Vacancies even in my tony neighborhood?

That concerns me.

Leave it to the Wall Street Journal to peep through Mayfair’s lace curtains:

LONDON — At an abandoned home with yellowing newspapers on its front stoop, Paul Palmer peeks through a mail slot to find letters and leaves carpeting the entryway. The house next door has a dead plant chained to its porch, which is covered in faded utility bills.

Mr. Palmer investigates abandoned homes for a living. But his turf isn’t a poverty-stricken corner of this financial capital. It’s the Mayfair district, home to wealthy financiers, celebrities, the U.S. Embassy — and a few squatters.

Who owns it, and why don’t the owners live here?

In the city of Westminster, where Mayfair is located, homes can cost up to £50 million ($81 million). Yet Westminster is fifth among London’s 33 boroughs in the number of unoccupied properties. In 2008, 1,737 homes had been vacant six months or more, the third highest number among all London boroughs, according to the Empty Homes Agency, a nonprofit group that seeks to put empty homes back into use.

Not confined to the bad neighborhoods: red means vacant

Unlike our recently-profiled case of no landlord at all, the problem isn’t loss of equity leading to economic abandonment:

Unlike people facing foreclosures in other neighborhoods around the world, Mayfair’s homeowners aren’t down on their luck. Rather, the properties serve as investments for owners who pay the bills to keep them empty — something the neighbors and city object to when the homes fall into disrepair.

Real estate, particularly well-located and well-built real estate, has long been a ‘brick safety deposit box’ for the world’s rich people.  More durable than gold or gems, it also can serve as a bolthole should things get too hot in the home country (as in Dubai, where defaulters on condo loans buy a one-way plane ticket and leave their Mercedes at the airport, escaping to avoid being thrown into debtors’ prison):

[New York Times, 12 Feb 09.]  With Dubai’s economy in free fall, newspapers have reported that more than 3,000 cars sit abandoned in the parking lot at the Dubai Airport, left by fleeing, debt-ridden foreigners (who could in fact be imprisoned if they failed to pay their bills). Some are said to have maxed-out credit cards inside and notes of apology taped to the windshield.

The owner fled, leaving the Merc behind

People are economically rational, so when you see a perplexing behavior, look for a missing incentive – which in this case is easy enough to find:

Many owners decline to rent the homes due to local council tax rules [Local real estate taxes – Ed.], which tax properties at a lower rate if they are empty and unfurnished.

As we saw in the case of California’s economic teardowns, where plowing a brand-new home under was less costly than securing it and holding it for eventual sale, localities can miscalibrate the relative incentives of different property types and tenure configurations and induce perverse outcomes.

So it is here in London, for the unseen owner’s equation probably looks like this:

Net benefit (cost) of renting a luxury owned flat in Mayfair

+ Rent from the unknown possible new tenant

– Leasing commissions to the estate agent

– Operating costs of heating and maintaining the apartment

– Unrecoverable damages (wear and tear) done by the tenant during the occupancy period

– Inconvenience of having the property rented/ needing to move the occupant out

– ‘Brain damage’ of having to think about it

– Loss of privacy/ anonymity by having to report the rent and expenses

– Increased council taxes resulting from being rental rather than vacant

= Net benefit (cost) of renting rather than holding securely vacant.

The optics – one positive, seven negatives – are deceiving, because this equation is conceptual rather than numeric, and we cannot assign accurate weights to each factor.

I don’t think so

Notice though that the richer you are, the more the intangible risks (inconvenience, brain damage, loss of privacy) rise in value relative to the quantifiable and probably minor (as a percentage of property value) net operating income from the rental.

Well bred and well concealed

The unseen owner’s caution makes more and more sense – which partially explains its frequency:

The high concentration of rundown, empty homes is striking for a posh neighborhood like Mayfair, with its ornately gated manses. The hub of aristocratic society before World War II, Mayfair’s modern-day image is demonstrated by its prominent place on the British Monopoly board.

The highest-rent color group on the board? Mayfair

Some locations, being psychological trophies, attract more than their share of interest.  How many luxury flats in Cairo, London, Miami, New York City, Los Angeles, Paris and Seattle are sitting empty, havens for jet-set plutocrats who think it’s worth taking out insurance against political or economic chaos at home?

In real life, the empty-home phenomenon touches some of the UK’s more famous residents. A few years ago, Mr. Palmer met comedian Tracey Ullman and her husband, Allan McKeown. They wanted to know why the house next door to theirs was derelict, recalls Mr. McKeown.

