Property Taxes Pay For Services; No Relation to Your Mortgage

In his State of the State address on March 4, 2025, Florida Governor DeSantis made this statement: 

"While Florida property values have surged in recent years, this has come at a cost to taxpayer squeezed by increasing local government property taxes. ... Taxpayers need relief. You buy a home, pay off a mortgage - and yet you still have to write a check to the government every year just to live in your own property?"

Perhaps he was more focused on increasing tax collections leading to more government spending rather than making an adjustment to reduce tax collections to match government spending needs.

But questioning why a homeowner should continue to pay taxes to the government after paying off their mortgage is odd and certainly doesn't help improve tax literacy.  Note that he didn't say that people who can afford to buy a home without a need for a mortgage should always be exempt from property taxes, which would seem to be the logical statement if property taxes are only paid by mortgagees.

Property taxes are paid, like other taxes, to fund government services and homeowners use a lot of them - streets, road maintenance, a judicial system, a school system, police and fire protection, sanitation services and likely even more. 

Florida does not impose an income tax so it needs to rely on its property tax to cover more government services than states that have more tax bases.

The Wall Street Journal (3/20/25) and other papers reported that Florida is considering eliminating the property tax because home prices have increased. I'm quoted in a Newsweek article (3/7/25 by Claire Dickey) on this topic (right next to a quote from Governor DeSantis). I was asked if local governments should have some control over their property taxes. I said yes! There may be situations where a homeowner has lost a job or can't work due to illness and risks losing their home because they can't temporarily pay their property taxes. A local government should be allowed to have a system to help these homeowners. 

And like many states did following the passage of Prop 13 in California in the 1970s, a state can modify the property tax base to have a cap on how much it can appreciate each year so if there is significant market increase, property taxes don't rise to the point where many homeowners can't afford to pay them (and along with that also could not afford to buy their home at today's value).

Given the close connection between the property tax which is usually a local tax and the numerous local government benefits taxpayers get, the property tax should stay. And it is one of the simpler taxes. But relief should be considered if property values are leading to tax increases (generally property tax is based on the current FMV) that many cannot afford. And, my suggestion for any Prop 13 relief measure is to modify it so that people with the highest value homes and most recent acquisitions get a higher annual revaluation because otherwise, Prop 13 provides a much larger tax break to the higher wealth/higher income homeowners.

What do you think?

Unusual Proposed Exclusion for Crypto Gains

HB 453 introduced in the Montana Legislature on February 11, 2025 calls for the Department of Revenue to create a program to allow state income taxes to be paid with cryptocurrency through arrangements with one ore more third party payment processors. That isn't unusual as at least one other state already does this - Colorado. 

What is unusual is that HB 453 would also make the payment of Montana income taxes with crypto tax free!  That is, if a taxpayer used bitcoin with a basis of $10 to pay state income taxes of $2,500, the realized gain of $2,490 ($2,500 liability satisfied with an asset with a basis of $10), would be tax free.

There is no tax policy justifying this treatment. The appreciation in the crypto used to pay state income taxes is a realized gain.  It is the same result if the holder sold the $10 basis bitcoin for $2,500 and used that money to pay their income taxes - a taxable gain. If someone had to sell stock to pay their taxes, any gain would be taxable.

Of course, if a state wants to exclude such a gain, it can certainly change its income tax to do so. The gain would still be taxable for federal purposes and likely a reason why few would take advantage of this state offer should HB 453 be enacted.

If enacted, I wonder if people would reduce their withholding, such as from paychecks and increase their estimated tax payments made with crypto to maximize their exclusion (but still taxable for federal purposes). Would others in Montana ask if they can pay their taxes with appreciated assets such as stock or gold, and also get an income exclusion? After all, what is so special about crypto, particularly if a third party is going to do the conversion of that asset to cash and get the cash to the Department of Revenue?

The revenue estimate for HB 453 is about $70,000 per year which minor. I suppose people with little gain in their crypto might take advantage as the federal tax consequences would be small. But individuals with large gains would most likely not be interested as they can also avoid the federal income tax gain if they die holding the appreciated crypto (which is a much greater tax policy flaw in our tax system - excluding gains at date of death).

What do you think about providing a special state rule for paying your taxes in crypto and avoiding state tax on that gain?

What's So Special About Tips to Make This Income Non-taxable?

Both presidential candidates offered a tax law change to make tips non-taxable. A few days after the inauguration, President Trump was in Las Vegas at a rally for "No Tax on Tips."  What is so special about tips to justify a law change to make then non-taxable?  I can't think of any, but offer these observations to remind us that tips are income just like wages and business income and there is little reason to provide a tax break to these workers - why not provide a tax break to all workers?

