Editor’s note: Shortly after Michael Wise wrote the letter below, Great Barrington Town Manager Jennifer Tabakin invited both Michael Wise and Chip Elitzer to her office to discuss their respective views on tax reform, and to produce a summary of their analyses that could become the basis for a public discussion.
Herewith her invitation: “The Town benefits from having the wealth of expertise that you both have on tax policy issues. As a next step, I invite you both to meet with me in my office to I can review your points. I am good at preparing summaries of facts, issues and questions. Let’s work together to get this information into a short format so we can all follow the pros and cons of proposed policies.
We all know that attention spans are short when it’s summer in the Berkshires!
Thanks for offering a substantive reaction to my proposal. I made some other points about the issues in the piece that the Edge ran two weeks ago, many of which overlap with ones in your letter. In that piece, I tried to translate issues into the more tractable form of comparing costs and benefits, and to underline what I have said from the outset, that if a sensible estimate of costs and benefits shows that the costs outweigh the benefits, then of course we don’t do it.
But it’s important to keep track of both. The motivation for my proposal is the problem of affordability. As I put it at one of the budget meetings: can we continue to be a place where our volunteer firemen can afford a house? That is why my March paper led with a discussion of how taxes here compare to the incomes of people who live here. We don’t have the highest taxes in Berkshire county; we come in second, behind Williamstown. But we do have the highest taxes as a share of the incomes of people who live here — which are not necessarily the same as the incomes of people who own houses here.
I am searching for an answer to the affordability problem that is revenue neutral, that is, one that maintains the present level of town services. In addition, I am searching for others. The residential exemption looks to be designed for that purpose. If we can find something else that would work even better, great. If we find something that works pretty well at lower cost, also great. If we decide that we don’t really have an affordability problem, well then of course we don’t have to try to fix it. But if we could cut the tax bills for 80 percent of the homeowners living in Great Barrington, and cut them by 20 percent for most of Housatonic village, yet we decide not to do it, then we should be able to give those people a good explanation of the costs that compelled that decision.
I will skip the points where we obviously agree, about the importance of economic development and of being an attractive place to live and locate a business, how second homes contribute to the town’s fiscal health, and how even economically sophisticated people can react to market situations irrationally. Instead, I will address two general themes and some particular problems that your letter raises (and try to avoid playing the argumentative tennis match of pro and con, typically freighted down by intensifying adverbs and moralizing labels — such as “penalize” and “discriminate”).
One theme of your letter is, or could be, pragmatic and thus susceptible to a non-controversial cost-benefit calculus: will changing our tax structure actually produce benefits that outweigh the costs, including the costs of getting there? Lines of technical inquiry to help understand that would include estimating the elasticity of tax revenues with respect to tax rates, assessing the pass-through impact in the rental market, and tracing long-term dynamic effects on values.
The first problem is understanding how tax revenues respond to changes in tax rates. The issue is not direction, which is easy to predict from theory, but quantity, which is impossible to predict from theory alone. The relationship might be elastic, which means that raising rates would reduce revenues disproportionately. If that were true, then in the other direction reducing rates ought to increase total revenue. Because the latter effect seems implausible, I tend to doubt the former one. Although I surmise that tax revenues are not particularly elastic with respect to tax rates, I doubt that they are strongly inelastic, either. This is a technical problem that is better analyzed with data rather than anecdote.
The second problem, about rents, has gotten some attention but deserves more. My paper tries to estimate the number of rentals, based mostly on census data. That doesn’t tell us much about the value range, though. My letter to the Edge estimates that implementing the residential exemption could raise rents by 2 to 3 percent. That estimate is constructed from some assumptions about values and financing and my own experience as a landlord in some other markets. I have not run it by a local real estate expert, though, and it would be very useful to do that. The market looks tight, so landlords will probably be able to pass through most of any increase: thus, this would indeed be a cost. The question is how big is this cost (along with others), compared to the benefit?
The third problem is, as a policy matter, a variation on the first one: how would changing the rate structure affect relative values in a way that affects tax revenues? Cutting tax bills at the low end could increase valuations there, and raising them at the top end could have the opposite effect. The question of interest is “how much?” Invoking the specter of the “slippery slope” is premature analytic surrender: these slopes are rarely Teflon coated, and the feared effects normally decay and things settle down. But theory — or “logic” — alone can’t say much about where this would end up. That is why I have suggested that the best way to examine this effect would be to compare changes in values in markets where the residential exemption is established with those in similar markets where it is not. Because effects at the two ends of the value scale would be opposite, it is conceivable that after the market reactions settle down both the costs and the benefits might be smaller than the first-order estimates. If benefits still outweigh costs, then it would still be worth doing. If the balance is close, though, and the transactional costs of getting there are daunting, the game might not be worth the candle.
Speaking of the costs of getting there: thank you for not using the silly phrase “class warfare”. I agree that the negative effect of controversy on our sense of community ought to be considered. But we also ought to consider other hard-to-quantify effects on the community that point the other way, such as losing people who can no longer afford the taxes on the family’s third-generation homestead. It feels wrong to treat losing them as a benefit to the town because the next owner can pay the taxes.
