Homeowner's Blog

Don't Tax Internet Purchases

Colorado last week joined a growing list of states that are expanding Internet sales tax collection. North Carolina and Rhode Island last year passed similar laws. We sympathize with the need of many states to raise money in this troubled economy, but state lawmakers have no business promoting the collection of a tax so widely disliked by their constituents. According to a Parade Magazine reader survey, 85% of consumers oppose sales taxes on Internet sales. Not that consumers are big fans of new taxes, but surveys show consumers are much less opposed to other types of taxes if necessary to plug budget gaps. By substantial margins they prefer alternatives such as higher sin taxes, income surtaxes on the wealthy, etc. to address budget shortfalls. In addition, taxes on alcohol and tobacco tend to discourage behavior that is very costly to society, and U.S. taxes on the wealthy, thanks to a series of tax cuts over the last half century, are among the lowest among the developed countries.

Sales tax collection on Internet purchases should not be expanded. It should be repealed. More and more consumers have their yard sales on Amazon, EBay, and Craig's list. If we apply sales tax to virtual garage sales, the next logical step will be to require that consumers collect sales taxes on real garage sales. Other consumers, including those pinched by the economy and low income consumers, are saving substantial amounts of money by purchasing second hand and heavily discounted items on the Internet, so Internet sales taxes discriminates against lower income consumers..

E-commerce helps the environment in several ways. Odd items (and sometimes really, really odd items) that might otherwise end up in a landfill, find a home with a consumer in another state who always wanted one of those. E-commerce also saves a lot of gas and wear and tear on our transportation infrastructure, and reduces traffic jams. Instead of individually driving their vehicles to the mall, the UPS or FedEx trucks, or your postal carrier can drop off your purchases, and they go down your street every day anyway.  

An e-commerce state sales tax exemption would be consistent with other sales tax exemptions for worthy purposes (back to school sales tax holidays, sales tax exemptions on prescription drugs, etc.). State legislators should consider the wishes of their constituents and repeal sales tax collections on Internet purchases. They should pursue alternative sources of revenue more palatable to their constituents if the state needs additional funds.

Some Proposed Administration Tax Increases are Needed; Others are Bad Policy

The Obama administration has proposed a number of new tax increases. The President deserves credit for recognizing that the ballooning federal deficit, resulting both directly and indirectly from the subprime mortgage crisis that preceded his election, must be addressed. It cannot be addressed by the needed budget cuts alone, and unfortunately some tax increases will be necessary. However, reducing tax system support of home ownership by cutting home mortgage interest and real estate tax deductions for high-income individuals and couples for housing is the wrong way to raise taxes.

Allowing the Bush tax cuts for high income individuals (over $250,000 per couple) makes more sense. At that income level those couples currently pay about 20% of their income in federal income taxes after deductions. Not that taxing people is a desirable goal, but the average total federal income tax currently paid by U.S. couples in that bracket is among the lowest in developed countries. While the wealthy owe President Bush their thanks for cutting their taxes by much more than they were cut for an average taxpayer, the expiration of the Bush tax cuts will only raise the effective tax rate on the wealthy to 22%. This should not cause an undue hardship on individuals at that income level, and they will still pay among the lowest federal income taxes compared to their peers in other countries. The new tax rates will also help home values and encourage home ownership in one respect, because the mortgage interest deduction will be worth more to high income individuals and couples at the higher tax rates.

While the expiration of the Bush tax cuts will raise the value of mortgage interest and real estate tax deductions for high income individuals, the Administration's proposal to cap those deductions for those high income individuals and couples is not a smart idea timing wise in the current weak real estate market. It is also unfair to those who had bought their home with the reasonable historical expectation that the mortgage interest and tax deduction would remain sacrosanct. Better revenue generation alternatives are to raise the capital gains rate on high income individuals after first giving them a reasonable time to dispose of fairly liquid capital assets, such as stocks and bonds. However, such capital gain tax increases should not be applied to residential real estate investments, whose values have dropped substantially in the current market, for the aforementioned reasons.

Home equity has historically been the single largest form of savings for most homeowners. With home values down dramatically, their savings rates at near all time lows, and their stock market and retirement plan investments devastated by irresponsible financial services sector practices, this is not the time to adopt any tax policies that would discourage home ownership.

New Tax Credit Rule Will Help Home Buyers

Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development (HUD), today announced that the Federal Housing Administration will permit its lenders to allow home buyers to use the new $8,000 federal first time buyers tax credit for their down payment. The credit would otherwise not be available to the home buyer until they filed their next annual federal tax form. In some cases the home buyer would not otherwise have a large enough down payment to purchase the home. To get around that dilemma, HUD will allow FHA's  approved lenders to provide buyers short-term bridge loans for up to the amount of the credit. This will enable home buyers to use the funds immediately if they are needed to complete the purchase. This is a wise decision that will help both home buyers and the recovery of the housing market, and is consistent with the intent of Congress in passing the home buyers tax credit.

Notice To State And Local Governments: Stay Away From Our Yard Sales!

Homeowners have been holding yard sales and bartering goods and services for a long, long time. It's been a great way to bring in some extra money and get rid of unused stuff. Today, a lot of the yard sales and bartering are being conducted online, using outlets such as Craigslist.com and Ebay.com. This has been an especially important means of income to homeowners who are facing tough economic times and looming forclosures. California-based http://swapthing.com offers 3.4 million+ items and services for barter or swap.

A looming threat to these trends are efforts by some state and local governments to require consumers to collect sales taxes on these transactions, and send them to the appropriate state and local government. This could be a real headache for consumers, because there are some 7,000 state and local taxing authorities, and each one taxes different products and services at different rates. State and local governments should either tighten their belts as many of the rest of us has had to do, and/or look to other sources of additional tax revenues besides untapped consumer Internet transactions.