1. Tips are income: Income is defined by the US Supreme Court as "an undeniable accession to wealth, clearly realized, and over which the taxpayer has complete dominion" (Glenshaw Glass, 348 US 426 (1955)). Some people suggest tips are gifts so are not taxable. A gift is defined by the US Supreme Court as something given with "detached and disinterested generosity" where the donor expected or expects nothing in return (Duberstein, 363 US 278 (1960)). Someone who receives services at a restaurant, hotel, hair salon, or similar establishment, might offer a tip because they appreciated the service and the amount likely varies by how much they liked the service. It is not a gift. If the giver wants to make a gift to someone they should go up to a stranger and give them money with no expectation of anything in return - that is a gift.

2. More than tipped workers need tax relief: H.R. 8785, Tax Free Tips Act (118th Congress) would have changed the law to say that wages do not include tips and make them not subject to income or payroll taxes. The sponsors offered as a rationale that many people getting tips might be "working a second job to make ends meet" so should be able to keep their money. That sounds reasonable if we are talking about raising the standard deduction for ALL low-income workers, but why single out or assume that only tipped workers are in need of tax relief.

3. Challenges of defining tipped workers: It looks like the key proposal in the 119th Congress based on the number of sponsors is No Tax on Tips Act. It would exempt cash tips from income tax (not payroll tax) and has "guardrails to ensure only traditionally tipped employees will benefit from" the proposal (see 1/16/25 sponsor press release). Do note that it says employees. Thus, contractors, such as your Uber driver and owner of a business, would not benefit from the tip deduction. The deduction is limited to $25,000 for the year and would not apply if the worker's income exceeds $160,000 (this is the amount per the reference to §414(q) in the bill). "Qualified tips" for the deduction are defined as "any cash tip received by an individual in the course of such individual's employment in an occupation which traditionally and customarily received tips on or before December 31, 2023, as provided by the Secretary." Thus, the Treasury and IRS would have to define this employee group.  I think that means that there isn't already a list of traditionally tipped industries.

4. Tip versus Service Charges: Some restaurants including ones in DC, automatically add a charge to restaurant bills such as because it was for a group of 6 or more (in DC, even 1 customer gets a 20% fee added). Is that a tip or something else (the DC one appears to be a service charge)? For tax purposes today for rules relevant on tip reporting, a service charge is not a tip (Rev. Rul. 2012-18). The fee is wages if distributed to employees. Will any legislative proposal address whether "forced" tips or service charges are the traditional and customary tips to be non-taxable? Arguably, I think yes, but to me it just doesn't seem like a tip when the business adds the amount to your bill automatically. But this should be addressed in any legislative change (in defining "tip").

5. Challenge of excluding tips from Social Security/Medicare taxes and state income taxes: Any tax big tax bill this year will likely be accomplished via the Budget Reconciliation process so that only 51 votes are needed in the Senate. This process does not allow for changes to Social Security so any tip exclusion in the bill can only remove income taxes (as proposed with No Tax on Tips Act (see 3 above)). Also, I think most states will opt not to conform to a federal exclusion or deduction if enacted due to the loss of revenue and the inequity of providing a tax cut to only a small number of employees. The Budget Lab at Yale estimates that 2.5% of workers earn tip income. At the 1/25/25 rally in Las Vegas, President Trump said over 4 million workers receive tip income and that about 25% of a typical restaurant worker's pay is from tips. Will a state enact a tax change to let about 3% of employees exclude 25% of their pay from taxes with no break to other employees who are at the same pay levels? I don't think so.

6. Permanent or temporary: Will any exclusion or deduction for tip income be a permanent change or temporary? I think if the extension of TCJA expiring tax cuts is temporary, the change for tip income will also be temporary, but who knows.

So, there is a lot to consider on this topic that affects a relatively small number of employees. Given the tax cut for a small number, will other employees, particularly those making minimum wage or a bit more also ask for an equivalent tax cut?  I think they should to improve the equity of the proposal - that is, similarly situated taxpayers based on income should be treated similarly. If a tipped employee making $70,000 including tips gets a tax cut, a non-tipped employee also making $70,000 should also get the same tax cut.

What do you think?

