The Wash Post Discovers Cheap Euro Airlines…

From today's Wash Post:

Flights as cheap as bus fares are changing the rhythm of European life. Growing numbers of Europeans are buying second homes in other countries because they can afford to travel to them frequently, creating building booms along seasides from Croatia to Portugal. Low airfares have also given rise to Euro commuters -- the increasing numbers of people who work in one country and spend weekends with their families in another.

Whole thing, including tales of cross-dressing Brits in Bratislava for bachelor parties, here.

If any of it sounds a year late and a dollar short, it's because former Reasonoid Matt Welch covered this beat over a year ago in his January 2005 piece, "Fly the Frugal Skies: How low-cost airlines have transformed Europe--and what it means for America." The short answer: A much more-interesting Europe--and a challenge to U.S. business as usual.

The Wash Post story was forwarded by reader and movie critic extraordinare Alan Vanneman, who also sent along this fascinating New York Times Magazine story that argues convincingly that the mortgage-interest deduction for homeowners is useless--and essentially bulletproof politically.

Comments

[happy bunny]

It is so unfair! The European young people have much more of a global view, and have a chance to see more cultures so much easier than Americans. They go to Egypt, and we go to...Florida.

[FXKLM]

As much as I like the cross-dressing trip to the shooting range part, it was a real mistake to for the writer to include it. It's only tangentially related and it totally overshadows the main story.

[sundog]

and check out the cross dressers at the shooting range in the video that's on the same page, it's loads of laughs!

[happyjuggler0]

Hey happy,

They have the whole world's cultures at Disneyw...er, Epcot Center in Orlando. Why experience the hassle of the real thing when you can be in a Bush state instead after hours?

[The Real Bill]

Thanks Alan!

I've been trying to convince people for years that the mortgage interest deduction is evil. (Anything that favors the rich over the poor is evil in my estimation.) My efforts were never received warmly by homeowners, regardless of their political views, leading me further down the path of misanthropy.

IMHO, if you support the MID, you're a prick of the first order.

[joshua corning]

IMHO, if you support the MID, you're a prick of the first order.

call me a prick but a tax cut is a tax cut.

[joshua corning]

It is so unfair! The European young people have much more of a global view, and have a chance to see more cultures so much easier than Americans.

*glup* I just puked in my mouth.

[James]

joshua: obviously, you didn't read the article. The proposal is not to raise taxes (although, given the deficit they're running, keeping the money would be common sense) but to change the way the taxes are collected. The money collected by eliminating the deduction would be used to reduce the rates.

The logic is that the subsidy causes malinvestment. People are encouraged to buy the most expensive homes possible instead of investing their money in productive enterprises. You might hope your home goes up in value but that doesn't make it an investment. It's just speculating in the future value of a consumer item. You might as well have a deduction favoring the purchase of baseball cards. This would send hordes of people out to buy baseball cards. Good for Comic-book Guy, I suppose, but bad for the economy.

The government should figure out how much money it's going to collect and set the rates accordingly instead of trying to use the tax code for social engineering. But since the absurdly complex tax code is a good place to hide special favors for wealthy friends, don't expect them to engage in any real reform.

[quasibill]

IMO, the MID issue is one of those "break" issues where you can tell the difference between a libertarian and a Republican who likes to smoke pot.

James nails the reason - it's not really a tax cut, it's a government directive veiled in the guise of a tax cut. You get to keep your money, but only if you use like we want you to...

[Slocum]

The problem with eliminating the mortgage interest deduction is that there would be some people seriously harmed by it. A 15% drop in a $600,000 house? Not a big deal? It's a hell of a big deal for a two-income couple that stretched their income to the max to buy it. A fifteen percent drop would wipe out all the equity they had in the house and more. 15% of a house in that price range is equivalent to college tuition for their kids. Do only rich people live in $600,000 houses? Go to California and ask that question.

And even with a phaseout, wouldn't the price impact would be immediate anyway? That is, after the change, a house buyer would know that, after 10 years of ownership say, the house would be worth 15% less than it would have if the deduction remained in place--wouldn't that result in a comparable 15% drop in price at the front end?

[bubba]

With a phaseout, the price drop should also phase in. Make it 30 years, the length of a mortgage, and it becomes imperceptible, and pointless.

The MID makes a much sense as any tax break. Hybrids, but not diesels? Please.

As part of a switch to a flat tax, then eliminating the MID makes sense. However, it should be the last thing eliminated.

So what if it only benefits the rich? The whole purpose of the tax system is to benefit the poor, since poor people don't pay income tax.

