To the Editor:
This is a response to the letter that the Edge posted on May 2 dismissing the idea of tax reform in Great Barrington as “short-sighted” and a threat to business investment. The memo I presented last month about tax reform options deals with both the benefits and the costs of changing our tax policies. Any significant change in policy will make someone unhappy: nothing interesting comes cost-free. The letter, using the familiar rhetorical gambit of the “parade of horribles,” lists potential costs without trying to quantify them and without comparing the costs to the benefits.
To be fair, many of these possible costs are not quantified in my memo, either. One reason is that some of them are speculative and others are hard to quantify or even to predict. It’s a commonplace that policy choices ought to be based on a comparison of costs and benefits. But quantifying the effects of policies reliably is hard to do. Precise data is often unavailable, so responsible policy choices must be based on estimates of effects, theoretical predictions about trends, analogies to similar policies or experiences in other places. And cost-benefit analysis is not the whole story: it must acknowledge that efforts to quantify and thus trade off some important values, such as fairness, are intrinsically controversial.
Another reason is that my memo was not intended to be the final word about the subject. It calls for further study of potential costs before deciding what to do. Although the letter reads like a campaign document, I’ll take it as an invitation to start estimating costs more precisely, where that is possible, in order to compare them to the benefits.
The benefit of reforming our tax structure is to make Great Barrington more affordable by cutting the tax bills for most homeowners. That is a reliable, quantifiable prediction. Data about property values is detailed and up to date. The benefits from the changes in valuation and tax rate can be calculated by an application of arithmetic. To be sure, the proportion of residential properties that would not get the exemption will not be known for certain until people start applying for it, but the Census data supports reasonable estimates of that proportion, and my memo shows that variations in that factor would not significantly change the basic benefit of the residential exemption reform.
So, what about the costs and other objections? Let’s take them up in the order of the parade.
By dismissing the residential exemption as suitable only for Boston and the Cape, the letter implies that experience shows it is not cost-effective in other settings, specifically, “small” towns like us. But that is not what experience shows. Of the 13 jurisdictions that use the residential exemption, one is smaller than Great Barrington: Tisbury, population 3,914. One of the other non-Cape towns that uses it is not full of apartments, does not have an unusual proportion of second homes, and isn’t that much bigger than Great Barrington: Somerset, population 18,172. If the point is that most towns haven’t tried it, that is indeed true. Interestingly, Great Barrington’s population puts it at the mid-point in Massachusetts: half of the towns are smaller, half are larger. Whether that makes us a “small” town evidently depends on which way you’re looking. In the context of southern Berkshire County, we are not a small town; we’re the “urban center.”
Will tax reform have “regressive” effects on seniors? The goal of the proposal is to use available tools to make the property tax more progressive. (Some people reject progressive taxation under all circumstances: I’m not a flat-taxer, and I won’t take that up here). Property taxes are in principle not progressive, and the residential exemption is an admittedly imperfect tool for making them progressive. It appears to be the best one available, though. The memo describes programs that could relieve its principal unintended effect, on seniors living in homes that they could afford when they acquired them but whose income now is stretched to cover their tax payments. The memo acknowledges that this is the side effect that most needs attention, and thus this is one of the costs that the report tries to assess in quantitative terms, by describing the potential application of several programs that are available under state law to correct this effect.
It is true that these programs are income-tested, and they can’t help people with homes valued over $691,000 or with incomes over $84,000 per year. And it is also true that we don’t know for sure how many seniors in Great Barrington would be adversely affected. About 200 are already taking advantage of the “circuit breaker” tax refund program. Conceivably, changing our tax structure would add some to that number. For those in homes valued below the breakeven point, there would be no problem: their taxes will go down. There are about 200 homes in Great Barrington valued above the likely “break-even” point but below the cutoff value for the circuit breaker, whose owners might use it to avoid the effect of the residential exemption. To establish whether this is a significant problem and whether we should do more to be sure we can deal with it, we could canvass the owners of the homes in this “notch” range, to find out whether the owners are seniors and, if so, to determine whether their incomes meet the criteria for relief. Contrary to the implication of the letter, implementing the residential exemption requires no inquiry into incomes. The issue would only come up because, to get the benefit of the state-authorized exemptions that protect low-income taxpayers, those taxpayers must indeed disclose their incomes. That some people fudge in reporting their incomes doesn’t render all income-based policy tools impotent. Some people fudge about their property holdings, too.