Improving Tax Systems

Over the years, we see numerous federal and state tax law changes such as adding or modifying a credit, deduction or exclusion. We sometimes see rate cuts and increased deductions, such as most individuals experienced for 2018 through 2025 with the Tax Cuts and Jobs Act of 2017 changes that lowered the individual rates, almost doubled the standard deduction (which 70% of individuals used prior to 2018; today about 90% claim it), and the child tax credit was doubled from $1,000 to $2,000. But there were numerous other TCJA changes many of which only affect the top 10% of taxpayers or even the top fraction of the top 1% of individual taxpayers (such as an almost $14 million estate tax exemption per person for 2025).

What was the purpose of these changes? Mainly it was to improve the international competitiveness of the U.S. corporate tax system. So, why any individual tax changes?  Well, people tend to favor individual tax cuts rather than corporate tax cuts (see this Pew Research poll among others). At the state level, what is the purpose of yet one more sales tax exemption or a new exclusion from income tax?

What about review and reform of the entire tax system? Well, it is a big project, but not an impossible one. It requires a good look at how much revenue is needed (where does the government need to spend money and what are public goods and services that warrant use of tax revenues), what should the mix of taxes be, and should certain spending be done through the tax law like we have today via special deductions, exclusions, credits and rates, or done directly and more transparently?

In a January 2025 Tax Notes State article, I suggest the need to look at four areas that tend to be overlooked in discussions of tax law changes, but that would improve tax systems if considered:

1. Articulate and use the jurisdiction's economic, societal and environmental goals.

2. Identify what tax revenues should pay for and how (directly via payments and grants or by the government paying for them directly or by reductions in recipient's tax bills via special deductions, exclusions, credits and rates?

3. Find missing voices and data.  For example, while a sales tax exemption for infant diapers might sound like something to help low income taxpayers, if higher income people spend more on diapers, they get the bulk of this tax break or subsidy?  Why do we have a $1 million limit on the debt to produce deductible mortgage interest for itemizers (since 1987 although only $750K for 2018 through 2025) when the median home sales price in December 2024 in the U.S. today is only $427,000 (Census Bureau data)?  Most likely because the drafters of this tax rule have far more expensive homes with large mortgages.

4. Provide tax transparency and tax literacy.  Provide the detailed reasons for tax changes, as well as who is affected including breaking it down by income groups including breaking it down for the wide range of income levels comprising the top 1% of individuals. Find ways to help individuals understand their own taxes (such as covering it in high school civics classes) and understand how spending occurs through our tax system and how it compares to the direct spending you can see in looking at budgets of government agencies.

I encourage you to read the article - Overlooking Considerations That Could Improve Tax Systems.

What do you think?

Federal Tax Treatment of Proposed NY Inflation Refunds

12/9/24 news release

Per a December 9, 2024 story at the New York State website, Governor Hochul has proposed "sending 8.6 million New Yorkers an Inflation Refund Check as first proposal of 2025 State of the State."

The rationale is that inflation increased the price of taxable goods and services on which sales tax was charged. So, the state collected more sales tax than it would have without inflation's affect on prices. Governor Hochul proposes giving "everyday New Yorkers":

   $500 for families making under $300,000

   $300 for individuals making under $150,000

Big question ... Will these "tax refunds" be subject to federal income taxes (must the recipients include them in their federal income tax)?

I think the answer is yes.

Income is broadly defined at IRC §61 and case law as being derived from any source and something that is an accession to wealth. In Notice 2023-56 suggested how the tax law applies to various payments received from a state and sought public comments for the IRS's final guidance (which has not yet been issued).

In Notice 2023-56, the IRS noted that the name given to a payment is not controlling but instead, the substance of the payment arrangement controls. If a tax "refund" is limited to how much tax the individual actually paid, the payment is likely to be a non-taxable tax refund (taxable though if the taxpayer claimed a deduction (tax benefit) for the tax later refunded).

The NY proposal is the same for everyone at a specified income level or marital status. It appears to have no relation to how much sales tax the recipient actually paid.

Notice 2023-56 also explains the general welfare exclusion where payments are made based on need. This also won't apply to the NY "refunds" as the income levels at which they can be issued is well beyond "needs" and the median income level.

Is there anyway to avoid the federal tax hit so that 100% of the refunds can stay in New York?  Well, they could be changed to be, for example, 10% of the actual sales tax paid. But people won't have these records. It could be achieved by temporarily lowering the sales tax rate to give buyers back some portion of sales tax by paying less today than they otherwise would. They could use the additional sales tax collected to provide funding for services available to low-income individuals.

I think they could significantly lower the income level for these payments, so that they are truly only provided to those in need making them excludable under the general welfare exclusion.

What do you think?