Thursday, April 27, 2006

A tax on both houses...

When I first read this post by HoCoBlog this morning, I wondered: “Where is he coming from?” The idea he’s proposing isn’t half bad – though projecting five children in my future is probably a little generous (and don’t even get me started on living in Carroll County) – but it just came out of nowhere. Or so it seemed until I read through the Howard County Times at lunch and found that the concept is being pushed by all of the Republican candidates for county council (if only the Democratic candidates could work so well together…)

Here’s a long excerpt – the plan requires a good amount of explaining:

Republican County Council candidates Tom D'Asto, Gina Ellrich, Greg Fox, Tony Salazar and Donna Thewes unveiled the plan this week. It is aimed at giving homeowners a tax break when they buy a more expensive home in the county.

The plan would allow homeowners to transfer some of the savings they realize from the county's cap on property tax increases to a more expensive home in the county.

The goal is to encourage people to buy better homes without worrying about facing huge hikes in property taxes, Fox said.

The plan relies in part on a county law that prohibits property tax bills from rising more than 5 percent annually, no matter how large the state's tax assessment of the property rises.

In essence, the GOP plan would allow a homeowner to transfer to a more expensive home the tax savings from the cap that he or she is realizing on a current home.

The candidates painted a scenario in which a homeowner living in a house assessed at $450,000 pays taxes, thanks to the cap, on $300,000 of that value - a $150,000 difference.

Under current county law, if that homeowner then buys a home assessed at $525,000, he or she must pay property taxes based on the full assessment.

The GOP plan would allow the homeowner to subtract from their new tax assessment the $150,000 savings he or she realized on their former home. That means the owner would pay property taxes on $375,000 of the new $525,000 home.

Any increases in the annual tax bill on the house would grow from $375,000 and not $525,000.
And here’s what HoCoBlog had to say in his update (you really should read his post for a better idea of how this would work in real life):
I don't think the article adequately explains the benefits to Seniors downsizing to a less expensive home with a greater property tax bill. It also doesn't explain that the plan would still phase in the assessment on the new property.
The plan certainly sounds interesting, but it makes me wonder at what point we (the taxpayers, that is) dedicate too many resources to homeowners, and I say this as one who finally gets to enjoy the fruits of 60 years of federal (and state and local) tax/housing policies.

Between the mortgage interest deduction, phased-in assessments, and other perks, homeowners are already given considerable priority over renters in our tax code; over $120 billion in federal tax dollars are foregone each year because of the mortgage deduction.

Don’t get me wrong, I’m not advocating for the repeal of the mortgage interest deduction, at least not until I’m paying considerably less in interest. But, at some point, we have to say enough is enough with middle class homeowner entitlements and special treatment.

Yes, I know it sucks to have your annual property tax bill more than double when you move into a new home that is maybe worth only 30 percent more than your previous one. But it’s hard for me to have much sympathy for someone spending upwards of a half a million dollars on a home.

Under this plan, first-time homebuyers, who pay taxes based on the full assessment, would be the only ones ever paying their full share of property taxes, which is about as close to backasswards as you can get (if it were seniors and first-time buyers, that would be completely backwards, but I digress). Do we really need to make it harder for first-time buyers – those without considerable pools of equity – to join the club?

How does this plan make it harder for them? Consider this:

Two families are identical in nearly every way, except one owns a house and the other does not (for the sake of this example, the non-house-owning family has a sizeable portfolio of stocks and plans to use this wealth as “equity” for a down payment). Both really like the same house and decide to bid on it. Naturally, the cost of the house is near the upper limits of what each can afford, only the repeat-buying family manages to outbid the other family mainly because they benefit from having owned a home in Howard County and therefore, unlike the first-time buyers, don’t have to pay taxes on the full value of the house, meaning their total out-of-pocket house payments are lower.

In this case, the tax plan acts kind of like the Bonus Card at Giant – it offers lower prices if you’re in the exclusive club.

I will grant you that there is a decent argument for using tax policy to help those who currently live in Howard County and wish to stay here. But I’m not convinced that this is the ideal solution.


Anonymous said...


Sounds like you have a pretty good grasp on first blush. Two things that may be obvious to others but have not sunk to my dim level:

1) Would the $150K in the given example be treated as a capital gain and subject to a tax?

2) This will also be very problematic in Columbia. In the past, the Covenants stated that the annual assessment is calculated based on the highest assessed value of the property. State legislation passed within the last 2 years overrode this part of the Covenants to give consideration to those who petition the State Department of Taxation and Assessment and successfully argue their property assessment was too high. With this proposed program, does CA use the transferred assessment, or assess the new owners at the original tax rate? These decisions need to be taken into consideration.

Lastly, my initial response to the idea was that this is rent control for property owners. That may or may not apply, but it sounds right.

hocoblog said...

I have to say we need to consider those who are seniors who have spent their entire lives in HoCo, contributed to the community, have friends and family who live here, and who want to stay here but are squeezed by increases in property taxes. If they decide to downsize they get hit hard with a property tax increase. This plan helps them downsize without getting socked.

As far as the middle class entitlement arguement - doesn't the middle class pay the largest portion of taxes anyway. I don't see this as an entitlement I see this as instead a well deserved break, and incentive to stay in the community and continue to contribute property, income, amusement, and sales taxes to the County.

Hayduke said...

Anonymous: Those are great questions. My sense is that somewhere, somehow the $150K would be taxed. Clearly, it is a “windfall” to homeowner, awarded for no other reason than they wish to stay in Howard County. As far as CA goes, my guess is that they would use the original rate and not the reduced, transferred assessment, but I’m neither a tax attorney nor accountant. I’m just guessing, really.

Hocoblog: I’m sensitive to the argument about seniors, but as far as the middle class goes, they pay the largest share in taxes because they are the largest group of people, not because they have the highest tax burdens individually.

As I said, I think the idea has merit and I’m not arguing against it. But I think there are more important things we could be addressing.