MuniLand

A conservative revolt on cutting taxes

Voters and legislators in two very red states, Oklahoma and North Dakota, have recently defeated conservative initiatives to eliminate important taxes. Among some Republicans, there seems to be a realization of the need to pay taxes to fund essential services like schools and police and firemen, and of the need to find other sources of revenue once a given tax is repealed.

North Dakota has become the first state in the nation to propose and subsequently defeat a constitutional amendment banning property taxes. The proposal, Measure 2, would have given all local revenue decisions to the state legislature without detailing how the process would work. It was overwhelmingly rejected – by 77 percent of voters. This comment in the Bismark Tribune seems to capture the reasoning of voters on the issue:

I voted “no” on M2 because it was too vague and when I inquired supporters on how funding gets reacquired they kept stating that politicians will be forced to rethink the budget when, in reality, politicians always get funding by raising taxes. There is no such thing as a vacuum in government budgets and this argument relies on common sense in government actually taking effect. If Mandan elects a grocery personality with dubious managerial skills (I worked for the guy, he severely lacks leadership), then I have serious doubts that politicians will “rethink” anything.

My message to the Tea Party, whom I am affiliated with: go back to the drawing board and write a bill that is explicit in detail and is based on economics and not blind ideology with a Thomas Jefferson quote attached. Don’t gripe, just rewrite it, make it more specific, and don’t treat voters like scared sheep.

In Oklahoma, several weeks ago the legislature surprisingly defeated a proposal to eliminate the state income tax. Oklahoma is among the reddest of red states, and both chambers of the legislature are controlled by Republicans. The Tulsa World‘s associate editor, Janet Pearson, credits a progressive think tank, OK Policy, with the defeat of income tax repeal:

The non-profit tax shell game

Old cities in the Northeast often have high concentrations of non-profit, tax exempt properties such as universities, hospitals and churches. Cities generally receive the bulk of their revenues through property taxation, so for cities with high concentrations of tax exempt properties the tax base can be considerably diminished. Ryan Delaney of WRVO, a public-radio station in upstate New York, reports that Syracuse has an astonishing 56 percent of city properties exempted from property taxes. Delaney drills down into a current fight over tax exemption for a proposed development project. The fight shows how property-tax exemptions are growing and can be just a mask for private development and profit. From Innovationtrails.org:

The project includes a few steps: Cameron Group would lease a small strip of land in front of an off-campus parking garage from the university for $1. Cameron Group would then spend $20 million to construct a new building that will mostly be filled with a fitness center and bookstore, and offering some space for private retail.

The university would rent out the space for its fitness center and bookstore. At the end of the 30-year tax break, ownership of the building would be transferred to the university, and only the private retail space would be taxed.

Illinois says non-profit does not mean tax-exempt

In a series of decisions that may affect healthcare nationally, Illinois is tightening the noose on hospitals that claim tax-exempt, non-profit status. What began as the denial of a property tax exemption by the Champaign County Board of Review for one hospital system in 2002 has become a state-wide analysis of how much actual “charity care” hospitals are providing.

The immediate implication is that hospitals’ property tax exemptions could be revoked and vital revenues could be collected. However, this raises a broader structural question around the use of tax-exempt municipal bonds for entities that may be passive vehicles for for-profit activity.

Becker’s Hospital Review has the specifics:

[T]he Illinois Department of Revenue’s crackdown on Illinois non-profit hospital tax-exempt statuses came on the heels of an Illinois Supreme Court ruling from last year. In 2010, the Illinois Supreme Court ruled that Provena Covenant Medical Center in Urbana, Ill., could not qualify for property tax-exempt status because it did not provide enough charity care to its community, although Provena argued that it provided millions of dollars in other free care and community benefits.

The state of state and local taxes

In addition to federal taxes, Americans are responsible for paying state and local sales, personal income and property taxes, and a variety of fees for the use of their cars, sewer systems and water systems. Although approximately 47 percent of the population pays no federal income tax, those people do contribute to public safety, education and welfare through their state and local taxes (and, it should be noted, also pay federal payroll taxes). Across the nation, sales taxes bring in about one-third of state revenues, personal income tax revenues bring in another third, and a variety of other taxes and fees make up the balance.

