(April 4, 2014) With the city’s budget deliberations opening up this week, the question for most property owners is “how much are my taxes going to be, and why?”
For the straightforward answer, one can read the budget. For a more esoteric answer, it depends on which economic theorist you subscribe to.
Despite his frequently misguided criticism at council meetings, local landlord Tony Christ raised an interesting point last week about the relationship between the tax rates and property values, one that illustrates a clear philosophical difference between two schools of thought.
From the city’s standpoint, property values control the tax rate. Every year, the state calculates the rate that the city would need to levy in order to generate the same tax revenue as the previous year, based on changes in state-assessed property values.
If assessed value goes up, the tax rate can go down by the same margin and the city will get the same amount of money as it did last year. If values drop, the rate must be raised to get the same income. This is called “constant yield.”
None of the resort’s properties were re-assessed this year, but due to the phase-in of prior re-assessments, values rose by a fraction of a percent. However, City Manager David Recor is not proposing to lower the tax rate to the constant yield, but instead raise it one cent, getting an extra $850,000 in tax money versus last year.
That Recor would be reluctant to lower the rate is understandable, given uncertain revenues and the increasing cost burdens placed upon him. Whether council will go along with a politically unfavorable tax hike has yet to be seen.
But from Christ’s standpoint, the causality is reversed – the tax rate controls property values. In his view, the burden of taxation and excessive governance cuts available capital in the private sector, making properties less lucrative and stagnating real estate sales and growth.
Assessed value is indexed to actual sale value, and will decline accordingly. Thus, in Christ’s perspective, the city is not raising its tax rate in response to declining property values – its property values are declining in response to an increased tax rate.
Christ’s biggest gripe has always been that the city suffers from a massive amount of fixed expenses that it is obligated to fulfill, even before the fiscal year begins. Pension, retiree medical, and capital debt payments are expected to top $16 million in 2014-2015, eating up roughly 40 percent of the tax roll before it’s even collected.
This is an argument similar to the one made in the 1970s and 1980s by libertarian economist Milton Friedman, who posited that excessive government overhead was slowing the growth of Western nations relative to the Asian economies, whose values were skyrocketing due to less restrictive governance.
Friedman’s lassiez faire attitude was a direct response to an earlier generation of thinkers, such as John Maynard Keynes, who had guided the West out of the Depression by championing public investment as a way to stimulate growth.
In the Keynesian theory, government action was the only way a stagnant economy could get back on its feet. Government is the only entity that can borrow money even if it currently cannot pay it back, or hire employees with post-retirement benefits that it has yet to fund. But if these initiatives are taken now, they will raise capital values so that the investment can be returned later.
In fact, Recor’s budget message quotes Keynes almost verbatim when it states that “we are optimistic that additional public and private investment as well as redevelopment initiatives and activities will lead to an increased property assessment roll.”
But to somebody like Friedman, or Christ, this is ludicrous. The city’s current debt could, theoretically be paid off in 10 years if the city borrows no more money. But this is unlikely, considering that outstanding bonds have actually risen in the past 10 years from $70 million in 2004 to a projected $96 million by the end of the current fiscal year, despite the city paying roughly $4 million a year to retire them. This effectively locks the city into a taxation cycle that will have the opposite of the intended effect.
“Any normal person would be saving up for these expenditures rather than borrowing and re-borrowing with no intent of paying it all off,” Christ said this week.
Contrarily, in Keynesian economics, government saving is generally anathema – instead of waiting to reap the benefit of public investment, it’s more efficient to borrow now and pay the debt off when you’ve realized the boost.
Whether it’s salvation or not, you’ll see it on your tax bill.