Proudly British, and proudly funny: Tracey Ullman

Former Prime Minister Tony Blair’s home is adjacent to a crumbling property that’s been vacant for more than a decade. The owner keeps up on its payments, according to Mr. Palmer. But one look inside indicates they likely haven’t visited in years.

It’s an economic sanctuary – and London is the beneficiary, at least financially, since whoever owned the house before made a large profit selling it, and today London collects taxes on it without having to provide any services.

That loophole frustrates Mr. Palmer.

Is it a loophole? 

Depends on what you think is behind the door

To me, a loophole creates an unintended option, something that is exploited by program participants to achieve outcomes that lawmakers would have prevented had they through of the possibility.

“We shouldn’t be rewarding these people,” he says.

Palmer doesn’t believe in rewarding absentee non-landlords

It’s not being rewarded – or is Mr. Palmer chafing at the real estate tax differential treatment?

As the Westminster City Council’s empty-property officer, Mr. Palmer strolls the area’s streets six hours each day to identify vacant homes and track down their owners.

Actually, Mr. Palmer has no interest in finding the missing owners, he can coax them from their foreign rabbit holes simply by seizing their property.

Once he identifies a vacant house, Mr. Palmer consults property records.

Because one cannot move property, it can be taken economic hostage.  Further, because property is immobile, one can mandate transparency in its ownership through a registry of title.

To claimownership, you need your name on the deed

After that, he often finds himself sending letters to the British Virgin Islands, a known tax haven for foreign companies, and a place where many of the property owners in question have mailing addresses.

Above we speculated on the value of anonymity; BVI and Netherlands Antilles addresses are a further clue that these are the discreet rich, who want to conceal either the source of their wealth, or its uses.

He says he rarely receives a response back. Except, that is, when a court action is about to begin.

Court action?  What court action?

Under British law, local authorities have the power to seek an order to claim ownership of the ghost properties and put them up for sale.

If a property is still empty after six months, with no effort on the owner’s part to occupy, rent or renovate it, Mr. Palmer begins a “compulsory purchase” — a process that forces an owner to relinquish possession.

‘Compulsory purchase’ is British for ‘eminent domain.’

Not as strong as the Fifth Amendment, but similarly evolved

Real estate, being immovable, makes a Tocquevillean asset in two ways:

1.  Its possession depends on a property-rights-respecting citizen-responsive government, so those who possess real estate property are invested in making their government work.

2.  Its value realization requires being physically present to claim the property, so municipalities and citizens who want better communities have a means of making their neighbors shape up.

As I posted nearly four years ago, tax liens act as the housing finance ecosystem’s anaerobic bacteria:

In this real estate taxes and their corollary, tax liens and tax lien takings, act like anaerobic bacteria, breaking down decayed dead organisms and turning them into a nutrient-rich environment that sprouts new growth.

And this is how we return it to its essence ….

That’s how London is using compulsory purchase:

After assessing the value of the property, officials typically sell the house.

If the owner fails to occupy/ maintain the house, even if minimally – then the municipality treats it as provisionally abandoned property, and returns the property to more active use and occupancy, by compelling its sale to someone who presumably will live in it (or actively rent it).

London doesn’t steal the property, however:

If the original owner hasn’t come forward, funds are paid to a local court where they remain for up to seven years.

The city forces the sale, but sequesters the proceeds.  The issue is use, not confiscation.

Most owners eventually turn up to claim the cash.

However, even this approach has a sharp edge in the boundary between private property rights and public-use imperatives:

And the bridge is out too …

The compulsory purchase, says Mr. Palmer, is a “tool we use as a last resort to take empty property away from owners who refuse to do anything to it.”

Isn’t the right to do nothing with my own property one of my fundamental rights?

I have the wight to be idle

If you tried this in New London, you’d have a major legal and political fight on your hands.

Wouldn’t it be better – and simpler – just to eliminate the favorable taxation of vacant property?

Now that you’re PM, Gordo, would you take care of that for me?

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Yesterday we delved into Westchester County’s recent settlement, as reported in the New York Times, of a desegregation lawsuit.  Via a clever legal end run, it was brought against the county by the Anti-Discrimination Center, using the False Claims Act:

The case was litigated by Mr. Gurian and the center’s lawyer, John Relman. Their argument that the county had largely ignored local impediments to affordable housing –

Ever since Lyndon Johnson, it has been the Federal government’s thesis that since overt racial discrimination is illegal (under Brown v. Board of Education as well as numerous Equal Opportunity statutes), communities seeking to exclude minorities adopt camouflage, usually in the form of exclusionary zoning.  The Federal government has therefore made embrace of affordable housing the talisman of anti-discrimination, and has bestowed or withheld Federal funding based on cities’ and towns’ affirmative declaration that they are taking housing-affordability steps.  As Charles M. Lamb put it in Housing Segregation in Suburban America since 1960:

[Under George Romney], housing desegregation became a primary concern in the allocation of all HUD financial assistance, regardless of the specific program. By virtue of HUD’s interest in housing desegregation, Breakthrough soon came to represent more than a large-scale attempt to build low-cost housing; it was used to help spearhead desegregation.  