A thorough exploration of how to avoid or correct unintended costs like these is a good idea. It will probably be about the same level of detail as the 22-page memo on the basics of these three policy tools. And it could be a good idea to take care of this issue first. In the discussion last week with the Selectboard, I suggested that the town sequence reforms by starting with as many of these tools as state law permits, including the principal one that we have not used at all, which lets low-income seniors defer paying their property taxes.
The letter claims that reform would also have a regressive effect on renters. Let’s try to quantify that generalization. It’s probably fair to assume that most renters do not have high incomes. The rental market here appears to be tight. There aren’t many listings, and evidently reasonably priced places don’t stay vacant long. Rapid turnover of reasonably priced rental properties is economically encouraging: we don’t have an overhang of uneconomic properties, and people want to live here. In those conditions, landlords could probably pass through most of the effect of a higher tax rate. The question is, how big is that increase, and is that too much? Here is an estimate based on what I have termed the “typical” valued home in Great Barrington, assessed at about $225,000. Supposing the monthly rent would be about $1,800, the higher nominal rate from adopting the residential exemption could increase that by $35, or about 2 percent. This effect is consistent with a calculation from my experience in another rental market, where raising the property tax rate by the amounts we’re talking about here would have implied adding about 2.5 percent to the rent. The effects on rental rates for apartments would likely be similar, but that is a question that should be explored. This aspect of the issue can thus be set out as a concrete policy-level choice: is the benefit of cutting the tax bills for most homeowners, and cutting those for modest homes by 15 or 20 percent, outweighed by the cost of increasing the rents for similarly modest properties by 2 to 3 percent? If someone has a better snapshot of the local rental market that would improve or refine that statement of the choice, I’d be delighted to incorporate it.
Implementing the residential exemption would indeed entail some additional administrative costs. As a budgetary item, this is a small issue, and one that can be estimated with some confidence. Most of the costs would be transitional, not permanent. In setting up the new arrangements, the town would need to educate taxpayers about the new rules, process applications for exemption and deal with disputes about how the new rules apply. Some towns report that inquiries to the assessor doubled during the transition phase. Doubling the resources, that is, adding one full-time-equivalent, during that phase would likely be necessary. But this could be covered by a short-term contractor. There would be no need for new permanent staff. In the discussions with the boards and town management about this issue, I have estimated that the one-time cost of transition and set-up would likely be in the range of about $50,000, to pay for something less than a year’s worth of the time of a qualified para-professional. That estimate too might be refined, but I doubt that it is very far out of line.
The letter’s principal theme is that shifting taxes would discourage business. The letter makes this point, or rather mentions it, with rhetorical questions. Let’s try some analysis. Whether Great Barrington can attract and keep businesses depends in significant part on where they would go if they did not come here. I have not supported a split rate in the past, because it could be perceived as hostile to business, encouraging them to look elsewhere. But that was in response to suggestions to use a maximum split rate, putting the maximum burden on business, to achieve maximum benefits for residences. The memo suggests how to use the split rate mechanism at a much lower level, with the goal of making the business rate the same as the basic residential rate while keeping Great Barrington competitive in the south county area. That common rate would be higher than it is now, but it would still be in line with the business tax rates in Lenox and Lee, which are the other towns near us that have significant commercial centers. A rate at that level would not make Great Barrington uncompetitive as a business destination. Another reason to combine them is that doing both the split rate and the residential exemption together tends to expand the benefit of the residential exemption somewhat. As the memo points out, every town and city that uses the residential exemption also uses a split rate. But the two tools are independent, and it is not necessary to use them both.
The letter notes an interaction between residential markets and business development. Closer examination suggests that the relationship between residential attractiveness and job creation might be complex. For example: One kind of business that we see locating in Great Barrington is the hub-and-spokes financial or creative professional who can run a network from home. These businesses typically operate without much staff, that is, without directly creating many jobs here other than the proprietor. But businesses like these typically demand high-speed data service. In attracting these businesses, Great Barrington has a big advantage over some of its still-unconnected neighbors.
