taxes – Page 3 – The Menace of Privilege

An improved real estate tax can help revitalize the south suburbs

photo of a south suburban rainbow by Tom Gill (CC BY-NC-ND 2.0)

Thanks to Crains for an article discussing the multiple difficulties of maintaining the south side of Chicago, and the south Cook County suburbs, as viable communities. There are a lot of issues here, but two of them are real estate taxes and vacant lots. The article notes that effective tax rates – taxes as a percentage of property value – in the south suburbs are more than double the average (I suppose they mean the average for Cook County). And that’s for the south suburbs as a whole; in one area your annual tax bill will be over 10% of what your real estate is worth.

So of course there are numerous vacant lots as well as rundown properties. If you spend $100,000 to build a house in an area where the effective tax rate is 10%, you’ll pay $10,000/year tax (in addition to the tax on the unimproved land value). That’s far more than your mortgage, maintenance, and utilities would be, so you don’t build it.

In fact, it’s worse, because Cook County, in practice, assesses residential properties at a higher percentage of value than vacant land – 56% higher according to the latest data(pdf) from the Illinois Department of Revenue. Even more incentive to let the property run down.

Suppose, instead, that two changes were made:

(1) Assess the value of vacant land, as well as of houses, accurately. This is the responsibility of the Cook County Asssessor.

(2) Stop giving vacant land the discount that residential property gets. Currently, commercial and industrial properties are supposed to pay a tax rate 2.5 times what houses and vacant land pay. That might not be a good idea, but it’s the law as enacted by the Cook County Board. The Board could move vacant land into the same category as commercial and industrial land.

If these two changes were made, the effective tax rate on vacant land would be triple, or more, what it is today. That changes the calculation for the land owner. Suddenly the cost of holding land vacant is higher, which means the alternative – developing or selling it – is lower. That’s important, because more development means more housing and/or more jobs.

Of course this change would raise more revenue for schools and other governments, or perhaps could be used to lower taxes on other uses. The amount of revenue isn’t certain, since the Assessor does not share information on the number or value of vacant parcels.

There is absolutely no danger that owners will pick up their vacant land and move it out of Cook County. It is here to stay. We just need to fix the incentives to encourage development in areas where it is lacking.

This is not the whole solution to the difficulties of the south suburbs, but it is one useful step that costs homeowners and governments nothing. All it requires is for Cook County officials to do their jobs.

Is Trump not entirely bad?

Photo of Jan 21 2017 women’s march by Bob Matter.

Political commentator Bob Matter took this photo, and sent it with the comment “You know you picked the right guy when the tax lawyers are against him.”

But are they? Sure, there’s a sign, but it’s hand-lettered, and carried by one guy. Maybe he’s a tax lawyer, and maybe he’s against Trump. But tax lawyers ain’t stupid. Nor impoverished. I bet they like whoever runs the government, and with Trump suggesting new rules on repatriation, a “border tax,” and a new “Dependent Care Savings Account,” which can be for benefit of the unborn and qualify for matching funds, there’ll be plenty of work for tax lawyers.

Maybe they hired an out-of-work actor to try to build some sympathy for their profession.

None of the above is meant to suggest that Hillary, or Jill, or even Gary would have reduced the demand for tax-related legal advice. As Henry George might have said: “It is not kings nor aristocracies, nor tax lawyers nor accountants, nor landowners nor capitalists, that anywhere really enslave the people. It is their own ignorance.” That’s why we have a Henry George School.

India does something a bit like what Scott Adams suggested

image credit: Andrew Sorensen (cc) via Flickr

It was over four years ago that I blogged about Scott Adams’ suggestion that the government could improve tax compliance by publicly honoring those who pay the most taxes. (My point was, not that this is a wonderful idea, but that it illustrates that tax ideas get attention when expressed by influential people.) Now, on the way to following up something else, I discover that tax authorities in India are emailing “certificates of appreciation” to those who they believe have complied with income tax rules. And the certificate will be bronze, silver, gold, or platinum, depending on how much tax you have paid. There is no monetary value nor official privilege attached to the email. The few comments with the Times of India article seem positive, tho I tend more to agree with those who see it as spam.

