Personal Bankruptcy and Now City Bankruptcy

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Property Taxes Icon (Photo credit: danielmoyle)

Personal bankruptcy dominated bankruptcy news when it significantly rose after the 2007 recession, but it is now currently on the decline. Expert financial analysts suggest that the reason for the past 27 month decline in personal bankruptcy is because money has tightened up and foreclosure rates have slowed. Now city bankruptcy is beginning to dominate bankruptcy news.

Stockton, California, one of the hardest hit cities during the recession for foreclosures in the United States, is currently facing filing for bankruptcy. There were so many foreclosures during the recession in Stockton that property taxes soon failed to be collected, and a much needed revenue was no longer available. Property taxes on foreclosures are not normally paid until foreclosure homes are sold. The taxes normally go with the property, and most of the time, either the mortgage lender or the taxing authority end up stuck with the bill.

Filing foreclosures on behalf of a taxing authority would do no good because the houses are already being foreclosed on by lenders who cannot afford paying the taxes any more than the homeowners facing bankruptcy who have been foreclosed on. Because of the added costs of owning a property that will not sell in the open market, there is a glut of homes not yet foreclosed. Even if the homes begin to sell, the lowered property values will lower the tax proceeds expected, something cities like Stockton have not been equipped to handle, having significantly cut its budget further than it ever has in is gloried history.

After trying mandatory arbitration with its creditors, it seems Stockton is being forced to file for reorganization under a Chapter 9, a type of bankruptcy for municipalities. If forced to file, Stockton will become the nation’s largest city to seek protection under the U.S. Bankruptcy Code.

Maybe there is a lesson that can be learned from all of this. Stockton spent millions of tax dollars on ambitious projects in the mid-2000s, like a sports arena, a super hotel, and a promenade. When the recession hit, these gargantuan projects turned into expensive albatrosses that cannot possibly make the project tax revenues that was once expected. In fact, they now cost the city of Stockton in expenses at a time when the city should be expecting additional revenues.

Property taxes may be the most efficient way to coerce taxes, but they certainly are not the most efficient way of inspiring devoted citizenry. Extracting property taxes comes with deep seated feelings of ownership and hard work from property owners. Taxing property is a direct tax that attacks the commitment and hard work of the citizenry that is usually the most productive in society.

Nevertheless, governments make allowances for certain groups to be exempt from property taxes. I call these groups the elitists, and politicians get to decide who these elitists are.

City governments could eliminate the elitists if they wanted. Wouldn’t it be better if every one just paid a direct use tax on every service and product regardless of their stance in life? You might be surprised at how much tax revenue could be generated by such a system where no one is exempt from paying, not even governments. Stockton, are you listening?

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