Veritas

In the late 1980’s the Builders’ Association was one of the first organizations to oppose a property tax reduction plan, proposed by the Blanchard Administration, which would have raised the sales tax while reducing the tax on residential property. One of our objections was the fact that the plan ignored the windfall the state would receive from rising property values that would eventually put total revenues above the pre- plan level.
When the original “Proposal A” plan was proposed in 1993, we had many of the same concerns, particularly since it included a 2% real estate transfer tax, on top of the additional 2% sales tax (which many of its supporters didn’t realize had an impact on new construction). However, after the transfer tax was cut to 0.5%, the benefits of “Proposal A” outweighed the negatives so dramatically, we put aside concerns and were in full support of the proposal. Furthermore, unlike the plan of the late ‘80s, it limited the growth in taxable value to the rate of inflation, thereby protecting homeowners and eliminating immediate windfalls from higher values.
However, unknown at the time, was that the implementation of “Proposal A” would prevent the use of state allocations for capital improvements in school districts, forcing districts to turn to the voters for higher millage rates even if state funding provided adequate resources.
This hits home in Genesee County. In this column of the April 3rd Veritas, we looked at growth of the local student population, finding that, over the past four school years, the rise was just 1.2%. Furthermore, in the six districts with the most home building, the rate of student population growth was just 8.7 per 100 homes.
Then, last week, one of those districts sent residents a flyer about its request for “Sinking Fund Millage Renewal,” noting that homesteads in nine of the county’s 21 school districts currently pay between 8.8 and 13.6 mills for school operations. In fact, four districts (Fenton, Montrose, Genesee, & Goodrich) pay well over double the six mill rate that finances state funding under Proposal A. And, several other districts have either had millage requests voted down, or plan to go to the voters with requests in the future.
Now, in recent years, we’ve written about the local windfalls in growing districts, as per pupil revenues from the state far exceed marginal costs of educating an additional student. And, have called for cutting the limitations on state funds, to allow growing districts to use them for capital improvements if desired.
However, in analyzing data for a Housing Quarterly article, we found that the growth tax base since 1994 has created an unbelievable windfall for Michigan’s education fund, creating dollars that could be available for capital improvements, without any reduction of funds for direct educational expenses.
When proposed and passed, Proposal A was expected to be, from the state’s perspective, no better than “revenue neutral,” meaning the increase in state per pupil spending would, at its best case scenario, be offset equally by the increased sales, cigarette and real estate transfer taxes. However, that was under growth estimates of ‘94. Since those estimates, single family starts have risen 53% annually, while home prices are up around 53% for the five year period. The results have been an incredible surge in state revenues, with little impact on Department of Education expenditures.
For example, take a look at additional revenue and expenditures, to and from Genesee County in the 1999-00 school year. It appears that roughly 400 additional students were enrolled in local, state funded, schools than in ‘98-’99, a cost of approximately $2.5 million to the department.
However, in offsetting revenue we find: The 2059 owner occupied homes built locally generated some $4.24 million in school fund sales taxes; $2.12 million in real estate transfers; and $1.29 million in new homestead school tax.
The 5,200 real estate sales generated $2.95 million in real estate transfers, and unlocked approximately $422,000 state revenue in the difference between assessed value and tax value. So, from last year’s local activity alone, we find the state’s education fund grew by $11 million, at a cost of just $2.5 million, leaving an $8.5 million windfall. And, that’s on owner occupied housing only.
In the next issue we’ll give a statewide look at increases in revenue and enrollments.

