Private Tax Collection
The New York Times has a story today that Credit Slips readers will want to check out. It catalogs the growing trend of local governments to sell their real estate tax debts to private investors. The reporter, Jack Healy, succinctly states the opposing policy points:
Governments, of course, can charge interest and penalties too, and they foreclose on properties for back taxes. But governments charge interest rates that are half what private investors charge — often offering no-interest payment plans — and are also more likely to be concerned about the long-term prospects of neighborhoods.
All good points, but there is nothing that the ivory tower can't make more confusing.
First, private investors buying tax liens is not a new business, but the article suggests it is a rapidly growing business. Tax liens are given priorities over other types of debt for several reasons. One is that the tax debt creates an involuntary creditor. By "involuntary," we mean the taxing entity was not intending to create a creditor-debtor relationship. (Of course, one might ask why other involuntary creditors, such as tort creditors, do not also get priority, but that is a problem for another time.) The investor has bought the tax lien voluntarily, creating a different type of debtor-creditor relationship. Yes, the price the investor pays for the debt reflects the collection advantages it carries. If, however, investor purchase of tax debt becomes routine, then the involuntary nature of the debt no longer is a justification for its collection advantages. We would have to justify the priority for tax debt on other grounds. Perhaps that justification is just that we like tax debts to be collected for the public fisc more than we like other debts to be collected?
The more troubling part of this trend is that collection practices by governmental entities are subject to the same democratic processes that surround all governmental decisions. Tax collectors have powerful collection tools, but these tools have to be exercised with the political ramifications in mind. These political checks are another reason we entrust tax collectors with powerful collection tools. Local officials with overly aggressive tax policies have to answer to the electorate. Private investors do not.