One Man's Loophole Is Another Man's . . .

The Washington Post has a summary of the results of the 2005 session of the Maryland General Assembly. One of the entries is a proposal that would have "[raised] money for construction by closing a corporate tax loophole." This alleged loophole closer died in a Senate committee.

The alleged loophole is the entity transfer tax bill. This bill would have imposed transfer and recordation taxes on the transfers of controlling interests in LLCs, partnerships, and corporations.

Let's be clear--the ability to freely transfer interests in entities that hold real property is not a "loophole." There are perfectly sound reasons not to impose a tax on such transfers, not the least of which is that such a tax would be difficult to enforce and, when applied to transactions that take place outside of Maryland between non-Maryland residents, unconstitutional as well.

Going one step further, the economic analysis of the revenue effect of the bill is suspect. That analysis depends solely on the estimated tax revenue that would be raised from the tax. The analysis does not factor into its conclusion the lost property tax revenue due to the depressive effect that the extension of the transfer and recordation tax would have on property valuations. The transfer and recordation tax is imposed on the entire value of the real property. Because real property is typically purchased using borrowed funds, the tax will reduce the amount that can be paid to purchase a property by about 4 or 5 times the amount of the tax itself. Since property taxes are annual levies, the tax loss from the reduced prices paid for commercial properties would recur year after year.

A friend of mine who was deeply involved in efforts to oppose the entity transfer tax bill bitterly complained about what he perceived to be left-wing bias on the part of the newspapers on the issue. While I thought that coverage was biased, the bias was that reporters like a simple story, e.g., rich, greedy developers attempt to preserve self-serving tax loophole.

There is no left-wing or right-wing bias. In fact, the actual systemic bias has worked to the benefit of the Bush Administration on numerous issues. (Think for a moment--does the President have a plan to reform Social Security? If so, would that plan resolve the current actuarial deficit with respect to the benefits due to current participants in the system? If one were to read the papers, one might conclude that there is an explicit plan (there's not) and that the plan will resolve the actuarial deficit (to the extent that any plan has been outlined by the Bush Administration, it does not address the actuarial deficit in any way, shape, or form).)

In fact, the bias is a dumb bias. That is, unless a story is simple, the press cannot digest it at all. The papers simply cannot seem to get their arms around anything that is even remotely complex, such as the concept of unintended consequences.