The financial press has found a way to make a fight over who pays for public life sound like a story about portfolio positioning. Read the strategists closely, though, and they have said something the anti-tax campaigns would prefer voters not hear: property-tax cuts "could weaken credit conditions for some local governments," and cities that lose that revenue "may need to raise other taxes or find alternative sources of funding."
That is the whole argument. The people whose job is to price risk look at Florida's proposal for larger homestead exemptions and see a hole in local budgets. They do not see a free lunch. Somebody fills that hole. It will be renters, who get no homestead exemption. It will be shoppers hit by sales taxes and residents hit by fees. Or it will be everyone who relies on the fire station, the school bus and the sewer line that the tax was paying for. A tax cut that sounds like relief for homeowners is a transfer, and the bill goes to people with less political clout and fewer lobbyists.
Now look at the other side of the ledger. California voters are considering a 5% tax on residents worth a billion dollars or more, and a permanent higher rate on income above $371,000. Washington voters are being asked to repeal a 9.9% tax on income above a million dollars a year. Opponents say these taxes will drive the rich away and wreck budgets that depend on volatile high earners. It's a serious argument, and the volatility is real. California's budget does swing with the fortunes of a small number of very high earners. A tax on unrealized wealth also raises hard questions about valuation and enforcement, and Democrats shouldn't pretend otherwise. It is telling that the party's own leaders are not unanimous about the billionaire measure.
But notice what the volatility argument actually proves. It says that top incomes have become so large a share of the economy that governments can't ignore them. That is a verdict on how lopsided the gains have been, and no reason to leave the money alone. The honest alternative to taxing the very top is not a painless low-tax equilibrium. It is a slow squeeze on local services, paid for by everyone else.
The bond market adds a final irony. Dan Close of Nuveen notes that higher state taxes make tax-exempt bonds more attractive. In other words, wealthy investors get a shelter from the very taxes they're fighting. Interest on municipal bonds is exempt from federal tax, and often from state tax for in-state holders. The affluent are both the loudest critics of high taxes and the most reliable beneficiaries of the exemption that makes public borrowing cheap. I don't begrudge them the bonds. I do object to being lectured about fiscal discipline by people whose portfolios are built around a subsidy.
Then there is the borrowing. Municipal issuance is up 7.8% from last year, at $473.8 billion through September. Cities and states are borrowing because roads, water systems and schools are aging, and because voters keep demanding services while being promised that nobody has to pay for them. Borrowing is fine for building things that last. It is a trap when it covers for revenue that a tax-cutting majority has voted away. Debt service is a claim on future budgets that comes ahead of teachers and caseworkers.
So here is the test voters face, whatever the bond desks say. Ask who gets the benefit, who gets the bill, and which public goods are on the table. A homestead exemption that squeezes a county's budget and a repeal of a millionaire's tax are not the same kind of tax relief. The first spreads the pain downward, while the second keeps the gain at the top. The market already knows the difference. Voters should too.
How it may affect me
If you own a home in Florida, a larger exemption may lower your tax bill, but your city or county could respond with higher fees, sales or other taxes, or reduced services; renters and businesses get less of the benefit. If you own municipal bonds or bond funds, watch local credit ratings and new issuance volume rather than expecting an immediate market reaction.