In Romney’s mind, suburban housing integration would also partly solve the thorny problems of segregated schools and minority unemployment. 

In return, not only would local governments receive low-income housing, but they would be given highest priority when applying for other forms of HUD assistance. If this carrot proved inadequate to implement Breakthrough, Romney threatened to rely on the stick as well, cutting or even revoking HUD assistance to communities refusing to cooperate.   Pages 63-64.

Remaking America: George Romney

Ever since Romney, localities that fail to adopt and implement anti-discriminatory policies can be denied Federal assistance, a requirement that had until recently become largely a rote affidavit, merely another of a long list of affirmations and declarations to be signed without thinking, and filed without reviewing.

Until, that is, the energetic lawyers opened up a False Claims suit and sought to show that Westchester’s deeds failed to match its words:

– was based, in part, on testimony by Andrew A. Beveridge, a sociologist at Queens College of the City University of New York.  

Beveridge’s graphic: blacks in tiny pockets

Judging by his CV, Dr. Beveridge specializes in these judicial expert-witness situations, which by itself is no disqualification, although it suggests he brings a perspective as well as extensive experience. 

Separating racial discrimination from economic: Beveridge

[His complete report is here, in .pdf, downloadable but not extractable, which is annoying since I'll have to retype the relevant quotes.]

[Many pages of statistical correlations, leading to the following.] 

Racial segregation levels are higher than segregation by income.

Forty years after Operation Breakthrough, the question remains: is visible socioeconomic segregation racist, or merely elitist? 

Racial discrimination, or economic?

Westchester County house values

When the affluent households are mapped (see Exhibit H), one can plainly see that there is substantial overlap between areas that have a high concentration of blacks in general, and those that have a high concentration of affluent blacks in particular. 

I can’t electronically extract Exhibit H, which is on page 45, but you can compare it with this page, also from his report:

Affluent blacks live in neighborhoods more black than affuent

This means that many affluent blacks in Westchester County share their neighborhoods with those who are much less well off than they.  (Sections 36-37, page 11)

That’s strong correlative evidence, and it won over the judge:

But the county’s claims were largely repudiated in February when Judge Denise L. Cote ruled that between 2000 and 2006 the county had misrepresented its efforts to desegregate overwhelmingly white communities when it applied for federal housing funds.

Don’t mess with this judge

The judge’s finding of county misrepresentation was based on ironclad logic:

Judge Cote concluded that Westchester made little or no effort:

To find out where low-income housing was being placed, or

To finance homes and apartments in communities that opposed affordable housing.

In other words, Westchester County had claimed it was actively seeking to desegregate its communities.  Yet Westchester County had failed either to build affordable housing in places with few blacks, or to find out if the market was building such housing on its own.  That’s excellent evidence of bad faith, or at the very least, total indifference.

Andrew Spano, the Westchester County executive, attributed the settlement” to “a historic shift of philosophy” by federal housing officials.  

“The Feds moved on us”: Andrew Spano

Mr. Spano said that the settlement would have “a sweeping effect on communities nationwide” and that he signed the agreement to avoid further litigation and possible penalties.

The county … said that since it had previously invested in affordable housing, “what is different is the locations where the housing must be built.”

The overarching goal, though, is to locate them in the least racially integrated neighborhoods.

It was at about this point in the Times article that I realized New York must lack an essential tool that Massachusetts has:

Not another failure?

New York needs a powerful inclusionary-zoning law like Massachusetts’ Chapter 40B. 

As I’ve posted before, Chapter 40B enables states to compel injection of affordable housing into recalcitrant localities, because it uses the override power of a higher unit of government (the state) to nullify the exclusionary restrictions promulgated by a lower unit (the town or village).

It has only just dawned on me that Chapter 40B works for the same reason the False Claims Act does – it privatizes enforcement by giving private actors a financial motivation to enforce.  Chapter 40B does for affordable housing development what the False Claims Act does for desegregation.  As shown by this map, 40B works – it builds properties in suburban cities and towns:

Notice now many suburbs have 40B properties

Meanwhile, in thirty-plus years of affordable housing here in Massachusetts, I’ve never heard of False-Claims litigation anything like Westchester’s.  Maybe 40B is acting like a vaccination, because any state with 40B or a similar inclusionary zoning statute will never be allowed to zone out of its domains.

