Archive for the ‘public policy–nec’ Category

Putting government pension costs into perspective

Wirepoints recently issued a helpful report showing state and local government pension debt per Chicago household.  They estimate the burden at $144,000 per household.  This is a big number, but one could suppose that a prosperous household, over decades, could bear such a burden.  Some could, but probably not those below poverty level.  Take them out of the picture and the per household amount rises to $172,000.  Excluding households with incomes below $75,000, or below $200,000, and the per-household amount rises further, to $393,000 and $2,022,000 respectively.

Here’s their chart: pension debt chart

Of course this doesn’t consider land values, nor businesses.  If prime Chicago land is worth $1,000/sq ft, that’s 5.38 sq miles.  But more typical land value is much less, probably no more than $25/sq ft. (it seems that nobody has tried to estimate citywide values). That would be 112 square miles.  Once we subtract land owned by governments, churches and other exempt nonprofits, we might be approaching the total value of all land in Chicago. And that’s just for pensions, not bonded debt, nor needed capital improvements.  Real estate buyers know, or certainly should know, about these encumbrances.

Of course money can be raised from business taxes, but that’s hardly a way to grow economic opportunity for Chicagoans. I would consider any tax revenue from “gaming” as a kind of business tax.

The lesson Wirepoints draws from this is that pensions have to be downsized somehow, which required amending the state constitution.  And they go further, comparing government salaries to those of the private sector:

some local gov't salaries compared to average workers

So it looks like we’re going to have to confront a large number of people with guns and firehoses and control over our children, who have been getting a lot of money from us for years and may prefer not to moderate their demands.

Tho I don’t know how, this problem will be solved. Maybe MMT will yield a continuing stream of funds to bail us out.  Maybe inflation will accelerate such that the fixed 3% compounded pension increase isn’t a burden.  Maybe Chicagoans will decide that they just don’t want so many government “services.”  Maybe politicians will decide to remove all taxes from productive economic activity, taxing only the value of land and other privileges (such as the private monopoly over street parking fees), which will grow the economy (while reducing the need for emergency services) sufficient to make pensions a non-issue.

And when it is solved, those who own land and other privileges will benefit most.

Why trust corrupt governments to honestly administer a land value tax?

bar chart of what folks say they're afraid of

source: Chapman University Survey of American Fears

I don’t know that governments are always and inevitably corrupt, but there sure seems to be a lot of corruption going on.  It isn’t a new development; maybe it’s worse nowadays or maybe just more visible.

So how can we single taxers say that we want the government to collect all, or nearly all, of the economic rent? Don’t we know that it will be stolen or, at best, wasted?

Not necessarily.  Consider the following:

In the U S at least, real estate tax is administered and collected at the local — that is, substate– level. This is where the records and expertise needed to operate a land value tax exist.

Unlike income tax or sales tax, nearly all the data involved in real estate taxation is public information.   Most of this data is accessible to everyone with internet access, generally without fee. I can see how much real estate tax my neighbor paid.  I cannot see how much income tax they paid. The same goes for sales taxes and most other kinds of taxes. So cheating in real estate tax can be seen.  That doesn’t mean it will always be impossible for people to cheat, but it provides a much greater possibility that cheating will be observed and rectified.

Government corruption seems to be a function of government size.  A survey earlier this year found that “87% of voters nationwide believe corruption is widespread in the federal government. Solid majorities believe there is also corruption in state (70%) and local (57%) government.”  Looked at the other way round, only 13% of us believe the federal government is possibly honest, compared to 30% for states and 43% for localities.  I actually believe that one of the local governments to whom I pay taxes is pretty honest and efficient.

State and federal governments might logically collect some of the economic rent.  Examples currently include severance taxes and could reasonably include rents for electromagnetic spectrum should our rulers become persuaded to levy and collect them. Existing federal agencies are able to review and evaluate collection efforts.

 

Why does public policy favor homeowners over renters?

image credit: Stephen Dann CC BY-SA 2.0

It’s certainly true here, where owner-occupants (of houses or condos) pay less tax than renters occupying units of the same value, with additional discounts for old people, some military veterans, and some poor old people.  Some owners also still benefit from deductability of mortgage interest and/or property tax.  So why do renters put up with this discrimination?

