 23% in 2009. Business has fled the state and yet they keep spending like nothing has changed.

Posted by AustinG | Report as abusive

“So, are the governors of two of the nation’s largest states crazy? No, they are pandering to the number-one voting bloc in the United States: senior citizens.”

Oh, please! Stop with the egregious senior-bashing already.

The fact is most property taxes now go to support school budgets, which are clearly out of control.

The reality is that anyone who is retired, regardless of income, shouldn’t have to be forced to pay taxes for educating our young anymore. There is NO possible way the elderly can benefit from educating them, which is the usual argument for property taxes to pay for schools.

Their time has come and gone. Leave them alone.

Old age is miserable enough as it is without being harassed by deliberate assaults from people like you.

If the elderly were all as rich as you claim, we would all be in the Bahamas, or at least someplace warm.

Your article is nothing more than pathetic racist (as in age discrimination) propaganda.

Posted by Gordon2352 | Report as abusive

CA and NY do not have income problems, they have spending problems. Rather than confiscating more money from the successfull citizenry, they should be cutting government spending.

LEEDAP – “The 99%” are “hurting”? Really? The 2011 Census Bureau classifies 1 in 7 Americans (46.2 million) living in poverty. Among those, 75% own a car, 66% have cable/satellite, 50% have Xbox or Playstation, 33% have a wide-screen or plasma TV.

Again, those who are “hurting” are not 99% but 14%. Remember, 91.6% of job seekers are currently employed. And among those poorest 14%, over half of them will drive their car to their apartment to watch ESPN and play Xbox on their wide-screen plasma TV. Even the poorest in the United States live a blessed life.

Posted by MickSmiley | Report as abusive

Since you brought up the subject of property taxes, and I mentioned that seniors should not be forced to pay for “free education” of the young once they reach retirement.

I want to extend this a bit further.

Not only do most of our property taxes go to support local schools, but most of that money is wasted anyhow, mostly to support teachers whose performance has deteriorated to little more than high-priced babysitters.

If you looked at teachers’ salaries and benefits on a “billable hour” basis, you would be shocked to see how much we are paying these people, for little discernible benefit to our economy.

We pay them a “yearly salary,” but they don’t work all year.

Not only do they “work” a very short day, they are off during the summer, all major holidays, and various school breaks during the year. Nor do they come trudging home from class with piles of homework to grade, or spending time with kids having trouble in school.

Plus they now have “cradle to grave” retirement funds.

Once upon a time it used to be that teachers worked very hard and were not paid for the effort they put in, but all of that has changed.

Now they are protected by their unions and barely work at all — if you doubt that, try looking at how the US educational system measures up to the rest of the world, and how hard they fight to keep it that way.

So, first fix the problem, then we can talk about property taxes, whether people are retired or not.

Let’s look at exactly HOW our property tax

Posted by Gordon2352 | Report as abusive

One final comment. Your article reads like some sick conspiracy theory of the elderly to overthrow society. You really need help.

Posted by Gordon2352 | Report as abusive

Alright, just one more comment on your data and choice for your source of data.

You state that “Last month the Pew Research Center reported that seniors are the best-off large cohort in America. Those over 65 years have a median net worth of $170,000, compared to $102,000 for those 45-54 — traditionally the peak earning years — and young adults have a median net worth of just $4,000. Seniors are also the only large group in the U.S. to receive federal income supplements via Social Security: an income-transfer program funded mainly by taxes on the young.”

(1) The Pew Research Center is so liberally biased their data is worthless. You might as well be using data from Wikipedia.

(2) Comparing seniors “net worth” with those in the 45-54 year old range is like comparing apples to oranges, and including the net worth of the young is too ridiculous to even comment on in any rational way, since these age groups have little in common in terms of net worth at their different stages in life for a multitude of reasons. If I have to explain why, you shouldn’t be writing this article (which is my opinion anyhow, since you are obviously not qualified to do so).

(3) Social Security was set up as a “pay as you go” insurance program, which is why the young are paying into it for themselves — NOT THE ELDERLY. The fact that the government is using their current taxes to fund the present program is the result of government manipulations of the fund for all sorts of reasons over the years. So it is a deliberate lie to state the young are paying the retirees benefits, because those were already paid by those retired people into their individual funds over the years as they worked. The problem is with the government mishandling of Social Security, which is not the fault of either young or old, both of whom are getting cheated.