Hey Bruce! Mike! Here’s a few bucks for the deficit… or something.

For a full-sized (23.4mb!) copy of this cool Illinois Coal Industry Map produced by Illlinois State Geological Survey, click the image — For a full-sized (23.4mb!) copy of this cool Illinois Coal Industry Map produced by Illinois State Geological Survey, click the image

En route to writing something else, I discovered that the Center for Tax and Budget Accountability published a report last fall suggesting that Illinois might want to impose a severance tax on coal. I was surprised to learn that we didn’t already have such a tax, but encouraged that somebody is looking into it.

The report looks into severance taxes in several coal-producing states, suggesting that Illinois might raise anywhere from $1.6 million to $128.8 million, which might be shared with local governments, used as general revenue, or put into a permanent fund, or some combination. The numbers are pretty modest in the context of a state budget short by $4.6 billion for just the current fiscal year, but that’s no excuse to ignore them.

I did note a couple curious things in the report. On page five it asserts that, since most Illinois coal is consumed in other states, consumers in those states would pay most of the tax. I rather doubt that any consumers would pay it. Rather, since the coal market is national, implementation of a significant severance tax here would just reduce the value of coal deposits, so the tax would be paid by the owners or lessees of coal rights.

Second, there’s no discussion of existing real estate tax as it applies to coal deposits. Per 35 ILCS 200/10-175 it appears that coal rights, if not yet developed, are taxed on a value not to exceed $75/acre, practically a negligible amount. That’s an extremely cheap way for speculators to hold rights waiting for a price increase. But, per 35 ILCS 200/10-180, coal which is actually being mined is assessed much higher, based on its actual economic value as defined in the statute. So there’s already a substantial incentive not to mine the coal. A proper analysis would consider how a severance fee would affect this assessment, both in terms of revenue and incentives to mine or not mine.

Politician talking sense…

…or at least so it appears from this interview. (No transcript is posted so you’ll have to listen to the audio.) Andrew Barr is described as Chief Minister of the Australian Capital Territory. His jurisdiction is substituting a “land tax” (which seems to be approximately proportional to land value) for the “stamp duty” (tax on buying/selling real estate), also using the revenue to reduce payroll taxes and eliminate a tax on insurance. He calls the land tax the least distorting tax.

The change is, in a sense, optional. Owners may choose,, instead of paying the tax annually, to incur a debt which becomes due when the property is sold.

Apparently this change is being phased in, having been announced in 2012, as also reported by Incentive Taxation.

Billionaires controlling land and other natural resources

The Resnicks who, according to Forbes, own 70,000 acres of pistachio and almond trees in California’s central valley, and entitlements to “at least 120 billion gallons of water per year” (enough to supply nearly 2 million households, by my estimate), and additional privileges. Their assets total $4.3 billion, estimates Forbes, including not only California properties but also Fiji Water. At least the government of Fiji manages to collect some tax on the water exported. In the U S, they’re well-connected with major politicians, and how much tax they pay is not reported.

Just another example of how fortunes are accumulated by control of natural resources, facilitated and supplemented by political favors (and, yes, a lot of hard work).

UPDATE December 27 2015: Not for the first time, the Resnicks have shared a tiny bit of their fortune with the Aspen Institute, which is thus funded by water taken from Fiji and California. Silly me, I always assumed the Aspen Institute was in Colorado, but of course for optimal influence and convenient participation by the influential it is in Washington, DC. And, yes, among the Institute’s concerns is water supply.

