Taxes and Gentrification

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The Baltimore City Paper offers a lesson in taxing your unchic neighbors off the block:

Some people think property-tax assessments in Baltimore's gentrifying Mount Vernon neighborhood are too low. They want the taxes increased.

These folks–some 33 members of the Mount Vernon-Belvedere Association–aren't talking about their own valuations, though. They're talking about some of their neighbors' places. The ones with the cheap apartments.

And these folks wanting the tax increase don't want their neighbors to pay those taxes. Not necessarily.

They want them to sell out.

To the pals of the tax increasers.

The best part? They openly admit all this.

"What's behind this whole tax thing for us–there's a real demand for big houses here," says Mount Vernon resident Paul Warren, who is leading the charge. "D.C. is driving it."

Warren, who telecommutes to Fairfax County, Va., from the jaw-droppingly renovated mansion he and his wife bought on the 800 block of Park Avenue in 1999, says a lot of Washington-area denizens of his acquaintance would sorely love to pick up a big ol' historic 25-foot-wide townhouse with parquet floors and plaster filigrees. He says they'd pay several hundred grand for the privilege of spending several hundred grand more fixing them up.

But nobody much is selling [the buildings, because] their absentee owners bought them cheap decades ago. Their taxes–figured on the basis of the income they derive as businesses–have remained low. And so the rents stay cheap, the landlords make money, and everyone is happy. Except the rich people who want to kick the renters out and turn them back into mansions.

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  1. Libertarians don’t care about the poor so I say raise their damn taxes and move them the hell out of there!!

  2. I predict that this thread will quickly turn into a pitched battle between joe and everybody else.

  3. It seems that the rich people place a greater value on the land. The only reason the current tenants are there is that they get favorable tax treatment. When tax policy leads to an inefficient allocation of resources, that’s a bad thing.

  4. thoreau,

    Yeah, and I predict the sun will set in the west tonight! 🙂

  5. Xavier-

    You say:
    It seems that the rich people place a greater value on the land. The only reason the current tenants are there is that they get favorable tax treatment. When tax policy leads to an inefficient allocation of resources, that’s a bad thing.

    However, the article says:
    Their taxes–figured on the basis of the income they derive as businesses–have remained low.

    Now, I’m not defending the existence of taxes and I’ve said many times that as long as taxes exist they should be simple to avoid economic micromanagement via the tax code. But I’m having a hard time figuring out how this arrangement (taxation based on income derived from the property) is some sort of preferential treatment. Seems to me like it’s a tax that’s grounded in market forces (well, to the extent that a tax can be grounded in market forces, add in other caveats as necessary).

    Finally, there’s nothing inefficient about an allocation of resources that doesn’t put everything in the hands of rich people. If rich people really want to live in those buildings, they should offer the property owners more money. Indeed, perhaps the current landlords have more money than the affluent people who want to buy those buildings. Would you still call the current allocation of resources inefficient if it turned out that the current owners are wealthier than the prospective buyers?

    fyodor-

    Gee, ya think? 😉

  6. Xavier,

    How is it a more efficient use of resources for one family to have a mansion than for 4,5,10, whatever, to have apartments?

    Mr. Warren argument is simple and sickening. Increase the taxes of the landlords until they’re forced to sell, evict the tenants, and replace them with wealthier people. If his associates really wanted the properties badly enough they’d pay more.

    Why not simply have an income threshold for continued existence. “May I see you paystub sir? Less than than one hundred thousand per year? I’m afraid you’ll have to get on the train sir.”

  7. I thought urban renewal was a good thing.

  8. Two words, eminent domain. Obviously the proper palms have yet to be greased.

  9. eminent domain

    Yes, but the houses have to be considered blight. Mr. Warren’s friends need to do some drive-bys,perhaps hire a shopping cart guy to steal some siding and brick, then the case is closed.

  10. Happy Jack,

    What constitutes blight is, regrettably, in the eye of the beholder. Actually, worse than that, it’s in the eye of the politician.

  11. Seems too me that I remember some cities (Pittsburgh?) basing their property tax assessments on the value of the unimproved land. In that way, they avoid the disincentives to improvements on land. It’s sorta Georgist, but makes some sense, not penalizing folks for keeping their properties well-maintained, and investing in them.