Rarely do you hear cries from the citizenry to have their taxes raised – usually you hear people lament that rates are too high. A recent Bloomberg slideshow listed aggregate tax rates by state but used data that did not include local tax rates. Many of the 1,256 comments on the slideshow pointed out that the information was wrong. In almost every comment that I read, people thought that their taxes were too high.

The response of state governments to their citizens’ cries for lower taxes has been ambivalent. While states decreased their sales taxes by $5.2 billion for 2012, they also increased personal income taxes by $3 billion, according to a National Conference of State Legislatures poll. There is a lot of variance among states in sales tax rates, though: Five states collect no state sales tax, and 13 states have an average local sales tax rate of zero. State and local governments are looking for additional revenue from every available source, but I predict that we will mainly see increases in income taxes for higher earners rather than increases to sales tax rates.

Providence drowns while Brown thrives

Municipalities across the country are looking to local non-profits to pay for their share of community services. These payments, known as PILOTs, or “payments in lieu of taxes,” are voluntarily contributed by private schools, hospitals and other non-profits as an alternative to paying property taxes. As cities come under more fiscal stress, this will be a growing trend.

The mayor of Providence, Rhode Island, Angel Taveras, is in a wrestling match with Brown University over increasing the school’s annual payments to the city. Taveras is angling to get a bigger sum from Brown, but if he is unsuccessful, then his only option to balance his city’s budget would be to get public unions to agree to concessions. Others, including Robert Flanders, the receiver of nearby Central Falls, believe that Providence’s only option is bankruptcy:

“I don’t see how [Providence] can get out of it without going there,” said Flanders, a former state Supreme Court justice and a partner at Hinckley, Allen & Snyder LLP in Providence. He put Central Falls into bankruptcy in August and has since torn up contracts with city workers and cut pension benefits.

When home prices and property taxes diverge

The latest S&P/Case-Shiller Home Price Index, released yesterday, wasn’t pretty. Housing values continued to fall, their 5th consecutive year-on-year decline. (You can download the data here). The Federal Reserve Bank of Cleveland had this to say about the release:

According to today’s [Case-Shiller] report, the fourth quarter started with broad-based declines in home prices… On an annual basis, the 10-city composite is down 3 percent and the 20-city composite is down 3.4 percent, and eighteen of the 20 MSAs are also in negative territory.

Basically, there’s blood on the streets everywhere.

The Federal Reserve Board reports in its Flow of Funds data (line 4) that the value of household real-estate assets has declined from $22.7 trillion in 2006 to $16.1 trillion in the third quarter of 2011. That’s a loss of 30 percents. Have revenues from property taxes, which are supposed to reflect the property valuations, mirrored the same decline?

Taxes, pictured


Kelly Nolan of the Wall Street Journal reported today that property-tax revenues have been off for two consecutive quarters. When you look at the numbers, though, you can see it’s not really off by that much, especially given the state of home prices. Here is the change in the data reported by the U.S. Census Bureau: Reporting period $ billions 2011 1st Quarter $ 113 2010 1st Quarter $ 115 2010 4th Quarter $ 177 2009 4th Quarter $ 182

These are not enormous drops in property-tax collections in light of the collapse of the housing market. The chart above is a plot of median home prices against property-tax collections. As you can see, tax collections continued climbing even as housing prices were falling off a cliff.

I think it’s safe to say that municipalities are doing quite well in collecting property taxes. Everybody and every public entity must tighten their belt; there is less and less to go around.

Property taxes are all over the map

From Credit Sesame (click through the map above for an even better interactive version):

Other than their mortgage, most home owners’ largest home-related expense is their property tax bill. And it’s no secret that when it comes to property taxes, some states are much harsher than others. Consider this: In 2009, New Jersey home owners paid an average of 27 times more in property taxes than property owners in Louisiana. Ouch.

Hat tip to The Big Picture.

Potential U.S. rating downgrade rattles muniland

Bloomberg reports:

At least 7,000 top-rated municipal credits would have their ratings cut if the U.S. government loses its Aaa grade, Moody’s Investors Service said.

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