Fair Tax in Texas - Update 2

I sent two e-mails to State Rep. Larry Taylor's office regarding Rep. Phil King's sales tax proposal and received replies to both of them from Cari Chistman-Ott, his Chief of Staff. The first e-mail was voicing my support for the sales tax, and the second included my criticism of Dick Levine's position paper from CPPP.

Her e-mails are below:

Thank you for contacting Rep. Taylor regarding Rep. Phil King's consumption tax proposal. Rep. Taylor works closely with Rep. King on the Texas Conservative Coalition's Property Tax Task Force, in which they are both members. He believes Rep. King's proposal is a good starting point and looks forward to continue working with him on this proposal and others to relieve taxpayers from skyrocketing property taxes.

I have attached a copy of the TCC's statement on property tax reform for your review. Rep. Taylor will continue working with the task force throughout the interim to find a solution that will pass during the next legislative session in 2009.

Text of the attachment is here:

Texas Conservative Coalition: End the School Property Tax
State Representatives Wayne Christian (President),
Linda Harper-Brown (Vice-President),
and Ken Paxton (Secretary/Treasurer)
FOR IMMEDIATE RELEASE December 12, 2007
Contact: Brent Connett Phone: 512-474-1798

The property tax is the single worst tax ever devised.

Despite billions of dollars appropriated by the Legislature to cut Maintenance & Operations (M&O) tax rates, homeowners and businesses are facing rising tax bills due to local increases in appraisals, rates, and debt. It is apparent that the only way to provide relief from the M&O property tax is to eliminate it altogether.

Members of the Texas Conservative Coalition have shared a stark realization with Texans around the state at TCC town hall meetings: No one ever truly owns their home. Even after a mortgage is paid in full, the government continues to collect ‘rent’ in the form of the property tax. Should a homeowner fail to pay their property tax bill, the government can ‘evict’ the homeowner and seize the property.

This system of taxation is unjust and unacceptable.

Home ownership is the ultimate expression of property rights, but as long as property is taxed in perpetuity, home ownership is a dream that can never be fully realized. We have posed the question to our constituents and they agree with the fundamental idea of eliminating the M&O property tax as a means to restore their property rights.

If we succeed in putting together a plan to eliminate the M&O property tax, more low-income Texans will be able to attain the American dream of homeownership, middle-income Texans will be free of a constantly growing financial drain, and senior citizens on fixed incomes will be free to live in their homes. Furthermore, we aim to bolster Texas’ entrepreneurial spirit by eliminating a major and never-ending cost that all businesses face.

The state can meet its obligation to fund public schools without burdening home and business owners with unjust and constantly increasing property taxes.

P.O. Box 2659, Austin TX, 78768 􀃕 512-474-1798 􀃕 http://www.txcc.org/

***************

The second e-mail indicates that she forwarded my criticism below to Rep. Taylor.

Maybe he will read it, maybe not, but at least I got a response.

Mr. Shelley, Thank you. I will pass this along to Rep. Taylor…clc

Fair Tax in Texas - Update

Recently I have been defending Texas Rep. Phil King's sales tax idea on Paul Burka's Blog on Texas Monthly Magazine's website. Follow the link to see my comments. Mr. Burka linked to a position paper put out by Dick Lavine the Center for Public Policy Priorities.

Below is a critique I wrote to Dick Lavine and cc:'d to Rep. Phil King and my district's Rep. Larry Taylor. I thought the line in bold was the most damning.

Mr. Levine,

I have read your “REPLACING PROPERTY TAXES WITH SALES TAXES WOULD BE BAD FOR TEXAS BUSINESSES, FAMILIES, AND PUBLIC EDUCATION“ and I have a few problems with your analysis and wanted to point out some contradictions and oversights.

While you state the obvious that if prices go up, demand will fall for retail purchase, you ignore a number of other effects of the sales taxes replacing the property tax. You state:

“Thus, if the state raised the sales tax to eliminate property taxes, Texas businesses would have trouble selling their goods and services because we would have the highest sales tax in the country.”