Which leads me to the other principal theme in your letter, one that is more philosophical than factual: why should we perceive flat-rate taxation as fair and progressive taxation as unfair – and in what circumstances is our intuition the other way around? Some quiet inconsistencies in your arguments about the various relief programs underscore why this is harder than it looks.
The state-backed programs to assist seniors (and some others in financial difficulty) with their property taxes are designed to relieve injustices that result from the fact that property tax is not progressive. These programs are independent of the residential exemption and usually have nothing to do with it. The voluntary community help fund is a relative novelty that is only used so far in a few places. I threw it in so the description of the state programs would be complete. Of course, I wouldn’t agree that mentioning it is an admission of policy failure. Rather, its existence highlights a typical experience, that doctrinaire policy spawns patches and cobbles to correct its ill effects. When flat-rate taxation produces injustices, the legislature enacts bandaids. The voluntary fund program, like the others, is addressed to the unfairness, the “policy failure”, if you will, of flat rate property taxation. Their connection to the residential exemption, which is another effort to address that policy failure, is at best tangential. They were all created to help people who can’t pay flat-rate property taxes because they are so resolutely non-progressive.
The residential exemption makes the property tax more progressive. But because it can’t do so directly and perfectly, implementing it might create a few more of the mismatches that these programs address. Whether as many as a third of the higher-valued homes in town would represent a new mismatch between value and income that is serious enough to undermine the proposal is something we need to know. To find out, we may need to do a direct canvass. If there are too many (new) mismatches that the available tools can’t correct, then the deal is off. The question is still, “how many are there, really?” I resist the implication that my treatment of this aspect of the problem is “cavalier,” although I admit to being guardedly optimistic that they will be sufficient, particularly if Great Barrington uses these programs to the maximum extent. The most important program that we do not use is tax deferral. This is one that no one else in Berkshire County has picked up yet, either. I don’t think that means the Berkshire County consensus is that tax deferral would be unfair; rather, it probably means no one else has thought it necessary yet.
Uniform residential rates are indeed the rule in most of the state. Rates would also be uniform after adopting the residential exemption; the progressive effect results from the fixed exemption, not from a difference in rates. In any event, though, uniformity of property tax rates is hardly the universal practice in Massachusetts. In a third of the towns, including most of the big ones and so perhaps as much as half of the population, property tax rates are not uniform, because the split rate sets commercial rates higher. Those communities evidently believe that the difference between a commercial property and a residential one is relevant to the tax rate they should pay. About 15 percent of the state’s population lives where the residential exemption has been in use for 30 years. By now, I imagine that residents of Cambridge and Boston and Brookline and Somerville and Watertown and Somerset and Marlborough think their familiar setup is fair. What is perceived as fair depends on context and experience.
The issue of what is “fair” is a point of political philosophy. It is hard to come up with a good characterization of “unfairness” — a difference in treatment that is not justified by a difference in circumstances — that does not beg the question or dissolve into an assertion that “my side wins”. The insight underlying progressive taxation is that marginal utility of income varies with economic condition: a dollar, more or less, is worth a whole lot more to the poor than to the rich. From that perspective, it is flat rate taxation that looks fundamentally unfair.
I appreciate your admission that progressive taxation can in principle be fair, in analyzing technical problems related to the fact that property taxes are not progressive. You say that the proposal to make property taxes progressive “only works fairly if property values and personal income are in sync”, that is, it would be fair if their relationship were perfect. This argument enlists the “best” as the enemy of the “good.” How much imperfection does it take to make the setup unfair? Property values are admittedly not a perfect proxy for income, but they are likely to be close. The question calls for consulting the economic literature for research findings about the strength of the correlation between them. I doubt that there is perfect proxy for income. Even “income” itself doesn’t work that well: what the tax man calls income is not the same as what the economist would call income.
You framed your message with a gracious introduction and conclusion, and I want to take you up on those sentiments. I’m serious about wanting to explore the likely costs as well as the benefits of reform (or to use a more neutral term, “change”). I’m not going to make this about “us” versus “them,” in part because I’m both: we were second homeowners for several years before coming here full-time, and if the residential exemption is adopted we’re going to pay more. In any event, I hope we can all keep this discussion aimed at solving problems, not defending particular positions.
Let’s focus on the bigger picture. Your letter is only about costs. Do you contend that there would be no benefits? How do you compare the costs you identify with the benefits? What would be a better strategy for dealing with the affordability problem? You have proposed fiscal consolidation within the school district and backed that up with persuasive data. That is a very good idea, which could be generalized to other services and other jurisdictions across South County. Savings and service improvements through mutual cooperation should be pursued not just for schools but also for aspects of public safety and other services. But it will not be easy to achieve. The steps that could save the most might also cost the most and be the hardest to do. We have to get others to agree to help us out. We have to offer them something in exchange. We will have to deal the costs, as well as the benefits, among competing considerations of efficiency, autonomy, and accountability.
Cost-benefit comparison looks bloodless, and it can be frustratingly imprecise despite its analytic aspirations. People are more comfortable basing judgments on category than on quantity. Still, setting up the problem in cost-benefit terms can depersonalize debate and keep things civil.
173 Castle Street
The writer is chairman of the Great Barrington Finance Committee.