Back in New York, will the judicial lever work?  Or will the plaintiffs’ victory be as hollow as that of the massive tobacco-litigation settlement, where the government gave the tobacco companies a quarter-century free run, in exchange for a share of the proceeds? 

Westchester’s got seven years to create a handful of affordable apartments.  We know the money’s totally inadequate to do this, which means either micro-sized apartments or more money must be found. 

Federal housing officials would appoint a monitor to ensure compliance.

It’s still a seven-year window, and by the time it’s over, we’ll have a new Administration.

Even if the agreement is enthusiastically fulfilled in every particular, Westchester will be moving only a tiny number of poorer people into whiter neighborhoods.  Will that make those neighborhoods blacker?

See any anti-black policies here?

Or will Westchester’s domestic workers just being moving out of outlaw in-law apartments?

Given that 120,000 acres of land in the county meet the criteria, Mr. Gurian said, the federal monitor “should have no difficulty making sure that Westchester ends its policy of allowing affordable housing to be off-limits in the most highly white neighborhoods in the county.”

What makes this a conundrum is that, after four decades of using affordable housing to segregate racially, we still don’t know if people are anti-black or anti-green.

How can we line up the incomes with the house prices?

“Affordable” housing is defined by a complex formula, but generally it is meant for working families. In some cases, a family of four could make up to $90,000 and still qualify.

That’s workforce housing, and there’s neither a guarantee nor even a legitimate mandate to ensure those ‘poor’ families are black.  

Or the unaffordable rents?

There is no minimum income level, “but it’s not going to be no-income,” Mr. Gurian said. “This agreement is not focused on facilitating housing for the poorest of the poor.”

Is Westchester County anti-black?  Or just anti-green?

The only minority we don’t like is the no-green group

Mr. Gurian said that while black and Hispanic residents have a disproportionate need for affordable housing, “this is an opportunity-creating agreement, not a guarantee” that the homes would go to members of minority groups.

Thus even if Westchester had done everything the False Claims litigation asserted Westchester did not, the county might still be just as segregated:

The county admitted no wrongdoing, blamed the judge’s ruling on a technicality, [and] said it had always given made affordable housing a priority.

Anti-black policies?  Or just anti-no-green?

We welcome anyone … with money!

Most of the homes would be new construction, although some existing houses and apartments could qualify if the county made them permanently affordable.

(Watch the county start discovering and granting quiet amnesty to in-law apartments being used for domestic workers, then counting them as affordable under the settlement formula.)

What does the Anti-Discrimination League’s expert say?

Dr. Beveridge found that “racial isolation is increasing for blacks, falling slightly for whites” and that “income level has very little impact on the degree of residential racial segregation experienced by African-Americans.”

If that’s so, then how will affordable housing solve it?

How will we encounter it?

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Forty years after Operation Breakthrough, the question remains: is exclusionary zoning (de jure or de facto in high land prices) racist, or merely elitist?

Racial discrimination, or economic?

Westchester County house values

Only one is illegal, and in the case of Westchester County, as reported in the New York Times, it took a curious private-citizen lawsuit to reach, if not a philosophical conclusion, at least a financial and real estate settlement:

Westchester County officials have entered into a landmark desegregation agreement that would compel the county to create affordable housing in overwhelmingly white communities and aggressively market it to non-whites in the county and in neighboring New York City.

The agreement, to be formally filed Monday [August 17 – Ed.] in Federal District Court in Manhattan, would end three years of litigation by the Anti-Discrimination Center over Westchester’s responsibility to enforce fair-housing goals.

Curious too is how the case was brought. It wasn’t brought by either the New York Attorney General or the US Department of Justice, either of whom have jurisdiction over discrimination. Instead it was brought by a private party.

“Residential segregation underlies virtually every racial disparity in America, from education to jobs to the delivery of health care,” said Craig Gurian, executive director of the Anti-Discrimination Center, which filed the suit under the federal False Claims Act.

Craig Gurian (at right) counseling other clients

False claims? What do false claims have to do with desegregation?

The False Claims Act (31 U.S.C. § 3729–3733, also called the “Lincoln Law”) is an American federal law which allows people who are not affiliated with the government to file actions against federal contractors claiming fraud against the government. The act of filing such actions is informally called “whistleblowing.” Persons filing under the Act stand to receive a portion (usually about 15%-25%) of any recovered damages.

By authorizing contingency payments to winning citizen plaintiffs, the False Claims Act turns ordinary citizens into tort bounty hunters.

