Sunday, February 28, 2010

Can We Talk?

At a recent meeting with the Chief of the Rhode Island Division of Municipal Finance, to propose an idea for changing from a market value base property tax to a 'taxable' value based property tax, I was presented with some of the very serious issues facing the state and its municipalities, in effect challenging whether the proposed change would help the property tax problem.

Some of those issues were, (1) the large increase in foreclosures, (2) those who simply find it increasingly difficult to make their skyrocketing tax payments, and (3) the concern that the proposal would mean people might be living in identical homes paying different property taxes.

Each of these deserves an answer.

1. Foreclosure occurs when the owner of a property can't meet his/her mortgage payments. Those mortgage payments are established at the time the mortgage is created and is simply a loan using the property as collateral. The borrower and lender (bank) choose a mortgage that will satisfy the borrower's ability to make the payments.

There are things than can change the ability to make payments; job loss, unexpected medical bills, either of which could reduce one's ability to make mortgage payments. The actual market value of the property has little to do with the mortgage as described, unless...

There are other situations however, when the owner of a home that has appreciated in value is tempted by a lender to take out a second mortgage to finance say, a vacation or a new car. The increased value is treated as if it were like money in the bank and, if necessary, the owner can sell for the higher value and pay off the loans, maybe with some money left over. Tempting. As unscrupulous salespeople urged buyers to take out these loans these mortgages proliferated like crabgrass in August, producing enormous profits for the people who pushed paper from one place to another.

Too often the "free money" added to monthly payments more than the owner's ability to meet obligations. Add in increased property taxes based on the higher market values and we have the makings of a serious problem: people began selling their homes to reduce monthly payments. The increase in selling forced down market prices as more people began to panic. They to tried selling their homes quickly to grab those 'high' market values, only to find they weren't there. Their homes in some cases weren't even worth what they paid for them and many were forced to declare bankruptcy.

This downward spiral only increased the disaster that was beginning to unfold as the banks holding those mortgages found themselves with worthless paper (toxic assets) and their incomes fell as more and more people defaulted on their loans.

And yet the market values of homes are assumed to be the best and fairest metric upon which to tax people to pay for municipal services. Incredible.

The RIGHT proposal of using 'taxable' values instead of market values will not immediately fix the above problems. Of course, neither will the continued reliance on market values. But going forward one must consider if we will be in a better place if we make the transition to a taxable value based system or if we continue using market values.

2. This brings us to the individual who is simply struggling to pay taxes on an increased property value. With the expected drop in values one might expect some tax relief, but this is anything but certain. If values drop town wide, as they have recently, the tax rate will simply rise to produce the needed revenue. In fact revaluation to market prices produces thousands of people whose taxes drop as those whose taxes are too high, regardless of the overall increase or decrease in property values. It's the nature of swings in market values.

The more important question is this: Would we be in this position at all if we were taxed on 'taxable' values for the last twenty years instead of market values? It would be much better to pay taxes limited to 4% increases for the next twenty years rather than continue with the market based system which brought on current problem in the first place. It seems we have an opportunity to rewrite history: today is the future's past.

3. Now for the last concern, that under a taxable value based system there would be people living in houses of equal value, possibly side by side, paying different taxes. Quite true. For many it is hard to accept and seems unfair.

Consider. If Bill and Joe buy property at the same time for the same price, they should pay equal taxes.

But what if Bill sells his house to Nate for a much higher price than he and Joe originally paid? Should Nate simply pay the taxes that Bill was paying? Of course not. Nate should be taxed based on what he paid, just as Bill and Joe were, and to make sure Nate pays a fair tax on his market value we must use a rate calculated from the market value of the entire town.

But now he and Joe will not be paying the same taxes would they? Nothing wrong with that. But our reevaluation system insists that everyone be reassessed to market values. If Joe's property increased in value the same as Nate's, Joe will pay the same tax as Nate. The reassessment has decided that Joe is in fact the same as Nate, but he is not. Assessing someone's property greater than (or less than) the one he bought, doesn't make him equivalent to the person who just spent that amount.

The use of 'taxable' values instead, would increase the value of Joe's house and every other current owner, the same percentage as the tax levy, not the market place. For example, a 3% tax increase would increase everyone's tax bill by approximately 3% while new owners would pay based on market value. Both owners are treated fairly. The following year the new owner becomes an existing owner.

There is nothing inherently unfair about people in similar homes paying different taxes to support government; we do it all the time. We pay for state government and federal government differently despite living in similar homes and there is nothing immoral or unfair about doing the same for local government.

Is the proposed system perfect? No. Will it be better and more just for everyone? Absolutely. Check the RIGHTTAX website for more.