ECONOMIC ANALYSIS:

Thinking About Revenue

by Fred Cederholm

The present catastrophe of declining real estate market values has almost no impact on tax revenue for now.

I’ve been thinking about revenues. Actually I’ve been thinking about “V.C.’s” questions, the housing debacle, governmental units, taxation, financial institutions, property assessments, timing, and lags. I frequently hear from those who read my columns in print and on-line. Last week’s TH*NK*NG (mone-TERROR-ism) prompted an on-line reader (V.C.) to ask two questions: First, as housing market prices head South and mortgage problems become foreclosures, how will State and Federal governments feel the consequences? Second, will serious credit problems stop the ability to sustain warfare abroad – will our country’s security therefore be affected? Sometimes such dialogues just lead to another column.

You see, V.C.'s concerns have real merit and got me TH*NK*NG and researching. The tentative conclusions prove NOT to be what one might expect. I’ll address the second inquiry first. Our national government has NEVER let annual revenue determine our foreign policy, our security, or the length of wars. Shortfalls in cash flow are met via borrowing. Analyzing the historical growth of the national debt, you find that it surges in times of war, and stays there. Presently, costs of the Civil War, the Spanish American War, World Wars I and II, Korea, Vietnam, Desert Storm, Afghanistan and Iraq are still there!

Currently the Federal government reaps about 40% of its annual revenue from individual income taxes. Only 10% comes from corporate income taxes. A third comes from payroll taxes (mostly Social Security assessments) – the $200-plus BILLION annual surplus raised is spent elsewhere. 12% comes from other sundry taxes and sources. Roughly the additional 25% of expenditure excess over revenue (including the interest expense) is “funded” by increasing Uncle $ugar’s outstanding debt. The lion’s share of a state’s revenue comes from sales taxes, and, for most states, it also comes from income taxes.

Financial institutions “contributions” to State and Federal coffers would fall under the corporate income tax categories. You would probably be surprised what a small portion this actually is. Most such institutions receive their largest revenue from service charges and fees—not from their interest spread. Their bottom-line taxable income (after they determine the level necessary to fund dividends to their shareholders— which is a post-taxable income expense) is pretty much up to their discretion. They are blessed with being able to legally manipulate their income via discretionary bonuses and profit-sharing expenses to executives and employees. Then too, the ability to book a discretionary annual provision for “perceived” loan losses is a huge tax planning advantage for them. Having a parent holding company, which may file a consolidated tax return, proves an even bigger plus. The list goes on and on.

The present catastrophe of declining real estate market values has almost no impact for now. True, the housing bubble created roughly two-thirds of new jobs in the past ten years. Any “correction” in this sector will impact individual income taxes paid in the future to Uncle $ugar and the states – a real estate re-valuation will not! A decline in market values could impact future revenue proceeds for county governments, local governments, school districts, fire districts, library districts and park districts; but even THAT is both doubtful and highly questionable. Please read on.

Property taxes to be paid in the coming period are based upon the prior year’s assessments and valuations. That is, the 2008 payments are for calendar/fiscal 2007. In Ogle County, Illinois, we just had our most recent quadrennial (4 year) assessment in October 2007. The increased assessments were published in the paper and notices were mailed to every property owner. You had 30 days to file your protest and question the re-evaluation to seek a re-adjustment. This locked in the valuation for 2008—to be paid in 2009! It is unheard of for any County Assessor’s Office to issue a blanket (across-the-board) change based upon a downward shift in market, or sales, values. The onus is on the property owner to file for any re-evaluation.

I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.

APPENDAGE:

Dear Mr. Cederholm,
I've been reading your articles through financialsense.com and I have liked them very much, they are not the usual Reuters / Bloomberg stories, I learn a lot from them.
I would like to pose two questions; I have been reading about the current credit crisis (to call it somehow), but I have not come across the following:
1) As house mkt prices go south, so go the taxes that the US government collects. Also, when there is a foreclosure and the Bank gets the property back, probably they do pay less taxes. So shall this mortgage problem start to spread nationally, how would the State and Federal Goverment feel the consequences? And all this while the Fed is lending all the money they can create on their computers?
2) Shall there be a serious credit problem, even for the US Government, one unwanted consequence will be to stop the ability to sustain warfare overseas; and that is an issue of Country Security which is much more worrisome than some poor people having to sleep on the streets because they lost their home, isn't it?
Thank you in advance for your time and please, keep on thinking!!
Rgds, "V.C."

Copyright 2007 Questions, Inc. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at asklet@rochelle.net.

Copyright © 2007 The Baltimore Chronicle. All rights reserved.

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This story was published on December 3, 2007.