Baucus Standard Deduction for Property Taxes Is Another Terrible Tax Proposal on Capitol Hill

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 deduction 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 tax 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 tax, the property tax 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.”