You are completely ignoring the costs savings through property tax elimination for retail properties. While the sales tax would increase, the underlying cost of business would decrease because, as you said, the price of rent (in a competitive market) will fall when property taxes fall. You also ignore the wealth effect on the budgets of residential property tax payers who would have more money to spend once their property taxes fell. Even though internet purchases are growing, the vast majority of retail purchases are made by locals at local retail establishments, it would be terribly inconvenient for Texans to avoid Texas retail establishments for most purchases.

You also mention on page 4 that:

“Businesses also pass on their property taxes to families and individuals in the form of higher prices, lower wages, or lower profits.”

This statement, in defense of property taxes, is not included in your analysis of who would benefit form the tax cuts. You argue that the sales tax would hurt businesses and increase prices, so the sales tax is bad. Then when defending property taxes you admit that they lead to “higher prices, lower wages, or lower profits” and this is ok? This is a blatant contradiction.

“The sales tax, which is based on consumption, is extremely regressive, meaning it takes a much larger percentage of the income of a low- or moderate-income family than of a higher-income family.“

Therefore, the sales tax is regressive because it hurts the poor, yet you also say in the defense of property taxes:

"Homeowners write checks directly, but renters also pay property taxes, which are passed on to them by their landlords in the form of higher rents. "

The poor generally rent at much higher rates than those with higher incomes. Because they are renters the property taxes calculated into their rent does not have homestead exemptions available. Secondly, renters cannot deduct mortgage interest or property taxes from their federal income tax and these extra costs pass into their rent. Their rent would fall with a conversion to the sales tax.

Your analysis also ignores the rebate mechanism Rep. King mentions, in an allusion to the FairTax, which is available to everyone. This oversight means that the sales tax, under Phil King’s plan, may actually be progressive depending on the size of the rebate.

Finally, you state:

"Property taxes do not imperil home ownership. Generally, Texas families buy homes based upon their annual income, giving the tax a rough correlation to the ability to pay."

This is a terrible contradiction. First, you claim that lower prices will not lead to higher demand for home ownership, which is patently absurd and contradicts the most fundamental principles of economics, and claim that “families buy homes based upon their annual income”. Under a switch from property tax to sales tax, the incentives would change to encourage more consumption of housing, which would be taxed less, and away from retail purchases, which would be taxed more. This would increase the level of home ownership.

While you do fine with your number crunching your economics is superficial. While you may not like the sales tax bill by Rep. King prima facie, you do a disservice to the parties you want to help by piling up evidence against a bill without fleshing out all of the effects. In the end, your points may be valid, but the gaping holes I noticed negate your entire argument for me.

Sincerely,
Brian Shelley

P.S. I am sending copies of my rebuttals to Rep. Phil King and my representative Rep. Larry Taylor

Titanic vs. Iceberg, Live!

Social Security is a titanic government obligation and a touchy subject that many politicians shy away from, which is unfortunate. The reality is that the Social Security Board of Trustees believes that by 2017 we will be withdrawing more money from Social Security than we are collecting in taxes. The board also believes that Social Security will go bankrupt by 2041 because the so-called trust fund will run out of money. Of course, the trust fund is mostly imaginary because Congress long since spent it on other things, so this later date is somewhat meaningless. In 2017, we will have to cut benefits, cut other government programs or raise taxes. This massive iceberg is ten years out and it is not moving out of the way.

Who pays what and who gets what under Social Security?

The payroll tax is 12.4% of your first $97,500 of wages. You pay 6.2% and your employer pays 6.2%. Income above $97,500/yr is not subject to payroll taxes because people who make $97,500/yr and those who make $2 Billion/yr receive the same Social Security Benefit. Or put another way, your Social Security benefits top out when you make $97,500/yr in payroll income.