PLEASE do everyone a favor and stop writing about things you obviously know nothing about.

CPA/MBA

Posted by Gordon2352 | Report as abusive

The top 1% pay lower overall tax rates than the top 10%. And overall, rates are pretty flat:

http://economistsview.typepad.com/econom istsview/2009/04/just-how-progressive-is -the-tax-system.html

Posted by NoeValleyJim | Report as abusive

The elderly benefitted from free education paid for by others back when they were young. UC tuition used to be free. People retiring today in California benefitted from one of the best educational systems in the whole country when they were growing up.

Now that it is their turn to pay up, they claim that it is not fair for them to pay to educate young people? The Baby Boomers are the most selfish generation in the history of mankind.

Posted by NoeValleyJim | Report as abusive

There are simple reasons why politicians might be more inclined to pander to seniors these days than previously (and note, I respect seniors as I respect all people):

1. Retired people are more likely to vote than working people,

2. Changing demographics mean there are relatively more retired people now.

Posted by matthewslyman | Report as abusive

The worst aspect of Proposition 13 is that the assessed value of a house is frozen at the price at last purchase. A young family paying tax on a $1,000,000 house might live next door to an older couple with higher income and a paid-off mortgage on an identical house. The older couple will pay tax on a $200,000 house. The young family is paying most of the property tax for their better-off neighbors.
With this entitlement in place, people wanting to make a career and have a family are better off leaving California.

Posted by Scientist1 | Report as abusive

I’m so sick of people bashing teachers because they get Paid well and don’t work all year. Those teachers are personally responsible for up to 38 kids in a class in some cases. I’ll bet most of you wouldn’t even last 30 minutes let alone actually teach. You want to cut the cost of education. Stop trying to put Severely Autistic kids in the regular Ed Classes and bring back tracking. It worked. We have dumb’d down America because now everyone gets a participation Ribbon and no one is “Allowed” to fail. Wake up for gods sake. California Public schools are not what they were(putting it very nicely) and rich people there now send their kids to private school which cost a lot more than a public education. The only ones who get cheated are the poor and middle class. Looks like nothing changes.

Posted by IDONTGETIT | Report as abusive

“Their time has come and gone. Leave them alone.
Old age is miserable enough as it is without being harassed by deliberate assaults from people like you.”

Speak only for yourself. My time has NOT come and gone and life is NOT miserable. Why shouldn’t seniors contribute to the cost of education for their grand kids? After all, those kids parents are paying for the senior’s social security and medicare.

Posted by mregl | Report as abusive

“The reality is that anyone who is retired, regardless of income, shouldn’t have to be forced to pay taxes for educating our young anymore. There is NO possible way the elderly can benefit from educating them, which is the usual argument for property taxes to pay for schools.”

The young people you don’t want to educate are the people who will be paying your Social Security (SS) benefits. Educated people earn more money and pay more SS taxes in absolute dollars. This doesn’t affect you directly, but it does contribute to the solvency of SS, which is absolutely in your own interest.

Perhaps just as importantly, plenty of people who saw no direct personal gain paid to educate you when you were young. Why do you feel as though you should be given a free pass after you’ve gotten yours?

Posted by wilsedw | Report as abusive

You don’t have a clue about what you are writing about.

Property taxes in states without an income tax are extremely high for seniors. Texas and Florida are prime examples. Yes the amount is capped, however, that absolute amount forces many seniors to sell their homes once their retirement income kicks in.

Then add in all the nuisance taxes that Texas and FL have adopted and guess what? It all adds up to the levels in high income tax states and then some for a border defending, medicaid give away state like Texas.

Get your facts straight before you write about seniors with a broad brush.

Posted by wesatch | Report as abusive

Another thing. The statement:Last month the Pew Research Center reported that seniors are the best-off large cohort in America. Those over 65 years have a median net worth of $170,000, compared to $102,000 for those 45-54 — traditionally the peak earning years — and young adults have a median net worth of just $4,000……

So what. On its surface its inflammatory. Ask the average senior what their net worth was as a young adult and at 45. You will get a much different picture.

Maybe seniors have worked all their lives, saved their $$ and paid off their mortgages. Perhaps these poor other disenfranchised folk should do likewise.

You are perhaps the worst columnist I have read in 10 years regarding your obvious bias. Get a real job.