Concerned citizens helping the government do its job

The False Claims Act, passed by Congress on March 2, 1863, was an effort by the USA to respond to entrenched fraud where the official Justice Department was reluctant to prosecute fraud cases.

Two months after the Emancipation Proclamation, and as part of Lincoln’s strategy for winning the Civil War, because an army that is corrupt is an army that cannot win.

The False Claims Act passed two months later

Importantly, a reward was offered in what is called the “qui tam” provision, which permits citizens to sue on behalf of the government and be paid a percentage of the recovery. Qui tam is short for the Latin phrase “qui tam pro domino rege quam pro se ipso in hac parte sequitur“, which means, “he who brings a case on behalf of our lord the King, as well as for himself.” In a qui tam action, the citizen filing suit is called a “relator”.

Like RICO, another statute whose financial potency has turned it into a lever of choice for ex parte citizen litigation, the False Claims Act sicks a financial terminator on the target, eventually forcing a confrontation.

You defrauded the government

To bring Westchester within its sights, the Anti-Discrimination Center had to connect the county’s alleged passivity to a frauduluent claim:

Westchester officials had originally dismissed as “garbage” the lawsuit’s premise that the county had fraudulently claimed that, as a condition of accepting federal funds, it fully complied with mandates to provide affordable housing without furthering racial segregation.

Just north of New York City, an original affluent suburban county

These Federal financial mandates date back to George Romney’s Operation Breakthrough, to which I’ve previously alluded and about which I intend to post one day. Breakthrough was envisioned as both a housing-affordability strategy (breakthrough technology) and a segregation-buster (breakthrough zoning barriers of prejudice), and that’s certainly how the Anti-Discrimination Center framed its case:

“Westchester, belatedly acknowledging its authority to do so, is obligated to take legal action against resistant municipalities where needed to fulfill the affirmatively furthering fair housing purposes of the settlement,” Mr. Gurian said.

Brokered by the Department of Housing and Urban Development, the agreement promises to spark challenges to suburban counties across the country that have resisted pressure to undo decades of residential segregation.

It’ll certainly trigger many more False Claims Act cases, now that the Anti-Discrimination Center has provided the road map, and hit the jackpot:

And 15-25% of it is yours

The false claims suit by the Anti-Discrimination Center, a nonprofit group, and the settlement, apply to towns and villages in Westchester.

The cities operate separately from the towns and villages – which turns out to matter

The federal government deals directly with the cities in the county, among them Yonkers, which nearly went bankrupt before capitulating two years ago in a housing segregation case that dragged on for 27 years.

Exempting the cities really changes the settlement and desegregation dynamics, as can be seen by the next chart:

The blacks live in the cities

With a few microscopic exceptions, Westchester’s blacks live in Peekskill, Mount Vernon, New Rochelle, and White Plains. Only Greenburgh/ Elmsford both is a non-city town/ village and has a large black population.

The agreement calls for the county to spend more than $50 million to build or acquire 750 homes or apartments –

It sounds good, but that’s only $67,500 per apartment. No way will that be sufficient.

It is subject to approval within 45 days by the county Board of Legislators, which is also required to approve a $32.9 million bond sale to help finance the housing.

That’s another forty grand an apartment. Still nowhere near enough.

Think that’ll cost under $100k apiece? New construction in Eastchester

– 630 of which must be provided in towns and villages where blacks constitute 3% or less of the population and Hispanic residents make up less than 7%.

To put that in context, Westchester County’s total population is about 950,000. If we presume three people per household (a high number, and therefore conservative in terms of households), Westchester County has 320,000 households; adding 750 affordable apartments represents one-quarter of one% (0.25%) of the total housing stock.

Among the towns and villages in which blacks constitute less than 3% of the population and would theoretically be eligible for affordable housing under the settlement are Bedford, Bronxville., Eastchester, Hastings-on-Hudson, Harrison, Larchmont, Mamaroneck, New Castle, Pelham Manor and Scarsdale.

We can also examine it by people, since Westchester has a cornucopia of statistical information, such as this Census 2000 report:

Hispanics constitute the largest minority group in the county. Also, Hispanics were the fastest growing group of immigrants, totaling 144,124 residents. Hispanics now account for 15.6% of the county’s total population compared to 9.9% in 1990.

The Asian population also grew by 27% between 1990 and 2000. There are now

41,367 Asian residents who make up 3.7% of the county’s total population.

African-Americans also increased from 114,652 in 1990 to 131,132 in 2000. They now account for 14.2% of the county’s total population compared to 13.1% in 1990.