    BTW, if the owners of the “underassessed” housing were to sell out, what kind of Federal and state income tax hits would they take? Those effects would bump the buyout price up some, I’d guess.

    What would be really stupid would be the forced sale of the rental units to the “gentrifiers” because increased operating costs to the landlords made the units uneconomic, followed by a boondoggle by local government to replace the lost apartments with subsidized “affordable housing.” Remember how hot cities were to get rid of “flophouses” only to wind up with a permanent population of “street people”?

    Kevin

  12. David- it’s in the eye of the politician

    Usually true, but fortunately, at least not in Lakewood.

  13. David-

    Yeah, if those poor people won’t hand over property to their betters, who clearly are able to make better use of it, well, they don’t deserve a place in our society!

    Even worse are the landlords who rent houses to poor people when rich people could have made better use of those houses. Clearly those landlords are traitors to their own class.

  14. Mr. Warren and his followers are obviously rich. They should just buy up the apartment buildings. Most of those owners will probably take a nice lump sum over having to maintain and mete for years on end.

    Of course, that would actually involve not getting the government involved, which is far too much to hope for anymore.

    Eminent domain? Sadly, Mr. Warren would get screwed, because they would obviously need to put up a big hotel and shopping mall instead of houses.

  15. Mr. Warren would get screwed, because they would obviously need to put up a big hotel and shopping mall instead of houses.

    Historic part of town… big church there, some museums and stuff; not where you’d allow a walmart.

  16. So there are buildings being assessed at under $100,000 that are actually worth several hundred thousand dollars.

    The City assesses homeowners’ property based on its market value, but they assess rental property based on the rents that are being charged. This creates a situation in which homeowners are paying much higher taxes for similar buildings.

    The lower a rental property owner can get for rent for his apartments, the lower his taxes are. So property owners get preferential tax treatment if they let their properties fall into disrepair, or if they rent out the space in the buildings rather than occupy it themselves.

    If reading the linked article gives you headache, welcome to my world.

  17. thoreau,

    “I’m having a hard time figuring out how this arrangement (taxation based on income derived from the property) is some sort of preferential treatment.”

    The rental property owners are paying less in property taxes than the owners of buildings with comparable market values.

  18. That is to say, “…than the OWNER-OCCUPANTS of buildings with comparable market values.”

    That, btw, is the antonymn of “absentee owner.” “Owner-occupant”

  19. “How is it a more efficient use of resources for one family to have a mansion than for 4,5,10, whatever, to have apartments?”

    I’d like someone who takes umbridge at the term “market fundamentalist” to answer this. How can you claim it is more efficient to house 1-5 people in a 5000 square foot house than 20-30, just because the housing budget of the first exceeds that of the second? Does your definition of the word “efficient” actually bear any resemblance to the concept of efficiency?

  20. Since the concept of “blight” has come up…

    Although the label is much abused for nefarious reasons, there actually is something called “blight.”

    And it almost never involves property that is owned by low or moderate income people. In cases of actual blight, the owners are almost always people who are wealthy enough to have plenty of choices, who make the choice to starve and abandon their property, because their time and investment is more profitably spent elsewhere.

  21. Not all blight involves slum landlords. Government is often the cause, though it rarely has the honesty to blame itself, or the politicians who vote for blight-causing regulations. Well-intentioned things like rent control and land use restrictions are famous for causing blight.

  22. This libertarian cares more about the working poor than the rich, especially rich bastards that use the government as their own personal gang-bangers. I think the tenants of these apartments should start their own association for the purpose of making these rich fucks’ lives pure hell. In my libertarian utopian fantasy, any rich person that tries to use the government to mess with someone (undeserving of it) would be immediately publicly executed and have their entire estate confiscated.

    I really don’t understand some libertarians. Why don’t you understand that the government and many of the rich are damn near one and the same–both use money to oppress the powerless. I would think that one of the main moral reasons for libertarianism is to take this type of power away from the government and the (immoral) rich.

  23. It might mean something to add that the apartments in Mt. Vernon are generally, if not exclusively, leased by gay men (Mt. Vernon is the heart of Baltimore’s gay community), something that everyone in Baltimore kinda knows, but the article doesn’t mention.

    One imagines interesting slogans at that hypothetical tenant’s association meeting.

    And, yeah, gay men kept that part of town alive when no one else wanted to be there.