Posted by wesatch | Report as abusive

This has to be one of the most ill thought out pieces I’ve ever read. It’s so bad I’m not sure where to begin. First, it’s a bit misleading to say that property taxes are capped anywhere. As far as I’m aware what is capped in many states are property tax rates and property tax increases not the amount of tax paid itself. This was done with a very important, and I believe fair, purpose in mind. It prevents people from being taxed out of their homes. For those of us who live in areas with highly volatile real estate prices it is not unrealistic for the value of one’s home to double, triple or even more in a few years (in 2007 my home was worth more than five times what I paid for it in 1999). Very few people are capable of paying double, triple (or certainly five times) their property taxes within ten years of buying their home. If my state did not have a cap on property tax increases, I (and many of my neighbors) would simply have had to sell our houses. There’s just no way I could have afforded to pay $30,000 a year in property taxes, nor could many of my neighbors, particularly the one’s on a fixed income.

The idea that raising income taxes on the wealthy will cause wholesale flights of the well-to-do to neighboring lower tax states is an old and tired one. Certainly it is not worthy of a column. Had you presented some actual evidence that this really occurs this might have been a worthwhile effort, but instead you simply rehashed the tired old argument with no supporting evidence whatsoever. To boot there are some obvious logical errors with your argument. Your example of the rich New Yorker moving to Connecticut is wrought with logical flaws. If New York were to attempt to increase tax revenue by a similar amount through property taxes what would prevent the same New Yorker from selling his New York property and moving to Connecticut to avoid the property tax as you suggest they might do to avoid the income tax? And while Nevada might be “right across the California border”, it’s also over 200 miles from Silicon Valley. Property values in Silicon Valley are astronomical for a reason, people like living near where they work, not a four hour drive away. And, as noted in one of the other comments, residency rules regarding state income taxes are likely not generally as lenient as those regarding running for public office. ‘Intending to move to Neveada’ would probably not hold much sway with the California department of revenue.

Property taxes are easily amongst the least fair of all taxes. There are generally two schools of thought regarding fairness in taxation. One proposes that taxes should be levied based on the individuals use of government services, those who use more services should pay more taxes. While it sounds fairly reasonable it turns out to be utterly infeasible in practice for two reasons. The first is that it’s nearly impossible to determine how much government service an individual uses. What share of the defense budget is an individual responsible for? Does it depend on wealth? The wealthy certainly have more at stake (before anyone mentions it, we all have our lives at stake so that basically drops out of the equation) to defend. These discussions quickly become hopelessly subjective. But the real fatal flaw in this doctrine is that many people simply cannot afford to pay for the services they receive so asking them to pay for them is meaningless. Which leads to the second idea that people should pay taxes based on their ability to pay. The primary flaw with property taxes is that the value of one’s home is not a reliable indicator of either one’s use of services or one’s ability to pay. Retirement or unemployment can reduce one’s income by an order of magnitude, yet the value of my home remains unchanged as do my property taxes. There are homes in my neighborhood that house four adults of taxpaying age, yet they pay the same property taxes as I do as a single person living alone, making their property tax rate one fourth of mine. Property taxes pay for services that are generally enjoyed by individuals such as education, emergency services and police. Why should these taxes be assessed based on residences rather than individuals?

Your statements regarding seniors’ wealth and social security are incredibly absurd. Is it not pathetically obvious that people will tend to accumulate wealth as they age? The comments regarding seniors’ wealth seem particularly out of touch considering the recent news concerning the National Academy of Sciences formula that places 18.6% of those over 65 (6.8 million people) below the poverty line. For the majority of middle class seniors the bulk of that $170,000 median net worth is their home, which they spent 30 years paying for, the thing that prevents them from dying from exposure. Raise their property taxes and you’ll likely put many of them out on the street or at least make it impossible for them to afford food and medicine. This was a truly shameful article.

Posted by jtfane | Report as abusive

I’m not an US citizen so I’m not familiar with the subtleties of the US taxing system but the population is getting older in many more places so this is something we must deal with.
Actually the real problem is not that we are getting older.
Its how getting older changes our mind set.
Some of us start to become more self centered and less inclined to accept alternative points of view.
Even more important we forget that our past decisions shaped the current situation, with goods and bads. So our insistence that we are entitled to the benefits of retirement and that we should be insulated from the effects of our bad decisions is rather callous.

