Would new local taxes on large tech firms really cause them to leave Silicon Valley?

Several communities in Silicon Valley are considering levying special taxes on large companies, possibly affecting some of the biggest tech companies:

Cupertino, Mountain View and East Palo Alto have begun to ponder new taxes based on employer headcounts — levies that could jolt Apple and Google — and if voters endorse the plans, a fresh wave of such measures may roll toward other corporate coffers.

Alarmed by traffic and other issues brought on by massive expansion projects, the three Silicon Valley cities are pushing forward with separate plans to impose new taxes that could be used to make transit and other improvements…

A lot of factors point to this being a prime time for efforts such as these. San Francisco ranked fifth worst for traffic congestion in the world — and third worst in the U.S. — last year, according to INRIX Global Congestion Ranking. Record housing prices in 2018 boosted the median price of a single family home in the Bay Area to a record $893,000 in April, according to a CoreLogic report.

Federal tax cuts also have improved the balance sheets on an array of U.S. companies, large and small. Silicon Valley’s largest tech companies have contributed to the gridlock on freeways and soaring housing costs as they’ve grown rapidly in recent years, with brisk hiring and expansion in unexpected areas and mega-leases that gobble up huge swaths of office space.

If this works the way that some would argue it does, then the local taxes will be viewed by the tech companies as an unnecessary burden for their operations. They should then consider moving elsewhere where they are not subject to such local taxes. Indeed, if they wanted to move sizable operations, they could probably get numerous communities to offer them tax breaks.

However, this assumes that the local taxes are the primary factor that determines where companies and organizations locate. Instead, there are a variety of factors that both support and work against staying in their current location. I assume these are important reasons for why Apple, Facebook, Google, and others are in this location: the construction and maintenance of large headquarters, proximity to other like-minded organizations, an talented employee pool nearby, and the proximity to major cities like San Jose and San Francisco. Are local tax issues more important than these other concerns? Probably not. And even if they are, it would take some time before a large organization could significantly alter their operations in response.

Ongoing Illinois debates about abolishing townships

Illinois is known as the state with the most taxing bodies and one way to reduce that figure would be to eliminate townships:

It’s prompted dueling Republican proposals for new state laws, one to make it easier to get rid of townships, the other to require a study to show financial savings before any township unit could be dissolved.

Illinois has 1,428 townships, helping to account for more units of government than any other state. It’s a layer of bureaucracy formed primarily to serve rural communities, but most states do without them…

“The real issue, and the reason property taxes are so high in Illinois, is because we have 7,000 units of government,” said state Rep. David McSweeney, a Barrington Hills Republican who’s sponsoring the bill to make it easier to mount township abolition campaigns in McHenry County. “The only way we’re going to reduce property taxes is to consolidate local governments. Townships are just a start.”…

Townships have three basic functions: maintaining roads that aren’t handled by other units of government, assessing property for real estate taxes, and helping the poor through food banks and emergency aid. Townships also often provide transportation for people with disabilities, as well as programs for senior citizens and youths….

Advocates of townships argue that they provide the most local, responsive service for the lowest price. In addition, several studies have found that expected expense reductions from government consolidation never materialized. A Rutgers University study concluded that “cost savings are not assured,” and that “most consolidations fail.”

Americans tend to prefer lower levels of government that they feel is more responsive to their daily needs. Taking the duties that townships do and pushing them up to a larger and more abstract county or state government can feel like ceding control to officials who do not know local conditions.

The article also makes it sound as if the research findings do not support claims that fewer bodies of local government would lead to cost savings. If that is not guaranteed, could a successful effort to abolish townships provide hope to some that government can be rolled back or reduced to some degree?

All said, efforts in Illinois in recent years to eliminate or consolidate units of government has been slow. The state legislature banned the formation of new government bodies and DuPage County slowly is reducing the number.

“[T]he federal government has backed away from subsidizing homeownership as a pathway to the “American Dream.”

