It is human nature to view a policy differently depending on whether it hurts you or favors you. It is also human for politicians to view as unjust a policy that hurts vocal citizens. But this doesn’t imply that catering to this side of human nature is good public policy.
Two examples of that surfaced recently, one here in St. Paul and another at the national level.
In the first case, angry homeowners at a local truth-in-taxation hearing expressed their displeasure with the fact that the value of their houses for 2009 taxes had risen, even though housing prices are falling in most neighborhoods.
Most overlooked two important points. First, the assessed values of properties lag one year. Taxes paid in 2008 were based on 2007 values and so on.
Second, Minnesota has a state law that cushions the effects of sharp increases in a home’s value. When the estimated market value of a property increases more than a specified amount in one year, the increase is spread over a number of years.
Both of these factors are symmetrical. They keep taxable values down when house prices are rising. They also keep them up when, as now, prices are falling.
Homeowner reactions are not symmetrical. When housing prices are rising, no one goes to a public hearing to complain that that their taxes for the coming year are based on a lower value than the current market. Nor does anyone see the “limited market value” buffer as a terrible injustice on the upside.
The second example, at the national level, is that of mandatory distributions from retirement accounts. The federal government subsidizes retirement savings by deferring the taxation of income in these funds until it is withdrawn. But the framers of this legislation did not intend that such tax deferrals be open-ended, or that they would become a vehicle to minimize taxes on large sums passed to heirs.
So the legislation included provisions requiring the account owner to withdraw specified minimum percentages each year beginning at age 70 1/2. The percentages vary with age of the owner and of any beneficiary of the account.
One detail is that the minimum required is computed on the value of the account at the beginning of the year. So in years like 2008, when stock prices are falling, a required minimum percentage based on beginning-of-year fund values means a larger percentage of end-of-year values.
Many account owners dislike withdrawing large amounts in a down market, assuming this will limit their ability to recover value when stock prices rise again. But again, there is a curious asymmetry. This provision benefits account owners when financial markets are rising. They have to withdraw less than if the amounts were based on values later in the year.
Think whatever you want about the fairness or economic efficiency of real estate taxes or tax-advantaged retirement accounts. But if you are happy with how they benefit you in one set of circumstances, you should not beef about how they hurt you in another.
© 2008 Edward Lotterman
Chanarambie Consulting, Inc.