Tax Scheme Would Have Rich On The Run

March 22, 2006
Opinion By Laurence Cohen

Be very nice to your grandma. Very, very nice.

If you live in Connecticut in general, or Hartford in particular, depreciating assets such as grandma may one day become very, very important to your financial future. So, don't forget to call on her birthday, send her a nice card on Valentine's Day and don't threaten to put her out on an ice floe if she starts to complain about her health.

If she's a rich grandma, get her on the next plane to Florida to establish a dubious six-months-and-a-day permanent residence, to avoid Connecticut's income tax and estate tax, both of which Florida doesn't have.

If grandma doesn't have much in the way of annual income, you may just have a treasure on your hands - should Mayor Eddie Perez sneak his property tax gimmick through the Connecticut General Assembly. The mayor would transform Hartford's property tax into a kind of income tax calculated on a sliding scale based on the owner's income.

Are you beginning to see what a doll your grandma really is? If through some miracle such a tax scheme actually came to be, make sure grandma "owns" your house in Hartford. Get her out of the nursing home, or the old family homestead, and bring her to Hartford. If the only "income" she claims is her Social Security check and the interest off a $5 certificate of deposit in the savings bank down the street, Mayor Eddie would be more likely to stop by and help her paint the living room than send her a sky-high property tax bill.

Mayor Eddie's proposal to grab all he can get from the undeserving rich; to create a more aggressive income redistribution system to benefit the deserving poor; and to grab the ill-gotten gains of the absentee landlords would, of course, accomplish almost none of those things -while making Hartford worse off for the effort.

The problem is that people are economic actors; that is, they respond to the financial incentives available to them. If, in fact, the financially comfortable resist a newfangled income tax designed to pay for the social service nightmare in Hartford, they will move to the suburbs and send Mayor Eddie postcards from their new homes.

The irony is that many of the suburban people who are, in fact, moving back to the city have surprisingly little in the way of "income" for Mayor Eddie to plunder.

Many of these folks are teetering on the edge of retirement, or have retired, and they have assets hidden in underground vaults, or second homes somewhere warm and happy.

What many of them don't have, or won't have for long, is much in the way of "annual income." The notion of slapping "absentee landlords," who, in the real world, are called "investors," with a property tax penalty rate will add to the already nightmarish incentives for them to pull up shop and abandon the very multifamily properties that the city needs to house its deserving and undeserving poor.

And for the folks in the middle, neither comfortably rich nor dirt poor nor evil-demon landlords, Mayor Eddie's plan promises a city unfriendly to the big spenders, unfriendly to the low-end real estate investors; and stuck with a property tax system that is perhaps best suited for Mars, where everyone is green and lives in a socialist paradise.

Mayor Perez has proposed (with the understanding that it will probably die in the General Assembly) a scheme that founders as much on the economic premise as it does on the practical complexities of designing an accurate snapshot of property value and income. Housing decisions tend to be made based on family's long-term perceived income, not the income in any particular year. The new system would be no more "fair" in taxing the asset-rich and income-poor; or the guy who is "rich" Wednesday but broke Thursday; or the high-income guy smart enough to stick his "income" in an out-of-state subsidiary.

Although not a perfect system, the traditional property tax system is a reasonable proxy for the income of those who own the property - and an effective measure of the market value of the asset. A hybrid income tax complication would lead to unintended and unfortunate consequences.