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Business Briefs: Why Agriculture always wins

Often in this column we write about the cost of farming to the American Taxpayer in comparison to the revenue generating home building and development industries. Well, last Thursday the Wall Street Journal ran a feature that may explain why Congress seems to always find a way, or reason, to bail out agriculture at rates that may actually exceed $25 billion this year. The article referred to pressure put on the Clinton Administration to “shore up” the domestic sugar market by spending $100 million to buy sugar and boost the market price. It told of 11 U.S. Senators marching into Agriculture Secretary Glickman’s office to lobby directly for the bail-out ... 11 Senators on one issue? That’s unheard of ... but also understandable.
The remainder of the article told of the real power behind agriculture— MONEY! We find that sugar industry political action committees gave $1.5 million last year, and a whopping $7.9 million since 1995. And, commodity producer PACs, everything from livestock to grains, gave more than $29.2 million over the past 4 years. No wonder we're drowning in amber waves of grain!

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Parade, Housing Quarterly & Industry Pride

This could well be the one commentary in the year 2000 where I offend no reader (or even non-subscriber), because I’m writing about the real meaning of the association’s spring promotions. Our Parades of Homes and Housing Quarterly magazine mean more to the home building industry than the promotion of quality construction and the most up-to-date products and designs available in housing today. They also highlight the skills and abilities of the building professional along with the pride we all take in being a part of this industry that means so much to the community as a whole.
In the April 19th column, I told of the Press Conference called by Genesee County’s elected leadership, in a local subdivision, to announce its third bond upgrade in two years and credit the surge in home building during the ‘90s for the upgrades. Quite frankly, it was a proud moment for our industry, which brings me to the real value of the spring events.
With so much publicity given to negatives regarding home building, these events give us the opportunity to publicize the positive, and tell the story of the industry’s role in the Flint area’s renaissance. This opportunity is made possible, not only by the efforts of our Parade participants and HQ advertisers, but by the support they receive from the members of the industry as a whole.

Barry

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Tax Planning for the year 2000 by Rachor, Purman & Tucker, CPAs

One tax year’s passed, and another has begun. Not only is the start of any new year usually the best time to plan your tax strategies for the year ahead, but Year 2000 presents special opportunities because of recent changes in the tax law. Here are some points to consider.
New for Year 2000 tax law:
The tax law is in constant change these days. In 1999, Congress passed a tax bill that gave “only” $18.4 billion in additional tax breaks over the next five years, while adding $2.6 billion in new tax revenues. Even more significant, however, are the billions of dollars in tax provisions that continue to be phased in during 2000, as required by legislation passed back in ‘97 and ‘98. For individuals, a long list includes the following:

· Relief from the alternative minimum tax for nonrefundable personal tax credits such as the child credit and education credits, making it more important to maximize these credits;
· The denial of charitable contributions for split-dollar charitable life insurance arrangements, suddenly making these investments filled with pitfalls;
· The extension of the income exclusion available to employees for educational assistance provided by employers, allowing up to $5,250 in tax free tuition benefits;
· An increase in the adjusted gross income phase-out for participants in employer plans to be qualified to also contribute to a deductible individual retirement account (up $1,000 in 2000 to $52,000 to $62,000 for joint returns and $32,000 to $42,000 for single filers);
· A jump in the maximum amount of student loan interest that is deductible, even without itemizing, from $1,500 to $2,000;
· An increase in the unified gift and estate tax credit amount that exempts gifts and estates up to $675,000 (up from $600,000 in ‘97), requiring re-evaluation of existing estate plans;
· How tax payments can now be made by credit card;
· A new IRS ruling that permits creative use of the option to amortize mortgage points;
· A new slant on when a bad debt deduction can be taken for a loan to a relative;
· Revised positions on when a small business owner must change an accounting period or an accounting method.
· Changes in the rules connected with connected with the new separate liability election for spouses;
· How the annual gift tax limit can be avoided for tuition payments;
· When opting out of a regular IRA or a Roth IRA makes sense; and
· Changes fin the rules for when the IRS will deny favorable tax treatment to family limited partnerships, and when they still will be respected for tax purposes.

