A Royal Family Energy Windfall

It’s good to be the Queen. British monarch Elizabeth II, who celebrated 60 years on the throne in June, may see her income rise 16 percent after the Crown Estate’s earnings increased and lawmakers changed the way royal finances are calculated. The monarch will be entitled to ?36 million ($56 million) for the fiscal year that runs from April 2013 through March 2014, up from ?31 million for the current year.

The Crown Estate manages real estate surrendered by the monarchy in 1760 in exchange for annual payments. Its profit increased 4 percent to ?240.2 million in fiscal 2012, which ended March 31, thanks in part to revenue from offshore leases for wind farms, which more than doubled. The former landholdings for the royal family include the seabed around Britain extending to 12 nautical miles offshore. “They’re a landmark set of results,” Crown Estate Chief Executive Officer Alison Nimmo said in an interview at the corporation’s office off Regent Street in central London.

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Another positive development for the royal family’s finances involves the sovereign grant, the amount the government provides to cover expenses the Queen incurs in her official duties. Under rules adopted by Parliament last year, it is pegged at 15 percent of the profit generated two years earlier by the Crown Estate. Previously, the amount was set once every 10 years by the Treasury and supplemented by grants.

The Crown Estate has offered leases for offshore sites since 2000 to companies including Centrica (CNA), Dong Energy, and Siemens (SI). The parks in operation now generate 1.5 percent of the U.K.’s electricity production, and that should double next year as more sites become operational, lifting income. The Crown Estate also oversees 36 sites across the U.K. earmarked for tidal or wave power generation, Nimmo says.

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The Queen’s other sources of income are the estates and assets owned by the Duchy of Lancaster as well as her privately owned estates, Balmoral in Scotland and Sandringham in eastern England. The monarch owns the royal palaces, most of the royal art collection, and the Crown Jewels on behalf of the nation and therefore is prohibited from selling them for her personal gain.

The Crown Estate also is the majority owner of Regent Street in central London, along with half the land in the St. James district, as well as shopping centers across the U.K., golf courses, Ascot Racecourse, and farms.

Nimmo, 48, joined the Crown Estate in January after overseeing the design and construction of most venues for the London 2012 Olympic Games. She says she is proceeding with the next phases of a ?1 billion project to revamp Regent Street in London’s West End. Work done so far has transformed it into one of the U.K.’s premier shopping strips. A ?500 million makeover of the St. James neighborhood also is under way. Says Nimmo: “We are making serious investment in the development pipeline.”

The bottom line: Queen Elizabeth may see a 16 percent rise in income to $56 million next year thanks in part to revenue from offshore wind farms.

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A Tax Windfall From the Housing Bust

As Karen Jacobs, an economist in Arizona’s Department of Revenue, was reviewing income tax data for 2010, she came across a puzzling trend: Refunds were down and tax liability was up even though the state’s unemployment rate peaked that year, at 10.8 percent. “My first thought was: ‘Taxable income? Why would that be up if people are losing jobs?’?” says Jacobs.

With new houses sitting vacant in the desert and foreclosures soaring, it didn’t take long to figure out the reason. Home ownership rates, real estate prices, and interest rates were all falling, so fewer people were deducting mortgage interest and mortgage holders had often borrowed less or had refinanced at lower rates. The value of itemized deductions dropped 20 percent for the year—led by a decline in the tax break for mortgage interest. “I was shocked about how much I owed,” says Stephen Buckman, who had to pay the Internal Revenue Service $1,500 when he filed his 2011 taxes. In December 2010, a bank foreclosed on his Phoenix townhouse, which had plunged in value to $50,000 from the $196,000 he paid in 2006.

Like Buckman, people across the U.S. have seen their tax bills increase due to the housing bust. On federal tax returns, claims for the mortgage interest deduction dropped by 14 percent, from 2007 to 2009, IRS data show. For 2010, preliminary data indicate that use of the write-off fell by a further 7.2 percent. The decline saved the U.S. government between $13 billion and $26 billion from 2007 to 2010, estimates Andrew Hanson, an assistant professor of economics at Georgia State University who has researched the tax break. The shift “is not surprising, given what we know happened to the housing market,” Hanson says.

Use of the mortgage interest deduction peaked in 2007 when it showed up on 40.8 million returns. That fell to 36.5 million for 2009, according to the IRS, and the amount deducted declined from $491 billion to $421 billion for those years. Preliminary data show the number of returns on which taxpayers claimed the tax break edged up to 36.9 million in 2010, though the dollar value of the write-offs fell to $387 billion. “You’re seeing 5 million fewer returns between 2007 and 2009 claiming the deduction,” says Matthew Gardner, executive director for the Institute on Taxation and Economic Policy, a nonprofit research group. “It is a real drop.”

In Arizona, the change led to about $170 million in unanticipated revenue for fiscal 2011, a pleasant surprise after a $3 billion drop in tax revenue during the previous three years, says John Arnold, Governor Jan Brewer’s budget director. “We’re in a budget crisis, and an extra $170 million shows up,” Arnold says. “We understand that is the result of people losing their homes. If I could say it was the result of people refinancing, we’d be all smiles.”

Other states, especially where foreclosures have been high, have seen a similar trend. In California, just behind Arizona with the third-highest foreclosure rate in the U.S. last year, the number of filers taking the deduction for mortgage interest fell 9 percent while the value of the write-offs fell almost 20 percent from 2007 to 2009, according to data from the state’s Franchise Tax Board. “It’s helping the state governments,” says David Albouy, assistant professor of economics at the University of Michigan at Ann Arbor, “because they are not giving away as much as they were before in the mortgage interest deduction.”

The bottom line: Mortgage interest deductions have dropped by more than $70 billion as the housing bust means fewer Americans qualify for the write-off.

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