I have always thought, and some data seems  to confirm, that it’s because homeowners vote, and renters don’t. But according to this interview, the problem is similar, perhaps worse, in Australia.  Voting in Australia is compulsory, which apparently means one is fined if one fails to at least show up at the polls (the fine is up to $79AU, less for their Federal elections).  They also vote on Saturday, and seem to make a party of it, according to various posts such as here and here.

Of course just showing up doesn’t mean that you vote, nor that you pay much attention to candidates and issues, but the problem of low-information voters isn’t unique to Australia. Maybe there’s something about the worldview of people who rent vs. that of people who own….? Dunno.

U S jurisdictions do often provide some protections for tenants, which can disadvantage landlords, but they wouldn’t affect the status of owner occupants.

Tribune clarifies how TIF’s work

 Great story by Hal Dardick in today’s Tribune explaining the real reason the Lincoln Yards TIF had to be Rahm’d thru the City Council before the new Mayor took office. The area just barely qualified as a TIF, and pending new assessments were going to rise enough that it would no longer be eligible. According to the story, it’s uncertain whether the new Mayor could have stopped the project, but she settled for what appear to be minor concessions.

Of course, the whole idea behind TIF’s is that money can be pulled from general revenue into giant slush funds, which the Mayor (and others) can manipulate with little oversight. Meanwhile, there’s little left for routine maintenance, replacement of infrastructure and funding of government schools and other services.   Which increases the “need” for TIF’s.

Dardick’s article goes into considerable detail, includes a link to a recent report by Lincoln Institute (no relation to Lincoln Yards, afaik). He does say “land” when I think he means “land + improvements.”

One counterfactual that Dardick doesn’t bother with: What would have happened if Joe Berrios was still Assessor? Would he have nudged down some values to keep the area eligible?  Or, to look at it the other way, suppose the current Assessor, who appears to be more conscientious, had been in office since 2013. Perhaps the earlier figures would have been higher, so the increase would be less?

We’ll never know, and it shouldn’t matter. In a well-run city, TIF’s wouldn’t be needed, and a well-informed electorate wouldn’t tolerate them.

 

“Chicago’s growth spurt” part of expanding Gaffney trove

Michigan Avenue around 1912.

As Polly Cleveland continues her project posting Mason Gaffney’s works, we find “Chicago’s Growth Spurt, 1890-1900.”  It’s not very long, and worth reading today as a contrast to our current stagnation. Most importantly, Gaffney deduces circumstantial evidence that during the era of growth, land values were significantly taxed.  As he notes in conclusion, “More research into Chicago’s political history is needed.”

The whole trove contains dozens of working papers, class notes, and publications, in Gaffney’s concise and understandable style.  (You’ll find it linked here as well as above; depending on your screen size and magnification you might need to scroll over to the right to see it.)

 

Notes on farmland from the 2017 Census of Agriculture for Illinois

wind turbines in a farm field

1009 Illinois farms have leased wind rights to others. (“Farms” by jopaha is licensed under CC BY-ND 2.0 )

The 2017 Census of Agriculture Illinois report was issued earlier this month, and here are a few statistics of interest:

Total value of land and buildings for the 72,651 farms in the state was $196,542,978,000. This amounts to $2.7 million per farm, and $7,278 per acre. Real estate taxes paid were $431,625,000, implying an effective tax rate of 0.22%.

58% of the acreage is tenant-farmed.  However most (44,378) of the farms are owned by the operator, whereas 6,021 are farmed by tenants.  The remainder (22,252) combine owned and rented acreage. The rent may be cash, or a share of crop, or other arrangement. Cash rent was reported to total $1,956,402,000.

Remember that whereas Georgists are concerned about who receives land rent:

  • The above figures may be mostly land, but do include buildings
  •  Even farmland may have some improvements, for example drainage tiles, and the value added by these is not “land” for purposes of political economy.

Illinois contains 7,992 very small farms of 1-9 acres (Anything smaller than 1 acre isn’t counted in this census,)  Most have less than $2500 revenue, but 64 of them report $1,000,000 or more.  3122 are operated by people who say farming is their primary occupation.

