Above All Else Stop Digging: Local Government Law as a (Partial) Cause of (and Solution to) the Current Housing Crisis

So many things have gone wrong with our housing market that it is hard to know where to start. One simple diagnosis is that we invested too much in houses that were not worth as much as we thought. Looked at in this way, it is relatively easy to see how innovations like interest-only loans contributed to an over-valuation of housing. Certain actions of the federal government were and are also clearly problematic, such as the longstanding tax breaks for home ownership. This Article looks at state and local government law, and particularly at financing mechanisms created by state law and used by local governments to subsidize new development. In essence, local governments issued bonds to build key infrastructure for new developments, and interest on those bonds were exempt from state and federal income taxes. This Article maintains that these mechanisms served as yet another subsidy to the very same kinds of value-destroying housing developments that were already being over-encouraged in other ways. Just as the current crisis has rightly led policymakers to reconsider government actions at the federal level, this crisis should also lead to a similar reevaluation of state and local government law, particularly as it intersects with the federal tax exemption for state and local bonds. However, to do this properly, we must first reconsider the central normative justification for the current local government landscape. This justification is economic and consists of the argument that competition among a multitude of local government entities is efficient. This vision of jurisdictional competition is generally known as the Tiebout model. This Article makes a series of specific contributions to this rethinking. First, despite arguments by proponents of the Tiebout model to the contrary, it is demonstrated that a full-blown Tiebout model does not release governments at various levels, nor citizens, from making political choices about a just (versus merely efficient) distribution of resources. This is primarily because the legal background rules that set the terms of the competition also select for different equally efficient sets of jurisdictions. From this result it follows that these legal background rules ought to be interrogated as making political choices. A particular type of rule is described in this Article as a bundling rule. A bundling rule operates, for instance, by making a certain method of financing schools readily available only to new subdivisions, thus bundling new schools with new development. By opting to make such a method available, state governments are in effect choosing to encourage certain patterns of development. Once this is realized, then there should be no barrier standing in the way of scrapping bundling rules that encourage sprawl

Expanding State Fiscal Capacity, Part I: Combining an Entity-Level Consumption Tax, Improved Sales Factor Apportionment, and a Tax on a Federal Windfall (the QBI Deduction)

The Tax Cuts and Jobs Act (TCJA) was the most significant piece of federal tax legislation passed in thirty years. Not surprisingly, the TCJA has spurred the states to rethink their tax systems. This rethinking of state taxes was necessary even before the TCJA. To date, the states have primarily considered reforms that respond to the capping of the State and Local Tax (SALT) deduction, and the current proposals, if enacted and successful, would only return the states to where they were in 2017, which is to say to quite mediocre revenue systems. This Article, the first in a series, argues that the TCJA should provide the final motivation to move the states to reform their tax systems in fundamental ways that made sense even before the passage of the TCJA. The reform that is the focus of this Article is the implementation of entity-level consumption taxes. The states should have implemented such taxes long ago for a number of reasons. Prominent among such reasons is that the United States under-taxes the consumption tax base generally and, if well-designed, a low-rate entity-level tax is not likely to spur much additional evasion. The passage of the TCJA makes such a tax more appealing because this tax would be imposed on business entities, and businesses can still deduct state and local taxes. Thus, this proposal represents a response to the new SALT cap. Two other complementary reforms are developed. First, states should tax the windfall given to certain unincorporated businesses by the TCJA. This too can be a form of SALT workaround, as the tax on the windfall can be reduced for those taxpayers hurt by the capping of the SALT deduction. Finally, states should bolster their laws governing the apportioning of the income of multistate corporations. These laws already govern the apportionment of the state corporate income and would also control the apportionment of the tax base for the two new taxes proposed in this Article (namely, a new tax on consumption and on the federal windfall)