Tax Equity

In a recent editorial, Tax Inequity (3/30/05) the Cape Cod Times took on the issue of a split tax rate in the Town of Barnstable, recommending that commercial property owners pay a higher tax rate. The concept of split tax rate allows for the municipal taxation of real property at different rates for commercial and residential uses. Currently, all towns locally, tax property at the same rate.

The idea was borne out of the the towns' running municipal budgets that are outstripping the abilty of the tax base to support it. They can't go to town meeting to raise money to cover shortfalls, because of Proposition 2 1/2. (By the way, every town does raise their tax revenues by 2 1/2 % every year.) They can't borrow money for operation budgets, it's illegal. And they would never win a vote among resident tax payers to raise the residential tax rates. Even though they are the constituency that uses almost all the municipal services.

The Times editors suggested they couldn't afford it anyway. Well, we can afford it. We would just have to rent fewer movies at Blockbuster, or do without some such extravegance. But they are right, we would never vote for a split rate in the other direction.

So the only constituency left to hit up, is the non-voting business community, local merchants, commercial property owners. It would be sort of like passing laws for victimless crimes. Besides, did I mention that they don't vote. (There is one other constituency that doesn't vote either, but more on that later.)

Many arguments can be made against this practice, but the Times couldn't seem to identify even one. Well, let's start with ... it's a really bad idea. We already have too few businesses that pay real estate taxes on Cape Cod. Primarily because of our location, we cannot sustain any industry, other than tourism. The little that we do have operates at marginal profitability.

The Cape's business today is old people. Fortunately, the last wave of them came to this side of the bridge with alot of money, bought big houses and pay alot of real estate taxes. But they really don't support alot of other businesses, except the Cape Cod Hospital. And FYI, the CCH doesn't pay any real estate taxes.

The Times dismisses the fairness argument that "you shouldn't tax the commercial sector any more", because they don't even use the most expense item on the town menu, schools. The Times made some cockeyed analogy about "neither do the senior citizens".

Last time I checked, we still have a social contract in this country between the generations. That we will pay for our schools for as long as we live and pay taxes in our communities, 30-60 years, even if we don't use them. We couldn't finance our edcuation system solely on the backs of households that use them. So, thank you Mrs. Meyers for paying for my schooling. Please send my parents a thank you note Mr. Mills, since they're paying for your kids now.

Collectively we, on the Cape, have done our level best to discourage a natural evolution of and a balance between commercial and residential development here. We have instituted land banks, 2-acre zoning, wetland protections, Title 5 regs, conservation areas, etc, etc. etc. No wonder we priced our chidren out of the housing market. Oh, and then there's the Cape Cod Commission, holding the onslaught of commercial develoment at bay. Now along comes the Times and says we should raise the rent on our businesses, and price our kids out of the labor market as well.

I'm not one to complain without actually having a solution in mind.

The real culprit is our municipal budgets that increase at disproportionate rates, more than 2 1/2 % each year, because of unionized labor costs (including health insurance). More than 80% of our school and operating budgets is labor. We're never going to solve that problem until everyone moves out of Massachusetts. And, besides it's not the point of today's lesson.

Let's look at our tax base then. Our defacto industry today is second home owners. Not the snow birds, but the weekenders and summer folk, who have decided to store their family's wealth in homes on Cape Cod. They are actually good for the economy, employing construction workers and generating net revenues to the towns. They don't use the schools, and in some communities they account for 50% of the town's revenues. So in essense they are paying for the schools that they don't use. But lets be honest, they're just taking up space.

Let's tax this class of taxpayers differently. How about a split rate for non-resident residential tax-payers. They can afford it. And they don't vote. We could actually hold the vote at town meetings in November, when they're not even here. Only the real estate agents would care.

If the Times is so keen on chasing out commercial real estate owners, not that the Commission hasn't done a good enough job already, then it should be just as keen on chasing out the interlopers. Non-resident residential taxpayers are our new commerial tax base. Let's tax the hell of them.

Boom or Bust ?

Neither. But that is the question on the minds of erstwhile Cape Cod homeowners. Recent reports of the imminent demise of the real estate market are greatly exaggerated. Even with average house prices breaking the $400K mark in some towns on the Cape, this real estate boom is different than the last one. It's based in equity instead of debt.

Many of you will remember the last boom. Lots of condominiums were being built and purchased for speculation around here. And the financing was easy because, hey, the sky was the limit. But now, the signal has come from California, that alot of really big houses are being bought and sold for speculation. Ala the internet stock boom.

But on Cape Cod for the last 10 years or so, lenders have only been lending at about 75% of valuation, with strong income requirements, for non-primary residences. Very unlike the last boom, when even the average investor was buying a condo for speculation and developers were typically getting 90 -110 % financing from local banks.

But most of our recent real estate boom, and the resulting rising housing prices, has been due to second home buying with cash, mostly because of wealth passing between generations and/or the tax cuts for upper incomes.

The great movement of money in this country is between real estate and the equity markets, with short stops in the debt markets (treasury bonds) along the way. We are seeing one of those transitions right now, helped along by the Federal Reserve Bank.

Money is moving back into the equity markets (stocks and bonds) because interest rates are rising. (Real estate prices are inversely related interest rates.) The Fed is raising rates because it is worried about inflation. Well not really. They are beholden to the money changers, the guys that make money when the shift is on, in either direction, and it's, well, time to make the donuts again.

That's what makes this country great. This elite group will always make their money off the top, because they actually get to decide when it's time, in other words, safe, to do so. They decide when the markets get to move, and in doing so, get to scrape the fat off the top of that market, in this case the real estate market, before the much smaller kids on the block figure out what is going on. And changing interest rates is the mechanism that signals the shift is on.

But, I digress. The point was, money is moving from real estate to equities, and the real estate market is flattening out as a result. But real estate valuations this time around, are relatively safe because with the new rules, this time we bought with cash instead of debt, we have safeguards against the bottom falling out.

So, you don't have to sell your house to preserve the equity you have in it. But don't buy that empty house on the beach thinking you're going to make some money if you just hold on to it for a while. And for those of you who like to speculate, it's OK to call your stock broker again. Come on, you know you want to.