[zardoz]

The money collected by eliminating the deduction would be used to reduce the rates.

Of course it would, sweetheart...after all, it's not like Bush would exploit that opportunity to reduce the yawning deficit at the expense of the middle class.

[zardoz]

With a phaseout, the price drop should also phase in. Make it 30 years, the length of a mortgage, and it becomes imperceptible, and pointless.

You apparently don't work in financial markets. NO change, once enacted, is ever "phased in". Current prices and values are immediately recalculated using the new variables, regardless of when the actual savings/costs are to be realized.

For example, home interest rates don't rise the day the FOMC announces a rate hike; the changes to rate pricing are factored in over the preceding weeks based on rumors backed by public statements by the members.

[thoreau]

zardoz-

I realize that markets respond quickly, but wouldn't markets react differently if the change in the tax code will take 30 years to implement, due to the time value of money?

If it's announced that a change in the tax code will (hypothetically) increase the annual tax burden by $900 for the owner of a particular home, then the price should drop right away, of course, and the drop should be about $900 divided by the discount rate. But if it's announced that the tax burden will increase by $30 this year, $60 next year, all the way up to $900 in 30 years, that stream of liabilities has a lower present value. The effect of the tax change on sale value therefore phases in slowly.

Or am I missing something?

[MikeP]

I realize that markets respond quickly, but wouldn't markets react differently if the change in the tax code will take 30 years to implement, due to the time value of money?

Especially when you consider that the benefit from the mortgage interest deduction is front-loaded by two effects: the first payment is all interest while the last is no interest; and the first payment is in 2006 dollars while the last is in 2036 dollars.

In fact, it is the banks who might be most stuck with the drop in housing prices. I'd expect a long MID phase-out will result in significant discounts on shorter term mortgages.

In any event, mortgage companies make gambles all the time on housing valuations 30 years in the future. Losing 15% over 30 years is interesting, but mostly noise. If GDP growth increases by three or four tenths of a percent a year due to the more rational tax code, that more than makes up for the 15%.

[zardoz]

Thoreau, while your theory makes sense, it wouldn't really work that way, any more than the fact that a lender charges a borrower a price for a 30 year mortgage *now*, without knowing what the cost of those funds would be 5, 10, or 29 years later. People take a gamble when they bank on future values: just ask any S&L banker who had their 1988 assets tied up in 5% VA loans from the 1960's while they were paying out 16% on CDs. Many banks foundered due to reasons like that, not just fraud.

Here are some other variables that no-MID folks are not taking into account. Property taxes collected by towns/counties are based on projections of the town's needs over the foreseeable future. Those taxes are levied according to estimated assessed value of the home, then multiplied by a factor to generate the required revenue. (I'm sure you know this anyway, but allow me to elaborate for the rental crowd here.)

Logically, when the assessed values begin to drop based on the drop in demand and prices (houses would now be more expensive), tax revenue would drop. The town has to make this up somewhere; schools, roads, bridges, levies and other services/infrastructure must be maintained per public demand.

Here's the problem: some states, like MA and CA, have property cap laws, like Prop 2 1/2 here. By statute the homeowner's prop taxes can go up no more than 2.5% per annum, but the factors determining the appropriate tax revenue may drop by 15%. We all know what the solution would be here: override votes to raise taxes in every community in the state, pitting older homeowners against younger homeowners/renters with kids in the local schools. It would be a disaster.

Or, here's the alternative: leave the homeowners alone, but raise commercial taxes, preferably by creating new businesses rather than raising tax rates. At that point you run into Kelo: towns managers will do anything to bring BigBox Corp to town rather than pass an unpopular massive tax hike, and they'll take Farmer Brown's field to build a mall if that's what it takes.

This, incidentally, is why real estate in NH will never be worth what it is in MA, yet prop taxes will be higher. As there a few other sources of tax money in NH, towns must lean on homeowners while renters get off scott free.

Be careful what you wish for...

[Isaac Bartram]

...towns must lean on homeowners while renters get off scott free.

Scot free? Are you saying that apartment building owners are assessed no property taxes?

If they are I'd bet they pass them on to tenants.

[zardoz]

In fact, it is the banks who might be most stuck with the drop in housing prices. I'd expect a long MID phase-out will result in significant discounts on shorter term mortgages.

