Phantom of the Opus: housing prices

My contention, perhaps a bit tongue in cheek, is that the Vermont Property Tax for public education enshrined first on Act 60, and then in Son-of-60, Act 68was the magnum opus, the Great Work if you will, of the Golden Dome folks over the last decade. If you can accept the contention of economist Richard Rahn, chairman of the Council for Global Economic Growth, that inflationary gains in nominal asset values are phantom in nature and shouldnt be taxed, then maybe you can accept my conclusion, that the weak link of the opus which hasnt shown stress fractures while housing values in Vermont were rising, will show them when and if housing values fall. I use the gerundive in past tense were risingand not the present tenseare risingbecause housing values in Vermont arent rising any more. Statistically, values havent yet begun to drop, as they have in almost all other states, but there is plenty of anecdotal evidence from individual sellers who have had to cut their price to make their sale, that the official stats dont yet reflect the on-the-ground situation. Theres also anecdotal evidence that inventories are rising as sellers well-insulated from economic pressure refuse to lower asking prices. That last observation comports well with the documented fact that Vermont real estate is at the bottom of the nationwide distress list in the elite company of (gentry liberals wont like this) Arkansas, West Virginia, and the two Dakotas, as shown by a Dec. 21 map in the Wall Street Journal, with fewer than 1 percent of mortgages facing upward rate resets, the heart of the so-called sub-prime mortgage sector crisis. Both point to a relatively high comfort-level in the economic solidity of Vermonts housing-stock pricing. There are counter-indications, for example the long-term secular trends in mortgages vs. rents, which show that nationwide (and Vermont is no exception) housing prices are 15 percent above their counterparts in rental costs, which would require a 15 percent price cut in housing to get back into the normal rents=5%-of-house-price ratio. Readers who think back to the early 90s will remember a brief and angst-filled 10 percent slump in housing prices in the State. It could happen again. Back, then, however, the notion of statewide property taxation for schools was barely an anticipatory procreative glint in its legislative parents eyes: Act 60 wasnt conceived until 96, just after the U.S. Supreme Courts Brigham (equal-educational-funding) decision and was born about nine months later in the 97 legislative session. Before Act 60, as property went up in value, towns were more or (as in the case of the larger cities) less eager to re-appraise, and there was a modest amount of state pressure to do so, but upward re-appraisals became far more frequent under the much-more-demanding common level of appraisal requirements, once Act 60 was an operational piece of legislation. In the early 90s when housing prices slumped, some of us mischievously asked whether towns would be as quick to reappraise downward as they had been to reappraise upward; the answer was always some variant of oh no, we couldnt do that because the schools couldnt afford it. Now it may be (possible but not probable) that Vermont housing prices will soon slump significantly (other states are now showing declines from 5 to 25 percent) and therefore the same old question arises: will the states ponderous CLA machinery, specifically designed and used as a sort of automated process to boost taxes, be deployed on this rare occasion to reduce them? Or will the negative answer, just like 15 years ago, be based on the supposedly unchallengeable and desperate needs of the schools? Id predict the latter. Lost in this what-if speculation is the phantom side of the discussion. Most economists, professional and amateur, agree that, ideally, paper gains in asset values shouldnt be taxed: in the stock market, for example, they arent, until actually sold. In the real estate market, they are. What then, of the notion that housing should be taxed not at its phantom or paper value but at its most recent real value, as shown by actual purchase price? Thats the basis of Californias successful Proposition 13, adopted there by public demand in the face of edu-crat opposition in 1978, but its since proven to have little transfer potential to the East Coast, having most recently been rejected in Maine. As we learned in the 1936 Presidential vote, as Maine goes, so goes Vermont.

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