Blacks moving to the cities: Westchester’s report, Page 37

By contrast, the number of residents identifying themselves as white dropped by 35,450 to 658,858. While they remain the largest group in Westchester, whites make up a smaller percentage of the total population than they did in 1990. They now account for 71% of the total compared to 79.4% in 1990.

If 750 new affordable apartments house 3,000 people (at four per household, poor families often having larger households especially when compared with elderly), they all go to non-Hispanic blacks, then roughly 2.5% of Westchester’s black population will move from more-concentrated to less-concentrated areas.

Yet that’s the problem with using affordable housing as a desegregation proxy – you can’t legally target it to a particular race, for that violates every fair-housing protocol imaginable.

Will the homes be filled by blacks and Hispanics? Does poor = black and black = poor?

These things are not equivalent

The county has seven years to complete the construction or acquisition of the affordable housing units.

My goodness, that’s a long interval for so few homes or apartments.

It was not immediately clear where the new houses and apartments would be placed, although the settlement says that priority should be given to sites near public transportation.

At this point, I realized that the judicial win may well prove no policy solution.

Did we win?

[Continued tomorrow in Part 2].

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[Continued from yesterday’s Part 1].

Yesterday’s post examined the hypothetical of raising property taxes while exempting a particular class of elderly homeowners from the increased costs they would vote to impose.  As shown in a fascinating quantitative analysis, Massachusetts Proposition 2½, Simulating Overrides with Low-Income Elderly Exemptions, published in the Federal Reserve Bank of Boston article in its summer issue of Communities and Banking.

Looks like a Venetian blind, and for the same reason:

The Boston Federal Reserve Bank building

Having chosen three representative Massachusetts mid-size cities – Cambridge, Worcester, and Springfield – the authors were then able to calculate highly interesting granular data on the impact to each community:

To analyze the effects of a property tax increase with the proposed exemption for low-income elderly households, the override simulation froze the property tax bill of low-income elderly households currently paying more than 10% of their total income in property taxes at its current level.  If any such household reached a 10% property tax burden as a result of the override, the property tax burden was capped at that level.

Further, it isn’t just a redistribution of real estate taxes, it’s also an increase:

Clearly, since overrides increase the community’s total tax levy by a specified amount, taxes are higher on taxpayers not receiving the exemption.

The pain will depend on how big an increase:

So NEPPC asked the question, What is the potential impact of a 6% property-tax increase for each municipality?

Cui bono?  The effects of boosting taxes just on some

If the local real estate taxes go up 6% in the aggregate, then the average tax burden has to rise more on the non-exempt, and in all three cities, only a few households are exempt: 5.6% in Springfield, 8.3% in Worcester, and 9.6% in richer, older Cambridge.

According to the analysis, 9.6% of all owner-occupied households and 35.4% of elderly owner-occupied households in Cambridge would benefit from the exemption. That is, their taxes would be lower with the exemption than if the override passed without the exemption. (See “Simulation Results.”)

At least the benefits would be targeted, with just under one in ten homeowners gaining a benefit – and yet, somewhat surprisingly, only one-third of the elderly homeowners would qualify.  (In Cambridge, remember, elderly homes are quite a bit more valuable than even Cambridge’s high average.)  Perhaps that’s because the other two-thirds have incomes above the $60,000 eligibility ceiling.

The median property tax burden of a qualifying household is 23.9%.

That is a big chunk of their budget – one quarter of the spending goes to pay real estate taxes on their expensive homes.

Tails you lose?  For Cambridge’s elderly homeowners, one-quarter of their budget is real estate taxes

Meanwhile, those not advantaged are disadvantaged:

The average nonexempt household in the lowest- income quintile would see its property tax burden increase by 1.06 percentage points, a $170 increase. (See “Distributional Effects on Select Nonexempt Groups,” page 24.)

Who pays more taxes?  Non-elderly poor!

Most striking in the large table above is the non-elderly lower-income (below $60,000) group, where they who are already socked with taxes would see their taxes boosted by $253, while identical homeowners next door, if they have an elderly head of household, would pay no increase whatsoever.  What’s the public policy justification for advantaging an elderly homeowner over an otherwise-equally-ppoor non-elderly neighbor?

The same disjuncture arises in the other two things:

An override exemption would benefit 8.3% of all owner-occupied households in Worcester and 41% of elderly owner-occupied households.

Whereas in Cambridge, only one in three elderly homeowners was poor enough to qualify, in Worcester three out of seven would be eligible.

We’re eligible

We’re not

The median property tax burden of a qualifying owner-occupied household is 18.2 percent.  Of all the households that would not qualify for the exemption, the largest increase in property tax burden—0.49 percentage points, an additional $147—would occur for those in the lowest-income quintile.  The burden of households in the highest income quintile would increase by 0.12 percentage points, or $200.