Not likely. When lenders are upside down in terms of equity--and they will be--they will begin to charge premiums for credit as they will begin to anticipate losses. You will begin to see a sea change in lending leading to a credit crunch across the board, from housing to commercial to consumer credit. Since the economy relies on massive spending, this crunch will hit the GDP like a stroke. After all, the situation I just described is what happened throughout the US in the early 1990's recession, when the bottom fell out the market.

And that bottom would fall out. Many of you don't seem to realize that financial and real estate markets are glass-half-empty industries--they like to make money but are terrified of losing a single cent. Things like rate drops and new finance products take time to emerge, but interest rates can go through the roof in a day on a rumor, and programs can be cut off without notice.

[zardoz]

If they are I'd bet they pass them on to tenants.

If they are able to, yes. But in some cases market rents are not rising as fast as prices or taxes (Providence RI springs to mind, based on my experience). When a city increases its tax load on the apartment building owner, it doesn't translate into an immediate or even potential rent increase to the tenant. Leases cannot be altered midway without a tenants' consent, and keeping 100% occupancy is far preferable to raising the rent and chancing a good tenant moving somewhere cheaper--and you being unable to find a new tenant. When you're a landlord, that's what you have to consider.

[Isaac Bartram]

And rents aren't keeping up with costs because...why?

[James]

In Minnesota property taxes on rental property is much higher than on owner-occupied dwellings. At one point, it was three times as high but it came down during a rental crunch in the late nineties. The taxes are passed onto the tenants like all other costs or, more precisely, the owner pays whatever costs he has to and charges as much as the market will bear.

Lowering the tax rates does not necessarily reduce rents. When the rental market is tight, rents go up, regardless of the tax rate. When vacancies are high, rents go down, regardless of the tax rate. The tax rate is, essentially, an operating cost that is factored into the equation of whether or not to BUILD a property, based on the projected lifecycle revenues.

And here is where the taxes influence the market: the owner is stuck trying to guess vacancy rates and rental income over a twenty-five year period. He has a pretty good idea of how much it's going to cost him to run the building, but not how much he's going to get paid for doing so. Property taxes are a projected cost that might be recovered...or maybe not. If taxes are very high, the possibility of losing money is increased. Yes, people have been known to lose money renting property.

So with the tax structure grossly punishing rental properties in Minnesota, they simply didn't get built in anything like the necessary number of units. When the crisis came, vacancy rates were at one percent, which is pretty much a statistical zero. You could call it the number of apartments being painted. Rents zoomed and the state dealt with it by lowering property taxes. A worse problem is that the city governments don't like apartment buildings and try to zone them out of existence, but that's another story. The crisis has since passed and rents have actually fallen to mid-nineties levels, artificially dragging down the CPI, but that's yet another story.

Incidentally, the state revenue agencies assume that all property taxes are, in fact, passed onto the renter. They have a renter's tax rebate program for poor families (I collected it when I was working for minimum wage) and the landlords have to provide them with a Certificate of Rent Paid that has an estimate of the property taxes paid on their apartment. The landlord pays the taxes as a cost of doing business and the tenant gets them back. Neat, huh?

[zardoz]

As best as I can tell, rental demand is softer because the factors allowing marginal people to buy homes have never been stronger. Other than that, it's anybody's guess. But it is a fact: A 3 family house that would sell in Providence for $250,000 with gross rents of $2250 now goes for $340,000, with estimated market rents of $2850. Not much reason to jump at that. But those transactions are happening every day.

[zardoz]

Sorry, that $250,000 price was from 2004. The $340,000 price is current since July.

[Isaac Bartram]

I've never really known anyone who expected to make an operating profit on rentals. What they hoped to do was get a capital gain on the sale of the property. If they were operating at a loss that was offset by the fact that they were converting income at high income tax rates into capital gains which would be taxed at a lower rate. Of course, there has been a lot less incentive to do this since income tax rates have been cut so much since 1980 or so.

Any way you look at it, this stuff has market distortion due to government policy written all over it.

Actually I have some Australian friends who make an operating profit on rentals, but then we're looking at an entirely different market.

[joshua corning]

IMO, the MID issue is one of those "break" issues where you can tell the difference between a libertarian and a Republican who likes to smoke pot.

bullshit.

Does the governemtn get less money? yes...does the tax payer get to keep more of her money? yes.

Is it worse then a more broad based shrinking of government and tax structure? yes, but is it also better then nothing? FUCK YES.

[Don Mynack]

From the article "just under $2,000 per return." is saved by the MID. Hey man, I don't know where this guy is from, but where I'm from, $2000 is $2000. If they want me to give that back, they better find another way to give me back my cash, otherwise, fuck 'em.