Everett, Wash.
Published: Wednesday, December 12, 2007

GUEST COMMENTARY

Tax deferral offers little help to homeowners

By Paul Guppy

 "On the surface it sounds good." That was one lawmaker's first reaction to a law signed recently by Gov. Chris Gregoire that lets some taxpayers defer up to half of their yearly property tax bill. This lawmaker voted for the bill, but her initial skepticism was well placed. The new program is no deal for hard-pressed homeowners; it comes with plenty of strings attached.

-- Your total household income must be at or below the state median of $57,000 a year.

-- You must have lived in your home for five years.

-- You can claim the deferral on your primary residence only, not on a second home or business property.

-- Your total claim is limited to no more than 40 percent of the equity you own in your home.

-- You must sign a lien granting the state a financial interest in your property.

-- This is not a tax cut. All deferred taxes, plus interest, must be paid when the home is sold.

-- The state plans to charge homeowners about 7 percent a year in interest.

Unlike the 1 percent property tax limit, on which there was broad bipartisan agreement, many lawmakers of both parties had doubts about a tax deferral program. An amendment to study the idea was narrowly defeated in committee, and on final passage all but one Republican, plus a number of Democrats, voted against it. An analysis by Washington Policy Center found major weaknesses in the program.

-- The tax debt would function as a lien against the home, and against the estates of deceased homeowners.

-- Heirs may be forced to sell the home to pay back taxes; home-based family businesses could be lost.

-- For families that fell further into debt, the state would assume a role similar to a credit card company or payday lender, seeking to collect despite the debtor's declining ability to pay.

-- It might be unconstitutional. The state constitution forbids giving public credit to private citizens. Because the tax deferral must be paid back with interest, the supreme court could rule that it is an illegal loan. Homeowners with several years of tax deferral on their house would be in for a nasty shock if a decision like that were handed down one day.

-- The income eligibility is not indexed to inflation, so its value will erode away over time.

This last point is an important consideration for middle-income families. The U.S. Treasury's latest Income Mobility Study shows that roughly half of taxpayers in the bottom one-fifth of income brackets move up to a higher income group within 10 years.

That means a median income family's household income could rise to the point where it is no longer eligible for the tax deferral, and would be left holding the bag on years of past taxes plus interest. The deferral law could put you in a classic middle-class trap, not rich enough to pay all your taxes, but not poor enough to qualify for public assistance.

The most disappointing part of the tax deferral program is how small-minded it is. Under the program, the vast majority of property owners would receive no benefit at all.

The best way to protect homeowners from high property tax bills is for lawmakers to simply cut the state property tax. Since state revenues are constantly growing -- state spending is up 32 percent over four years -- a modest tax cut would result in only a slowing in the rate of spending increase. There would be no real-dollar cuts in programs. It would, however, provide fair, broad-based relief to every Washington property owner, without officials in Olympia picking winners and losers.

A tax cut would also stimulate the economy by spurring private investment and creating new jobs. Best of all, it would give lawmakers the opportunity to rebuild trust with the public. State officials do not need every dollar we send them. By easing the tax burden, our representatives would show respect for taxpayers and become more accountable for the way they treat the people's money.

There is one more advantage to a tax cut: You don't have to pay it back when you sell your house.

Paul Guppy is vice president for research at Washington Policy Center, a non-partisan public policy research organization.
© 2009The Daily Herald Co., Everett, WA