Book Extract: The Pale King

image credit: Martin Heigan (cc) via flickr — Pale King (credit: Martin Heigan (cc) via flickr)

I am in no way qualified to review works of acknowledged fiction, as I read very few. But I have been intrigued by David Foster Wallace since a Radio National commentator observed that Wallace had, in his 1996 novel Infinite Jest, anticipated the effect of the Internet. When later I learned that his final, unfinished work, which had been assembled by his longtime editor, was about the administration of the U S Federal income tax, I couldn’t resist taking a look at it. I thought it might give some insight into how the IRS staff manage to actually patch together the mess of U S tax law and regulations to maintain something which provides the rulers with pretty good control as well as huge revenue, without causing any effective revolt by taxpayers.

No success there, I’m afraid, which is all the more disappointing because, in Chapter 9 Wallace breaks into whatever narrative structure the book has to say that, hey, here I am, a real person, and this book portrays real people and events modified only slightly. Then he points out that on the copyright page is the statement that “The characters and events in this book are fictitious. Any similarity to real persons, living or dead, is coincidental and not intended by the author,” which assertion necessarily applies to his statement that the book is not fiction.

Beyond that, the work is set in the 1980s, when the tax rules were simpler, with documentation and computerization far less than today. Which meant that a lot of people spent their days manually comparing sets of figures, on return after return, hour after hour, day after day. I suspect that in today’s IRS much of this work has been computerized, with the human staff devoting their time to other things perhaps too horrible to contemplate.

CTA railcar image by Menace of Privilege

Too, a lot of the book is just contrary to fact. The description of the Chicago public transportation system, to take one aspect of interest, is simply wrong. CTA do not operate any high-speed commuter trains, nor did they ever have a station named “Washington Square.” And it would be virtually impossible today for a passenger, with his arm stuck in the door of a crowded train, to be dragged along the platform to his death, because every railcar has long had a red handle, at every door, which any passenger could pull to open the door and stop the train (here’s why).

That said, there are some helpful insights about how the regime makes use of dullness:

[T]he whole subject of tax policy and administration is dull. Massively, spectacularly dull. It is impossible to overstate the importance of this feature. Consider, from the [Internal Revenue] Service’s perspective, the advantages of the dull, the arcane, the mind-numbingly complex. The IRS was one of the first government agencies to learn that such qualities help insulate them against public protest and political opposition, and that abstruse dullness is actually a much more effective shield than is secrecy. For the great disadvantage of secrecy is that it’s interesting (from page 83 in chapter 9)

And the key to success in a bureaucracy:

The underlying bureaucratic key is the ability to deal with boredom. To function effectively in an environment that precludes everything vital and human. To breathe, so to speak, without air.

The key is the ability, whether innate or conditioned, to find the other side of the rote, the picayune, the meaningless, the repetitive, the pointlessly complex. To be, in a word, unborable…

It is the key to modern life. If you are immune to boredom, there is literally nothing you cannot accomplish. (pp 437-438 in chapter 44)

America’s Biggest Bank and America’s Biggest Crook and Cook County’s Treasurer

logo3 No, they aren’t all one and the same.

I personally haven’t had any problem with JP Morgan Chase. I had a CD with a predecessor bank and, when it matured, I retrieved it without difficulty. My real estate tax is paid thru them, and as far as I could tell my payments have been processed as intended. Once upon a time I may have had a credit card with them. But I long assumed JP Morgan Chase is a corrupt organization, because I seem to recall having read various things here and there, and, well, how could an honest bank become so large?

I hadn’t even thought about Morgan Chase’s role in the Madoff affair, but of course it was nontrivial, as documented by Helen Davis Chaitman and Lance Gothoffer on their JP Madoff website (and, one presumes, in their book). They have compiled the information, most of which was floating around the Internet, that “In the past four years alone, JPMorgan Chase has paid out $28,902,150,000 in fines and settlements for fraudulent and illegal practices.” And that, of course, is only the cases where they were caught and unable to avoid prosecution.

