Senator Phil Graham is the Former Chairman of the US Senate Banking Committee. Prior to going into politics he was an economics professor at Texas A&M. I follow his writings in various news outlets including the Wall Street Journal. Yesterday he wrote about the story that broke last week in ProPublica about billionaires in our country not paying any Federal Income Tax. In fact, available IRS data shows that the 400 richest people in our country pay an average of a 32% marginal rate. In Mr. Graham’s article he counters the argument about billionaires not paying taxes by explaining that in our country we tax income and wages and not wealth. He asks how much of the total value of our homes, businesses, farms and retirement funds do any of us pay taxes on? These are all assets on our personal balance sheets but we all know that we pay taxes on these assets—wealth not income. Wealth is supposed to be taxed only when converted into income or with estate taxes.
Before we go any further let us acknowledge that the top 1% pay 32% of taxes and the top 5% pay 40% of income taxes. The bottom 40% pay no income taxes at all. The bottom 20% receive the equivalent of $42,500 of government transfer payments per year—over $20/ hour. The income gap between the rich and the poor is increasing if we look only at gross income before taxes and exclude transfer payments that are distributed via the agency of government. Net income—after taxes are paid and after transfers have been reallocated shows that the difference in income between high earners and those receiving benefits has dropped dramatically since 2010.
Mr. Graham points out that these arguments about income taxes are really arguments about the differences between taxing work (wages and salaries) and the taxing of wealth. He makes the point in his article that “nobody pays a Wealth tax in our country” but he is wrong.
Is property tax not a form of a wealth tax? In fact as we see the values of homes going up dramatically we come to realize that the property tax is at least in part a tax on an unclaimed or not realized capital gain. Not exactly the same but almost if real estate values go up quickly in a short period of time we are taxed on the increased value of our asset—our real property, without ever having sold or leveraged the asset. The bases of the value of the asset is calculated by only one method—the value of comparable assets in a similar neighborhood. There are other ways of valuing the asset for example using a cash flow present value formula, or a balance sheet. Homes don’t generally have a cash flow unless they are rented out, assets-minus liabilities, provides little information about businesses that they create income and may have many other assets within the entity—some creating losses and others profits.
The transaction between the government and the individual when it comes to taxes does not conform to the usual conditions of a financial transaction. At least one party is not coming to the table willingly, but more to the point the information leading to a reckoning is one sided. In our Community we are lucky to have an auditor—Robert McQuade who has spent his professional life trying to remedy the situation of property assessment transparency and an equitable way of allowing homeowners to see their property values go up, but not have to carry the burden of paying for an increase in value—unrealized capital gain, at a time when for example senior citizens move from higher brackets themselves onto fixed income retirement plans. And why should seniors who see a 2% increase in their social security checks pay a tax based on a 20-30% increase in their property values? A new home- owner may believe they can pay for a more expensive home today, because interest rates are so low, but the older home owner is penalized for the low interest rates as property values goes up. There is no way to recover from the increased taxes when markets change direction and velocity.
New homes are valued for tax purposes using a “cost bases” formula whereas older homes use a “mark to market” process. Maybe a hybrid valuation formula for existing homes should be fashioned and offsets for senior citizens who have been paying taxes for many years should be considered. The existing tax formula is codified in Idaho Law and only the legislature can fix it. They have been given plenty of time and opportunity and with the exception of a few brave Senators and Representatives, most seem to believe that securing a cash flow for government is more important than keeping the fruits of their constituent’s labors in their own pockets.
Many of these folks have been living in the same homes and paying property taxes for 30-40 years. Various ideas come and go but the bottom line is after a certain period of time living in a community and paying property taxes, the formula applied to older property owners should provide for a marginal decrease for taxes using total taxes paid as a way of determining the offset. Another way would be to establish an average rate for an average owner and plotting a graph that would establish a moving average of taxes over the years. A homeowner would then know for all times that his taxes would only go up at most only 1-2%/ year above the moving average. Finally for the elderly we should consider using the increase in the social security income they receive as a bases for their property tax increases. A two percent social security increase may allow for a 1% increase in property taxes for example.
Our senior citizens have built our communities, paid for schools and roads and new development. They should be given a discount not made to pay a premium on their taxes. In fact their “wealth should not be allowed to be taxed” ever when based on an unclaimed or unrealized capital gain. For a few when they die their estates will be taxed at over 50%!
Discussions about valuations based on the original price paid for the home plus some preset add on are far better than what we have now. I hope Robert McQuade will continue in his quest to find a solution to our local governments taxing our wealth. His long and distinguished career and his commitment to transparency are part of a great legacy of public service and we all should be grateful for his faithful service. He has certainly set the bar high for those who will follow in his footsteps.