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Since World War II, homeownership has developed into the major tenure in almost all European countries. This democratization of homeownership has turned owned homes from luxury items available to a lucky few into inherent and attainable life goals for many. In the general perception, owning is often associated with better homes with larger gardens, in better neighbourhoods with better schools. To rent, in contrast, is considered pouring money down the drain. Therefore, especially as people marry and children are planned, homeownership becomes the preferred choice of tenure. This choice has been strongly subsidized by governments and has become the norm in countries such as Australia, Britain, Belgium, and the United States. Once people have better jobs or more children, they move to ever bigger and better homes. This has been described as people moving up the housing ladder.
However, the underlying idea of a stable, married family – which has been the standard convention for most of the twentieth century – is outdated. Many (though declining numbers of) marriages end in separation today. Besides the emotional turmoil that the marital separation causes, this event has profound effects on the chances to remain in homeownership for both ex-partners. Generally, at least one, if not both partners, will leave the previously shared dwelling. As separation often involves a loss of financial resources, people may have a hard time re-entering homeownership. After falling out of love and separating, a fall down the housing ladder may follow, as we show in a study recently published in European Sociological Review.
Figure 1: Average ownership rate before and after separation in Britain. Source: Lersch/Vidal 2014
How drastic this fall will be depends very much on the housing market environment (see Figures 1 and 2). In the past in Britain, easy access to housing finance and high supply facilitated (re-)entry into homeownership for ex-partners even under house price inflation in the 1990s and early 2000s. In tight housing markets ex-partners will face more difficulties, and once access to mortgages becomes restricted, as happened in Britain after the recent crash in the housing market, problems may arise. So in the past British ex-partners could return to homeownership at some point in their lives because access to mortgages was easy – and they needed to return because alternatives in the private and social rental sector were and are unattractive. This may no longer work in future. Ex-partners may increasingly face similar problems that new market entrants currently encounter, for which the term generation rent has already been coined.
To better understand what may happen to British ex-partners, we can consider the example of Germany. The German housing market is in many ways different from the British, not the least because private rental accommodation is an attractive alternative to homeownership. Access to mortgages is also more restricted than in Britain, even after the recent tightening of regulations in Britain. High down payments are the rule in Germany. In this market environment, homeownership is a once-in-a-lifetime opportunity for many, while a considerable share of people will never enter homeownership. After separation, very few Germans will be able to return to homeownership (see Figure 2). Ex-partners will be less likely to be in homeownership through their lives post-separation. This scenario may foreshadow the British situation in the near future.
Figure 2: Average ownership rate before and after separation in Germany. Source: Lersch/Vidal 2014
Being excluded from homeownership in the German context is not as consequential as it may turn out to be in Britain, however. First, more Germans will accept to rent after separation compared to the British, because attractive, and most of all, secure accommodation is available for – internationally seen – reasonable costs. Second, the German public pension system is relatively generous for those who continuously worked throughout their lives. To build up private wealth as a cushion for old age is not as necessary as in Britain. In Britain, where individuals are expected to privately invest in financial products and property to build an individual safety net – an idea called asset-based welfare – people that experience a separation may lose this safety net. This may result in stark disparities between the separated and those remaining married in old life.
Homeownership may offer many advantages for families. At the same time, homeownership is a long-term investment that does not necessarily fit well with the dynamics of modern partnership and family life. Everybody needs suitable and secure accommodation. Such diverse accommodation may sometimes be better provided in the private and social rental sector, which must not result in less security or quality compared to homeownership as can be seen in Germany. To make this work people need decent options to build up a safety net for rainy days outside of the housing market. However, people should also have reasonable tenure choice, which is not currently the case for many ex-partners in Germany.
Lucio Noto worked for Mobil and ExxonMobil in Virginia and Texas before retiring in 2001. In his retirement, Mr. Noto and his wife Joan maintain homes in Greenwich, Connecticut and in East Hampton, New York. For state income tax purposes, the Notos are residents of both Connecticut where they are domiciled and New York where they spend at least 183 days annually at their second home.
During his employment in the oil industry, Mr. Noto earned stock options and deferred compensation. In 2005 and 2006, he exercised these stock options at considerable gain and also received the deferred compensation he had earned earlier during his employment. Both New York and Connecticut taxed the resulting income in full without providing a credit for the income tax levied by the other. Consequently, the Notos, as dual residents of both the Empire State and the Nutmeg State, paid double state income taxes on their stock option and deferred compensation income.
The New York Supreme Court (the Empire State’s trial court) recently upheld this double state income taxation by holding that New York could tax the Notos’ income in full, even though Connecticut taxed that income as well. The Noto court correctly applied the tax and constitutional law as it today governs dual state residents like the Notos. While double taxation of dual state residents is currently legal, such double taxation is neither fair nor economically efficient.
In a recent article in the Florida Tax Review, I argue that, as a matter of both tax policy and constitutional law, it is time to apportion state personal income taxes to eliminate the double state income taxation of dual residents like the Notos. As to income which two or more states tax only on the basis of residence, such states should apportion, based on the dual resident’s relative presence in each state of residence. This apportioned approach would eliminate the double taxation of dual residents’ incomes and would comport better with modern patterns of residence and mobility.
The Noto decision illustrates the need to eliminate the double state income taxation of dual residents. In a case like the Notos’, New York and Connecticut should each tax only a pro rata share of the Notos’ option-derived and deferred compensation income based on the days the Notos spend in each of these two states of residence.
On days when a dual resident lives in his second state of residence, the first state provides no services which justify taxing the part of the individual’s income properly apportioned to the time in his second state of residence, the state which provides services on those days. Part-year benefits do not justify full-year taxation. The status quo is economically inefficient as the specter of double residence-based taxation causes unproductive tax-motivated behavior to avoid such taxation. Such economically unproductive behavior inhibits individuals from moving across state lines as they would without interference by tax considerations.
So far, the US Supreme Court has been unwilling to declare unconstitutional the kind of double state taxation imposed upon dual state residents like Mr. and Mrs. Noto. Moreover, most states have been unwilling to abate such double taxation by extending a credit for the tax imposed by the taxpayer’s second state of residence. The result is the kind of double taxation imposed on the Notos by New York and Connecticut.
It is easy to dismiss this type of double state income taxation as a quandary of the proverbial one percent. However, the problem of double residence-based personal income taxation, once limited to the very rich, is moving down the income scale as more individuals maintain second residences in different states, e.g., the Baby Boomer retiree who establishes a winter home in a warm climate; the dual career couple that balances the demands of work and family by maintaining two homes in different states.
In this environment, the traditional acquiescence to double state income taxation of dual residents is no longer acceptable. Congress could eliminate this double taxation through a federal law requiring states to apportion income when taxpayers are residents of two or more states. The US Supreme Court could reach the same result by requiring under the Constitution’s Commerce and Due Process Clauses that states apportion the income of dual residents. The states could, on their own, move toward such apportionment, either by unilateral adoption of rules of apportionment (including tax credits) or by mutual agreement.
The kind of double state income taxation imposed upon dual state residents like the Notos is an anomaly in the 21st century. In the interests of fairness and economic efficiency, this anomaly should be eliminated by requiring states to apportion the income of dual residents.
Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the 