When policy analysts talk about the law of unintended consequences, they’re usually referring to something bad. The mortgage foreclosure crisis has many bad unintended consequences, as highlighted in OLR Report 2010-R-0019. But this dark cloud turns out to have a silver fiscal lining. That’s what Arizona Revenue Services economist Karen Jacobs discovered as she reviewed 2010 income tax data and found that “refunds were down and tax liability was up even though the state’s unemployment rate peaked that year at 10.8 percent,” Bloomberg Businessweek recently reported.
How could that be? Think it through. What happens when home ownership rates, real estate prices, and interest rates fall? There are fewer people deducting mortgage interest for their income taxes. In addition, consider the impact on revenue when people borrow less or refinance their homes at lower interest rates. In Arizona
Still, the silver lining may be a very thin one. The article didn’t mention how the foreclosure crisis affects other tax revenues, such as the property tax, which is based on a property’s fair market value. Nonetheless, it shows economic trends affects tax revenue streams in diverse ways.
