Friday, December 03, 2004

Property Tax Deductibility Revisited

by Tom Bozzo

We had previously commented on trial balloons for Bush Administration's tax "reform" plans. Among the proposals, broad reductions in or elimination of taxes on income from savings and investment might be kept more-or-less revenue neutral in part by eliminating the deductability of state and local income and property taxes.

The Administration likes to trot out representative-seeming beneficiaries of their tax plans for photo ops, so in that tradition I'll just note from the previous post and its comments two family types set to be screwed if local tax deductibility goes away:

The question arose as to why the Bushies would want to screw us families like that, who if anything (particularly if you replace "academics" with "professionals" in the second example) probably lean Republican.

Then comes the Washington Post's Jonathan Weisman with the answer:

In crafting a broad [tax reform] agenda for his second term, Bush is trying to adhere strictly to economic theory...

In a speech... at the American Enterprise Institute, N. Gregory Mankiw, chairman of the White House Council of Economic Advisers, spoke repeatedly of "standard economic theory," "textbook economic theory" and "scholarly literature in economics" to bolster his arguments.(1)

Well, that makes me feel a lot better. I won't be screwed as a payoff to even fatter cats, but simply as a matter of inexorable economic logic. Notes Weisman:

In the February 2003 Economic Report of the President, the White House held that the deductibility of state and local taxes -- especially property taxes -- "lowers the price of local public services" and unfairly favors local government services over privately provided services. [emphasis added]

As economic theory goes, this is the sort of thing one expects from Young Republicans leveraging their Econ 101 knowledge. It's true enough that the tax deduction for property taxes insulates me from the full brunt of my $7,690 property tax bill in an amount determined by my marginal federal income tax rate. So I'll demand more services from the city than I would in the absence of deductibility because part of my would-be cost is effectively pushed off onto the upper-income Federal taxpayer. (Which is to say, I'm subsidizing my own consumption of local government services. I shall write myself an indignant letter.)

For one thing, the ERP logic begs the question of whether it makes any sense to raise the price of local services. An almost equally well-known result of "standard economic theory" is that private interests will underprovide collective goods (law enforcement, for instance).(2) For public services that are not quite pure collective goods, the question is whether we are actually over-consuming anything such that we should get a price signal to use less. For instance, given that roughly half of the Madison tax bill goes to the school district, is there really a problem that Madison's schoolchildren are getting "too much" primary and secondary education? Of course, since the quality and quantity of public services helps support Madison's high property values, there's some tradeoff between the size of our tax bills and our property wealth.(3)

For another, the idea that it's "unfair" to support local provision of public services over private services -- which private firms may or may not deign to provide -- is a matter of religion and not economic theory. (In a similar vein, see Brayden King on telco efforts to forestall public network projects.) Does living on a 5,500-sq. ft. urban lot, without so much as an indoor parking space for my BMW (yes, I'm a degenerate, I know), and thus relying on the nearby public parks to burn off excess toddler energy, create a material unfair burden on Rainbow Play Systems, compared to the alternative of needing to provide my own "park" on a one-acre lot out in Cardinal Point Estates? If your answer leans to the affirmative, please account for the cost of the non-private provision of the roads between the 'burbs and the rest of the world and re-answer.

In short, it's hard to see this application of "economic theory" as much more than a figleaf for the Grover Norquist-Stephen Moore desire to make everyone hate government as much as they do, and thus create some sort of libertarian paradise. Which may sound good until you seriously consider what that means for those of us of less than robber-baronial means.

(1) Listening to Mankiw speak on Bush Administration economic policy gives me the impression that they'll give anyone tenure at Harvard, but anyway...

(2) Some hardcore libertarians entertain themselves by coming up with private contracting arrangements to replace the essential collective good provision functions of government, but I remain a fan of the late Mancur Olson's The Logic of Collective Action and subsequent works on the subject.

(3) This does not absolve the city and other taxing entities of its burden to avoid boondoggles and generally use our money wisely. See, for instance, Althouse on the city swimming pool turned waterpark.
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