The vast majority of homeowners
believe that the current property tax system is inherently regressive, meaning
middle class heavily subsidizes the rich. Others think it’s the biggest annual
harassment they have to endure. Rich folks owning expensive homes are not too
bothered as the system favors them. It is more or less the opposite of the
income tax system where the top 1% pays 40% of all federal taxes. According to
the Tax Policy Center 44% of Americans will not pay any income taxes this year
– not so when it comes to property taxes. Property tax is one of the main
reasons why seniors and minorities get uprooted from their neighborhoods.
Unfortunately, home is the biggest investment for most Americans and it’s
usually controlled by the local governments via their primary revenue tool
called the property taxes.
It’s about time we phase out
this mostly unfair and inequitable property tax system and replace it with a
series of truly fair and transparent revenue tools, thus freeing the homeowners
from the clutches of the government control. So, what are the replacement tools
(revenue sources)?
1. Introduce
Junk Food Surtax on Unhealthy Processed Foods and Beverages – Just the
way the middle class must not subsidize the rich people’s property taxes, the
health-conscious folks must not subsidize those who basically live off junk
foods. This is a (preventive) health issue and, hopefully, this surtax will
save citizens billions in health insurance premiums down the road. The counter
case is equally compelling: Today smokers are paying a heavy price for their
lifestyle (significantly higher taxes on their lifestyle products and higher
premiums on life and health insurances, etc.). While we must not take smokers’
choice away, the rest of us must not finance their lifestyles either. The
phase-out of the property tax system will take 5 to 7 years, during which as
the property tax revenue starts to come down, the Junk Food Surtax should start
at, say 10%, graduating up and perhaps leveling out at 20% (will require
studies to make the system revenue-neutral). This tax could be implemented at
the State level, where the States reimburse counties based on actual
collections. If the State becomes an unwilling participant, it must be
implemented at the county level. In a Utopian society, this collection will
come down to null.
2. Implement
Surtax on Basic and Luxury Durable Goods – In order to save $5K to
$150K on property taxes at the front-end and capped deductions at the back-end,
homeowners would be amenable to the proposed durable goods surtax. Unlike
involuntary property taxes, consumption taxes are more humane – families can
budget/plan for these expenditures. Since the basic durable goods impact the
middle class, the rate must be lower, say 2 to 3% for the basic, followed by
the luxury durable and ultra luxury durable goods, with progressively higher
rates. For instance, all appliances under $10K could be basic, $10K to $20K
being the luxury category and >$20K as the ultra luxury category, with
progressively higher rates. Likewise, automobiles could have three categories
as well. While counties would be allowed to charge different rates, there must
be non-resident tariff provisions to negate any arbitrage; in other words,
counties with lower rates must collect the differentials from the non-resident
purchasers (from the reciprocating counties) with higher rates. Non-reciprocating
counties would be notified of the non-resident purchases.
3. Let
the Investors Pay Higher Sales and Transfer Taxes on Income-producing SFRs –
In terms of sales and transfer taxes, single family homes occupied as primary
residences must be treated differently from investor purchases for conversion
to rentals. At the point of purchase, those investors must pay higher sales
taxes (add-on sales surtax). During the last recession, many institutions
bought and converted millions of single family homes into rentals creating a
whole new SFR Rental industry. Unlike people’s primary residences, these are
income-producing properties and must be treated as such. Even during the years
of property tax phase-out, they must be treated as a sub-class of the multi-family,
paying higher sales, property and transfer taxes than the primary residences,
in line with the competing multi-families. This should apply to large
institutions as well as other parties and individuals with 5+ rental units
including condos and co-ops.
4. Let
the Gamers and Flippers Pay Higher Transfer Taxes – At the point of
sale, shorter holding periods (say, up to 2 years) must carry much higher
transfer taxes so the traders and flippers are separated from the homeowners.
In fact, it’s a clear case of moral hazard when primary homeowners and gamers
are treated alike by the local assessors. While the gamers are entitled to
compete and buy, they must be treated as investors if they sell within the
shorter window. They can however bypass the surtax by using the 1031 exchange
(federal). Of course, exceptions (e.g., job-related relocation, medical
emergency, etc.) must be factored in as long as the use of home as primary
residence could be proven. During the tax phase-out period, none of these sales
(institutional, traders and flippers) could be used in developing SFR AVMs or
as SFR comps, to avoid having to artificially inflate the price/assessment
levels.
