Dear Texas and Florida, if you haven’t gotten the memo yet: don’t turn into New York or California. We started out with great intentions, a few politicians wanted to help some people struggling with their housing. So they created programs to control rents, yet this didn’t solve the problem of expensive housing. Californians 40 years ago saw too many transplants moving in and pushing up home prices, so they voted to cap property taxes. Many residents, from home owners to renters, wanted to “preserve the character of their neighborhood” whether this meant keeping it all white or keeping out gentrifiers. NIMBYism swept through communities to enact new zoning laws or those same rent control policies and years later the rest of us were left with the mess they have created.
It’s no wonder that some of the most highly zoned, controlled and regulated housing markets in the US are the most expensive. Last December, I posted about NYC rent control and how it doesn’t achieve the aims it intends to: reduce the cost of housing for working people. In fact, as time progresses it has become one of the main sources contributing to the housing shortage, slum housing as well as subsidies for the rich from the poor. That’s just for rent. In NYC we have subsidized ownership as well, through tax breaks for buildings, in addition to the tax breaks that the government gives homeowners through mortgage interest deduction. There are programs for every manner of thing you can think of: for converting old buildings, for building new ones and everything in between.
This has created a vast and complex web of regulations which has primarily benefitted the wealthy. This was further highlighted this week with an investigative piece published by Bloomberg Businessweek on property taxes in NYC.
The Lower Classes Pay More
The most egregious example was of a condo owner in Brooklyn who paid $157 annually in taxes on a $2 million apartment in Brooklyn, while an owner in the Bronx paid almost $4,000 in taxes on an apartment that cost $185,000. The report pointed to numerous studies conducted by academics at the University of Chicago which showed that the owners of the most expensive properties essentially shift their tax burden onto less well off homeowners by dodging their fair share of taxes. In fact, homes over a million dollars and above paid the lowest tax rates as a proportion of their value of all the homes in the study.
The reason for this likely rests with the opaque methods that the city uses to value the homes. Rather than doing something similar to what an appraiser does in a market transaction, called the the sales ratio, tax assessors create a hypothetical rental figure. This figure is based on what assessors think the apartment could be rented for if it was on the open market. Yet their comparables for this vary wildly and consistently are lowballed for high priced buildings. It also opens up the potential for fraud which the story pointed to. In 2002, Howie Habler and 17 other city assessors were indicted by the federal government for taking over $10 million in bribes in throughout the 90’s to purposefully lower the value of commercial real estate so developers could end up paying less taxes. This triggered a city government investigation and report which found many of the same findings as the academics and can be found here.
The other tool that the assessors use to value properties that are tinkered with are what is called the capitalization rate or cap rate as it is known in the real estate industry. This figure is the net operating income of a property divided by its market value. It can be though of as the equivalent to the dividend yield for real estate. City assessors consistently used higher cap rates to value condo properties as opposed to how they valued rental properties. This ended up assessing property tax rates on average of about 0.5% for condo properties but then setting rental rates at 0.7%.
How the Poor End Up Paying More
The example above shows how this filters through to the poor. Much of New York City is made up of renters who live in rent controlled housing. Yet the city also caps those rates. The tax assessments done on the buildings have them paying higher taxes. What this produces is a squeezing from both sides for rent controlled landlords. On the one hand they can’t raise the revenue they generate from buildings to upgrade anything, hopefully the allowed rent raises can let them at least maintain the building. On the other end, taxes continue to go up. If landlords can’t raise the rent much and they owe more taxes, they will eventually start cutting out other things. This means maintenance and basic upkeep of the buildings.
It’s no wonder then that the popular media is constantly filled with stories of slum like conditions in dilapidated buildings with tenants who refuse to pay. Honest landlords who want to take care of their place and the tenants usually would not like being squeezed by the government from both sides. They will likely sell and go elsewhere where they aren’t bothered. That leaves the people who don’t care to buy up the properties, producing the mess many tenants find themselves in now.
Outside New York
I wish I could say this was just a New York story as well but unfortunately the University of Chicago Department on municipal taxation studying this issue has consistently found the same outcome across various cities in the US. Time after time, the tax rate paid by high priced properties comes in lower than that for cheaper properties, shifting tax burdens away from the rich.
They say history doesn’t repeat itself but it rhymes. Rather than getting dismayed by the conclusions of these studies it’s worth noting that the 60’s and 70’s saw big government expand into the lives of many which produced a number of glaring inefficiencies. Eventually public sentiment pushed back and unleashed much of the deregulation that the country saw in the 1980’s. From YIMBYism (Yes In My Backyard) to the recent zoning changes that California passed, the momentum to start to unwind some of these policies is gaining steam. It’s up to the public to push their government further.
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