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December 16, 2013

Taxing times for cities

     Nearly 30 state legislators from the six New England states participated in a daylong seminar on current issues in state and local taxation at Lincoln House last week, with presentations by ten experts from government, academia, and think tanks.
     Mark Skidmore, a Lincoln Institute visiting fellow from Michigan State University, looked at the role of the property tax in Detroit’s fiscal crisis, noting how the recent collapse in housing prices has not been reflected in Detroit’s assessments, leading to massively inflated assessments. In 2010, the sale price for an average home in Detroit was only $7,000, but that home would be taxed as if it were worth $50,000 to $60,000. In addition, the state’s assessment cap has resulted in huge variations in effective tax rates for homes with identical values based on when they were purchased. The inflated assessments and horizontal inequities have undermined the property tax’s perceived fairness, which has contributed to the city’s 50 percent property tax delinquency rate.
     Visiting fellow Andrew Reschovsky discussed the factors that will impact the long-term future of the property tax. Public support for funding public education may diminish as the country becomes older and more diverse.  A declining share of households with school age children cuts both ways—it could diminish support for taxes used to fund education, but also spreads the cost of educating each student across more taxpayers. Cuts in state and federal aid, growing pension and healthcare costs, and the difficulty of replacing property tax revenues with other local sources are all factors that could increase property taxes in the future.
     Keynote speaker Jeffrey Carr, president of Economic and Policy Resources, Inc.  gave an overview of recent U.S. economic performance and a five-year forecast. Overall his outlook is positive for the next three years, with growth returning to normal rates. Household debt relative to disposable income is at its lowest level since the early 1980s, the stock market has reached new highs, and the housing market is returning to normal. There will, however, be a slower return to normal for the labor market, which has increasingly become the norm in recent recoveries. Federal fiscal policy has been a big drag on the economy, but the Ryan-Murray budget agreement is an important step away from budget brinksmanship in Washington, he said, which could have significant impacts on consumer confidence and get businesses to invest more in expanding operations.
     State debt affordability was the topic for both Jennifer Weiner (Federal Reserve Bank of Boston) and Scott Jordan (Massachusetts Executive Office of Administration and Finance), with Weiner focusing on the pros and cons of different ways of measuring affordability and Jordan touching on striking the balance between making the investments needed to maintain public infrastructure and keeping debt service payments affordable. Edith Brashares from the U.S. Treasury Department talked about proposals to move away from the federal government’s traditional way of subsidizing infrastructure through tax-exempt municipal bonds in favor of more efficient tax-credit bonds. Visiting fellow Richard England discussed use value assessment of rural land and reforms to make these programs more cost-effective.
             Interstate tax competition was the focus of the final session. Cristobal Young (Stanford University) presented evidence that differences in state income taxes have little impact on millionaire migration; David Agrawal (University of Georgia) showed that sales tax differentials between neighboring jurisdictions do impact cross-border shopping; and Ranjana Madhusudhan (New Jersey Department of Treasury) presented data on a 50 percent decline in New Jersey’s casino tax revenues since a 2006 peak, which coincided with substantial expansions in legalized gambling in surrounding states.
     PowerPoint slides for all presentations are available here.

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