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Coming soon: A tax revolt like no other
Anger over property taxes and the AMT is about to boil over. And the wave of tax revolts thundering our way will have intended and unintended effects that ripple through the economy.
By Jim Jubak
The next tax revolt is coming, and it's going to be a doozy. Even bigger than the last one set off by Howard Jarvis and Proposition 13 in California in 1978.
That one slashed California property taxes by 57% overnight and put in place a system that has given Californians the most unfair property tax bills in the country.
This time around the tax revolt will have a big say in how much higher housing prices will go and whether or not the economy stalls, in how state governments will meet a pension shortfall of hundreds of billions of dollars, and in whether in 10 years the annual federal budget deficit will be large or monstrously, economy-swallowing huge.
The California tax revolt of the 1970s was set off by rising home values -- and unresponsive local governments. As property values soared, local governments kept property tax rates steady. That resulted in a windfall of tax revenues to local governments, and in tax bills so high that they forced elderly or poor homeowners to the wall. Proposition 13 rode to passage on a wave of anger against high taxes and high government spending. Voters in other states followed California's lead and enacted their own tax limits.
The anger returns
You can find echoes of that anger across the country now in the wake of the real estate boom of 2005 (and counting). For example, New York City, where I live, is one of the most overheated local housing markets in the United States, according to the Federal Deposit Insurance Corp. Thanks to rising property values, my tax bill will go up about 18% this year.
I'm actually doing pretty well compared to what's going on in some other parts of the country. New York City reassesses property values every year, so my taxes have ratcheted upwards in uncomfortable but not shocking jumps. In many localities around the country, property values are assessed only every three or five years, so taxpayers now are getting blasted by the full impact of years of house-price appreciation in just one lump.
New York City has cut the tax rate I pay on the assessed value of my property this year, which takes down the tax bite a bit. And last year, thanks to an unexpected city budget surplus, I got a real-estate tax rebate from the city. Other local governments, struggling to recover from years of budget deficits, are actually raising tax rates, adding to the pain.
Related news and commentary on MSN Money
How bad is it? Here are some numbers I've found from around the country.
In Pierce County on Washington's Puget Sound, valuations sent to taxpayers are up 20% this year, on average. In Lexington, S.C., real-estate taxes have climbed 20% a year since 2000. In Northern Virginia, homeowners are paying as much as 70% more in real estate taxes than five years ago.
In Incline Village, a Nevada community 35 miles south of Reno, the median price of a home has climbed to $270,000 from $200,000 in the last year. Of course, some houses have appreciated by much more. According to The Wall Street Journal, a house owned by Ted Harris, for example, assessed at $400,000 in 1989, was assessed at $1.2 million this year. Harris's property taxes have climbed to $12,000 from $2,200 in 1990. Would you be surprised to learn that Harris is the head of the local Incline Village tax revolt?
You can see why there are active efforts to put caps on taxes and state spending in more than 20 states right now.
Not just property taxes
But this time, unlike the tax revolt of the 1970s and 1980s, it's not just property taxes. The AMT (alternative minimum tax), originally designed to make sure that rich taxpayers paid something in income tax, has started to devour the same middle-income taxpayers who are getting socked with the biggest increases in property tax bills. And the AMT is going to get worse, much worse, for the rest of this decade.
The problem with the AMT is that when it was created 36 years ago, nobody bothered to index its tax brackets to inflation. That bracket creep is now biting really hard as inflation pushes middle-class incomes into brackets designed for the rich of 36 years ago.
According to an analysis done for The New York Times, only 1% of taxpayers making $75,000 to $100,000 paid more in taxes in 2004 because of the AMT. That will rise to 52% of all taxpayers in this income group by 2010. The average taxpayer hit by the AMT at this income level will pay an extra $1,600 in taxes in 2010. The impact is even greater for taxpayers in the $100,000 to $200,000 range, where 80%, up from 6%, will pay AMT taxes by 2010. That will add $2,500 to the average tax bill of the 80% affected by the AMT.
Not too worried about people making that much? (At $100,000 to $200,000 in income, you are in the top 10% of all taxpayers, after all.) Well, 16% of taxpayers making $50,000 to $75,000 will get dinged by the AMT by 2010 for an average $900 a year in extra taxes.
You can see how soaring real-estate taxes and the increasing bite from the AMT might be enough to fuel a tax revolt or two.
Fight for fairness
But I'm not done. Something else has changed in the country since the 1970s and 1980s. At least, I think it has. First, thanks to the Reagan and Bush tax cuts, and to the supply-side economics used to justify them, there's much less fiscal restraint on cutting taxes. Running a budget deficit? Cut taxes anyway. Rising revenue, created by the tax cuts, will fix the problem in time. Second, runaway government spending has undermined the public's belief that it gets value for the taxes it pays.
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