Monday, March 12, 2012

The Blue Goose: Property Tax and Why Its Not Going to be Reduced After the Housing Bubble Burst

Post World War 2 US private residential real estate markets, in the main, have experience a long steady increase in values albeit punctuated by periods of mild decreases or periods of stabilization. Obviously there are outliers on both the high and low ends [San Francisco vs. Detroit]. However, over this post WW2 cycle several clear trends emerged regarding the long steady increase in values:

(1) private residential real estate became the largest investment on the consumer's balance sheet,

(2) private residential real estate became the largest debt on the same balance sheet,

(3) the mantra of “…buy real estate as they are not making anymore of it…” [i.e. what goes up, always goes up] emerged,

(4) private residential real estate became part of "the American dream” mantra. Some kind of social collective “dream” that in essence does not exist except in the abstract,

(5) politicos through the mechanism of government found more and more ways to create tax preference items to incentivize private residential purchases. That is, large amount of resources were purposely directed into the private residential real estate market by politicos,

(5a) not so incidentally politicos viewed the value of the private residential real estate as a tax revenue stream [local, state, and federal] regarding property tax and consequential sales above capital gains exemption [which has varied over the years] and estate tax calculation [which has varied over the years], not to mention the taxes associated with original construction and future renovations.

Note: the chicken and the egg. In this case the egg came first, then the chicken was given a mantra, and the chicken morphed into the tax goose.

Hence politicos incentivize a particular sector, mantras are attached, taxes are extracted and the underlying private residential real estate market eventually bubbles-up and like all good bubbles, it burst.

Problem is, during the long steady increase in values ending with a bubble, the associated tax revenue was also viewed by politicos as “what goes up, always goes up”. Politicos not satisfied with limited government piled on layers and layer of spending for assorted and asundry pet programs, projects, and political constituency building exercises. Over time public sector workers, through the both sides of the table phenomena, make more total compensation than their private sector counter parts. Then the bubble bust! Oh no! The consciously and purposefully groomed tax goose is on the skids! The goose is blue!

However, politicos being politicos, politically frame current spending levels as needed, necessary and required. Stated alternatively, spending levels are framed as needed, necessary and required as without the tax revenue the politico’s purposely built political constituency will find another politico to fund their needs -or- tax revenue equals reelection and/or perpetuation of a greater social vision supported by such politicos and their associated special interests.

Consequently, regardless of real estate value reassessments associated with the now burst bubble, tax rates will be adjusted to cause the same or even greater revenue to flow into politico directed tax coffers as the revenue is actually required to extend the politico’s needed, necessary and required spending levels in order to perpetuate their particular political constituency building exercises and/or a greater social vision supported by such politicos.

Who pays? You pay! Ah, the evil of it all!




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