Your benefits are a proportion of the income you made during the years you paid into Social Security. Those with low incomes have their benefits subsidized and are generally a higher proportion of their working salary than benefits received by those with high incomes. These benefits are indexed to wage inflation, which means about a 4% increase in benefits each year.

How do we fix it?

In general, there are three major proposals to fix it:

1) Extend payroll taxes (which you see on your check as FICA) on wage income above $200,000 to keep benefits as high as they are now. Those making above $200,000/yr will not receive any more benefits with the new extra taxes. This amounts to a 12.4% tax hike on all payroll income above $200,000. This means that those who work for a living like doctors, lawyers, and athletes would get a tax hike. Those who have inherited money or are independently wealthy who receive their income from investments would not pay any extra tax.

My salary does not begin to approach this level, but I despise how this proposal treats high wage people like a piggy bank we can raid. Many people toss around the term Socialism far too much, but this is by definition Socialism. This is merely taking money from one person and handing it to another. We have many policies, like national defense, where the wealthy pay more taxes, but they still participate in the benefits. We have other policies that transfer funds from the wealthy to those in need. This is not one of those policies. It is not based on need, and is not based on community benefit. It is simply a plan put forward to get money for some by taking it from someone else. It is pure greed.

2) Increase the retirement age. At first glance, this seems like an equal way to reduce the benefits, but when digging a little deeper it is not quite as fair. Poor people tend not to live as long as wealthy people. The poor are more often employed in physically demanding jobs, have more health problems, or simply made bad decisions in their life that led to a shorter lifespan. Under this plan, those who live the shortest lives face the largest percentage cut to their benefits. To cut the largest percentage from the benefits of those who are poor and/or have medical problems, but have paid into the system their entire lives seems unfair.

3) Reduce the growth rate of benefits. First proposed under George W. Bush, and now supported by Fred Thompson, this plan cuts the growth in benefits for anyone under the age of 58. On a percentage basis, everyone who receives social security retirement benefits would have the exact same amount reduced from their benefits as everyone else. On a dollar basis, those who receive more social security benefits would have their benefits reduced the most.

Technically speaking, it would reduce the growth rate from the wage growth rate (normally 4%) to the inflation rate (normally 3%), effectively reducing the growth rate of social security benefits by 1% a year. Some believe that this will not cure the entire problem, but the sooner we act the less dramatic the changes will have to be in the future. We need to tap the rudder on this titanic program now so we don’t risk hitting the iceberg later.

Virtually every American is eligible to receive social security retirement benefits. America needs to cut benefits so that the system does not go broke. Every American eligible for benefits should have their benefits cut and the same proportion should apply to everyone. If the ship is sinking, we should not be throwing some people over board so we can save our luggage.

As always, tell me what you think.


Here are a couple quotes in response to Alex’s guest post last week:

Steve S. – “Accountability. What a novel idea! Why that's practically un-American…”

Craig W. – “I agree with [Alex] up to a point in his letter-to-the-editor…I believe the banks put these folks in this precarious position; knowing full well that they barely could make the introductory payment on their current income…I think it is mostly [the banks’] responsibility to work with the individuals to come out with a workable solution.”

Guest Blog - Mortgage Bail Out

A few weeks ago, I challenged you to write a letter-to-the-editor of sorts that I would print in this newsletter. Well, Alex G. took me up on it and I have included it below. These are his words, unedited.

Mortgage Bail Out

A lot has been said recently about the Federal Government's proposed "mortgage bail out". I have heard some pretty tough language at the people who can't pay their mortgages and are facing foreclosure in response to the proposed plan. It matters not if the people who will capitalize on this plan were "greedy" or "stupid". What they were (or were not) thinking when they signed those papers for their homes does not matter now.

