MauledAgain

A little more than four years ago, in Who Gets Surplus Proceeds From a Tax Sale?, I explained that I had learned about a dozen states seize property for failure to pay property taxes and instead of simply taking from the sales proceeds the unpaid taxes, interest, and penalties and returning the excess to the property owner, instead pocket all of the sales proceeds. What brought this to my attention was a Michigan Supreme Court decision that held this practice in Michigan to be a violation of the Michigan Constitution.

About a year and a half ago, in Supreme Court Puts An End to a Bad Tax Practice, I explained that the United States Supreme Court handed down a decision, Tyler v. Hennepin County, Minnesota, that involved a similar practice in Minnesota in which the excess of the sales price over the delinquent taxes was not returned to the property owner. The Court held that the property owner plausibly alleged that the retention of the sales surplus violated the Takings Clause. The Court explained that a government cannot take more from a taxpayer than is owed, and that this principle has its origins at least as far back as the Magna Carta, and that most states had statutes adopting this principle. Minnesota did not provide a way for the property owner to recover the excess in the case of delinquent real property taxes even though it did provide for return of the excess when property was seized on account of delinquent income taxes and personal property taxes. The Supreme Court rejected Minnesota’s argument that the property owner did not have a property interest in the excess sales proceeds because she constructively abandoned her home by failing to pay the property tax.

I wrote that the outcome was not, to me, surprising. I noted that the “obvious impropriety of what Minnesota and the other states have been doing is apparent from the fact that the Supreme Court’s opinion was unanimous, something that doesn’t happen very often these days.” I also noted that the decisions of the district court and the Eighth Circuit, which rejected the homeowner’s argument that the Supreme Court accepted, indeed was surprising. One expects better.

When it came time to put a headline or caption on my post, I chose “Supreme Court Puts An End to a Bad Tax Practice.” I was wrong. Reader Morris directed my attention to report from Reason explaining that states had found a loophole to get around the Supreme Court’s holding. The Supreme Court held that “a government cannot take more from a taxpayer than is owed.” The authorities in Oakland County, Michigan, decided to seize the home of a person who owed real property taxes and to give that home to a private company. The private company sold the house, remitted the unpaid taxes to Oakland County, and kept the balance. None of the proceeds went to the homeowner. The homeowner sued, claiming that the Takings Clause had been violated. The judge dismissed the case because “the government itself didn’t make a profit.” According to the report, quoting the lawyer who represented the homeowner, the private company is operated by the mayor and the city administrator. Apparently the company collected $10 million in selling houses in this manner.

If this practice disturbs you, good. Perhaps you will never find yourself owing back taxes on your home. Perhaps you don’t live and will never live in a jurisdiction where this circumvention of the Supreme Court’s holding is practiced. But perhaps you will end up as did these homeowners. What would be your reaction? Dismay? Anger? Frustration? Disappointment? Would you wonder why this happens? Would you be concerned about corruption in government? If corruption in government offends you, understand that there are tens of millions of people who are willing either to turn a blind eye to this sort of corruption or to actively support it because they see some sort of benefit to themselves from its application.

As readers of MauledAgain know, I’m not a fan of public-private partnerships. Too often, the private wins and the public loses. So now there is another public-private arrangement that does not bode well for taxpayers who should be protected by governments, but who end up losing when government officials ignore law.

I don’t know if the judicial decision that approved the use of a private company to circumvent the Supreme Court’s holding has been or will be appealed. Surely there is an argument that the private company is acting as an agent of, or in collusion with, the government that is prohibited from failing to return the excess proceeds to the homeowner. Perhaps it will take another visit to the Supreme Court to get the message across to the officials who are doing this. Perhaps the Supreme Court needs to recognize that it, surely unintentionally, did not succeed in putting an end to a bad tax practice.

Tom Giovanetti at the Institute for Policy Innovation has written an interesting commentary that is A Reminder about Tax Neutrality. He makes some important points, though he also makes several statements with which I disagree.

Tom begins by pointing out that both presidential candidates are trying to acquire votes by making promises to provide tax breaks to particular groups of people or for certain types of income or expenditures. He mentions the proposals to eliminate taxes on tips and social security benefits, to eliminate the SALT cap, to provide tax breaks for families with children, first-time home buyers, and African American men starting businesses. Tom notes that these promises have been made in response to where a candidate was campaigning, the audience the candidate was addressing, or particular poll results.

Tom notes that using the tax code to encourage or discourage behavior violates the concept of tax neutrality. He is correct. He writes that “[t]ax neutrality is a key principle of tax reform that was at the forefront of the Reagan tax policy in the 1980s, and that continued through the 1990s and the 2000s.” I disagree. Tax neutrality has been honored in the breach for many decades. For example, tax breaks for families with children and tax breaks for first-time homebuyers have been in and out of the Internal Revenue Code for many years. Every revenue act that has been passed since long before World War II has included a variety of tax breaks for one or another, in fact, many different, activities and statuses.

Tom writes, “[T]he tax code should not encourage or discourage individuals from buying a home, from going to college, from having children, from marrying, and it should not reward or punish businesses for whether they choose to purchase equipment or lease equipment, etc.” He is correct. For decades I have advocated letting agencies other than the IRS deal with these sorts of issues.

But then Tom writes, “The core philosophical idea behind tax neutrality is that in a free economy, it is not the government’s job to direct you to behave in a way that it prefers.” I totally disagree. Governments at every level must necessarily direct people to behave in certain ways under certain circumstances. With several exceptions, drivers are required to stop at red lights and stop signs. People are directed to refrain from littering. People are prohibited from robbing banks. Laws exist to enforce these rules and even though enforcement falls short of sufficiently comprehensive, using the tax law as a form of enforcement is inappropriate, and in the examples I provided the tax law has not, at least until now, been used to encourage compliance with these rules.

However, Tom then points out, “ You should be able to run your household, and run your business, based on your own criteria, and not based on the details of the tax code.” I do agree that the tax code should not be used to control how people run their households and businesses. But I disagree that people should run their households and businesses based on their own criteria, because without rules that protect people from harm, at least some people would run households and businesses in ways that harm people both directly and indirectly. A business owner’s “own criteria” might include dumping waste into nearby rivers but that is and must be prohibited. However, enforcement needs to be done through means other than cluttering the tax code with breaks and penalties dealing with those violations of law. And so, when Tom writes that “government does NOT know best,” he is overstating a proposition. There are matters on which government does not know best, but there also are matters on which government – provided it is not under the control of a dictator, oligopoly, or cabal – knows best because it reflects the wishes of society, such as the desire for clean water free of waste dumped into rivers by business owners operating by their “own criteria.”

Tom then writes, “Essentially, tax policy should raise the necessary revenue for government while introducing as few distortions as possible.” He is correct. This is a point that I have made consistently for a long time. I doubt it will happen, and though Tom doesn’t offer a prediction, I suspect that if pushed, he would admit that the likelihood of cleaning up the tax law and stripping the Internal Revenue Code of its various incentives and tax breaks is extremely low if not zero.

Tome concludes that “politicians should not use the tax code to buy votes or to reward favored constituencies,” and that this “would require candidates who operate from principle, and sadly that’s out of fashion in 2024 America.” I agree with Tom. Again, I doubt politicians will change their messaging, especially and as long as dark money is used by a handful of people to control the nation and to dictate what they want the tax law to be (which is something that enriches the wealthy and frustrates everyone else).