Oct. 4 (Bloomberg) -- While purring about middle-class tax
breaks, U.S. lawmakers who backed them ignored how the cuts would
further accelerate state and local tax increases.
The $146 billion "Working Families Tax Relief Act of 2004"
-- passed by Congress on Sept. 23 -- will actually increase the
total tax burden for most households.
The tax savings will hold up like papier-mache when you
consider how other taxes shred the federal breaks. The
alternative minimum tax as well as state and local levies will
continue to balloon as the new law vacuums money from the coffers
of local schools, agencies and state governments.
"The decline in federal revenue sharing causes a greater
burden on middle-class homeowners," said Richard Roll, head of
the American Homeowners Association, a national consumer
membership organization. "The federal tax cuts have a concealed
effect. It's a detriment."
The tax relief act extends the child tax credits to 2009,
the marriage penalty breaks until 2008 and the 10 percent tax
bracket through 2010.
What families may save on slightly lower federal tax bills,
though, will be offset by higher state and local taxes.
While Congress has passed legislation to bolster national
security and education ("No Child Left Behind Act") and to fund
Iraq and Afghanistan reconstruction, it has shortchanged state
and local governments with "unfunded mandates," which are laws
passed by Congress without adequate funding given to states to
The federal government's spending binge and tax-cut
shortfalls shifted some $33 billion in bills to deficit-ridden
state and local agencies in fiscal year 2005. These expenses are
passed on to you through higher sales, excise, small-business and
property taxes, according to the National Conference of State
Legislatures, an association that represents state lawmakers. As
a result, state taxes alone rose by $18 billion from 2000 to
Combining the effects of record home appreciation with
federal-revenue shortfalls, local tax authorities have increased
property-tax bills as much as 56 percent during the last four
years in some areas.
In a survey of 12 metropolitan areas that included New York,
Los Angeles, Boston and Chicago, property taxes increased 23
percent from 2000 to 2004, according to Runzheimer International,
an international management-consulting firm that specializes in
In the meantime, average monthly household income has
dropped in real terms, declining from $4,607 in 1999 to $4,385 in
2003 (adjusted to 2003 dollars), according to a study by the
Harvard Joint Center for Housing Studies. That means fewer
dollars are available for rising tax bills.
In addition to failing to relieve state and local agencies
of their growing burden, Congress also dodged the tax tiger --
the Alternative Minimum Tax.
Potentially biting as many as 40 million taxpayers by 2014,
the AMT was introduced in 1969 to ensure that the ultra-wealthy
paid federal tax by taking away deductions if they reached a
certain level. Now the tax increasingly affects mostly middle-
income families in states with high local and state taxes.
In 2004, those subject to the AMT paid an extra $6,000 (on
average) in federal taxes over what they would normally pay,
according to the Tax Policy Center, a joint venture of the Urban
Institute and the Brookings Institution, two social-research
The easing of the marriage penalty in the current tax law,
which lowers effective tax rates for dual-income married couples,
also can be a wash. The alternative tax affects middle-class
married couples with children the most.
"Virtually all (94 percent) of married couples with two or
more children and adjusted gross income between $75,000 and
$100,000 will be on the AMT by 2010," the center's update on the
AMT stated recently.
What stings most about the AMT is that if you are subject to
it, you can't deduct state and property taxes, which have risen
as fewer federal dollars have reached your community. The
alternative tax can even be partially triggered by high state and
Instead of reforming the way the alternative tax is
calculated by indexing it to inflation, two weeks ago Congress
punted and extended one-year AMT exemptions, which don't even
come close to fixing the long-term problem.
AMT Fix Put Off
"Half of New York City was paying AMT this year -- even
with the exemptions," said Martin Nissenbaum, national director
of personal tax policy for Ernst & Young LLP, the New York-based
accounting firm. "If you weren't in AMT last year, you can do
Cutting ordinary federal income tax rates also worsened the
"Extending the 2001 and 2003 tax cuts makes the AMT problem
much larger and more expensive to fix," the Tax Center concluded
earlier this year.
Clint Stretch, director of tax policy for Deloitte & Touche
LLP, said the new tax law's enactment offers little incentive for
Congress to reform the alternative tax, which nails taxpayers
hardest in expensive states like New York, California and New
"There's no (national) political mandate to fix the AMT,"
Stretch said. "It comes down to a regional fight now."
Appealing Your Taxes
While there's little you can do to avoid the alternative
tax, it's possible to reduce your property taxes.
There's a three-part process to see if you're paying too
much in real-estate taxes.
-- First, review your assessment notice. This is what your
local assessor says your property is worth, which may be
inaccurate. If you spot mistakes, tell your local assessor. You
may be able to get a reduction through a letter.
-- Since as much as 60 percent of real-estate tax bills may
have errors, you need to check if your property description
(square footage, number of bedrooms and bathrooms) is correct.
You could be overcharged based on those factors.
-- Also compare your property value to similar houses with
equal square footage and amenities in your area. Sometimes
neighbors will even let you see their tax bills. If you are
paying more than your fair share, file an appeal with your
Ultimately, lawmakers did a disservice in extending tax
breaks by using borrowed money and exacerbating long-term fiscal
woes. Don't let the cat get your tongue when you confront them
about your additional tax burden. Some genuine growling is in
To contact the writer of this column:
To contact the editor of this column:
John F. Wasik in Chicago at [email protected].
Bill Ahearn at [email protected].