To: WSFAlist at KeithLynch.net
Date: Mon, 8 Oct 2007 22:48:35 -0400
Subject: [WSFA] The English disease: was: Various replies
From: ronkean at juno.com
Reply-To: WSFA members <WSFAlist at KeithLynch.net>

On Mon, 08 Oct 2007 00:36:58 -0400 "Mike B." <omni at omniphile.com> writes:

> On the store rent issue, I wonder how much of that is due to
> property
> taxes?  With the recent skyrocketing in property values, and with
> property taxes tied to estimated market value rather than purchase
> price, an increase in real estate price will result in a large tax
> increase on property owners...it's certainly happened to mine.  So
> my
> house would sell for more...I get nothing from that until and unless
>
> I sell it...so where am I supposed to come up with more tax
> money?  Even if I do sell, the government is going to take a big
> chunk of the proceeds in capital gains tax, transfer tax,
> recordation
> fees and income tax from the agents and brokers involved
> anyway.  Who's paying for this place anyway?  Whatever happens to
> the
> owners is going to get passed along to the renters, so whether you
> own or rent it still affects you.
>

Commercial leases typically pass any real estate tax increases directly
and immediately to the tenant in the form of rent increases, during the
lease term.  Residential leases almost never directly pass along tax
increases, but residential landlords do attempt to cover tax increases by
raising rents at lease renewal time.

For homeowners, it sounds like you are complaining about the 'English
disease', which afflicted properties in the British Isles in the 1970s.
Inflation had caused nominal property values to soar, so that if a
long-held property were to be sold, something like half the value would
be taxed away, even though the 'real' value might not have increased much
at all.  Local taxing councils sensed that property owners were trapped
by the capital gains tax, so like vultures they moved in for the kill,
increasing real estate taxes to unreasonable levels.  The public reaction
against this abuse of property owners helped bring Thatcher to power in
1979.

We don't have quite that problem of owners being trapped, here in the US,
partly because there is a large capital gains exemption for those who
sell their homes, and capital gains tax rates are fairly low.  As you
point out, skyrocketing property values can lead to higher real estate
taxes for homeowners.  One consolation I can offer is that the political
process, over time, works to tie property taxes informally more to
average income levels than to property values.  Explicitly, the property
tax is an 'ad valorem' tax, proportionate to assessed value.  The
proportion is the tax rate.  If property values soar, there is political
pressure to reduce the rates.  We have seen that recently in Maryland, as
rates have been reduced, and homestead credits have been increased.
Conversely, if property values fall, revenues suffer and there is
pressure to raise the rates.  In that case, the electorate is generally
willing to approve raising the rates, so long as the resulting tax is
affordable to the average homeowner.  This effect can be seen clearly by
comparing real estate tax rates in different parts of the country, or
even different parts of the same state.  Rates are set lower where values
are high, and rates are set higher where values are lower.  The cost of
government varies generally less from place to place than do property
values.

Continuing the reasoning, if strongly rising property values are
accompanied by strongly rising incomes in the area, then net real estate
taxes will rise strongly.  This will tend to force out residents whose
incomes lag way behind the average.  I think some wag said that the
average IQ in Manhattan is rising, because economic forces are pushing
low income residents out of the borough of Manhattan.

Ron Kean

.