Money Beagle

Both presidential candidates have spent a lot of time talking about how their tax plan will help America get out of the current economic slump, and how they will create prosperity and wealth.

Hopefully everybody remembers that campaign promises are often very different than what happens once the president is elected.  Things change, compromises have to be met, priorities change, and many other things happen that usually lead to campaign promises being left on the campaign trail.  In this current campaign, I hope that everybody realizes that this will most likely be the case.  Not because I believe that Obama and McCain are ‘just saying that’, but really for a simple factor.

Necessity.

The state of the economy, the amount of money committed to the bailout, and the growing national debt are probably going to limit what either candidate could do if president.  While they talk about things that may sound great, the reality is that America can’t afford everything that they’re talking about.  We probably can’t afford to cut taxes but add in national health care.  We can’t afford to give taxpayers credits for various things at the same time we’re trying to stabilize the economy.

The election is only days away but I hope that people realize as they cast their vote that the America in years ahead will be drastically different than the pictures painted by both candidates today.

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This week, the United States Senate and House of Representatives both passed measures to temporarily ‘fix’ the Alternative Minimum Tax for the current tax year.  For those who aren’t familiar, the Alternative Minimum Tax, or AMT for short, is a tax that applies to higher income people and is designed to prevent those earners from using deductions and the like to pay little or no taxes.  The AMT tax was enacted in 1970 with the intention of targeting 155 people who had been avoiding taxes.

The problem with the tax, as it was enacted into law, is that it is not adjusted for inflation.  What was considered ‘high income’ back in 1970 would affect a lot more people today, resulting in higher tax obligation.  So, what’s been happening is year after year, the government passes legislation temproarily raising the amounts for that year.  Last year, they didn’t get around to it until December, which caused problems with tax forms and such that had already been printed.

Luckily, this year, they got around to passing the legislation earlier, and it was passed this week.  This will save roughly 20,000,000 households from having to pay additional taxes that would have applied had the AMT kicked in.  I’m not sure why they don’t fix it permanently, but my guess is that they want to keep their options, and might one day backhandedly ‘raise taxes’ without actually passing a new law to do so.

I was surprised because although the vote on both sides was overwhelmingly to pass the ‘fix’, there were still two members of Senate and thirty members of the house that voted against the bill.  Why would these individuals in essence vote to raise taxes?  It might be worthwhile to check the list and make sure that your representatives are voting in your best interests.  The results for the Senate can be found here.  For the House of Representatives vote, look here.

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I haven’t posted too much about the $700 billion dollar bailout plan (that’s 700,000,000,000 for people that like to see the numbers). There’s two main reasons that I haven’t posted much to date. First, there have been so many articles and blog posts about it that I don’t think I can put too much original idea down. Second, I don’t think anybody, even the experts, truly know how things are going to play out, so it’s just speculation.

However, I will say one thing that kind of scares me about the whole thing. A lot. It actually came to me yesterday while watching the president speak, which was basically a plea to Congress to pass the bailout package. I guess that there’s been a number of questions and people already wanting to change it, so the address was his way to get things ‘back on track’. But, the thing that scared me was this thought:

As much money as $700 billion is, will the number be even more? A lot, lot more?

Think about this. It’s almost a matter of course that when the government puts a price tag on something during planning, the number turns out to be way more. For example:

• The Hubble telescope was originally estimated at $400 million and ended up costing approximately $2.5 billion.
• When the Iraq War started, the White House refuted claims that it could cost $200 billion, saying that was even beyond worst case scenarios. Well, we’re way past that already and it will probably cost over $1 trillion before it’s all said and done.

I could go on and on but I think the point is hopefully already clear. We think $700 billion is a lot of money, and it is, but I wouldn’t be surprised if the number turns out to be more than that. Much, much more.

Brace yourselves, it’s going to be a wild ride!

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I paid our summer taxes the other day, and it’s worth noting that there is one good thing about lower home values: (sometimes) lower property taxes!

We moved into our home about a year ago.  The price had already fallen over 10% from when it was listed, and probably 15-20% from it’s peak value.  We paid the taxes in 2007 as well as the winter taxes for 2008 based on the previous value.

After we moved on, they re-assessed the property, and the value fell to match what we had paid for it.  This meant that our tax bill is now about 10% lower than it was last year, and from what the previous owners were paying.

I guess that’s one thing that’s potentially good about lower housing values, though it doesn’t benefit everybody.  How?  Here’s a couple of ways:

• If the city doesn’t lower the assessment value. I’ve been keeping tab of the tax records for my old condo, and the city I used to live in did not lower the assessed value at all.  I think they’ve perhaps even raised it!  I’ve heard that you can protest the value if you don’t agree with it, but also heard that it’s pretty hard to win this, especially nowadays when many municipalities are struggling financially and are not going to want to give up that money.
• If you’ve lived in your house a long time. Every state is different, but Michigan has this thing called Proposal A.  With that, the ‘taxable’ value of ones home cannot increase annually by more than 5% OR the rate of inflation, whichever is lower.  This was good for people when inflation was low and/or home values were rising 5-10% a year.  It meant that there became a gap between what the assessed value was and what they could tax you on.  Unfortunately, some of those people are finding that they’re still paying higher taxes, because even if the assessed value is falling, the taxable rate is still rising, and will do so until the gap is closed.

Now, I’m curious to see if 2009 will bring another adjustment.  I estimate that the value of our home has probably fallen another 10% or so since we bought it, which is consistent with the rest of the real estate market.  Stay tuned!

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