Friday, July 23, 2010

Tax Rate Changes (Warning - Long Post)

President George Bush (the first one - usually referred to as "Bush The Elected" to distinguish him from his son, who was appointed in 2000.) famously said in 1988, "Read my lips - no new taxes." As the economic effect of massive deficit spending in the Reagan years weighed the country down, Bush The Elected had to back off from that promise and raise taxes during his term. There are still many who think it was breaking this promise that cost him the 1992 election.

For what it's worth, I disagree with that view. People understand that conditions change and that taxes change to match them. Government has a role, a big one, in economic recovery and during hard times it can counter-intuitively have to raise taxes. During the Clinton years, when the American economy saw the greatest growth in history, the Reagan stimulus tax cuts (You thought this was the first stimulus?) were allowed to lapse and the country saw record growth while the deficit was on track to zero out in ten years. Well, we know what happened next.

On January 8, 2008, North Bay Village had its own "No New Taxes" moment when the commission voted to maintain total taxes at the then current rate as a matter of policy. Resolution 2008-1 was passed 4-0 by Oscar Alfonso, George Kane, Rey Trujillo and Joe Geller, with Paul Vogel absent that night. This resolution was never repealed and very well may remain in effect in July 2010.

We know times changed and this week the commission took the first step in setting the millage for 2011. The commission voted 3-2 to set the maximum millage rate at 5.9. The current millage rate is 4.277. Now the word maximum is very important here. It is not the new millage rate but the upper legal limit that the city can work with for budget purposes. It's not likely to be the new millage rate. I believe that number is decided in September.

With a 26% decline in property values, our tax revenues will most likely fall below a sustainable level in 2011 without some raise. Given the lack of financial discipline on the dais, with Rey Trujillo, George Kane and Dr. Vogel spending money we don't even know if we have like it grows on magic money trees, the tax raise will probably be higher than it should be.

I created a large spreadsheet which I will share with anyone who wants it if you email me at nbvrbc @ (remove the spaces, I don't want bot mass mailings) to show the effect of the following on three comparable houses bought at different times:

  • House 1 purchased in say 2000 valued at $200,000 and currently homesteaded
  • House 2 purchased in say 2007 valued at $500,000 and currently homesteaded.
  • House 3 purchased in say 2007 valued at $500,000 and not homesteaded.
Assumptions for the first scenario are that Miami-Dade raises the county millage rate by 12% as reported in the Herald this week, that North Bay Village raises the millage rate to the maximium of 5.9, and that the two owners who bought at the top of the market ($500,000) have their values reduced by 26% and the owner who bought ten years ago has the assessed value increase by 3% as per Florida Homestead Law, still below market value but a raise.

The assumptions for Scenario 2 are the same except the North Bay Village millage rate is set at 4.95, which is just below the middle and about where I expect it will end up.

Constants for both scenarios are that the NBV Debt Service Millage rises to .8326 as it must by law.

Scenario 1 - NBV Raises Millage to 5.9
  • House 1 will see an overall increase total tax of 15.14% in 2011 (+$490)
  • House 2 will see a decrease of total tax of -20.23% in 2011 (-$2014)
  • House 3 will see a decrease of total tax of -17.42% in 2011(-$1,889)

Scenario 2 - NBV Raises Millage to 4.9
  • House 1 will see an overall increase total tax of 10.64% in 2011 (+$344)
  • House 2 will see a decrease of total tax of -23.44% in 2011 (-$2334)
  • House 3 will see a decrease of total tax of -20.83% in 2011(-$2259)

Now remember, House 1 increased value (3%) and increased millage, while Houses 2&3 dropped value by 26%, which is why the lower millage increase brings them even more dramatic tax relief.

Again, if you write me, I will send you the spreadsheet in Excel or OpenOffice format and you can run your own numbers through. The one thing I will ask is that if you find an error in the calculations, let me know.

My Opinions - I warned you it would be a long post and if you've read this far, you've gotten the point and if you are thinking "I could live without this part." I won't be offended if you leave now.

On Resolution 2008-01 and "No New Taxes" - I hate this kind of resolution. It hobbles government, is never something you see in well run companies (Imagine a corporate mission statement: We Vow Never To Raise Prices No Matter.) and is generally meaningless. Had I been writing this blog in 2008, the whole commission would have heard about it. Never make a promise that you can't live up to.

My concern about this at the moment is that without repealing 2008-01, North Bay Village may once again be open to expensive lawsuits and challenges as it is not clear that without the repeal, the commission has the right to set a combined millage rate above the January 2008 level. It's a stupid resolution anyway.

On the political positions of the commission - Kane, Trujillo and Vogel got it right when they voted to give the city maximum flexibility in creating the budget. Rodriguez and Alfonso got it wrong. And I'm glad it passed. I think most NBV taxpayers, not all, agree with that.

Alfonso has remained consistent on the subject of keeping taxes flat, so he gets some political points for that consistency. Kane and Trujillo lose some for having voted for this when it looked like no big deal and then not acknowledging that they were wrong and stating that in future they will consider the implications of such pandering more closely.

What we've learned - When I hear people say about the property bubble, "Who knew?", or "There was no way to predict this.", I feel like smacking them. I don't smack them but I do lose respect instantly for them. In 2006 and 2007, we all knew that it was fantasy. We didn't want to know as our property values made us feel really rich and a lot us got in the game, hoping to get out before it fell, many borrowed large sums against phantom equity, banks goaded us on, and we didn't want to know. Like all gamblers, the ones who timed their departure right made money, but for the rest of us, the house won, as it always. Anyone with a high school level grasp of economics, statistics and history knew it wouldn't last.

There were never enough people to buy all those condos that we approved. The city looks like crap now with looming, empty buildings, 7525 E. Treasure Drive alone looks like the third world.

We do need to learn from this. The basic lessons of not gambling more than you can afford to lose still stands. Our government should not rubber stamp all construction projects. Our commission should not hobble us with resolutions that restrict the government from responding to new circumstances.

And the next time a politician says "No new taxes.", don't listen to whatever follows.

Special Note - I expect as always to be bombarded with remarks about local pols and taxes. Watch for a posting coming up on the subject by someone who disagrees with me on just about everything. I am thinking Monday as there is some editing to agree.

Kevin Vericker
July 23, 2010

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