Friday, September 14, 2007

Property taxes, diffuse taxes and cyclical spending

The past couple of weeks I have been busy setting up my travel schedule. The first chunk of it was for pleasure as my wife and I took a quick vacation to the New England coast, but the rest of it has been for business as I am getting tagged to go to a fascinating conference in November and another high value trip is being planned for January. November should be a full week of hard core geekery, quant-jockies and evaluation freaks to 'socialize' if you want to call it that, and exchange lots of good ideas and plenty of bad ones. However I digress, as I finally booked my hotels and rental cars and noticed the diffused taxes that I am paying to support the Ravens and Orioles.

Now there is nothing uncommon about a local governing body raising taxes that are overwhelmingly borne by non-stakeholding individuals such as out of towners to pay for a set of mega-projects. The incidence of the taxation does not entirely fall on the out of towners due to the high level of regional renters and shifts in business to lower tax cross border communities, but the appearance of the tax is that it is borne by non-voting members of the public who are fairly unorganized and therefore not politically potent.

Property and sales taxes are taxes of a different beast. They are borne, or at least perceived to be borne, by local residents, and more importantly local voters. In Pennsylvania, my home state, the annual dog and pony show in Harrisburg is on new plans to reduce the property tax burdens of homeowners. Right now my wife and I own way less home than our income theoretically could support and we shift a good deal of that 'saved' money into consumption so a shift to increased sales taxation would most likely be a net loss to us. But for the median voter in Pennsylvania, a relative increase in sales taxation with a concurrent reduction in property taxes should be a small net win. And that is why property tax 'reform' is on the top of every candidate's agenda.

In an environment of flat or falling real property values and a strong political and legal set of constraints against increasing millage rates as well as signigicant fairly fixed costs within local governmental budgets, more diffuse taxes and privatization of quasi-public functionality will occur if there is a public or at least a political desire to finance megaprojects. For instance, a Chicago company is looking to monetize permanent seat licenses while also creating fluid secondary markets to finance new stadiums. I have long thought that there is only an exceptional rare case for a significant direct public expenditure for stadiums, so I think this is a great idea.

However there are limits to these partnerships that either make fiscal sense or good public policy sense. And in an environment of declining activity and constrained municipal and regional government revenues, we should expect a slowdown in governmental infrastructure projects or a very nasty series of fights on assessments.

Assessments in PA are in the hands of the county and they are very rarely well done marks to models primarily because there is little political incentive to update assessments on a regular basis. Local governmental institutions will have a strong overt and implicit incentive to delay any reassessment for as long as they can in order to maintain 'top-tick' valuations from the bubble. Property owners who write the checks for the taxes even if they are the economic payers of the tax will want to go to rapid re-assessment to catch the downward lag. And voila, a nasty fight and decreased municipal services and diminished ability for local governments to engage in counter-cyclical spending.

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