“Boycott JP Morgan Chase,” Chaitman and Gothoffer urge. Great idea, and I have done so as best I can. But I need to pay real estate tax, and as long as I live in Cook County it seems I must pay it to JP Morgan Chase. So I wrote Maria Pappas, the County Treasurer, saying

I see from the check with which I paid my most recent real estate tax bill that you are still using JP Morgan Chase to process the County’s receipts. It’s pretty clear that JP Morgan Chase is a criminal enterprise, having paid over $28.9 billion in fines and settlements for fraudulent and illegal practices during the past four years. Why is the County unable to use any less dishonest bank to process payments? Thanks in advance for your response.

And just a couple of [business] days later, I received a response from “Customer Service Department:”

Thank you for contacting the Office of Cook County Treasurer Maria Pappas.

Cook County aims to provide efficient payment processing to the greatest number of taxpayers at the least cost to those taxpayers. Nevertheless, we acknowledge that additional considerations are relevant in the County’s choice of vendors, and we take your concern under advisement.

We hope this information is helpful and thank you for the opportunity to be of assistance.

So, they didn’t exactly say “we are going to boycott JP Morgan Chase because they’re crooks,” but it at least it appears that somebody read and understood my message.

My other recent check processed by JP Morgan Chase was used to pay Illinois State income tax. I suppose I should write somebody (Governor? Treasurer? Comptroller?) with a similar message, but I just assume that anyone responsible for administering a tax on earned income is already beyond hope. Maybe someone else will do it.

Two dumb tax policies give Aussie millionaire a bite of your lunch

Image Credit: Marshall Astor (cc) via flickr

From Crains we have a report that McPier — the Metropolitan Pier and Exposition Authority which controls McCormick Place and Navy Pier — has paid $5.5 million for about half an acre which sold last year for just “over $1 million.” It seems to be an awfully nice profit for Drapec USA, the California-based Australian real estate operator who earlier was expected to develop the property themselves.

I don’t know that this deal was in any way particularly corrupt or dishonest. Maybe the parcel actually quintupled in value over 14 months. Or maybe Drapec really has better “analytical and negotiating skills in finance and real estate” than McPier (or the seller last year, BMO Harris). But there are two things I do know:

(1) The multi-million dollar profit will be paid by everyone who patronizes restaurants in or near the central part of Chicago, where McPier imposes a 1% tax on all meals. To keep the math easy, figure the average fast-food meal costs $5.50, yielding 5½¢ for McPier. At that rate, it’ll take a hundred million meals to buy this real estate. Of course, McPier has other tax revenues, too. And actually, not quite all meals are subject to the tax, since some nonprofit organizations, as well as governmental agencies including McPier, are exempt.

(2) The asserted purpose of McPier is to “strengthen the local economy.” Why should the economy need to be “strengthened?” What are the obstacles preventing people from finding productive employment? Certainly one of these obstacles is taxes, not only the amount of taxes paid but also the difficulty and expence of conforming to all the applicable tax rules and regulations. Another, perhaps more important obstacle, is the vacant and underused land throughout the City. Land can be forced into productive use by collecting its full economic value through a land value tax. Since nothing can be produced without labor, productive use means wages will be earned. That is the way to strengthen the local economy. Of course, under a full land value tax, the selling price of that half-acre parcel near McCormick Place would be nominal, and Drapec would not have bought it unless they planned to begin development promptly.

Retiring regional leader on how to fund infrastructure

From Marni Pyke’s interview in the Herald:

One way to pay involves value capture — establishing special taxing areas that assume that development like a new road benefits landowners by growth in sales, rents or property values, he said.

“I’m a developer,” Ranney said. “I think developers need to pay more for the value that is generated (by the project). Value capture makes sense. That is something that the real estate community isn’t too keen on — but let’s get real. If you use public dollars to generate private wealth, you can darn well pay for it.”

And an observation regarding transit progress in the region:

Noting he takes the same train from Libertyville that his father took, Ranney added that “nowhere else in the world do they have complacency about exactly the same level of service.”