Saturday, December 15, 2018

The solution is both fair and unfair at the same time.

From Progressive unTaxing by Scott H. Greenfield. This is not a screed against taxation, it is a elaboration of the challenge of fixing a broken tax system. The details are in the post but basically Nassau County has for years been dramatically over assessing some tax payers and dramatically under-assessing others. The problem has been recognized and the county is in the process of rectifying it by ensuring that everyone is assessed in the same fashion (not the same amount, but in the same way so that the different tax burdens are equally proportional to the underlying asset value.

But fixing one problem leads to another.
But before you take to the parapets, consider that these same poor owners have been underpaying their fair share for years due to under-assessment, which means that someone else was overpaying taxes to make up the difference. If the reassessment is fair, then owners for whom taxes will “drastically” increase are owners who were “drastically” underpaying. It was a sweet deal, but it’s coming to an end.

Yet, the pain won’t be felt immediately, as the scheme is progressive, phasing in the increases over a five-year period. On the flip side, the notifications to homeowners of what their assessment will be, and what will happen to their hypothetical taxes, inform the owners who have been overpaying taxes for years of their “drastic” good fortune in taxes being reduced. Yay, right?

There’s a dirty little problem, however, that neither Curran, Newsday nor anybody else has noticed as yet. This means the people who have been over-assessed, and have been paying more than their fair share in taxes for years, now know what their correct assessment should be and how much in taxes they should be paying. But they will still pay more for the next five years than their fair share in order to ease the pain on other homeowners who have enjoyed years of paying less than their fair share.

So if your real estate taxes this year were $30,000, and you’ve been informed by the county that under reassessment, your corrected taxes should be $20,000, you will get a $2000* reduction (which beats the hell out of an increase, or even the same taxes as before) but still pay $8000 more than you should.

There’s an argument to be made that the pain of having one’s taxes increase is certainly worse than the pain of a decrease. There will also be some who express their willingness to overpay taxes to ease that pain for their neighbors, although it’s never clear that the people who takes this position are actually taxpayers and not merely the unduly empathetic who are very good at spending other people’s money.

But this isn’t about sad tears and poor little Timmy. It’s just money, and taxes, and the government taking money it needs from people who shouldn’t be paying it. The owners overpaying taxes have their own uses for their income other than charity for their neighbors who have been free-riding for years. Whether they have their own little Timmy or want to buy a mocha frappuccino really isn’t the government’s business.

None of this has to do with the government raising taxes, per se, which is where too many residents go because they fail to grasp how taxes are assessed and assume any increase in their taxes means the government is just spending more. This is only about paying one’s fair share, about the distribution of the tax burden between homeowners.
It is a great example of trade-offs and perspectives. From one perspective, it makes perfect sense and seems imminently fair that there should be a transition period while everyone adjusts their budgets to the new numbers.

But, of course, from the perspective of those residents historically overpaying, it is not only not fair, but almost insulting.

Both strategies (immediate adjustment and five year transition window) are both sensibly fair and indisputably unfair at the same time.

Clarifying the nature of the problem, as Greenfield does, allows you to consider alternative solutions. Whether they are acceptable or not remains to be determined but at least you can think constructively once the problem is clarified.

One approach might be to immediately adjust the over-payers to their new lower obligation. That is of course fair. Why should they have to continue paying more simply because they have been historically and incorrectly overpaying?

But for those who have been historically underpaying, perhaps it might make sense to use a common technique in partnerships (accounting, law, etc.) Once admitted, new partners are expected to pay in a substantial capital amount to the firm. Since new and especially younger partners have typically not accumulated enough capital, the partnership will extend a loan of the capital amount which can be paid off in coming years from their higher income as partners.

Taxpayers, in a parallel with new partners, whose payments have jumped dramatically because they were historically under-assessed, might receive a loan secured by the property which would allow them to pay out the increase over a longer period of ten or fifteen years.

Those who were historically over-assessed get immediate relief. The County maintains its expected revenue flow. Those who were under-assessed have a longer period of transition via the instrument of a loan (rather than a phased step-up.)

Whether that is a good solution or not, it is one that becomes more obvious only when the definition of the problem has been clarified as done by Greenfield.

Very interesting.

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