Thursday, March 09, 2006

Now we're talking...

Before I get to the substance of this post, I want to start out by saying how great it is to be a part of a honest discussion of county policy (not politics). After my post yesterday on Charles Feaga's tax plan, which was prompted by Howard County Blog #1's post on the issue, HCB1 responded with further analysis and David Wissing even got into the act today. I think we have all made valid, reasonable points and have covered the issue more comprehensively than any newspaper.

Okay, that's enough blog triumphialism. On to the substance.

First, where I went wrong. From yesterday's post:

Well, in order for Feaga’s tax cut to actually amount to it’s $41 over seven years savings, property values in Howard County have to continue to grow at least 4 percent a year for the next seven years. This is entirely possible, but it’s also entirely possible that it won’t happen. Check out this website to get an estimate of your home’s worth, and then look at the graph of that value over the last 5 years. Twenty, 30, and 40 percent increases in property values are not sustainable - no matter what your real estate agent tells you.
Why is that wrong? Well, here's what HCB1 has to say:
Maryland uses a triennial assessment process. In that process one third of the County is reassessed each year and the assessment adjustment is phased in over a three year period. So revenue is predictable. If a triennial reassessment increase on a property is more than 15 percent, it will take more than three years to fully phase in the increase. Since the current assessment cap is at 5 percent and 5 goes into 15 equals 3 it will take three years to phase in the increases. This year the residentaial portion of the assessable base in the third assessment area (Northeastern third of the county) grew by an average of 74% from reassessments. If these properties remain with the same owner, it will take fifteen years for those properties to be fully phased in. We know not all homeowners are going to stay for 15 years, but at a 74% reassessment how many have to leave to meaningfully change the numbers? Now consider and add the other assessment areas of the county. Additionally, during this same time period those same properties will be assessed up to three more times before THIS assessment increase is fully implemented.
Yes, he's right about that. But I don't think that particularly matters.

The overriding point, which David Wissing gets at, is that projecting out seven, ten, or 15 years is not the best way to judge the worthiness of these tax cuts. While many folks will stay in the same place for the next 15 years, many will not. And for those who plan on moving to a larger house -- for instance, me and Wissing -- the phased in assessment is thrown out the window when you buy a new house; that is, you pay taxes according to the full value of the most recent assessment. Which means, essentially, that Feaga's tax cut -- though more significant in the long run -- is really only beneficial to those who are satisfied staying put for the long run.

Here's what Wissing had to say:

I live in a townhouse that has an present day assessed value of about $200,000 (let’s talk round numbers for simplicity). Next year, I will get a new assessment and based on what townhouses have been selling for in my neighborhood, I expect that number to grow to at least $250,000 (I wouldn’t be surprised to see it go even higher, but let’s be conservative). Regardless, since the increase in value is greater than 5%, each year the taxable assessed value of the house will be capped either at 4% under Feaga’s plan or 5% under Robey’s plan.

Then after three years, I am ready to move out of the townhouse and into a single family home. For a one-to-one comparison, I will use the value of a present-day $400,000 home in four years based on a 8% yearly increase in assessed value, which would be $503,885. When I purchase this new home, my property tax basis starts out at the assessed value of the home when I purchase it. So let’s adjust the tables used by both Hayduke and HoCoBlog for this analysis using the $200,000 townhouse for three years and the “$400,000″ house after that.

So instead of recouping my money in seven years, as both Hayduke and HoCoBlog agree to, it will end up taking me almost twelve years to see the greater benefit of Feaga’s tax cut over Robey’s tax cut. Prior to that, Robey’s tax cut is more beneficial to me.
(go to his post to see the table).

He then goes on to add what I think is another very important point (and assumption) in this whole debate. Taxes (and tax rates) are not and will never be static. If we're trying to project 15 years out from now, we're talking about three elections between now and then, three elections where the county executive and council could completely change. And I'm willing to bet the farm (well, my house) that we'll see a change in tax rates before our next county executive -- be it Merdon, Ulman, or Dunbar -- leaves office.

The further out we project, the more we are forced to discount the value of future savings -- both in terms of inflation and opportunity costs (i.e., net present value) and in terms of the likelihood of us actually seeing property taxes and rates stay the same, which I would (conservatively) say is between zero and ten percent. Also, it's always better to get your money from the government up front, rather than having to wait several years.

