The Low-Income Homeowner Tax
By Dean Baker
t r u t h o u t | Perspective
Monday 03 March 2008
Forget about trying to get more kids health care insurance by expanding SCHIP or increasing government funding for child care. The new way the politicians plan to help moderate-income families is to have them pay a special 18 percent income tax to live in a home in which they have no equity.
Here's the deal. As we know, millions of moderate-income families are facing foreclosure on their homes because they have mortgages that they can't afford and they live in homes that are worth less than the amount on their mortgage. This is a situation where the banks would ordinarily take a huge hit since they have no hope of recouping anywhere near the amount owed on the mortgage when the home goes through the foreclosure process.
But the politicians are coming to the rescue. They want the government to step in and either guarantee or directly issue new mortgages to these homeowners. When these new mortgages are issued to pay off most or all of the prior mortgages, they will be giving the banks far more money than they can reasonably hope to get if the houses had gone through the foreclosure process.
This can be viewed as bad policy because it is giving tens of billions of taxpayer dollars to the truly rich. But it should be viewed as even worse policy because it is effectively taxing millions of low- and moderate-income families to live in homes in which they have no equity. This low-income homeowner tax can be demonstrated with simple arithmetic.
Typically, houses sell for about 14 times as much as what it would cost to rent the same unit for a year. The run-up in house prices in the bubble raised the ratio of sale price to annual rent to more than 20 to 1. While prices have begun to fall, in many areas the ratio of sale price to annual rent is still more than 20 to 1.
Working from this ratio, it is easy to see homeowners are almost certainly paying far more to stay in their houses than it would cost them to rent the same home, and these excess payments are a large share of their income.
Suppose a moderate homeowner gets a 6 percent mortgage, and then pays an additional 1 percent of the sale price each year on both tax and maintenance. This means their costs of "owning" the house is equal to 8 percent of the sale price, not counting any payments of principle on the mortgage. Since the rent of the home is just 5 percent of the sale price, the homeowner is paying 60 percent more in housing costs each year than they would if they were a renter.
Let's put numbers in this story. Suppose the house would sell for $200,000. The 20 to 1 sale to rent ratio implies it would rent for $10,000 a year or $830 a month. Instead, this homeowner is paying $12,000 a year in interest, $2,000 a year in taxes and $2,000 a year in maintenance for a total of $16,000 a year, or $1,330 per month.
This additional $6,000 a year in housing costs is likely to be large relative to the family's income. Housing costs average 30 percent of disposable income, so this sum would be equivalent to an 18 percent tax on the family's disposable income. This sum is also roughly what it would cost to insure two kids for a year, and more than enough to pay for child care for a kid for a full year.
Paying extra to own, rather than rent, a home could make sense if the homeowner was accumulating equity in the house. However, this is almost certainly not the case. House prices are falling rapidly and will likely to continue to fall until the overhang from the housing bubble is eliminated. The vast majority of moderate-income homeowners facing foreclosure will never see a dime in equity on their home. In other words, the excess housing payments are basically just a tax that gives no return whatsoever to these homeowners.
It is truly bizarre we are struggling to find ways to pay for health care and child care for kids in low-income families at the same time the government is encouraging these families to throw large amounts of money away so they can be called homeowners. Many of these families will still need help for their kids, but they would need much less if we ended the 18 percent homeowner tax. We need a housing policy designed to give people decent housing, not to fulfill ideological commitments to an "ownership society."
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.
By Robert B. Reich
The San Francisco Chronicle
Monday 03 March 2008
We're finally reaping the whirlwind of widening inequality. A recession looms because most consumers are at the end of their ropes and can't buy more. Median hourly wages, adjusted for inflation, are no higher than what they were three decades ago. Since then, most of what's been earned in America has gone to the richest 5 percent. But the rich won't buy much more because they already have most of what they want - after all, that's what it means to be rich.
There's no magic bullet for reversing the trend toward widening inequality. Surely, better schools for children from poor and lower-middle class communities are part of the answer. So is a bigger refundable tax credit - in effect, a cash supplement - for working families. Both should be financed by a higher marginal tax rate on the rich.
But an additional part of the solution - rarely talked about these days - is stronger labor unions. This is especially true for low-paid workers in local service occupations, such as retail workers, hotel and restaurant employees, and people who work in hospitals. If they were unionized, they'd have the bargaining leverage they need to get better wages. They'd also have a voice for suggesting to management better ways of delivering services - often improving productivity enough to cover the higher pay.
But it's been difficult for low-wage workers to organize themselves into unions. Employers often fire or intimidate those who take the lead. While it's illegal to do so, the penalty for employers who get caught is in effect a slap on the wrist. Charges of illegal dismissals take years to wind their way through the National Labor Relations Board. And even when the board finds that an employer acted illegally, the worst that can happen is the worker has to be rehired and given back pay that was lost.
A half century ago, most employers obeyed the law and allowed workers to organize. In the 1950s, the board found only one of every 20 union elections marred by illegal firings. But as competition heated up in subsequent decades, employers have felt increasing pressure to cut wages. So union-busting became common. By the early 1990s, according to government data, illegal dismissals occurred in one of every four union elections. Nowadays, even though polls show most workers would organize a union if they could, the process is so complicated that it's rare they even get to choose.
Even employers who should know better are fighting unions. Take the St. Joseph's Hospital System, for example. It's a huge, 14-hospital enterprise with 21,000 employees, including hospitals in Santa Rosa and in Orange County. The system is owned by an order of nuns who have distinguished themselves in the past with their support for civil rights and social justice, including marching along with Cesar Chavez and the farm worker's union and backing the service employees' union "Justice for Janitors" campaign in the 1980s.
But when it comes to its own workers, St. Joseph's has dug in its heels. Workers have been trying to organize there since 2004, and the outmoded NLRB process hasn't protected them. The NLRB found St. Joseph's employees had been "threatened with adverse consequences" for supporting a union. But St. Joseph's still won't even negotiate with its employees a process for holding a fair union election. I've spoken with the chief executive, Deborah Proctor, and with Sister Katherine Gray, chair of the St. Joseph Health System. Both insist that their workers "don't need a union" because "we take good care of them."
That's not what I've heard from St. Joseph employees. Of course, it's not unusual for management and labor to have different views. That's one way a union can be helpful to management. It gives employees enough security to feel free to share their candid views. Such sharing is also good for customers - such as hospital patients - because front-line workers often know more about how people are being treated, and how treatment can be improved, than does top management.
Hospital workers are among the lowest-paid and hardest-working people in America. They deserve a union. But the old NLRB process won't even get them a fair hearing because it's so broken. That's why workers at St. Joseph's - like so many other workers across America - are seeking a fairer process for union elections.
The "Employee Fair Choice Act," which recently passed the House of Representatives, would let workers have a union if a majority wants one, in a simple up-or-down vote. St. Joseph's workers aren't even asking that much. They just want an arbitrator, chosen by both management and labor, who'd help both sides quickly resolve any conflicts along the way to a vote. So far, St. Joseph's management says no.
The American economy is in trouble largely because lower and middle-income workers no longer have the buying power they need to keep it going. Inequality is wider now than it's been in more than 70 years. Unions could help reverse this trend. But if even an order of nuns can stop workers from forming one, we've got a very long way to go.
To learn more go to www.sfgate.com/ZCPJ to read the news behind this commentary.
Robert B. Reich is professor of public policy, Goldman School of Public Policy, UC Berkeley, former US Secretary of Labor, and author, most recently, of "Supercapitalism."