Last week, in Why This New Tax Provision?, I asked why Congress had complicated the Internal Revenue Code, tax return filing, tax forms, instructions, and the tax law by adding a new above-the-line deduction for a small portion of real estate taxes, and invited the member of Congress who inserted the provision into the legislation to educate me on what transpired during the legislative process with respect to this provision. Though I haven't (yet) heard from anyone on Capitol Hill, I have been the beneficiary of two explanations, one from Andrew Oh-Willeke and the other by Robert D. Flach.

Andrew suggests that the lobby for this new deduction is the AARP and that the beneficiaries of the deduction are "elderly homeowners with low incomes who want to keep living in their homes." These homeowners are asset-rich and income-deficient, and even though the provision "doesn't make much sense from a tax complexity or economic necessity perspective," it is difficult for legislators to deny some sort of relief to these homeowners. What the AARP and Congress understand is that older voters are "the most reliable voting block in existence, and are capable of mounting massive letter writing campaigns." Older voters who don't own homes, or who itemize deductions, see the provision as an indication that "a member of Congress who votes for it cares about elderly homeowners generally." Andrew notes that to this extent it resembles the additional standard deduction for elderly taxpayers.

After doing some research, for which I am deeply appreciative, Andrew determined that the AARP did lobby the bill but, as reported by the New York Times and other media outlets, with its primary focus on reverse mortgages and FHA administration. It is possible that the provision had been sitting on the shelf, waiting for an appropriate piece of legislation to come along to which it could be attached. Considering that the AARP lobbies at the state level for senior citizen property tax relief, it makes sense to conclude that the AARP was the moving lobbying force behind the provision. Interestingly, an earlier Senate version of the provision, which would have limited its benefits to taxpayers living in localities that did not raise property taxes, met objections from a large coalition including the National Conference of State Legislatures, the United States Conference of Mayors, the Council of State Governments, the National League of Cities, the International City-County Management Association, the National Association of Counties, and the National Education Association. Their point was that the Senate version would discourage localities from raising tax rates to make up for revenues lost to falling home values, and could force localities to cut funding for schools, police, and other public services.

According to AARP research, 63 percent of Americans aged 65 or older filed tax returns in 1998, but only 50.6 percent of them had positive tax liability. The other 49.4 percent would not benefit from increased deductions, increased exemptions, reduced rates, or increases in nonrefundable credits. They are not the beneficiaries of the new provision. The AARP also determined that only 27 percent of older filers itemize deduction and thus benefit from the existing deduction for real estate taxes. What is unclear from these two disconnected bits of statistical information is how many of the the 50.6 percent with positive tax liability itemize deductions. A good guess is that all, or almost all, of the itemizers are among that group. That suggests that only one-fourth of senior citizens file tax returns with positive tax liability but do not itemize deductions. In other words, the new provision benefits, at best, one-fourth of senior citizens.

Robert D. Flach, the Wandering Tax Pro, shares this comment: "In response to who will claim the deduction, as I have mentioned here before I do see several of my retired senior clients receiving the very small benefit of this deduction – taxpayers who have paid off their mortgage and have an inflated standard deduction which is more than their deductions due to 2 additions for age 65 or over." In other words, the conclusion that I reached, that the benefits of the new provision are rather limited, is corroborated by the observations of yet another tax practitioner.

If the notion that the other three-fourths are more willing to vote for incumbents because their support of the new provision indicates some sort of caring about older citizens is correct, it strikes me as rather sad that the nation's tax laws must be complicated and tax administration increasingly burdened in order to make some people feel good about Congress. That people would consider something of no value to them to have value is baffling. It is inconceivable that anyone will find a tax provision worth $50 to $75 for one year will make the difference between keeping and losing his or her home.

If Congress truly cared about the impact of rising property taxes on elderly low-income homeowners, it would do something other than enact a provision that benefits a fairly small proportion of them. It would examine the reasons for those property tax increases, and if it did so properly, it would discover that it, yes, the Congress, is responsible for a substantial portion of the increase. The Congress consistently enacts mandates that it imposes on state and local school systems, but fails to provide funding. These unfunded mandates then become a fiscal obligation of the states and localities, which then must raise taxes in order to pay for what the Congress has ordered them to do. I suppose, though, that by enacting these unfunded mandates, members of Congress obtain yet another block of votes in their perpetual campaigns to remain in office and hold power. Somewhere, somehow, the goal of retaining power has usurped the task of doing what is right for the country, and somehow politicians and their consultants have figured out how to distract taxpayers from focusing on long-term questions of national interest by blinding them with misleading promises of short-term individual benefits that aren't, after close examination, benefits after all.
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