Tag Archives: Taxes

How Can The Mortgage Deduction Be Wrong?

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A handful of politicians both left and right, recently floated test balloons on eliminating the mortgage interest deduction in exchange for a more generous standard deduction or a lowering of marginal rates. Special interest groups like the National Association of Realtors and the National Association of Home Builders are howling that the mortgage deduction is a pillar of home ownership and the US economy in general. On the contrary, the mortgage deduction is a harmful manipulation of the free market, and its elimination would stabilize tax revenues while preventing further housing bubbles.

Most people cherish their mortgage deductions; after all, their taxes are high enough already. The proposals, from Steve Forbes’s flat tax to Pres. Obama’s Commission on Fiscal Responsibility and Reform are more complex and might actually lower the middle class tax burden. In short, the mortgage deduction would be eliminated in exchange for an overall lower income tax rate. People with modest debt loads relative to their income would see taxes fall, while heavy borrowers might face trouble.

By encouraging borrowing, the mortgage deduction perverts the economy in several ways. First, since Uncle Sam pays about 30% of a homeowner’s interest expense, people are encouraged to borrow as much as they can. Likewise, since mortgages are artificially cheap, people are encouraged to buy as much house as possible. These incentives are the formula for a speculative bubble in housing. Combined with loose credit care of government backed mortgage securities (i.e. Fannie Mae), the 2008 housing collapse was inevitable.

On the government’s side, high marginal rates combined with targeted deductions create a boom and bust cycle for tax receipts. By placing about half of the tax burden on the top 5% of earners, federal revenues are highly variable. California, whose taxes are even more targeted, is the best example of the ruin caused by overly progressive income taxes – whenever the economy dips, California’s tax revenues collapse. Most economists agree that a broad and transparent tax policy is the best way to fund the government, yet higher tax rates combined with targeted deductions remains Washington’s policy.

Finally, higher tax rates combined with targeted deductions encourage Beltway corruption. The availability of targeted tax favors encourages the investment in lobbying and PACs. While NAR and NAHB‘s lobbying hardly compares to AARP’s, they do force their members to donate to politicians in the hope of influencing the tax code. If the individual tax return were completed on a post card as Steve Forbes proposed, there would be little opportunity for Washington’s tax lobbyists and the economic drag they impose.

Would eliminating the mortgage deduction deny home ownership to Americans? Not likely. Already, the housing collapse has limited financing to those who can afford it, the very people who would likely feel little pain from the adjustment. Other home financing tools, like REX Agreements could fill in any gap left by smaller mortgages. Eliminating the mortgage deduction might reduce the number of ‘McMansions’ built for aggressive borrowers, but the trend away from overbuilding started with the collapse. People will still need homes, but they will not be coerced into over buying and over borrowing if the mortgage deduction is eliminated – hardly the end of Realtors and homebuilders.

Of course taking from the many to benefit the few is Washington’s staple business, so the mortgage deduction is probably secure. Still, if the US has any hope of constraining its government and saving its future, proposals like eliminating the mortgage deduction must be on the table. The pleasant surprise that the President’s Commission was willing to confront the culture of corruption that surrounds the tax code is a ray of hope for the US’s future.

Renewable Scam II

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In February, Shout Bits exposed the fraud in Colorado’s renewable energy mandate law. The law was deceptive in that it purported to mandate 30% of the State’s electricity come from renewable sources. In reality, it shifts much of Colorado’s electricity from coal to more expensive and unpredictable natural gas. The law was fraudulent because it promised that utility rates would not go up more than 2%. No serious person believed the transition from cheap and stable coal to other energy sources costing 2 to 10 times as much would not raise their rates.

Reality hit today in a Denver Business Journal
report showing Denver residential electricity prices have exploded 21.4% in the past twelve months. Coal prices have remained stable, and natural gas prices have actually fallen 6.2%, so the only cause for the outrageous increase is the mandated switch to renewables and other green policies designed to punish energy consumption.

The left leaning newspapers in Denver won’t report on the cost to homeowners, only on the illusory ‘green’ jobs created by this huge new tax on homeowners. Colorado voters should consider the real cost of Gov. Ritter’s ‘green’ economy – higher prices, lost jobs, and a state in decline.

With All These Savings, We Will Soon Be Broke

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Unlike the private sector, government accounting is unaccountable. Governments are free to toss out ridiculous figures without an audit or criticism – Pres. Obama’s stimuli have saved 3 million jobs, please. One way governments claim to save money is through creative financing that would be illegal in the private sector. One recent example is the Denver bus system’s claim that it has saved $1.9 bln on a future train to the local airport. This savings is huge, considering the project’s budget is $2.3 bln. Nobody in the press questioned the improbability of such amazing savings or how the simple math could add up so favorably. In reality, RTD, Denver’s transit system, pulled a fast one by effectively taking out an illegal loan and raising taxes to pay for its airport train.

A little background on RTD’s train lust: RTD has always wanted to build a local train system for metro Denver, and voters rejected a series of tax measures to do so. In 2004, RTD finally succeeded in doubling the transit sales tax to fund an ambitious train system, including a link to the airport. Considering the fact that RTD had tried this several times in the past, one might assume that the budget was in place and that the tax increase would be sufficient. Oh naive ones, no. There was no budget or schedule, only empty promises. RTD eventually disclosed that they needed about twice as much money as they had initially told the voters. RTD wrestled with asking for a further 50% tax increase, but due to the recession and voter sentiment, they backed down. The solution, it turned out is a popular financing trick called the Public Private Partnership, or P3, which allows for off balance sheet financing of large construction projects.

While financiers like to parse deals to attract investors and sometimes hide risk, there is always a simple underlying truth. The reality of the airport train is that it will cost billions of dollars up front and passenger revenues cannot be collected until the work is done. Voters authorized a sales tax increase, along with eventual ticket sales, to pay for this project. No financial engineering can change the fact that this project needs about twice as much money as it has. The only solutions are to either delay construction or issue debt.

Enter the P3 concept. RTD partnered with a team of private contractors and train operators to reduce its upfront costs. This partnership will get the operating and tax revenues for most of the life of the train in exchange for building and operating it. Since the train is a money loser, RTD will pay the partnership $2.3 bln for taking on the liability. RTD will also allow the partnership to issue tax advantaged bonds to pay for the construction of the train. So, everyone is happy?

Everyone shouldn’t be happy because there are unanswered questions. Why didn’t RTD just issue its own bonds and save the middle man cost of a P3? Such muni bonds require the vote of the people, and public sentiment is generally against more government debt, so RTD went around the law and likely will of the people with the P3 concept. RTD has effectively entered into off balance sheet financing that, due to its lengthy term, violates the accounting rules a private company would have to follow. While the debt goes on the balance sheet of the private partners, the ultimate risk is still carried by the taxpayers, a financial sleight of hand that is often illegal under the Sarbanes Oxley law. Further, tax advantaged bonds like the one for the airport train siphon capital from the private sector because only the government can give investors a pass on income taxes. Further still, RTD has not stated who will set the train fares to and from the airport. Currently the bus to the airport is five times more expensive than a regular bus ride, and the P3′s train certainly won’t lower the fare.

Because RTD is the government, it makes its own rules. RTD engages in lease financing that would be illegal in the private sector. RTD skirts the law by issuing bonds without a vote of the people. RTD uses the power of the government to pay a lower coupon on its debt at the expense of regular bond issuers. Many of these sleights of hand that the Denver press lauded were tried ten years ago, by Enron. Former Enron CEO Jeff Skilling must be frustrated that had he done such things for the government, he would be a hero today instead of a federal prisoner.