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1 Joseph Henchman, Would the Proposed Bailout Affect Local Property Tax Collections 1 (2008)

handle is hein.taxfoundation/ffbejxz0001 and id is 1 raw text is: OUNDATION
September 2008
No. 149

FISCAL
FACT

Would the Proposed Bailout Affect Local
Property Tax Collections?
By Joseph Henchman
Executive Summary
The talk of Washington is the Bush Administration's proposal to have the federal government
purchase up to $700 billion of underperforming assets, such as mortgage-backed securities, from
troubled financial institutions. Treasury Secretary Hank Paulson and Federal Reserve Chairman
Ben Bernanke argue that because there is reluctance to trade short-term asset-backed securities,
removing these assets from the books of investment houses and banks is necessary to prevent a
credit freeze from spreading to the rest of the economy and stunting long-term growth.
There is much to be said about this assessment in particular and the plan in general, and its merits
and pitfalls are the subject of much debate now. Legally, questions of separation of powers and the
extent of congressional oversight and judicial review come to mind. We also certainly hope that
policymakers will bear in mind that our tax code encourages overinvestment in owner-occupied
housing, and policy solutions that preserve this distortionary policy may store up additional
trouble for the future. Details on how our tax code does this can be found in past Tax Foundation
publications and on our website.
This fiscal fact addresses a narrower question. Assuming that the proposal passes and the
securities are transferred in some form to the federal government, and assuming that some of these
securities will result in foreclosures, the federal government or one of its creations could find itself
in possession of property pending disposition. (Provisions of the bill dealing with restructuring of
mortgages to encourage homeowners to retain possession also imply this.) Because the federal
government and its instrumentalities are immune from state taxation, a question is raised as to

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