Tried-and-True Planning.
Just because tax technique has been around for a while doesn’t mean that it doesn’t deserve reconsideration. Year end tax planning is often necessary to salvage an unfavorable tax position created by additional income or lower deductions, but planning right from the start makes sense for many strategies.
Contributing to an Individual Retirement Account (IRA) at the beginning of the tax year, allows the fund to grow, tax free, for a longer period of time. The same principle applies to gifts, since they can appreciate for the rest of the year with no further tax impact upon the donor.
Setting up a home office and following the latest set of rules from the outset can yield significantly greater tax benefits than waiting until tax return season for 2000 is over. Planning for retirement distributions and shifting retirement assets, private annuity payments, charitable remainder trusts, medical savings accounts, planning for tax passive investments all make more sense if begun at the beginning of the year.
If you have any further questions about how tax planning at the start of the year can maximize your after-tax savings, be sure to contact your tax consultant.

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It’s still about "Nothing" in particular

Apparently one can find his 15 minutes anywhere. How about the world’s most famous house cleaner, Donato Dalrymple (a.k.a. the Fisherman)? After telling the media all about how Elian licked his face, continued with such comments as “I am the savior” and “I believe I was meant for this in some way.” Sure, and Kato Kaelin’s fame was predestined.

Now that Elian Gonzalez’ playmates have come to visit from Cuba, David Letterman noted the last time four playmates visited the Washington D.C. area. “President Bill Clinton invited Miss October, Miss November, along with Misses December and January.”

A Veritas reader E-Mailed us, looking for comment on last week’s release by the Center for Disease Control, stating that a “20 cent increase on a six-pack of beer would cut the rate of gonorrhea infection by 9%,” because it would cut the alcohol consumption by young people. So, kids who are violating the law will think twice due to 3.3 cents per beer? Sure! And massive tax cuts in 1981 ended the U.S. deficit.

From the San Francisco Examiner: “If young voters turned out like older voters, ... politicians would spend more time talking about federal loans for college students and tax breaks for first time home buyers.” Tax breaks for first time home buyers? Sounds Good! But we better forget about the 20 cent beer tax...

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Association News and Events May Meeting; Parade; Golf Outing & more

As we get ready to kick-off our spring housing promotions, its only appropriate that our guest speaker for the May 10th General Membership meeting is someone who truly appreciates home building’s value to the community as a whole. So Wednesday we’ll be joined by Rick Hammel, the 2000 Chairman of Genesee County’s Board of Commissioners.
As chairman, Rick’s frequently credited the surge in home building for the fiscal health of the County, evident in recent bond upgrade commentary. He’ll be speaking on the current state of county government, and may well have some updates on local projects which have gained considerable media attention.
Regarding those spring promotions, the Parade will open Saturday May 13th, and Housing Quarterly is in publication as we write, and is set to be mailed Friday. The current issue was extended to 104 pages, and focuses on the value of housing to the local economic renaissance.
We urge all members to get out and tour the 42 Parade models beginning next weekend ... and, to remind you that additional copies of HQ are available for distribution, and can be picked up at the Association office, or at Wednesday’s General Membership meeting.
Golf Outing! Set for Tuesday, August 1, at Woodfield’s Captain’s Club ... Now that the Parade’s about to open and Housing Quarterly’s in print, we’re taking reservations ... as with last year’s event, we’re holding a four person scramble; Golf/Cart; burgers & hot dogs; dinner; keg beer and drink tickets, all for $100.
Hole Sponsorships are also available ($100 if sponsor supplies prize/$150 if BAMF gets it) ... Remember, we’re limited to 144 golfers and were at capacity by July 4th last year!