A more complicated claim is that the reform would “surely” have a negative effect on property values. Although the basic theory about that is undeniable, this potential effect turns out on examination to be subtle and inconsistent. At the low end of the market, the prediction of a negative effect looks wrong. Rather, the residential exemption might tend to increase sale prices and values of less expensive homes somewhat, because reducing the tax element of the monthly payment could permit a buyer to take out a larger loan. Increasing the bill on expensive homes would have the opposite effect. Each of these effects is a predicted tendency or trend. In economic terms, estimating how big either effect would be requires knowing the price elasticities of demand and supply in the different ranges of the Great Barrington housing market. Knowing those factors, one could produce a short-term, one-shot estimate of the market and revenue effects. A major policy change such as this is likely to have longer-term dynamic and feedback effects, though, and making precise predictions of long-term effects verges on speculation.
In examining complex changes like this, comparing actual experiences can be a better guide than theory to how things might play out over time. Where the residential exemption has been in use for decades, markets have adjusted. Most of the towns that use it are in parts of the state where property values have been rising. A side-by-side analysis of neighboring towns might be able to distinguish the effect of the residential exemption from the effect of other market factors on these increasing valuations. Or not: there are many other relevant considerations. It might be worth checking this out, although my experience trying to divine factors like this from such market data tells me not to spend a lot time or effort on that search, because it is likely to turn out to be inconclusive. Any separate long-term effect of the residential exemption on relative home valuations could be undetectable.
Finally, the letter complains that reform would drive out second-home owners and thus reduce tax revenues. Basic economic theory does hold that when prices go up, demand goes down. But how big this effect would be is harder to say, and predicting the effect on town revenues requires an estimate of the tax-rate elasticity of demand for second homes. For example, if demand were highly elastic with respect to the tax rate, then lower tax rates might attract enough new second homes to offset the revenue loss, while raising rates might have the opposite effect. If demand responses to tax rate changes were inelastic, changing the rate wouldn’t change revenues very much, either way. Without knowing those factors, quantification is speculation.
Here again, what people are actually doing can be a better guide than theoretical or polemical generalization. Someone looking for a weekend place in the country is already looking in Alford or New Marlborough if taxes are their principal worry. People who want to be closer to the “urban” center of South County, with amenities like high-speed Internet service, are already looking in Great Barrington. Perhaps we want to actively encourage expansion of the second-home presence in Great Barrington; perhaps not. I’ll be the first to defend our second-home “business.” I used to be a second-homer here, and in the master plan process I pushed back against lamentations that there were too many second-homes. First, there aren’t that many: 15 percent. (The share of second homes in the towns around Great Barrington is much higher than here, though not nearly as high as the letter claims. Nowhere in South County is it as high as 60 percent.) Second, those homes tend to be more expensive and thus pay higher taxes, but their owners use fewer services. For the town, they are a profit center. Certainly we don’t want them all to go away. Comparative experience is a useful predictor: a similar tax rate has not driven second-home owners out of Lenox.
People come here and stay here because it’s a great place to live, and one reason is that it has quality public services and good government. Because Great Barrington’s voters have generally supported a town government that provides a broad range of public services, I have explored how we could address the affordability problem on the assumption of a constant level of services and hence budget. The letter calls instead for a “comprehensive” plan to “reduce taxes for everyone,” referring to unspecified efficiencies and consolidations. Based on my five years of close involvement in the details of this town’s government, and 40 years of direct involvement in other government and private sector organizations, it’s my judgment that we are unlikely to come up with efficiencies or consolidations that could significantly reduce the town’s budget without making significant cuts in the quality and quantity of public services. In any event, that is a different, long-standing, and ongoing conversation, which also profits by moving beyond hopeful generalizations to assessment of credible, evidence-based particulars, including, where possible, a clear-eyed comparison of costs and benefits.
Michael Wise
173 Castle St.
Great Barrington, Mass.
The writer is a member of the Great Barrington Finance Committee.