This is why I think Robey's plan is better. Every property owner will realize greater tax savings in the next four years, regardless of if they decide to move up and let someone else move in. Of course, like Wissing, I'm probably biased in favor of the plan that will benefit me the most. And personal bias is always better than political bias, especially during an election year.

7 comments:

hocoblog said...

Hayduke, I agree. This was a very good discussion. I think it comes down to this. "It Depends..." as David Wissing said.

From my perspective, which is:

My assessments went way up and I don't plan on moving for 30 years.

I prefer the Feaga legislation over the Robey proposal.

One size doesn't fit all though.

Ideally, I would like to see both implemented considering the projected surpluses.

Hayduke said...

I knew I left something out...

I, too, would like to see both tax cuts implemented. Alas, we may be pushing our luck.

I would also like to see the income tax increase rolled back, but I understand that cutting property taxes -- which have gone up a whole lot -- is probably a better deal for most folks.

Dave Wissing said...

I think wanting to see both tax cut plans implemented is something we can all agree on....

DukeFan said...

This Blog is most triumphant!

Yes please; pass both property tax cuts as even when they are totaled together, they do not exceed the amount of this year's 20m surplus.

Or much better still, pass some combination of the property tax relief proposals AND more importantly GIVE US A BREAK on the County’s income tax hike imposed in '03.

Even as they voted to raise our income taxes in '03, our glorious leaders promised to give us relief if we got out of deficits. Well, not everyone in HoCo is fortunate enough to be a property owner, but don't all of our hard-working residents deserve some relief? ALL HoCo workers had our income taxes raised, right? Does the 2003 promise stand or what? Does it stand shoulder to shoulder? – nevermind.

If no income tax relief is given, then the proportion of the County’s overall tax burden would shift slightly more heavily onto the backs of the workers who do not own property. This, of course, does nothing to help these workers ever become property owners. HayDuke I ask you, where is the justice, where is the compassion?

I will stand shoulder to shoulder with he or she who will cut our surplus income taxes a bit, as promised in ‘03. Is accountability alive and well? Yes, thanks to the blogosphere. Viva HayDuke & his good faith interlocutors.

Hayduke said...

Dukefan,

Indeed. Where is the justice? Where is the compassion? Everyone was forced to pay more income taxes just three years ago, and now we're cutting taxes only to those who own property, a group of people who -- on average -- may not need the tax break as much as non-property owners. I understand that some folks are now burdened by significantly larger property tax bills, but these are the same people who will reap the rewards of property value increases when they decide to sell their homes.

Clearly, the most equitable solution is to first cut income taxes, then cut the property tax rate, and then lower the assessment cap. It's too bad fairness doesn't seem to be an overarching principle on which we base tax rates -- at least in this county.

Perhaps we need to start causing more of a ruckus. Stand Up and Be Counted: Income Tax Cuts for Everyone!

Anonymous said...

Let Them Eat Cake!


Jim Robey
AKA (Marie Antoinette)

dukefan said...

The thing that's confused me is why Exec Robey is bought into the Ehrlich approach so adamantly here. Yes, Ehrlich suggested that counties cut property taxes, but his word is not Howard County law.

Likewise, Robey's word does not constitute law by fiat. His property tax cut proposal is just that, a proposal. Any civics teacher will tell you that the executive branch proposes and THEN the legislative branch disposes. So that means it's not too late for the Council to step-up and substantively offer to work WITH the County Executive to tweak the tax relief so that it better accounts for our values and recent history.

What does all that mean? This: "first cut income taxes, then cut the property tax rate, and then lower the assessment cap".

One can hope that the County Exec is a daily HayDuker and will soon reply with a post indicating his full agreement on all points.

Mr. Robey, I am not even arguing that the '03 tax raise was wrong then, just that it's wrong now to leave it in place. Especially because its current place is disproportionately on the backs of the hardest hard working and least privileged county folk. These folk will reward you for recognizing the wisdom of the blogosphere.

Can't we all just get along? Can't we ALL just get a little taste of the tax cut pie? We're hungry.

We've been on family budget diets since '03. Now it can be the county's turn to tighten the billion plus dollar belt, or at least limit the growth of our surplus waistline. The County will never miss the empty calories.