Posted by BetterFailling | Report as abusive

The top 1% pay lower overall tax rates than the top 10%. And overall, rates are pretty flat:

http://economistsview.typepad.com/econom istsview/2009/04/just-how-progressive-is -the-tax-system.html

Posted by NoeValleyJim |

The CBO gets their data from the IRS. How does this other person get her data on what the “rich” are taxed by their state and local governments? Taxes are different state to state and some states have no income tax at all which requires no reporting. So how does she get reliable data on them?

Consumption taxes certainly hit the “poor” harder than the “rich”, but those are generally offset by property and other taxes. Plus according to her graph the total taxes paid by the top 1% on federal, state, and local taxes is less than what the CBO says the top 1% pay on just their federal taxes. For my specific situation the CBO numbers seem to be more accurate, though whether that is an anecdote or not is unknown.

I basically agree 100% with your other post. Seniors who complain about paying for the education of young people today while having gotten the same deal themselves seems strange. Doublely so when you also include the fact that they essentially live off of the contributions made to Social Security and Medicare that the parents of those kids make. I am sure the parents wouldn’t mind relieving the burden the seniors have in paying for education if they could also be relieved of the burden of paying payroll taxes.

Posted by AustinG | Report as abusive

Just a quick response to the rebuttals to my comments:

@AustinG, you seem to take the facts and skew the conclusion. Your most salient point that CA spent 17% of GDP in 2000 and 23% in 2009 is important and is being corrected. But you fail to consider the growth of the tax base from 2000 to 2007 as property values rose, which takes time to correct as painful spending cuts adjust to the dramatically shrunken tax base after 2008. During this correction period the state must make proportionally greater expenditures for education, it’s greatest single expense, to keep per student benefits from dropping below there already pathetic levels.

However your concern about the tax burden of the rich versus the 99% doesn’t even get the facts right. Let me just say that everyone’s first $50K is taxed the next income brackets are more progressively. So every dollar is not taxed at twice as much. Nice try. But even if it were, most people would agree that a progressive tax rate is more fair, so I am curious to know why you don’t think it is.

As for businesses leaving the State, I can assure you, that is correct. I know several people who took their companies out of the state and found much greater prosperity. However, you fail to consider that California is the home to Venture Capitalists and other entrepreneurial wellsprings. I’m pretty sure that except for 2008 and 2009, California creates more jobs than it looses. So again, your facts are right, but your conclusion that Government spending is the problem just doesn’t add up.

@MickSmiley you, too, seem to take the facts and skew the conclusion. Just because the poor can scrape together the credit to buy a Plasma TV, doesn’t mean they aren’t hurting. Why don’t you look at the macro picture instead of irrelevant tid-bits. Consumption is down, homelessness and unemployment are up. I think those are the problems that need fixing. I’m curious to know how cutting Government spending is going to fix them? I think it would exacerbate them.

Posted by LEEDAP | Report as abusive

Property value increases from 2000 to 2007 were illusory. Those in government should have known that the rate of growth on property values wasn’t sustainable. They should have anticipated a fall off. Instead they irresponsibly increased spending and now cry foul when they have to decrease it. That or blame their inability to raise taxes instead of citing the real problem which was allowing spending to increase too fast.

Your point on taxes is true in theory, but not in reality especially since we are talking about effective tax rates and not marginal tax rates. Effective tax rates is total taxes paid versus total earnings. Marginal tax rates are what is paid for the next dollar of earnings. Effective rates give a better comparison because it eliminates deductions and other things that muddy the water. The effective tax rate of the top 1% is over twice as high as the effective tax rate of middle income earners. Which means for every dollar that they earn they have to give twice as much to the government. That is from the CBO and only counts federal taxes.

Posted by AustinG | Report as abusive

I lived for years in Massachusetts, but worked in Rhode Island. I had to pay income tax in both states, even though I didn’t earn money in Mass, nor did I live in Rhode Island. The reason this isn’t totally insane is because I only paid the higher rate of the two, not the combined rate. Since Rhode Island has a slightly lower income tax rate, I paid that one first and then used it as a tax credit on my Mass tax forms. Ultimately, that means I just paid the 5.35% (Mass has a flat tax).

This means that you can’t get away from paying income tax to a state that you work in just because you don’t live there.

Posted by MassUser | Report as abusive