  24. The City assesses homeowners’ property based on its market value, but they assess rental property based on the rents that are being charged. This creates a situation in which homeowners are paying much higher taxes for similar buildings.

    OK, that part makes sense.

    This part doesn’t:
    The lower a rental property owner can get for rent for his apartments, the lower his taxes are. So property owners get preferential tax treatment if they let their properties fall into disrepair, or if they rent out the space in the buildings rather than occupy it themselves.

    Right, but the only way to pay the lower taxes is if that disrepair translates into lower rent. And lower rent translates into less revenue for the owner. Are you saying that the tax formulas are so screwed up that the loss of rent would actually be compensated for by lower taxes?

    I can see sense in a formula that says tax = X% of rent. (Yes, yes, I know, that tax is still bad because it’s a tax, but I’m using the word “sense” in a more colloquial fashion, not as a statement of compliance with libertarian dogma.) If you decrease your rents collected by $1, you save X% of $1 in taxes, but as long as X

  25. On the assumption that this scheme works(i wish I could say I don’t think it will, but the side wth more cash in any argument usually seems to get its way), how long before the group demanding tax increases on the absentee owenrs, starts clamoring for lower property taxes?

    Apart from that, shouldn’t the libertatarian stance on this be the the owner-occupants pay the same lower rate of tax on their property that the abesentee owners do?

  26. thoreau, I’m no investor, but I think the idea is that you charge as much in rent as you can while doing only minimal maintenance. So your income from the property plus taxes maybe just covers your expenses, no loss, no gain either. Then you wait until the value has risen so much that you can get a ton of money for even a shitty property. Maximum gain with minimal investment and labor.

    Jesse (or somebody in B’more), is this near that big Greek style church up on a hill, kind of near the Maryland Institute? I don’t know Baltimore, but I had a friend who lived in a row house, sounds like the same area. Really incredible buildings, gigantic row houses. I wish someone would drag something like that over the Rockies and plant it here in Phoenix.

  27. I’ve always thought that, property values be damned, property taxes should be based on the price a homeowner first paid for the house, with increases only at the rate of inflation, and should reflect higher market values ONLY when the owner is selling. The current system basically ensures that poor folks can keep their homes only until some wealthier person decides he’d like it.

  28. If this is the gay-district of baltimore… I seriously doubt we can assume these apartments to be slums. Maybe the owners of the mansions, want to buy the apartments because they are better maintained and will be low-cost conversions into single occupant homes.

  29. I’m confused.

    something called “blight.” And it almost never involves property that is owned by low or moderate income people.

    According to the link, 93% of property in Lakewood would fall under the definition of “blight.”

    So, either Lakewood is an outlier, or it’s a town mainly comprised of renters.

    P.S.: The city planners in Lakewood decided that having a one-car garage is “blight.” Isn’t increasing traffic congestion and pollution (more cars) a bad thing?

  30. Isn’t this the same kind of garbage bigoted morons used to use to keep blacks out of their neighborhoods?

    Telling so’n’so they can’t do what they want with their property is utter complete bullshit. You wanna rent it out go ahead, you wanna pave part of a backyard for a basketball court fine, you wanna paint it purple & green stripes that’s your perogative. Them That Pay The Bills Make The Rules.

    As if someone else’s concern over their property value somehow outweighs your right to use your property however you wish, Ha!

  31. As someone mentioned earlier, its likely that the current owners of the properties in question are considerably wealthier than the prospective purchasers. Hence they probably have a bit more sway in the community, and hence can effectively fight against changes in the tax code that would hurt them. I’d really love to see the big money vs. big money slapfight that would come out of that!

  32. That IJ link about Lakewood cracked me up. I used to live within walking distance of that part of Lakewood. Not only is it not blighted under any reasonably definition, it contains some of the best shopping and nightlife in the city, and it borders Rocky River, one of the most affluent suburbs in the county, so as one can imagine there’s a crossover effect there.

    Friggin’ politicians.

  33. Happty Jack, the blight designation in Lakewood was bogus. And the POLITICIANS in Lakewood decided having a one car garage was blight. The planners just went along with their bosses.

    thoreau, as for the second part that you took issue with, I don’t claim that the lower taxes fully made up for the lower rents, just that they helped ameliorate the investor-owner’s costs in owning the rental housing, thus allowing them to keep collecting sub-par rents without deciding that investments makes sense. Most rental property owners would rather keep collecing “good enough” rents and invest little or nothing in the property, than collect great rents, at the expense of having their capital tied up in building improvements. I’d be curious if anyone can point me to a good explaination of this phenomenon.

