Another Bad Justification for Cutting the Estate Tax

I already instructed my readers the previous week about their Arizona tax credit contributions, so this week it was safe to talk about how far real estate prices still have to fall. My suggested headline was "Bubble, Toil, Trouble -- And Estate Taxes" but the editor focused on the real estate angle.

Nobody told me that the Tribune's Perspective section would be given over to tributes to R.C. Hoiles, the extremely libertarian founding publisher of the Orange County Register, which is the current owner of the Tribune. It was like reading the worst of the Arizona Republic about what a really, really swell guy Eugene Pulliam was, because he had only your interests at heart. Sheesh. (Check out this quote from the previous link):

The acquisition [by Gannett of Central Newspapers, publisher of the Republic] is the end of the long reign of the Pulliam family, the descendants of the company founder, Eugene C. Pulliam, a conservative publishing clan whose members include Dan Quayle, the Republican former vice president. The family has long been a political force in Indiana and Arizona -- indeed, one investment banker pointed out that neither state observes daylight time ''because Eugene Pulliam always refused to change his clock.''

Next week: Libertarian sex tips from Ayn Rand!

HOUSING DIP TO KEEP GETTING DEEPER
East Valley Tribune, Nov. 25, 2007

We’ve always had real estate triumphalism in Arizona, and last week it tried to justify a tax cut for the really rich. Last Wednesday, GOP stalwarts Michelle Bolton (of the National Federation of Independent Business) and Alan Langston (of the Arizona Real Estate Investment Association) became exceedingly strange bedfellows of Rep. Harry Mitchell, D-Ariz., praising his support for letting Paris Hilton inherit everything tax-free. After all, Arizona home prices increased 150 percent over the past 10 years!

That’s the latest justification for eliminating the estate tax, even though most people already would pay no taxes on sale of a personal residence. Never let the facts stop arguments in favor of letting billionaires avoid millions in taxes by pretending that regular guys benefit, too.

Sorry, Harry, but if there were actual family farmers or small business owners affected by the estate tax, we’d know their names by now. Opponents of this giveaway can cite Paris Hilton. Proponents have nobody, but it’s not like they haven’t tried. Sen. Jon Kyl, R-Ariz., also a huge fan of the rich paying less, searched in vain for a Katrina victim who faced the estate tax. When a tax cut is being "justified" by lies and fairy tales, maybe it isn’t such a good idea.

However, considering the latest real estate news, maybe using home price appreciation wasn’t such a great idea, either. Two days before the Bolton-Langston column, Goldman Sachs housing analysts turned really, really bearish on Arizona.

Goldman’s chief U.S. economist, Jan Hatzius, raised doubts in 2006, estimating that housing prices were overvalued by 20 percent. In last Monday’s conference call, Goldman predicted that nationally, housing prices still have 13 to 14 percent to fall.

Arizona’s already part of that trend. First American’s Loan Performance index reported Phoenix real estate prices dropping 6.72 percent between August 2006 and August 2007. We’re not used to drops; if growth is under 2 percent, we get cranky. But the declines already have started; the only question is how low it’ll go.

Goldman’s analysts say a lot lower. They see the overall national drop masking even more severe declines in certain markets, predicting 30 percent price depreciation in the 8 states which had the biggest price rises -- including Arizona.

In hindsight, anyone could see that house prices couldn’t race ahead of increases gains in income forever; that speculators and extraordinarily low mortgage rates and lending standards would leave after bad news arrived. It’s also not the media’s fault for that bad news; nobody credited the media for the good market. Those good times were, of course, due to the brilliance of people who, in reality, were only bobbing like corks on a wave.

Current national estimates of losses, both private and public, from the real estate bubble have risen past $400 billion. To put that in perspective, adjusting for inflation, the S&L crisis was $240 billion. Really pessimistic economists who track real estate prices against historical benchmarks think the bubble is much bigger yet. Research by Yale’s Robert Shiller shows house prices tracking inflation for 100 years prior to 1995, at which point prices rose by more than 70 percent after adjusting for inflation. If Shiller’s model is correct and house prices revert to historic norms, the bubble is larger than $8 trillion.

That’s a big, big number. What happens to property tax collections? How many jobs will be lost in the finance-insurance-real-estate sector? Is Maricopa County ready for thousands of assessment appeals and drops in valuations? Will builders keep selling at a loss to liquidate land inventories and avoid greater losses? How will outer-ring suburbs expand services to half-built subdivisions? Were permanent state tax cuts based on statistics distorted by the dot-com and real estate bubbles?

For people who obsess about this sort of thing, it’s time to start quoting Margo Channing and figuring you won’t sell the house for 3-5 years. And the next time Alan Greenspan says you really should get an adjustable-rate mortgage? Don’t.