The folks on Capitol Hill are suffering from the famous “do something” disease when it comes to the current situation with the housing market. As part of the Senate compromise that was reached regarding aid to the housing sector, Sen. Finance Committee Chairman Max Baucus managed to add in a standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. that could be claimed for people who don’t itemize yet pay property taxes. The maximum deduction for a married couple would be $1,000, while singles could claim $500.
Don’t pay property taxes to your local government? Then you aren’t worthy of this taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. relief according to Sen. Baucus for some reason. In fact, you may actually be paying for it in the form of higher taxes elsewhere, lower spending, or higher taxes in the future (i.e. deficits today).
Such a deduction would be proper tax policy under an income tax if we taxed the imputed net rental income from housing, but we don’t. Under a consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. , the property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. could be viewed as an expense to housing investment and a legitimate deduction, but the consumption of the housing services should be taxed too (as well as the consumption portion of the government services provided with those tax dollars).
As the late Milton Friedman once said, “The government solution to a problem is usually as bad as the problem.”
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