RALEIGH – The tax code is chock full of exemptions, deductions, exclusions, and complexities. Self-styled tax reformers of every political stripe typically point this out and argue for simplicity, but all too often they fail to identify a coherent set of principles with which to judge specific tax provisions.
As a result, when criticizing the current tax code, these critics lump the indefensible in with the indispensable.
Exempting certain kinds of income, sales, or property from a tax base before applying the tax rate is not necessarily evidence of bias or favoritism. For example, if you levy a retail sales tax and fail to exempt business-to-business purchases of inputs, such as office supplies, then you create a tax bias. Large companies that can afford to produce much of what they need in-house get a lower tax bill to pass along to their consumers, employees, or owners. Small companies that buy inputs from other firms and then sell a taxable product end up with a higher tax bill to pass along. The resulting bias is unfair and inefficient.
A good example from the income tax is the tax treatment of investment. If you tax both the principal of an investment – say, $5,000 going into a mutual fund – as well as the return on that investment, the dividends and the capital gains, then you have double-taxed the same stream of investment income. You taxed it once as it went into the mutual fund, inherently reducing its earnings by an equivalent percentage, and then you taxed it again coming out. The resulting bias favors immediate consumption over savings (future consumption).
These are both examples of tax exclusions that increase the fairness and economic neutrality of the tax system.
In the property-tax area, North Carolina has long maintained a bias by failing to exclude unsold homes from the property-tax bills of the firms trying to sell them. The NC House just approved a bill to give homebuilders a three-year deferral of taxes on this unsold inventory. Supporters argued that the bill was designed to help a major industry that is struggling. Perhaps that’s true, but that’s not the proper justification for change the tax law.
The best argument is that unsold new homes should never have been on the property-tax rolls in the first place.
Local property taxes are a challenging and unpopular form of taxation. There are two potential justifications for them, it seems to me. One is that when you own physical property in a community, you tend to benefit from the provision of certain public services in rough proportion to the value of the property you own.
The other justification is that, at least in the long run, property values tend to rise commensurate with income. The more money people earn, the more house and developed land they can afford to buy or rent (remember, renters pay property taxes, too, they just don’t handle the bill before it’s sent in). Given that it would be the height of folly to authorize North Carolina localities to impose income taxes, a property tax acts as a sort of proxy. Again, the notion is that the more dollars you have to spend – the higher your standard of living – the more dollars you should pay to help finance public services from which you benefit, directly or indirectly.
Now, apply these principles to the taxation of unsold homes. By definition, no one is residing in them. That means there’s little traffic going to and from them. No kids are waiting at the bus stop to be carted off to local schools. No residents are visiting the nearby public parks or libraries, signing up for county health programs, or using water and sewer.
Admittedly, there is some value to police and fire protection of the land and unoccupied structures. That may be an argument for a discounted tax rate, or perhaps a deferral rather than an outright exemption. But it can’t justify taxing housing inventory the same way occupied homes are taxed.
When analyzing tax policy, you have to start with some core principles. Mine are simplicity, neutrality, and equity. The latter two, in particular, lead me to believe that unsold homes shouldn’t be taxed the same as occupied ones. Let’s end that bias.
Hood is president of the John Locke Foundation