Once again the non-elderly poor get socked, their taxes rising $206 per household:

Thank you sir, may I have another?

Of the nonexempt non-elderly owner-occupied households, about 6.6% have incomes less than $60,000 and would experience a property tax burden of 10% or higher in the event an override.

As a policy matter, do we really want to give tax-increase waivers to elderly people who own valuable homes? 

Proposals for exemptions protecting vulnerable groups may help municipalities successfully pass overrides.

While I understand the political imperative to relieve elderly distress, we could be confusing cash-flow limitations – fixed or slowly-rising incomes – with actual poverty.  If the house has that much value, the owner could sell the house and move to something smaller, or failing that take out a reverse mortgage. 

A reversal of my fortune?  Would be monstrous!

Don’t forget, the elderly more than likely have reduced mortgage payments.  They are no longer paying for children’s food, clothing, and education.  A larger portion of their annual income can go for shelter because smaller portions go for other things.

In other words, by granting cash-flow relief at no cost, we will be subsidizing the asset-rich cash-poor elderly in the manner to which they have become accustomed – at the expense of families who probably have higher household expenses (such as raising children).

However, other groups vulnerable to overrides—say, non-elderly low-income households with severe property tax burdens—may be motivated to vote against such proposals.

[We could also detour into an exploration of 'who benefits from municipal services'.  Families with school-age children obviously benefit more than do the childless; conversely, since they have more to protect, the rich benefit more than the poor from services such as police and fire.  That would take us far afield, so we won't. – Ed.]

Don’t go there so late in a blog post

I don’t mind subsidies.  I mind invisible subsidies, and I mind surcharges concealing themselves in the absence of subsidy.

You can look at it two ways, can’t you?

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Once we have accepted the principle that tax burdens should vary by taxpayer group – and everyone except a few economists have so accepted, at least in the world of political reality – we must choose who gains the more favored treatment – and how we package it.

Long ago, when I matriculated to Our Fair City, I was ecstatic to be awarded financial aid, and being young and capital-short, I made no mental distinction among its three forms: scholarship aid, on-campus employment opportunities, and student loans at generous interest rates. Many, many years later, long after I’d repaid the (government-funded) loans, I realized that if the university was trumpeting its delivery of financial aid to a high percentage of its students, what the typical student paid must more or less represent the education’s cost.

Which ones stand out?

Seeing the economics in a reverse light, what had seemed a generous discount for my benefit could also be viewed as a surcharge on other parents richer than mine were.

How ’bout now? Who’s got the advantage?

This didn’t bother me at the time – after all, I was the beneficiary – though it increased my cynicism regarding college administration. And then when I started thinking about those ‘legacy’ admissions, and realizing they probably came from richer families and hence were paying full boat, I came full circle. The surcharge being invisibly imposed on those richer if less quick-witted students were funding the scholarship for poorer smart kids like me.

When you turn it upside down, who’s advantaging whom?

So it is with local real estate taxes. To balance its basic budget algebra, the municipality needs to raise a totality of taxes from all its taxpayers. For a host of reasons that seem like a good idea at the time, some groups will be charged less (per dollar of property value) – meaning that others will be charged more. It gets especially tricky when, as in Massachusetts, the votes in their infinite wisdom have enacted a hard cap on real estate taxes (Proposition 2½), which can be increased only by a town override, as explored in an interesting Federal Reserve Bank of Boston article, Massachusetts Proposition 2½, Simulating Overrides with Low-Income Elderly Exemptions, in its summer issue of Communities and Banking:

In 1980, Massachusetts instituted Proposition 2½, a law limiting increases in local property taxes. Nevertheless, municipalities facing revenue shortfalls have repeatedly sought overrides—votes by community residents to approve levy increases higher than 2.5 percent. Of the approximately 1,180 override attempts since 2000, nearly 51% have passed.

After all, if you don’t tax people more, services have to be cut:

Proposition 2 ½ overrides offer a tempting solution for Massachusetts cities and towns searching for new revenues. When override ballot questions fail to pass, however, municipalities are left with budget shortfalls causing cuts in public services, school programs, public workers, and the like.

[Whether in good times we took on new municipal services as luxuries that we should now rethink is a discussion beyond the bounds of this humble blog post. – Ed.]

Overrides being hard to enact – they represent people voluntarily taxing themselves more – localities have devised means of buying votes by exempting some groups, particularly those with high voting rates, such as the elderly:

Now legislation has been introduced to exempt low-income elderly homeowners from property tax increases authorized by overrides.