  34. re: joe’s request for why slumlords are that way.

    I’m a neighborhood landlord who owns 14 buildings (mostly houses & duplexes) within a 3×4 block area in an historic district. I’ve invested much personal capital and more sweat equity making the apartments places where I would feel at home. This results in higher taxes of course, but also results in far more livable neighborhood.

    However, while I get OK rents compared to the mean(new construction trumps all – nothing like tearing up Iowa farmland for sh*tty beige condos), the ugly truth is that crappy tenants that pay lower rent never move!! A landlord’s dream. My tenants are successful young folks, and generally move after they finish school, or find a house. Regular income slightly worse than the average, but consistent, coupled with no maintenance make poor people a bingo group to lazy landlords who have attended one too many Carlton Sheets seminars.

    Poor tenants also complain less than my higher paying tenants. In exchange for mediocre rent, landlords get a stable money machine, and the community gets rusty cars in the alley. Of course, the landlords don’t live there, after all. It’s a WIN-WIN!!

    Except for the few of us who appreciate older homes and are trying to improve the neighborhood.

    The only cure I’ve come up with is to buy, fix, hold and control.

  35. “The planners just went along with their bosses.”

    Aah, planners are using the Nurnberg defense.

    “Most rental property owners would rather keep collecing “good enough” rents and invest little or nothing in the property, than collect great rents, at the expense of having their capital tied up in building improvements.”

    That’s an assertion, not a fact. How many people really prefer making less money to more?

  36. And Joe enters the fray, clucking about the poorer people because they just aren’t paying what he thinks they should in taxes.

    So there are buildings being assessed at under $100,000 that are actually worth several hundred thousand dollars.

    Then, gee, maybe your would-be friends should offer to buy out these rental properties, Joe.

    If reading the linked article gives you headache, welcome to my world.

    Welcome to the world people like you help make, maybe.

  37. This is proof that DC isn’t big enough for all the assholes that live there, now they’re spreading out to Baltimore and and beyond. I’d be scared if I lived in Richmond, the pods are probably already being loaded onto the trucks this very moment.

    I think the solution is to move DC to East St. Louis.

  38. Well maybe that’s not fair. What did East St. Louis ever do to anybody, I suppose.

  39. Note: in Baltimore 95% of the buildings are on leased land. The leases run for 99 years.

  40. Good God, this is a boring topic. Well, back to engineering.

  41. Jennifer, your prescription was adopted in California as Proposition 13. It’s been a catastrophe.

    Imagine you’re living in a house you bought for $100,000. It’s market value is now $400,000. You get a job 100 miles away, in a community that has roughly the same property values. So either you move, and your property taxes quadruple, or you drive 100 miles each way to and from work.

    That’s assuming you can find a house to buy in the new town, which is full of other people unwilling to move because of the same quirk in tax policy.

  42. Totally unfair, all else being equal, no ones prefers to make less money than more. But the point is, all else is not equal – making more money by improving the quality of your rental property ties us your capital and your time, which impose their own costs on the transaction.

    What a stunner, Half an Eric misread my posts. I haven’t actually ventured an opinion about the tax disparity, as eager as you are to assume that I’m arguing whatever is the opposite on your take. I just explained why it is, in fact, preferential treatment for the rental property owners. Sometimes, preferential treatment is a good way to achieve public benefits.

    Why would my would-be friends want to buy these properties? Who exactly are my would-be friends, anyway? Your blind assumptions have expanded to the point that your post is meaningless.

  43. btw, Totally Unfair, thanks for the Godwin. I win!

    Seriously, the analogy falls apart because the Nuremburg defense is an affirmative defense for somebody who obeyed illegal orders. I’ve never been issues an illegal order in my life, much less obeyed one.

    Do you really want public employees deciding which fully-legal instruction to follow, and which to ignore, from the democratically-elected, legitimate officials they report to?

  44. Do you really want public employees deciding which fully-legal instruction to follow, and which to ignore, from the democratically-elected, legitimate officials they report to?

    Well, sometimes preferential treatment is a good way to achieve public benefits.

  45. Joe-
    Do you prefer the current system, where the government can literally tax people out of their homes?

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