Economic Update: GDP and Labor Costs send a shockwave

Last Thursday the Government issued two reports that suggest inflation may be back. First, the Commerce Department said the economy, as measured by Gross Domestic Product, grew at a 5.4% rate in the first quarter. Although the rate was below forecasts and well below the pace in last year’s fourth quarter, it’s still well above the 2.5% Federal Reserve comfort zone. And, with the growth report came word that the GDP price deflator, a closely watched inflation index, rose at 2.7% for the period, well above the 1.9% rate of the fourth quarter.
Then came the news from the Labor Department that labor costs rose at a 1.4% rate from January through March, above analysts’ expectations (0.9%) and above the fourth quarter’s 1.4%.
Combined, the reports confirmed the fears of many in analysis business that the robust job market is spurring higher salaries, while consumers are willing to pay for the higher costs.
It’s true that those fears may be confirmed in looking at some of the GDP data. After all, they show that first quarter consumer spending rose at its fastest rate in 17 years, up 8.3%. But this is still the new economy, and the numbers don’t factor in the way in which this additional consumption is taking place (priceline et. al.).
And, what about the price deflator? There’s no question the 2.7% 1st quarter rate is higher than expected, but so were the major price indexes during the period, due mostly to oil, a problem that’s receding. And, excluding food and energy, the index was up at a more moderate rate of 1.8%.
Regarding labor costs, we find that they’re up 4.3% for the past twelve months, the biggest jump since the fourth quarter of ‘91. But most of the gain came from higher benefit costs due mostly to rising health insurance premiums. Wages and salaries were up at a rate of 1.1%.
And finally, since the 1st quarter productivity report is to be released this Thursday, we don’t know what part of the higher labor costs are offset.

Is Inflation Back?
Ever since foreign markets came out of their slump, this column has been concerned about inflation, particularly since low import prices had a critical competitive effect on keeping domestic prices in check. However, despite occasional shocks in isolated sectors of the economy, the price levels have continued a moderate rise, and there’s been no evidence of a resurgence. Our concern relates more to perception, and potential interest rate action by the Federal Reserve, bond market, or both. Why? Because the cost of borrowing shows up, in a number of ways, in the actual inflation numbers. Just like gasoline prices raise transportation costs, and ultimately the cost of goods transported, higher borrowing rates raise the real costs of everything from gathering raw materials to manufacturing, from home building to home buying.
The fears from Thursday’s reports relate, as much, to concerns about Federal Reserve action as they do to present inflationary pressures.
Of greater concern are the upcoming price index reports for April, now that oil prices have returned to some semblance of sanity. If these reports look good, we would hope concerns about inflation would be tempered.

Other Economic Notes:
Manufacturing is still expanding, but at a slower rate than during most of the past seven months, according to the purchasing managers’ index ... however, that followed 3 months of slower durable goods orders, which turned around dramatically in March, surging 2.6%.

Housing Industry News’ Update

Well, so much for all the analysts’ claims about rising interest rates taking the steam out of the housing market ... Despite concerns about interest rates, and even a drop in consumer confidence, (fewer Americans expressed plans to purchase homes) last week the National Association of Realtors reported that existing home sales were up during March, rising 1.5% to a rate of 4.83 million units. Sales activity was up in every region except the south.
Furthermore, it looks like sales will stay at a strong rate in the near future. According to reports from the Mortgage Bankers’ Association, mortgage applications have been climbing toward record highs in recent weeks, an indication that sales are likely to remain on the upswing.
Still, interest rates may be having more of an impact than most analysts believe. One interesting item in the Realtors’ report was that the median price in March was at $134,400, just 3.7% above the level of one year ago and substantially less than home values rose over the twelve month period. It’s conceivable that buyers are offering less, and sellers accepting less, due to higher monthly payments.

Housing activity across Southeast Michigan was up 10.1% in the 1st quarter of the year according to Housing Consultants’ report in Mid-April. A total of 4,746 permits were issued in the eight county region during the January/March period, up 435 from the same period in ‘99.
All counties showed improvement over last year, with the exception of Wash-tenaw, as Wayne County showed the biggest gain, up 30.4% from 1999’s first quarter. Genesee County’s starts were up 8.2% for the quarter, with 395 permits.
However, the Genesee County numbers only tell part of the story regarding local housing, as Genesee County development has now spread into Oakland.
The biggest improvement of any municipality in the region was Holly Township, up 1,750%. But 3/4 of it’s starts were at the southern edge of the Woodfield subdivision, only in Oakland Co for taxes. Those permits take “local” activity to 423, up 15.9% from last year.

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