The report contains a huge amount of detailed information gathered from farm operators.  That may help explain why the actual response rate (nationally) was just 71.8%, with systematic estimates covering the remainder. This rate is down from 74.6% in 2012, and 78.2% in 2007.  Much of the data is reported at the county level as well as statewide.

 

 

 

Fictitious people and their imaginary taxes

Credit: Mike Licht (CC BY 2.0)

Matt Levine has an illuminating post about why the recent reduction in corporate tax rates results in a reduction in some corporations’ reported profits.  It seems that past losses can be saved as a “deferred tax asset,” permitting a reduction in taxes to be paid in future years.  But the ratio of losses to tax reduction declines when the tax rate declines, so the deferred tax asset is reduced.   Levine notes that such tax rate reduction can cause a corporation to appear less well capitalized, since it reduces assets, even tho it increases expected after-tax income.

Just another illustration of the absurdity of a corporate income tax (or perhaps of corporations in general).  Of course corporations should pay taxes – based on the land (including spectrum and other natural resources) that they claim.  And they should pay additional taxes reflecting the limited liability granted by the state.  But the accounting concept of corporate income has little to do with this.

How come a LaSalle County TV station is the most valuable in the country?

image credit: Brian Smith (CC BY-NC-SA 2.0)

Well now, more precisely, how come the spectrum held by  a TV station broadcasting from Ottawa fetched a higher price than any other station offered? WWTO is owned by Trinity Broadcasting and broadcasts on five digital subchannels according to the Wikipedia article.  According to the report today from the Federal Communications Commission, their spectrum sold for $304 million, highest in the U S. , while WYCC’s spectrum in Chicago fetched only $16 million.  I know there are all kinds of technical considerations that might explain the difference, but it’s a curious one. Some of us are suspicious when government-owned assets are sold for a comparatively low price.  Both stations are reportedly going off the air.

Nationwide, most of the spectrum has been “purchased” by wireless companies but apparently some will be returned to the “unlicensed” category for use by wifi and similar low-power devices.

So most of the spectrum will be used by private corporations to provide services from which they expect to obtain a profit.  Kind of like commercial land, which everyone agrees is subject to tax.  So why does the government not tax privately-held spectrum?

Land sales price vs. what is paid for land

image credit: Onishenko

image credit: Onishenko

In order to fund community needs from a tax on land value, assessors need to estimate what that land value is.  Conceptually the task need not be difficult (Ted Gwartney outlines some options here, but a more complete and still-valid examination is in this book.) Basically, you look at sales prices for actual land transactions, and make adjustments for parcels which haven’t sold recently or where land comprises only a small part of the value.  But what happens if the buyer pays something additional, “off the books,”  for the land?

According to Peter Katz, that seems to be what often happens. This presentation at APA last March starts off slow (and self-promotional), but moves along thru some interesting territory. Regarding the price of vacant land, he asserts that, in many desirable areas, developers have to first buy (or option) the land, then negotiate with local authorities to get permission to build. Getting that permission might require agreeing to donate money (or land) for public use, or perhaps less savory expenditures, and to the developer this is part of the cost of land. If an area of any size is subject to such constraints, all the land sales are below market prices by the amount of such costs, and all sites, whether sold or not, receive assessed land values that are lower than what developers actually pay to get a buildable site.  This results in less public revenue, implying a need for other taxes, as well as a tendency to develop at lower densities than might be appropriate, when developers choose to settle for existing zoning rather than what they might be able to negotiate. Katz suggests that a formal study of this effect should be done, and nominates Lincoln Institute to make it happen.

Katz’s remedy seems to be a combination of form-based zoning codes, plus a sophisticated (and presumably accurate) fiscal impact analysis that might show denser development to actually be more “profitable” to governments.  But, responding to a question about 65 minutes into (and near the end of) his talk, he acknowledges that funding government from a land value tax would be a good way to obtain the desired development pattern, and that Henry George was a great guy.  His observation that Georgists tend to be wacky has been made before, and I can’t say it’s wrong.

Mortgage Wars & Collapse

An informed review by political economist Ed Dodson of Tim Howard’s new book about the collapse of Fannie Mae. The senior people understood that they were in trouble due to politics and ideology, and they saw the collapse of underwriting standards, but most had no interest in addressing the fundamental cause.