A key economic component of the “Reagan Revolution” of the 1980s was tax reform that indexed the federal income tax to inflation while reducing the number of income tax brackets from 15 to three. Prior to that, ordinary middle-class workers were pushed up into higher and higher tax brackets by simply receiving cost-of-living pay increases. The result was that a couple of years of cost-of-living increases actually reduced your standard of living by diminishing your overall take-home pay after taxes.
Under this corrupt scheme, the Federal Reserve would print such excessive amounts of money that it created inflation. The inflation led to cost-of-living increases that in turn led to bracket creep and higher tax payments. The federal government’s budget became bloated while the taxpayers suffered. Politicians never had to take the heat for voting for a tax increase; inflation did it for them.
The federal government is no longer capable of plundering middle-class taxpayers like this, but state and local governments do through the vehicle of property taxation. The Fed has not created a general level of inflation comparable to what occurred during the 1970s, but its expansionary monetary policy over the past decade or so has caused historically low interest rates that have fueled the real estate boom (or bubble, as some would say). That’s where the inflation is — in real estate.
Along with extraordinary increases in property values has come equally extraordinary property tax increases all across America, and especially in Maryland. Maryland taxpayers have been hit especially hard thanks to Gov. Robert Ehrlich’s 57 percent increase in the state property tax rate that he put into place at the beginning of the real estate boom in 2002 (the tax rate went from 8.4 cents per $100 of evaluation to 13.2 cents). This was the biggest state property tax rate increase in Maryland history. Combined with the phenomenal escalation of house prices in the past four years, it has fleeced the taxpayers of Maryland while allowing the government to wallow in a budget surplus, i.e., a gross overcharging for governmental services, or price-gouging, if you will.
According to online reports of Maryland tax revenues, local governments in the Baltimore area alone collect about 35 percent more in property tax revenues than they did in 2000 (total property tax collections for the area exceed $2.5 billion). Are Baltimore’s schools 35 percent better? Are the police 35 percent more efficient? Are you getting a third more services from City Hall, or are you just paying that much more? (Even renters pay at least part of higher property taxes, which are passed on to them in the form of higher monthly rents).
On top of higher property taxes, many homeowners who have sold their homes have also been snared by capital gains taxes, not to mention the confiscatory “property transfer tax” which gives the government its “take” of every real estate transaction, not unlike how the Tony Soprano gang of HBO fame goes about its business of taking “collections” from local merchants.
After gouging Maryland taxpayers for years in this way, this election year has suddenly turned many Maryland politicians into “tax cutters” — sort of. Ehrlich has magnanimously proposed to cut the state’s property tax rate so much that it would save the average Maryland homeowner as much as $40 a year, almost enough to attend an Orioles game — by yourself. Local politicians have made similarly “generous” proposals while shedding crocodile tears for the poor taxpayers.
The property tax bonanza that is being enjoyed by state and local governmental bureaucracies is not merely a matter of price-gouging. It threatens the long-term financial health of the state. Whenever state and local governments experience windfall “profits” such as this, they use the money to appease more and more special interest groups by starting up myriad new programs. Then when the real estate market cools, or the economy in general slows down, the programs all remain in place while revenues shrink, creating a “deficit crisis.” This in turn leads to calls for even more tax increases, which impose further harm on the local economy. There is never any mention of making government more efficient because government cannot be made more efficient any more than a cat can be taught to bark like a dog.
During the early 1990s, after the last big real estate boom (of the 1980s), states that had experienced more modest revenue growth were in the best financial condition because they had not gone on the kinds of wild spending binges that Maryland has in recent years.
Thus, to place Maryland on a more secure financial footing in the future, the governor should rescind his record-breaking property tax rate increase of 2002, and local politicians should follow his lead. Truth be told, Maryland’s politicians make the oil companies look like pikers when it comes to price-gouging.
Thomas DiLorenzo is professor of economics at Loyola College; author of “How Capitalism Saved America” (Crown Forum/Random House, 2004; and a member of The Examiner’s editorial board.