Give people a discount and every will want one, so the proposed legislation carves a precise keyhole:

Let’s be precise about whom we let in

Three criteria must be met:

[0] The household must own a home.

I’ve added condition zero as a reminder: we are talking only about households that own a home – which is not insignificant since the home is a huge financial asset, and that asset is the sole cause of the tax burden for which this legislation proposes relief.

[1] The head of the household must be 65 years of age or older

[2] The total household income must be $60,000 or less

The first two criteria are easily comprehensible: you need an oldster at home, and the oldster must have limited income (although many people would consider $60,000 family income fairly decent, especially for elderly homeowners who probably have little or no mortgage remaining on their homes). The third is trickier:

Not that tricky at all

[3] The ratio of the household’s property tax to income (the property tax burden) must be 10% or greater.

Word can obscure arithmetic, so let us pause to calculate.

We’re going to make it perfectly clear

The household’s maximum income is $60,000; say $50,000 for the typical beneficiary. 10% of income is $5,000, and under Proposition 2½, that cannot exceed 2.5% of property value; since the legislation is aimed only at overrides, we can safely use the 2.5% ceiling, meaning that $5,000 in annual real estate taxes will be paid if your home is worth $200,000 or more ($5,000 / 0.025). With the Massachusetts median home price well above that – it was $300,000 back in 2005, and is likely higher than that now – just about every elderly homeowner will be eligible.

In effect, seniors who own their homes and have a fixed or moderate level of income are generally granted an exemption.

Try ‘every income-eligible elderly homeowner.’

Everybody’s eligible to be liked, anyway

To study the implications, the New England Public Policy Center [An arm of the FRB Boston -- Ed] developed a circuit-breaker analysis. The analysis was based on publicly available data from the 2006 American Community Survey, published by the U.S. Census Bureau. With its up-to-date demographic and economic data, including total household income and total property taxes paid, the ACS enabled the NEPPC to analyze the number of households that could benefit from the exemption and the potential effect on the property tax burdens of nonexempt households.

Thus the clever fellows at FRB Boston wanted to figure out how many people get real-estate tax scholarships, and conversely how many others pay how much surcharge.

So for purposes of simulating potential override effects, the NEPPC chose three municipalities that lie within their own PUMA—Cambridge, Springfield, and Worcester. (Although these three are not among those that regularly propose or pass overrides, they are useful for demonstrating the simulation tool.)

For Cambridge, just find Boston J

The three cities are a good choice, since they’re all large (Cambridge 100,000 people, Worcester 175,000, Springfield 150,000), scattered across the state, and in property markets that are great (Cambridge), weakening (Worcester), and downright awful (Springfield).

Average home $400,000

The authors find some interesting facts:

A tale of three cities: who pays what?

In Cambridge, elderly owner-occupied households have a much larger median income, are less burdened by property taxes than their counterparts statewide, and have more than double the median property tax burden of the city’s median owner-occupied households. Cambridge also has a larger percentage of owner-occupied households headed by elderly residents.

In Our Fair City, the elderly are rich, own big houses (double the tax burden), and numerous. (Cambridge is also a predominantly rental city, with only 39% owner-occupancy, compared with 48% in Worcester and 52% in Springfield.) Not the people for whom one would ordinarily wish to targeting subsidies, would one?

Average home $140,000

Property values rise and fall faster than changes in municipal budgets, so rich towns tax their homeowners less (percent of value) than do middle-income or poor ones. At least that’s the case contrasting Cambridge and Worcester, where Worcester’s lower-value markets, even with Worcester’s lower municipal budget, impose on property owners a higher tax burden, both in percentage of income and even in absolute dollars.

In Worcester, elderly owner-occupied households are more severely burdened then their statewide counterparts. Compared with the median owner-occupied household, the median elderly owner-occupied household in Worcester has exactly double the property tax burden.

Average home $100,000

Springfield’s got a lower budget – taxes are only $2,150 per house, instead of $2,650 in Cambridge and $2,750 in Worcester – but the highest tax burde4n because values are so low.

In Springfield, elderly owner-occupied households have a lower median property tax burden, lower median income, and a slightly higher percentage of all owner-occupied houses.

In Cambridge, the elderly pay higher taxes than average ($4,050 versus $2,650) because they’re richer in terms of assets: they own 50% more valuable homes. In Worcester, they’re poorer – $2,450 in taxes versus $2,750 average. In Springfield, they’re about the same ($2,050 for elderly homeowners, $2,150 for the average).

With all that data, the researchers were then in a position to do what legislatures should do more often: to quantify who gains and who loses from their proposal, and in each case by how much.

Pick a direction

[Continued tomorrow in Part 2].

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