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Proposed Bailout Brings Some Uncertainty to Property Tax Collections

September 29, 2008 While History Shows State, Local Governments Need Not Worry, Congressional Action Often Clarifies Tax Status of Federal Government-Owned Assets
TaxFoundation.org 

Washington, DC, September 29, 2008 - The property tax collections of state and local governments will probably not be harmed by a federal bailout of lenders, according to a newly released historical review by Tax Foundation tax counsel Joseph Henchman.

 

In Tax Foundation Fiscal Fact No. 149, "Would a Federal Bailout Affect Local Property Tax Collections?" Henchman examines the tax treatment of federal property. The bailout proposal would transfer many mortgage-backed securities to the federal government in some form, and many foreclosures would give the federal government ownership pending disposition. Because entities of the federal government are usually immune from state taxation, state and local officials might be worried about their revenue stream.

"State and local governments in 2008 will rely on an estimated $397 billion in property tax collections. As of August 2008, 1.2 million homes were in foreclosure, out of 45 million mortgages outstanding," Henchman explains. "If even a fraction of the assets underlying the estimated $12 trillion in mortgage loans falls into government title, and are immunized from state and local taxes, a revenue problem could arise for local governments."

Henchman examines similar situations where the federal government:

  • Establishes a quasi-public corporation to take title of the assets (similar to Amtrak, the Federal Deposit Insurance Corporation, and the Resolution Trust Corporation);
  • Funds existing companies that retain title (similar to Conrail and pre-September Fannie Mae); or
  • Takes title (itself or through a government agency) to the mortgage-backed securities (similar to the Tennessee Valley Authority and the U.S. Postal Service).

An analysis of these past structures suggests that receiving a federal charter by itself does not immunize a corporation from state and local tax obligations. In each of the examples, any tax immunity resulted from either explicit congressional action or status as a federal instrumentality.

"It is unlikely that the bailout proposal, if enacted, would significantly harm state and local property tax revenues, and past experience suggests that state and local governments need not worry," Henchman argues. "If the federal government sets up a quasi-public corporation to take title to the assets, or if the existing owners retain title but receive federal funding, the property would be subject to state and local taxation absent congressional directive otherwise. If the federal government itself takes title, the property would be exempt from state and local taxes, but in that case Congress is likely to provide payments in lieu of taxes as it has authorized in the past."

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937. 
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To schedule an interview to discuss the proposed bailout of financial institutions and their impact on property taxes, please contact Matt Moon, the Tax Foundation's Manager of Media Relations, at (202) 464-5102.

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