Sunday, May 24, 2009

Another tax reform idea

The property tax is supposed to be a tax on wealth. The idea is that the more wealth you have, the more you pay. But it isn't. For individuals, the tax only applies to the wealth or assets each taxpayers has in their home. For most Washingtonians, almost all of their assets are in their home.

Most of the assets in our state are held in the form of financial assets such as stocks and bonds. Unlike the value of assets held by individual homeowners, the vast majority of these assets are owned by those at the top. The top 1% in America owns 42% of the financial assets and the top quintile owns 92.5%. This form of wealth is known as an intangible asset (as compared to the tangible asset - your home). Guess what? Intangible wealth is exempt from the property tax.

One approach to tax reform would be simply take away the exemption. Since the valuation of financial assets on an annual basis is difficult to measure, the tax would take the form of an in-lieu property tax. The tax would be based on a proportionate value of the income to the asset. This is exactly how are state leasehold excise tax is applied to property that is leased. Since it is difficult to apply the property tax to the value of leases, the tax applied to the in-lieu income from the lease. This tax is constitutional by any measure.

The end result would be a tax system that is fair. The problem would be that the tax would fall disproportionately on senior citizens whose income is entirely based on their savings. This would require a property tax exemption that evens the playing field.

If you're worried that this is some kind of soak the rich populism, take note that a 3% tax on intangible income would be lower than the income tax paid in all of our neighboring states including the People's Republic Of Idaho where they would be 7%.

If we were unable to pull off an intangible property tax we ought to at least take up the idea of a homestead property tax exemption. Most states exempt the first fifty to one hundred thousand or so value of a home from the property tax. Like the intangible property tax, this makes the tax system more fair and more progressive. Given our sales tax dependence which has made our tax system the most regressive in the country, this just make sense.

There is more than one way to tax reform.

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