On Progressive Taxation and Property Taxes

David Lublin raised a number of good points on the property tax increase that deserve a response. Let’s take them in order.

(1) Lots of people have lived in homes for a long time that have appreciated substantially. Particularly for retirees on a fixed income, an increase of over $1000 (very easy to hit in SoMoCo) can be tough even if they live in a high-value home. Even if economic theory says they can borrow against their homes, people really hate that idea for understandable reasons. In any case, this market isn't the best one for realizing the profit.

David rightly points out that some people on fixed income could potentially receive a $1,000 property tax increase under County Executive Ike Leggett’s proposal. Under the formula in my previous post, a home receiving a county property tax increase of $1,000 would have a net assessment of $891,789 (and a much higher gross assessment and market value if the homestead credit applied). But the county provides residential property owners of at least 70 years in age a “senior property tax credit” of 25% of their combined state and county homestead credits. So a senior would be allowed to own an even more valuable home than a non-senior before being subject to a $1,000 property tax increase – perhaps even a home approaching $1 million in market value.

But no one will want to pay that amount of property tax increase. So suppose we relieve the tax increase on seniors with homes approaching a million dollars in market value. If there is to be a property tax increase at all, someone will have to pay more as a result – perhaps seniors occupying homes worth $300,000. But suppose we relieve them too from the extra taxes. Then the burden will fall on young families – a group with substantially less wealth than seniors and significantly less retirement security. Where should the burden fall?

Progressive taxation, a bedrock principle of progressive economic philosophy, holds that tax burdens should advance with income levels. Recent events suggest that principle may be out of fashion in Montgomery County.

(2) Focusing just on the millionaires tax is a mistake. Don't forget all those sales and income taxes raised during the special session. Also don't forget all those fees which were jacked up under Gov. Ehrlich. The voters won't. All things being equal, Americans like having more disposable income. If this is done to maintain services, it will need to be convincingly explained--not necessarily an easy sell though it can be done.

I am not about to forget the tax package from the special session. Because it relied primarily on sales taxes, it was regressive. To quote once again the analysis by the Maryland Budget and Policy Institute:

The poorest 1/5 of taxpayers will pay nearly 0.8% more of their income in taxes. The middle 1/5 will pay half that percentage: just over 0.4%. The wealthiest 1/5 will pay between 0.3% and 0.5% of their incomes in increased taxes. This overall regressive distribution occurs because the regressive nature of the sales tax increase overwhelms the progressive features of the income tax changes.

The County Executive’s property tax proposal is progressive and may, in conjunction with the new state millionaire tax, flatten the tax burden. These two progressive tax proposals, which together total $238 million, have attracted immense opposition from a substantial portion of Montgomery’s political leadership. But the $700+ million regressive state sales tax hike passed without a whimper. That is a chilling but instructive development in this county’s political environment.

In any case, I agree that any tax hike, no matter its character, must be explained to voters. The public employee unions are not in the best position to do this since most people will perceive their defense of public services as a defense of their memberships, which is of course their role. It is the responsibility of the politicians to explain why county services are worthy of a tax increase if that is what they believe. That is especially true of politicians who were eager to accept the support and aid of labor during the last election campaign. For the most part, that defense has yet to begin.

(3) The debate has been cast as an either/or debate with no middle ground. Either taxes go up a great deal or services are cut substantially. Like all money issues, this one can be negotiated to all sorts of points inbetween. Both sides know this but are posturing right now is my guess.

I suspect the County Council will have to settle somewhere in the middle. Such is the way of legislative bodies. But the decision to surpass the charter limit truly is an either/or decision. If the council rejects the County Executive’s tax proposal, they will have to cut the budget by a further $128 million.

There is another option. As Delegate Al Carr pointed out in a comment on an earlier post, the County Council is considering increasing taxes on electricity and natural gas. This is a far more regressive option than the County Executive’s property tax hike and it does not need a super-majority to pass. The shade of Annapolis may be descending on Rockville.

(4) The recession may just be starting with next year's budget looking even more grim. As at the state level, the chances of getting both budget cuts and tax increases over the course of several years are starting to look pretty good.

A recession is a distinct possibility as we recently reported. People on the lowest rung of the income ladder, not those earning one million dollars a year, are on the leading edge of the downturn. The residents at the bottom will be sure to bear the brunt of any spending cuts. They should not also bear the brunt of the tax increases. Under the County Executive’s property tax proposal, many working-class people are indeed spared further tax hikes after their setbacks in the last special session. They will not be spared the lash of a home fuel tax hike.

I completely agree with David's judgement that the tax and budgetary choices are going to get tougher at both the state and county levels, not easier, in coming years.

None of this has any bearing on some key questions other have raised: (1) does labor deserve the pay increases, (2) does MoCo need to pay them to maintain quality services, and (3) can MoCo afford the pay increases. The first is a morality, not a market, question. The second is largely market driven. The third is driven by the tax base, economic needs, and taxpayer willingness to pay. I haven't thought much about any of these questions so I won't weigh in just yet.

On point (1):

Speaking as someone who has been involved in several union organizing campaigns, the notion of what a worker “deserves” is a very explosive question. Many public employees are starting to believe that their leaders think they are paid too much. This argument has been stated, or at least hinted at, by more than one of the Democratic candidates in the District 4 County Council race. Economic arguments can be conducted rationally but the question of what a worker “deserves” is a question for the heart. Right now, hearts are pounding inside the public sector workforce.

On point (2):

In a recent survey of county employee compensation, we learned that Montgomery faces potential problems competing for labor in the region. Fair-to-middling (at best) pay levels, a lack of defined benefit pensions and high housing costs may deter top talent from coming here in the future. The existing workforce, originally recruited in times when the county’s housing stock was more affordable, is still known for its excellence. But the entry level talent will gradually erode unless the county keeps up with its neighbors.

On point (3):

In 2006, Montgomery County reported the 8th-highest median household income of all 3,077 counties in the United States. The County Executive’s proposal taxes the median assessed household an extra 38 cents per day. Readers can form their own opinions on whether we can afford that.

But there is a much larger argument here: where does the county’s economic competitiveness come from? Montgomery is perceived to be one of the higher-cost jurisdictions for residents and businesses in the region. So why are people willing to pay those costs? One reason is the excellent reputation of the schools and public services. As a former resident of the District of Columbia and a rural area in upstate New York, I have a meaningful standard of comparison for the county’s service quality.

But Montgomery’s true competitors are jurisdictions like Fairfax – counties that also have good schools and abundant resources. We are never going to compete with Virginia by matching them on tax rates. Instead, we will have to equal or surpass them in our quality of education, planning, parks, police and other public services. Those services comprise a valuable, productive asset that preserves our standard of living, maintains our property values and protects our economic edge. The money we spend on the public sector is an investment, not money thrown down a black hole. Any investment has to be evaluated not merely on its cost but also on the return it generates for its holders. Why are we hearing so much about the cost but so little about the return?