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The Housing Bill May be Bad for Your Town

April 6, 2008 - by Donny Shaw

<img src=“”align=“right” width=" 300"height= "200">The property tax deduction for people who don’t itemize that is part of the Senate’s bipartisan housing bill has been criticized as being pretty irrelevant to the issues the bill was supposed to address. But there may also be another reason for Congress to take a closer look at it before they finish up the bill. The Center for Budget and Policy Priorities has drawn the red flag on a little-known provision that, when combined with the new deduction, they say “could force many localities to cut police, schools, and other vital public services.”

The bill stipulates that that new deduction will not be available to “any resident of a locality that raises its property tax rate between April 2 and next January 1.” CBPP is concerned that the new deduction this bill is promising homeowners — $500 for single filers and $1,000 for joint filers — could strengthen the already-strong opposition to raising local property taxes, since agreeing to a tax increase would mean losing the individual tax deductions. And since a lot of tows and cities are going through hard times financially, if they aren’t able to raise property taxes, they may have to cut back on the services they provide to the community.

CBPP’s got other problems with this provision too. Here are the main points from their analysis:

  • Property taxes support vital services such as police and fire departments and are a major funding source for schools in most states. In the areas hardest hit by the housing crisis, property values — and thus property tax revenues — are falling. If they do not have the flexibility to offset even a portion of this revenue loss by raising property tax rates, they will have to cut police forces, close fire stations, and potentially lay off teachers or take other drastic action to cut K-12 education.
  • This proposal would also undercut localities’ efforts to deal with extra burdens that foreclosures have placed on them, such as policing areas with abandoned housing, assisting families that have lost their homes, and housing the newly homeless.
  • If the federal government precludes localities from offsetting their lost property tax revenues, states will face pressure to make up the revenue. But more than half of the states already face deficits that average 9 percent of their expenditures. Thus, this proposal would squeeze state and local services from both ends.
  • The federal government should not pre-empt local governments’ taxing power. In our system of federalism, states — not the federal government — grant taxing power to localities. If the federal government decides to create a new tax break, it should do so without pre-empting local rights.
  • The proposal is unworkable. At least 40,000 different towns, counties, and school districts levy property taxes; their boundaries overlap in some states and do not correspond to any other boundary measures, such as zip codes. For each taxpayer seeking the proposed deduction, the IRS would have to determine whether the jurisdiction(s) in which the taxpayer resides had complied with the freeze on property taxes. Because there is no central repository of current data on property tax rates, that would be an impossible task for the IRS to perform.

As far as I can tell, there has not been an amendment introduced in the Senate to address these concerns. The bill will have to be reconciled with the House before it is sent to President Bush to be signed into law. We’ll keep you posted on how things are shaping up around this provision.

Pictured above are the two main architects behind the bill, Chris Dodd (D-CT) and Richard Shelby (R-AL)

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