Exempting the elderly

By Eric Crampton 19/04/2013

New Zealand and Christchurch having been a bit depressing lately, other than last night’s rather nice 77-44 vote in favour of allowing same sex marriages in addition to civil unions, it is sanity-enhancing to look a bit at lunacy elsewhere.

While New Zealand funds education from general taxation revenues and ensures that schools in needier areas receive enhanced funding, Manitoba, and much of North America, mainly funds its schools out of local property taxes. There are potentially good Tiebout reasons for doing this as some people prefer paying more in taxes for better schools, it also makes it harder for schools in poor areas to provide decent services.

From 2015, Manitoba seniors will be exempt from the education portion of the property tax bill. Says Finance Minister Stan Struthers, “These seniors who paid a lot of taxes over their working careers as they raised families, I think they deserve a break.”

Let’s leave to one side for now the obvious equity problem here that letting the relatively wealthy elderly off the hook for a bundle of services that they don’t currently consume might well invite relatively poorer young people to request exemptions from the portion of their taxes that go to pay for government services never consumed by young people: the Canada Pension Plan, Medicare coverage for Altzheimers’, government-funded old folks’ homes, the Royal Canadian Air Farce… I’d be pretty surprised if net government funding didn’t already strongly favour the wrinklies.

The bigger problem is the long-term fiscal outlook when the political incentive is to pull back from taxing the wealthy elderly. Now there are reasons why property taxes on the elderly can be politically unpalatable. Suppose that you’ve owned your house for 60 years, its value is bid up by a bunch of families coming in because of the local school, and you suddenly can’t cover the property tax bill. This will be a problem for any land tax system, any capital gains tax system that taxes unrealised gains on the family home,* or systems supporting local education out of local levies on property values.** There are plenty of ways that the elderly homeowner could re-optimise: reverse mortgages could tap the equity, or the homeowner could sell to someone who values the local amenity and move somewhere else in town.

But if policy should be moving towards a tax base that can withstand a large proportion of taxable-income poor but asset-rich individuals with strong demand for government services, Manitoba’s move isn’t encouraging.

New Zealand at least has been making some moves in the right direction. We’ve been shifting the tax base from income to consumption. We don’t tax capital gains, and for good reason. But whenever retirees cash out some of their portfolios to fund current consumption, they pay the 15% GST. I’d also expect that we’ll be scheduling increases to the age of superannuation eligibility after the next election.

* Systems taxing only realised gains have other problems. And systems exempting the family home entirely have still other problems. Seamus has a rather lengthy series of posts on the topic, some of which are here indexed.

** Note also that we can also get big problems in rural school districts: townies are income rich but have less land wealth; farmers are land rich but will have incomes that fluctuate a lot year to year. If the school levy is a fixed proportion of the land value, the farmers bear a very large share of the school district’s costs. I have no particular view as to what’s fair here other than a generalised view that a progressive consumption tax would be rather better than all of this mess.