5. Introduce/Re-introduce
Million$-plus Home Sales Surtax – Since the upscale and expensive
homes (owners) would be a big beneficiary of the phase-out (followed by no
property taxes), the million$-plus home sales must be subjected to additional
progressive surtaxes. It must not be a blanket one-size-fits-all rate; instead,
it must be progressive in view of the savings – for example, sale price $1M to
$2M @2.00%, $2M to $3M @2.25%, $3M to $5M @2.50%, $5M to $10M @2.75%, $10M+
@3.00% etc., etc. While the elimination of property taxes will make the
high-end housing market more liquid, the introduction of sales surtax (coupled
with higher short-holding transfer taxes) will gradually de-incentivize gamers,
stabilizing this volatile segment. Should sales clusters start to balloon just
under $1M, the threshold could be lowered to the jumbo mortgage
(non-conforming) level. Of course, State’s participation will be important,
absent which counties must implement the surtax on their own.
6. Let
there be Luxury Hotel (4 and 5-Star) Surtax – These hotels are
primarily for the corporate executives and rich folks so additional 5-6% surtax
will not harm the hotel industry. In fact, these hotels might even use this
surtax as a promo (“We Will Pay Your Surtax”) in order to boost traffic during
the off-peak season. A vast majority of these hotels have medium-to-large
convention centers – seasonal to round-the-year – so convention center surtax
could be an ancillary surtax as well. The hotels that are run as resorts must
be subjected to an additional resort surtax. Luxury car rentals must carry
sizable luxury rental surtax. Similarly, all golf courses, private and public,
must have additional surtaxes. None of these would adversely impact the middle
class; even if they impact the middle class to some extent, it would be almost
insignificant when compared to the tax savings they would be enjoying from the
elimination of property taxes.
7. Counties
should Start Selling Naming Rights to its Infrastructure – Let the
rich people/private institutions pay to put up their names on local government
buildings, county roads, town squares, bridges, marinas, municipal parking,
toll booths, service plazas, ball parks, parks and recreational centers, public
pools and rinks, etc. (that the local governments own and operate). Of course,
public schools and colleges should be exempted. The selling process must be
totally open and transparent (via open tenders), thus awarding the naming
rights to the highest bidders (some restrictions could apply). Also, in order
to attract the right market price, it must also be term-limited, say 3 to 5
years. Counties could also consider private-public joint ventures to build new
toll roads and bridges (unable to get federal funding) wherein the private
party incurs all costs to build the infrastructure in return for the toll
incomes for 10-15 years.
8. Now
that Airbnb is Mainstream, Counties must Claim its Share of Taxes –
Like Uber, Airbnb has become mainstream competing with the commercial lodging
industry, potentially lowering the latter’s occupancy rates and consequently
government’s tax revenues. Under the circumstances, states must make sure that
Airbnb collects and returns all taxes back to respective states and, in turn,
to the originating counties. Given the skyrocketing popularity of Airbnb, this
tax revenue will grow exponentially in coming years. In fact, this new-found
tax revenue will not only far exceed the lost hotel tax revenue, but it will
also generate new taxes in smaller markets where hotels/motels generally are in
short supply. Because of the physical nature of Airbnb’s client-properties, it
will be easier (than the internet sales) for the states to collect taxes. The
emerging Airbnb competition must also follow suit, collecting and clearing
taxes to the states.
9. Last
but not least, massive Savings will be generated from the Closure of Assessment
Offices – In large cities and counties, hundreds of employees work in
those offices (Assessor’s office, Assessment Review, Data Collection, Mapping,
Valuation and Valuation Modeling, Customer Service, Exemptions, Public
Relations and Outreach, Attorneys, etc.). The elimination of those high-paying
jobs will save local governments tens of millions in salaries and benefits.
Additionally, the closure of those offices will save significant sums in rent,
utilities, security, maintenance, IT, web, telecom services, etc. Since
governments try to solve all problems by hiring more people (actual case: “The county has hired 60 staffers and plans to bring
on 20 more. The [XX] Commission…has hired 16 staffers and plans to bring on
another 10 in the coming months.”), the elimination of property taxes will
save local governments a ton.
Since property tax is one of the
most explosive issues for the local politicians (they win or lose elections
based on the assessment issue alone), homeowners and their watch groups must
fight tooth and nail to phase it out. Now that the SALT deduction has been
capped, even the rich homeowners might be in favor of this phase-out. Of
course, the local unions will not be silent spectators in this fight. No doubt,
this fight will end up at State Supreme Courts. Of course, in order to win this
fight, all homeowners need is one favorable decision, which will spearhead and
strengthen the movement coast-to-coast.
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