This week’s “Daily Journal” guest columnist is Paul Messino, Project Management Specialist for the John Locke Foundation.
No one would demolish his house to get rid of a rat. He’d hire an exterminator. Although it’s true that destroying the house would get rid of the rat, doing so would leave him worse off than before.
It’s often the case that the government will blow up the house to get rid of the rat, instead of finding a more simple and direct way to get rid of the problem.
In response to a perceived market failure – that can become apparent when constituents complain to representatives – the government swings into action. Before understanding the problem, the government simply tries to fix it – usually in the most visible and straightforward way – and usually in the wrong way.
One of the growing concerns among North Carolinians is rising property values. Among mountain and costal residents, property values are far outstripping incomes. Residents are especially vocal in coastal communities, where horror stories that upwards of 700 percent increases in property values at revaluation are forcing some long-time homeowners to sell their homes.
State representatives are responding. One bill moving through the House proposes property-tax deferrals for the primary residence of homeowners who are at least 65 years old or are permanently disabled and have an income of not more than $30,000. The deferred payments accrue at an interest rate of 5 percent. Once the deferred payments reach 85 percent of the assessed value of the property, the homeowner has 60 days to pay the interest exceeding this percentage. Full payment is due following the death of the owner or upon its transfer.
Another proposal limits the increase in home values to the Consumer Price Index (CPI), a measure of inflation that is viewed by some as a cost-of-living index, currently 2.6 percent.
From a constituent’s point of view, both proposals could help ease the property-tax burden. Obviously, the deferment plan is more specific, targeting a select group of individuals for special tax treatment – not unusual in a complex tax code such as ours, but, nevertheless, unfair and, more importantly, misguided. The CPI plan is an attempt to link the purchasing power of money to the value of land, regardless of socioeconomic position. I applaud the equity but shun the plan, which is also misguided.
Where have both of these bills gone awry? Instead of identifying the underlying problem, they’ve identified a result of the problem that happens to be visible to constituents. The problem legislators are trying to address is that property values – and therefore taxes – are rising much faster than the original property holders can afford. If this is the core problem, how do the proposals fail to provide a solution?
The tax deferment plan is a short-term solution to a long-term problem. Under this plan, property values would continue to grow faster than the incomes of many who would qualify to benefit from the plan, eventually trapping them. Feeling as though revaluation doesn’t matter to them now that their taxes are deferred, residents potentially could be struck by huge tax bills when they are forced to pay, either upon reaching the threshold 85 percent, when they sell, or – what’s worse – when they die and their kin must pick up the bill. Furthermore, the 5 percent interest that accrues on the deferment is greater than the homeowner’s inflation-adjusted income and greater than nearly any safe investment he may choose for his money in anticipation of future tax collection.
Going the CPI route is even worse. The CPI tracks a “basket” of goods in the market. The difference between the prices of these goods provides a measure of inflation. Property is not one of these goods. The value of property is not linked to the rate of inflation. Its price rises and falls with demand. This is partly why land values are so disparate across the world. Linking the value of land to the CPI is faulty and would seriously disrupt local government revenues.
Instead, legislators should be looking for solutions that make property revaluation more regular and attempt to quantify property’s true value without penalizing a homeowner for improving what’s his. Perhaps the best way to do this is to segregate property into at least two taxing categories: residential and commercial. Commercially zoned property would be assessed as the current system allows. Residential property that constitutes a primary residence would have the tax assessment based on time of purchase. The value would remain fixed until it changed ownership.
Identify the problem, then provide a solution.