Sunday, October 08, 2006

Otis White: How property tax limits are like rent control

Otis and I don't always agree, but on this topic we do. This post from his Urban Notebook blog at Governing magazine really succinctly sums up the problems with schemes like California's Prop 13 that excessively cap property tax appraisals. This is not to say reasonable growth limits on local government spending - like Houston has now and is voting on again this fall - are a bad idea. Those restrain government spending without the market distortions seen elsewhere. When a city gets "hot" and property values shoot up, it's too easy for politicians to spend the windfall rather than uniformly lowering the property tax rate.

One item he overlooks: having a solid property tax (as opposed to too low and/or relying more on other taxes, like sales or income) incentivizes owners of valuable but idle land to do something with it, thus increasing the vitality of the city. They face a cash drain the longer they hold onto it without developing it into a use the community values and is willing to pay for.

You can find some of my previous thoughts on tax caps in this post, which also contains links to other posts I've made on the topic.

As usual with Otis' blog, no permalinks, so here's the entire post.

Kooky Ideas
How Tax Limitations Are Like Rent Control

It’s time to call these mindless property tax-limitation schemes what they are: a libertarian version of rent control. Here’s the irony: Like rent control, they end up punishing the ones they were intended to benefit. And along the way, they throttle cities.

How are property tax limitations like rent control? Let us count the ways.

First, they’re aimed at a particular, politically powerful group: homeowners in the case of tax limitations, urban renters for rent control. Second, they shower subsidies on these groups. Tax limitations do so by sticking others with the tax bill (commercial property owners, renters, second-home folks, new homeowners, etc.), rent control by taking money from landlords.

Third, like all subsidies, tax limitations and rent control create distortions in the marketplace. By subsidizing some renters, rent control forces landlords to do things they wouldn’t otherwise do. Some find ways of pushing out longtime tenants, since the longer a person has lived in a rent-controlled building, the less he pays as a rule. This defies the usual logic of the marketplace, which is that businesses love longtime customers. Other distortions: It forces owners to turn apartments into condos, even if they’d rather be in the rental business. And seeing what a lousy business renting is, developers don’t build new apartment buildings.

End result: The supply of apartments grows so tight that it traps families in units they’ve outgrown (they can’t afford to move to more suitable apartments) and newcomers can’t find places to live.

Something similar happens with property tax limitations and the housing market. As with rent control, tax limitations tend to benefit longtime homeowners, and therefore trap them in their homes. Even if an older couple would like to downsize by moving to a condo or townhouse, they can’t. They’d lose their tax benefits. And newcomers, who have to pay for the tax breaks of longtime residents, often can’t afford the high taxes that come with home purchases.

Under tax-limitation schemes, governments are loath to allow new housing to be built. Reason: Localities hold out for land uses that pay their way, such as offices, apartments, industrial and retail. In time, then, communities come to the conclusion that they just can’t afford any more homeowners.

Final way tax-limitation schemes are like rent control: They make housing scarce and, therefore, unaffordable. It’s no accident that the nine of the 10 worst markets for housing affordability are in California, home of Proposition 13. Rising fast on the unaffordability lists: Florida, which has had a brain-dead tax limitation scheme called “Save Our Homes” since 1992. This kooky law hasn’t saved any homes; it has simply made them unaffordable.

In the end, then, homeowners as a group do not benefit any more from these tax-limitation schemes than do renters under rent control. Oh, a fairly small group does: People content to stay in one apartment or house for decade after decade. For them, the rewards of rent control or tax limitations are huge, and they are fiercely protective of their subsidies. But just about everyone else loses, including cities. Newcomers and young people are the lifeblood of communities. By rewarding a small group of old-timers — indeed, by cementing them in place — we make it harder to attract the ones we need the most.

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