There has been a lot of discussion of a potential reinstatement of the state and local tax deduction (SALT). Few market participants actually anticipate that this desire would be fulfilled any time soon.
The common negative theme has been a jeremiad against the reinstatement as a windfall for the wealthy. It is true that those who own more expensive properties would experience a greater benefit. However, the tautology goes that millionaires and billionaires would be receiving the lion’s share of the break at the expense of the middle class taxpayer.
I want to take the other side of this argument. I do not have the conviction that there is only a unilateral argument to this discussion.
In particular, school districts’ finances across the land will be hurt over time by the lack of a SALT deduction. There are a number of points to substantiate this view. But to do so, we need to do a quick précis of school finances across the country.
Education is not a specific right that is granted under the U.S.Constitution. It is not life, liberty, freedom and education. From the very beginning of this country, education was viewed as states’ responsibility. In more modern times, we collectively have developed the principle of providing an “adequate education” to citizens of a certain age range. I can recall that not so long ago there was an actual debate in New Hampshire about whether an adequate education had to be provided under that state’s constitution. Let’s just say the matter was resolved.
Litigation or threatened litigation has cropped up in a number of states over the years concerning the provision for an adequate education. Sometimes the litigation is resolved before a court hearing by the provision of more funding in the state’s budget. At other times, the action has reached the court and there has been a stipulation to take specific action to improve the status, as was the case for the “deserving” districts in New Jersey.
By now, you have deduced that states are important to the overall funding for primary and secondary education. But one should not conclude that state funding is uniform. Average support per pupil varies considerably from New Hampshire to Utah and state funding for the most part does not constitute the largest annual revenue source for most schools across the country.
Property taxes are the largest revenue item in most school district budgets. Schools often go about their budgeting by assuming how much revenue will flow from the state, and each district calculates how much it needs to raise from the local property tax. In turn, the last calculation made is usually the tax rate. Setting the tax rate is also a function of how much assessed valuation growth has occurred in the period used for the base calculation. Assessments are a function of appraisals, market values and factoring especially if the property under consideration has not turned over for some time.
I have not mentioned federal aid because such aid is not usually a large component in the revenue picture. Federal aid often makes up only 10% or so of a local school budget.
By not allowing a SALT deduction over $10,000, I can see a scenario under which the school’s revenue side will suffer. It is impossible to factor out the relative strength of the economy in this consideration. However, I do not think it is a complete coincidence that there has been a slowdown in the growth and value of higher-end properties. Homes at the higher end, say for this purpose over the $750,000 mortgage deductibility limit, are experiencing a slowdown in sales and are often being sold under asking amount. A $1.5 million house in Charlotte would probably be paying approximately $12,000 in property taxes and the same property in Westchester County, New York, would be paying approximately $50,000. It is clear which district is more at risk.
If assessed valuation growth continues to slow, putting other factors aside, more pressure will be generated on that school district’s budget. In turn, there would be more pressure to raise the tax rate and/or cut the school district’s budget. In this instance, mature districts with few opportunities for growth may be even more prone.
In considering the average local property tax, about two thirds of the total bill goes to the local school district. If the contribution from the property tax will suffer due to the SALT limitation over time, any shortfall will have to be countered by other measures.
Yes, it is true that the property taxes paid on higher-end properties will contribute more than the average property, proportionally speaking. We accept in a democratic society that it is an important goal to educate the populace.This educational attainment ensures the polity will thrive.
I suppose I am harping on the theme that the SALT limit could put our school systems’ funding at risk over time. I am not pleased to contemplate this potential outcome. More federal and state support should not be expected to be forthcoming.
If reinstating the SALT deduction would benefit the wealthy property owner, so be it. The education system also benefits under such a provision.
After the nation was born out of frustration with taxation, we have spent the last 243 years trying to come to grips with what should constitute “fair” taxation. One only has to glance at campaign rhetoric to witness same. At least we have the freedom to reach conclusions in a democratic process.