What matters is if we are still a Nation that holds up the idea of accountability. When you make a mistake, whether you were greedy, stupid, or just plain old unlucky, there are consequences. We are moving further and further away from the idea that an individual is responsible for his or her own actions. Whenever something goes wrong the average American wants to blame someone/anyone but themselves. Your son is failing in school...it's the teachers fault. Your daughter fell off her bike..it's the manufacturer's fault. You hit the golf ball into the water. . .it's the club's fault.

You can't pay your mortgage . . .it's the bank's fault.

This is pervasive throughout our Republic. The most contentious issues of the day all deal with a lack of personal accountability (can anyone say Abortion?).

What's next? Maybe someday I can walk into a casino, lose all my money, and blame the casino for my losses and go cry to the government that "predatory" gambling practices were engaged, and I was duped into betting and losing.

Please. Stop crying for the homeowners about to be kicked out on the street. Let the big banks collapse under their own mistakes. This Republic is strong enough to withstand this bump in the economy, but what we can't withstand is a change in culture that allows people to run away from the consequences of their own decisions.

--Alex G.

Well said, but I think the real problem with American culture is ignorance of proper sentence structure Alex. Just kidding. Thanks for writing, and I invite everyone who is passionate about our society to put that passion on paper and work for change.

As always, tell me (us) what you think.

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P.S. A person named Marsha left a note on the blog advertising a grassroots organization working for the FairTax. They have a humble website, but don't solicit donations. I think that their hearts are in the right place.

http://www.operationoffthefence.org/

The FairTax Comes to Texas

A few weeks ago, I wrote about the FairTax and had some criticisms, but overall I think it’s a pretty good, if not ideal, reform to the federal tax code. To review, the FairTax is a national sales taxes with a “prebate” (a rebate that happens at the beginning of the year) for all citizens so that the poor won’t face the same burden as those with more income.

Recently, a Texas State Representative named Phil King out of Weatherford has proposed a similar measure for the state of Texas. The Fair Tax is better suited for Texas because our tax code is already simple (compared to the Federal tax code) and the state already collects a large portion of its income from sales tax.

Texas has two major sources of income: Sales Tax and Property Tax. Rep. King is proposing that Texas eliminate much of the property taxes in favor of a higher sales tax. This is a good idea.

Why are sales taxes better than property taxes?

Through no fault of their own, someone can be taxed out of their home. In some areas property values have skyrocketed over the last few years, and people can no longer afford to live there because of the skyrocketing property taxes. How crushing would it be to retire to your dream house only to have to sell it because you could not afford the property taxes?

It also makes sense that a single and simple source of tax revenue reduces the size of government bureaucracy. Changing the sales tax rate should not require any additional staff to collect the income. Property taxes require appraisers to annually reevaluate every piece of property in the state.

Who does it help?

The first are those that are property rich and income poor. Generally, these are the elderly. Currently, the elderly can lock in the appraisal value of their homes, but still have to pay property taxes at whatever rate is being charged. This bill would eliminate a good chunk of their taxes. Poor elderly who survive on social security income would face higher sales taxes, but the prebate would reimburse them for a large portion of them. This would reduce the chance that they would be taxed out of their homes.

Another group to benefit is the poor who rent. While a homeowner in Texas can limit their property tax appraisal value by getting a homestead exemption, the owner of a rent house or apartment complex cannot. Assuming a competitive rental market, the price of rent includes the cost of property taxes. If property taxes drop, then rents drop, and poor people save money. The poor would also receive the prebate (like every citizen) that would offset the increase in sales taxes.

There are other winners, but I will limit the conversation to these two.

Who does it hurt?

The people who would be hurt the most are those that live in an inexpensive home but spend a large portion of their high income on retail services and merchandise. It would also hurt teenagers and other people who do not pay rent, but have an income.

I’m willing to accept the trade off.

I have written to my state representative (Larry Taylor) and told him that I support this bill and I hope that he will too. If you like this idea and live in Texas follow this link – and write your state Representative or Senator to express your support. For those that live outside of Texas you may want to pass it on to your representatives to suggest to them.

As always, let me know what you think.