Replacing Property Taxes with Middle-Class friendly Progressive Consumption Taxes

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.

- Sid Som, MBA, MIM

President, Homequant, Inc.

homequant@gmail.com

Link to the Book

Local Governments should seriously Consider Outsourcing Non-essential Services

Most people I talk to still define outsourcing as “shipping out” services (hence, American jobs) to highly specialized companies in other countries, especially to the front-runners like China, India and Mexico. But that’s half the story. The other half of the story is that there are many great American companies that provide very similar services at very competitive rates.

Likewise, the local governments (counties, cities, towns, etc.) will do themselves a big favor if they start outsourcing some of their non-essential services to such great American companies, without having to worry about the data privacy or compromise of sensitive records, as they tend to have much better systems in place than the local governments can ever envision and implement. It will be win-win, meaning those government services would be more efficient while lessening the financial burden on the taxpayers. Let’s save the obvious: Before worrying about Unions, Civil Service, Labor Contracts, Collective Bargaining, etc., governments and legislative apparatus need to strengthen their will, believing ‘if there is a will, there is a way.’ Granted, it won’t be pretty or perfect to start with, but it will provide a start, the future of which will be brighter by the day.

Now, let’s differentiate between essential and non-essential services. First off, the outsourcing of essential services – law enforcement, public health, public schools, public transportations, public works, correction officers/prison guards, fire fighters, social services, sanitation, the office of management and budget, etc. – is strictly non-negotiable. While both essential and non-essential services are needed, in this day and age when better and faster services are demanded by the public, the need for agency’s direct involvement in providing non-essential services could however be independently studied and decided upon (i.e., the cost-benefit analysis of outsourcing vs. keeping the services in-house). Here are some non-essential services of local governments that would make good outsourcing candidates:

     1. Employee Benefits, Payroll and Time Processing – These are some of the most commonly outsourced functions in the private sector. While some small and mid-size local governments have already been outsourcing these functions, the large cities and counties are still far behind. These functions generally return the best bang for the buck when bundled across essential and non-essential services; for instance, there is hardly any difference between the processing of payrolls for law enforcement and that of the assessment office. Managing and processing of human resource components like payrolls, benefits, time, leave, talent, etc. go hand in hand, often inter-connected via the different modules of the same HRIS software, as well as a central customer service system with specialty units. ADP is perhaps the most well-known in this space.

     2. Sales Tax Collection and Processing – Many large counties and cities across the country levy additional sales taxes, charging local sales taxes on top of the usual state sales taxes. In addition to the local sales taxes, some of them have local income taxes, commercial rent taxes, sanitation taxes, water district taxes, etc. All of these taxes may be bundled and outsourced to companies specializing in this domain. In many local governments, these taxes are often managed and collected by separate units under different verticals altogether, thus wasting significant taxpayer dollars on redundant or inefficient services that could easily be grouped or combined. In a scenario like that, the outsourcing is the ideal way out, to avoid having to maintain them separately, without any additional return on such parallel and wasteful investments.     

     3. Property Data, Assessment and Tax Collection – This is the local juggernaut that needs serious considerations. In fact, if the counties need to just single out one function to begin the “outsourcing” experimentation, this obviously is the one – no two ways about it! As we all know, the local elections are often won or lost on the issue of property assessment alone. Unfortunately, after the winning party takes over, it reinvents the same losing experimentations, expecting different results. Of course, the only long-term solution to this age-old problem is the total abolishment of the existing property tax system and replacing it with a set of middle-class friendly progressive consumption taxes. Meanwhile, the mayors and county executives will hopefully understand the need for real (not make-shift) solutions to this age-old problem and start outsourcing it to quality economic consulting firms. In fact, the leading consulting firms like Accenture, Boston Consulting, Deloitte, EY, KPMG, McKinsey, PwC, etc. should seriously look into this emerging multi-billion dollar outsourcing business. It will be great for taxpayers as well, considering the kind of forward-looking solutions these firms will finally bring in. Taxpayer advocacy groups must also fight to have the full assessment umbrella outsourced, helping taxpayers get out of this unfair cycle they have been trapped in for a long, long time.

     4. Property Tax Appeals Review and Processing – In an effort to provide fair and independent review and processing of property tax appeals, both residential and commercial, almost all major jurisdictions have established separate bodies (departments, agencies, statutory commissions, etc.). In fact, some are larger (in headcount) than the vast majority of mid-size assessment offices. Since the day-to-day functioning of these bodies does not depend on the assessment office, they could easily be outsourced to economic consulting firms as well, eventually saving taxpayers a ton. Additionally, their AI-based expert system will do a much better job in introducing true fairness and equity in the appeals system. Their solution could then be ploughed back into the tax roll, forcing the assessment staff to improve the overall quality of future rolls. As long as the property assessment system is alive and ticking, the rapid introduction of AI-based solutions is the only meaningful way forward. And, that is possible with the direct outsourcing of the assessment review functions to major consulting firms.

