The Real Honey Pot for Teachers, State Employees and Their Unions

Have you been too busy working to follow all the commotion in Wisconsin? The casual media coverage makes it sound like an armed revolution is about to break out. But, here is the core of the dispute between the state government of Wisconsin and its union-represented employees:

The bill would also require union members to contribute 5.8% of salary toward their pensions and chip in 12.6% of the cost of their health insurance premiums.

If those numbers don’t sound outrageous, you probably work in the private economy. The comparable nationwide employee health-care contribution is 20% for private industry according to the Bureau of Labor Statistics. The average employee contribution from take-home pay for retirement was 7.5% in 2009, according to the Employee Benefits Research Institute.

How does this compare to your compensation package? In a world when actual unemployment is 9.8% and pro forma unemployment is 17% and more Americans are on food stamps than ever before, is this such a big deal?

Maybe we can tweak your interest even more by examining where all the money comes from to support public education. Here is a summary of Public School Finances in Billions of Dollars:

US Public Education Finances 2006-2007 Academic Year

Federal and State funding sources of funding are managed for better or worse by elected government bodies. Who then manages the local sources of funding? Since $155,329,981,000 of the $245,625,089,000, or 63% of the total comes from property taxes, the answer to this question is that an unelected body of individuals manages the local source of public education revenue.

Have you looked at the details of your real estate tax bill recently? Well, I have and it is unpleasantly instructive. I have owned the same house for over 38 years. My original cost of the house was $70,000. The last known estimated market value was about $550,000. And, I definitely do not want to sell it for that amount. The current valuation for purposes of computing the current tax is $95,730 or 17.4% (95,730/550,000) of the market value. Therefore, if we apply this 17.4% to my beginning purchase price of $70,000, we get a total of $12,183 as my basis for computing my tax for my first year. Using the current tax rate of 6.8122% per $100.00, we can estimate my tax in the first year as totaling $830.00 ($12,183/100 x 6.8122%). (After 10 years, I throw the receipts out).

Don’t get discouraged for I can show you how to compute something which you should know. How much have you paid in real estate taxes over the life of your house?

If your first year’s property tax was $830 and your 2010 property tax is $6,521, the average tax per year is $3,675 [$6,521(2010 tax)+$830(1973 tax)=$7,351/2=$3,675]. Thus, the approximate total taxes over 38 years are $139,650 (38x$3,675). This is almost exactly twice the original purchase price of the house! I never voted to increase or decrease my real estate taxes. They just kept increasing automatically because of some mysterious person called the county assessor.

The real estate tax is the only tax that results from unrealized appreciation of an asset. In every other instance, you have to have a cash realization to become subject to a tax. Now when you consider that houses are probably the largest single stock of personal savings in our economy, these real estate taxes are stealthly stealing a lifetime of accumulated appreciation in the value of your home from you. If your blood pressure is increasing, you may want to not read any further.

Now suppose that instead of sending 38 checks to the local assessor, you put the same amount of money in an IRA that earned 5%. This stream of payments would grow to (are you ready for this?) over $415,624. And, your actual financial position would have improved by $415,624 plus the $139,650 that you would not have sent to the county assessor. Your net worth would have increased by a total of $552,274. The purpose of this example is not to call for eliminating all local funding for education, but to simply show the true cost of the stealth funding from the mere appreciation in value of your house.

Oh, now maybe you are getting a lot more interested in what is going on in Madison, Wisconsin, where the true beneficiaries of your real estate taxes, teachers and other local government employees, are raising hell with the state government which is trying to balance its budget. And, all they want to do is make the government employees contribute something above zero to their pensions, 5.8% of their salary, and 12.6% of their cost of their health insurance premiums.

Yes, your house is the “Honey Pot” that helps fund what otherwise is already an excellent compensation package by every competitive standard.

In addition to the union employees, Democratic Party office holders also have benefited from this “Honey Pot.” For the period 1989 to 2010, out of the top 100 donors to political candidates, the following three large unions which are all now protesting in Wisconsin, gave the following percentages of all their contributions to the Democratic Party: The American Federation of State, County and Municipal Employees gave 99%; the American Federation of Teachers gave 98%; and the National Education Association gave 92%.