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Taxes Are Deductible, Fees are Not

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By Lowell L. Kalapa

With the end of the fiscal year looming just around the corner, county councils are racing against the clock to put the final touches on the county budgets for the coming fiscal year. However, that means that the councils will have to adopt new rates for the real property tax. In some counties the whole gamut of potential revenue sources is on the table from real property taxes to user fees to highway tax sources. Council members will be tempted to find sources other than real property taxes to finance the shortfalls since the real property tax affects all county taxpayers.

As a result, user fees and highway related taxes may be an easy target for increases since these revenue sources tend to be more narrowly focused than the real property tax. The problem is that given a choice between the real property tax and user fees or other types of taxes (such as the county fuel or motor vehicle weight tax), part of the real property tax burden can be shifted to other levels of government like the state or the federal government.

This is because real property tax remains a deductible item under both the federal and state income tax law. Because a deduction reduces the amount of income subject to the income tax, the amount that would otherwise have been paid to the state or feds in income taxes is reduced by the amount of real property taxes paid times the applicable percentage of the taxpayer’s bracket. It is something like having the state or federal government pay a part of the property tax burden.

Now county officials don’t like to raise property taxes because their constituents will see how much it is truly costing to run the county government. The higher the property tax rate goes, the more resistance taxpayers will have toward county government. Taxpayers will question whether all of that county spending is really necessary. My goodness, in some cases, some taxpayers will suggest that less is better!

So is raising the real property tax rate all that bad? From a pure tax standpoint, it isn’t all that bad in the sense a portion of the tax burden will be shifted to the federal and state governments through increased deductions. From a public accountability standpoint, it ain’t all that bad either! As a result of the broad application of the real property tax, more taxpayers will take notice of what the county is doing with their hard earned tax dollars. Taxpayers will question whether or not certain expenses are truly necessary for the day-to-day operation of county government.

This is a major reason why county officials resented the loss of the transient accommodations tax revenues last year. The TAT receipts were viewed as “free money” in the sense that they could spend monies that they didn’t have to take the heat for raising. It is the state legislature that has the responsibility for raising the TAT rate and therefore must face the consequences. However, for nearly eight years the counties enjoyed the benefits of the tax on tourists.

The result of this windfall from the TAT is that county officials were able to spend on all sorts of programs that the counties probably should never have undertaken because those were programs for which the state is responsible. In some cases, the counties used the TAT receipts to lower real property tax rates on homeowners at a time when rates should have been increased because of falling values. Thus, to some degree, the TAT revenue sharing spoiled the counties rather than helping the counties to better manage their resources.

Now that real property values have fallen dramatically and a part of the TAT receipts has been taken back by the state, the counties are struggling to justify a substantial rate increase. But as noted earlier, there is nothing wrong with raising real property tax rates . . . as long as county officials can justify the spending. This is where the rubber will hit the road. If county officials cannot justify the spending, then it is likely that they won’t be able to justify raising property tax rates.

So as your county council begins laborious rhetoric on why they have to raise property tax rates, ask yourself, is the spending really worth paying higher property taxes?

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