     5. Information Technology (IT) and Help-Desk Services – This is the most common service in the private sector that gets outsourced to the specialized global players like Accenture, IBM, Capgemini, TCS, Infosys, etc. Local governments should also consider outsourcing these services to well-known companies, not only for efficiency, cost improvement and scalability but also for minimizing redundancy and duplications. In any case, whenever they need enterprise-level applications and solutions, they depend on outside vendors. Unfortunately, the applications they develop in-house are generally low quality and ad hoc. For example, in this age of modern technology, they still take pride in developing applications in MS-Access that their own IT does not support. This is a terrible use of taxpayer dollars. Even when the outside vendors are used, the RFPs are circulated within a very limited pool of vendors, that are rarely known for the world-class quality and service taxpayers would expect. Even within the local government, agencies are generally run mutually exclusively, generating significant amount of duplication of services. Outsourcing is the only way to address these inefficiencies and minimize the resulting wastefulness.

     6. Public Parking Maintenance and Traffic Ticket Processing – Private operators like Laz are already managing numerous public garages and surface lots for government agencies. Similarly, there are many private companies that help government process parking and traffic tickets. Considering the fact that these companies not only use cutting edge technologies, but they also continually upgrade them to remain competitive. Some of them also provide general (parking) building and lot maintenance services, and arrange for renovation and reconstruction services. Some companies even work with the Wall Street investment firms to help issue bonds and/or securitize the revenue streams. Therefore, the outsourcing of parking and traffic ticket processing services makes the system, on the whole, a lot more efficient, generating significant amount of savings for the government agencies over a period of time.

     7. Public Housing Maintenance and Rental Processing – In almost all major cities in this country there are (local government owned and operated) affordable public housing projects. For instance, the NYC Housing Authority provides housing for over 400,000 low and moderate income residents and employs over 13,000 employees. A number of their basic services like rent and application processing, building maintenance, safety and security, etc. could be outsourced. Additionally, it makes no economic sense to use the regular law enforcement personnel to provide the basic safety and security services for those facilities which, unfortunately, is quite common; in fact, outsourcing the security service to established private security firms would be just fine. Some of these government agencies even provide free vocational and financial education, job training, transportation, child/day care and a host of other subsidized services in partnership with other social service agencies and non-profit organizations, so those services could easily be outsourced as well. Of course, the same case can also be made for the maintenance of all office buildings owned and operated by local governments. 

     8. Public Parks and Recreation Facilities – Many parks and recreation facilities are within the jurisdiction of the local governments. They can either be leased to the private institutions or run as joint ventures with revenue-sharing agreements. Under the private auspices, these facilities will not only be better managed and run, but they will also free up the local governments of the on-going fixed overheads. Selling naming rights for those facilities, especially of the round-the-year recreational components like indoor swimming pools, skating rinks, bowling alleys, golf courses, marinas, etc., could also be viable revenue options. Land lease for future restaurants, food courts, 3D movie theatres, concert halls, science parks, miniature golf, Go Karts, etc. within popular parks are other revenue options.   

     9. Management of Shelters for Women and Children – Almost all major local governments operate shelters for women and children. Instead of having to rent from slum landlords and unsafe hotels and motels, government agencies should seriously consider working with quality private operators where the operators own and operate dedicated facilities – in line with the private adult homes – with better living conditions, safety, job training, day care, emotional therapy, transportation services, etc. It’s totally immoral to house these unfortunate women and children in poor and unsafe facilities. Of course, in addition to living and safety condition, the emphasis must also be on job training and education so these facilities continue to serve only as transitional facilities. It’s equally immoral to operate juvenile detention centers. Instead of building and operating such detention centers, governments must hire more social workers, school counselors and adolescent/family therapists, thereby creating long-term solutions to the growing juvenile issues. The reinvented juvenile functions could be outsourced as well. 

As we all know, labor unions are very powerful so they will fight tooth and nail to protect the status quo. By the same token, the new generation of local politicians must campaign and run on platforms that protect taxpayers from the ever-mounting tax burdens. They need to approach and market the outsourcing issue on humane grounds, walking down on the curve where the taxpayers are currently being the hardest-hit. Obviously, one of the most critical areas is the out-of-control property taxes that heavily favor the rich at the expense of the poor and middle-class, of whom the minorities and seniors suffer the most, often to the extent that they are ousted from their roots. Therefore, the umbrella of property assessment and taxes should be the mother of all outsourcing for local governments. 

The next on the queue should be the establishment of a central processing agency across the entire local government which will process the vast majority of services indicated above, thus removing the need for agency-wise duplication of expensive infrastructure, personnel and mutually exclusive processing. The advantage of having a central processing agency is that people could be cross-trained on variety of related processing, gradually ironing out the seasonal impact (seasonality) from the different services.

Again, unions are not going to be silent spectators but the concept of central processing (in-house) might be an easier sell than the outright outsourcing of other services to external institutions.

Now is the time to emancipate the maxed out taxpayers.

- Sid Som, MBA, MIM

President, Homequant, Inc.

homequant@gmail.com

Link to the Book