voter accountability

June 1st, 2007
Vermont, economics, education, taxes

Vermont has done itself a disservice in becoming the most highly taxed state in the union. One would have to be under a rock to not be aware of it, and about as smart to fail to see the consequences. Never-the-less, our legislators completely failed to address the school budget issue this session as the core problem of Vermont’s tax “problem”.

The real responsibility lies with the voter who elects these legislators. The majority of voters however fail to give serious thought to their choice of elected official simply because – for the apparent majority - the consequences are not in proportion to the result of their vote; either for their non-thinking legislator or for the increase in the local school budget that – after all – doesn’t significantly increase their personal tax burden – at least in the short term. The long term consequences require the insight of an economist like Art Woolf.

 

Vermont’s statewide reappraisal for property tax purposes simply exacerbates the underlying problem of voter accountability. Certainly there has been a legitimate disparity in property value growth in recent years, more desirable properties having increased more than others. But increasing the property tax rate, that disparity is not as great as the typical Vermonter would like to believe – and the process leads to an unfair disparity in property tax. Fairness can be subjective. Again, an economist like Art Woolf understands this as well as a few others who take the time to understand the issues.

Many towns attempt to “solve” the tax rate burden during reappraisal by shifting some greater portion of the tax /property value burden to those more desirable properties. This may or may not be fair – depends on your point of view. But for some, the greater “real” value of their property can only be realized by selling (into the “fair market”) – they can’t pay the higher tax each year and remain solvent. Oh well… it sucks to be them. Of course to get out from under the burden, they may have to sell at less than the real “fair market value”. Again, it sucks to be them.

In the mad frenzy to re-allocate our outrageous tax burden, fairness has fallen by the wayside, and those seemingly more well off (a decided minority) are – and it is quite conscious – made to pay a disproportionate share. So the average (majority) voter has little incentive to practice fiscal responsibility in the voting both. This disparity will eventually solve itself in the long term – again I think Art Woolf would agree. Free markets do ultimately apply their powers - even to governmental meddling. It is a painful process and one generally to be avoided.

Vermont needs to have fiscal accountability and that means each and every voter needs to be held fiscally accountable. No pointing their finger at the proverbial “flat lander” and giggling. Sooner (and with our current system, a bit later) that finger will get bitten. There is a simple, more efficient, more expedient and fairer way to assess property values and thus taxation while maintaining voter accountability.

Establish the “fair market value” of a property by what ever method. Current values – whether reappraised or not – that’s fine. The property owner can do it – or the “listers” can do it. Or – pull a number out of a hat. This method is not too dissimilar from currently used methods. And pay the assessed tax rate each year.

However, once a property is actually sold into the “fair market” the real property value is determined at that time and all taxes – underpaid or over paid – are adjusted accordingly with interest – amortized over the full tax period. This approach would an have amazing curative effect on ACT 60 inequities – and would place public fiscal accountability squarely on each and every voter. No one gets away with anything.

Here’s how it works. A property today is assessed at $200,000 “fair market value”. The real “fair market value” is what a buyer would pay for it. But the property is not being sold. It sells in ten years (2014) for $300,000. The state (town) average index for increase in property value (which factors in fairly the housing market such as local economy, replacement costs, inflation – all those good things that drive “fair market value”) between 2007 and 2014 is exactly 50% (for the sake of this example) and thus the tax “appraised value” was exactly right.

Now let’s say the property was appraised at $250,000 in 2007 and still sells for $300,000 in 2014. The statewide index (based on other property sales) is 50%. This means that the house was over appraised by 50,000 in 2007. For each of ten years, the property owner was paying taxes on $50,000 of value that was not there (relative the to state index) and thus ALL the taxpayers must ante up those excess taxes paid by the individual property owner - back to the property owner at the time he sells - with interest. All the taxpayers must ante up more of their money by increasing the local tax rate.

Conversely, let’s say the property was under appraised at $150,000 in 2007 and again sells for $300,000 in 2014. The property owner has underpaid his tax rate by $50,000 of the “index adjusted” “fair market value”, and must (out of the proceeds of the sale) ante up the accumulated tax deficit plus interest. Ouch.

(Or… and this is a good thing, maybe not “ouch” but this method allows for deferring taxes until sale – in effect amortizing the tax burden - working like a reverse mortgage.)

If this seems complicated at first blush, its not. Taxes work like mortgages and calculating the net result is simply calculating an amortization schedule. The “index” - which seems like it might be arbitrary - isn’t. If it is set too high, the state (or town or the collective taxpayers) takes a hit (pays out on overpaid taxes), if set too low the state takes a hit (doesn’t get its “fair share” of tax revenue. It will be remarkably accurate! Even more so since each and every voter will be painfully and personally aware of any mis-adjustments. Equity markets will be more than happy to absorb short term cash flow issues.

If a town wishes to overvalue lake front property – they (all the tax payers) will pay the consequences at sale time. If the owner wishes to undervalue his lake front property – he or she will pay the consequences at sale time.

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