The recent changes to the American tax code signal a shift toward homeownership:

It may be a few years before experts can accurately assess how the new tax reform law will affect each city’s individual housing market, but one thing is clear: For the first time in a century, the federal government has backed away from subsidizing homeownership as a pathway to the “American Dream.”…

“It’s very hard to come up with how this is helpful to housing,” said Jonathan Miller, President and CEO of Miller Samuel Inc., a real estate appraisal and consulting firm “It’s either neutral or negative; there’s no positive, at least that we’re aware of at the moment. All this does is make everything more expensive, at least in high-cost housing markets.”

As a result of the bill, Moody’s Analytics estimates that housing prices will drop about 4 percent nationwide relative to projections in which the law doesn’t exist, and those drops are more pronounced in high-cost housing markets.

A lower sale price is good news, though, right? Not necessarily. Average home prices will drop because of the lowered cap on the MID (from $1 million to $750,000), and a new cap on SALT deductions. These two tax deductions were baked into the price of homes-for-sale, so without them, prices will seem lower. But homeowners and buyers could end up with less mortgage interest to deduct, and a potentially astronomical property tax bill. Previously, there was no cap at all on property tax deductions.

Several things to keep in mind:

  1. The context – the specific address of the residence – matters a lot for this bill. And, local communities and states can respond uniquely to how the changes affect local homeowners.
  2. A lot of urbanists have criticized the subsidies from the federal government for single-family homes and suburbanization. Might these tax code changes help encourage more density in certain locales (and these high-price/high-tax locations are also ones where affordable housing is sorely needed)? Of course, since context matters here, some of those who prefer more sprawl could move to cheaper states where the disappearing SALT deductions matter less. But, isn’t this good for limiting Americans deducting mortgage interest?
  3. Could this help some communities move away from such reliance on property taxes? As one example, some have argued for decades that school funding needs to be more equitable and this is directly tied to property values and taxes: wealthier communities can draw in more tax revenue. (I would argue this is a red herring to as there are bigger issues at work.) Could these federal tax changes encourage more revenue sharing within counties, regions, and states?

Perhaps the best thing to keep in mind is the first sentence of the article quoted above: it could take years to see how this all plays out.

Cities ready to offer tax monies for new soccer stadiums

Cities continue to see sports stadiums as good uses for tax dollars. This time, it involves soccer stadiums:

Officials from Cincinnati, Detroit, Nashville, and Sacramento appeared in New York on Wednesday to place their bids with Major League Soccer for an expansion team. Slots for two teams are now up for grabs in the league’s plans to expand, so cities are lining up to lob promises of tax incentives for stadium construction at the MLS. Picture the mayors of each of these cities lined up for a free kick on goal.

Cincinnati, for example, has secured $200 million in private funds to build a stadium for FC Cincinnati, and the city has pledged up to $75 million in public money to pay for the infrastructure associated with a stadium. Nashville promises $25 million in tax dollars toward build-out costs for a $275 million Nashville Soccer Club stadium, which would be paid for through a public-private financing deal. Representatives for Sacramento Republic FC argued for a plan that would cost the city $46 million to realize a privately financed $226 million stadium.

Meanwhile, the Detroit Express would play on Ford Field, the home of the National Football League’s Detroit Lions, meaning that the proposed soccer team’s owners—who also own the Lions, the Detroit Pistons, and the Cleveland Cavaliers—would merely have to pony up the $150 million franchise fee plus some smaller costs in adjusting the existing stadium.

Perhaps in their favor, the cities and taxpayers would not be investing so much as is required for a top-four sport stadium.

At the same time, this approach is likely a bad idea. The research is pretty clear: the winners of taxpayer funded stadiums are the team owners who tend to already be wealthy people. Cities desperately want to boost their status and look trendy and acquiring a new sports team, particularly one in a sport that is thriving and looks like it is on the rise (just see the number of new teams in MLS in recent years). But, research shows that if do not build these stadiums and acquire teams, residents and visitors will just spend their money elsewhere.

Another interesting piece of the MLS expansion is that it is involving some medium-size big cities. Think Sacramento: they have a NBA franchise and nothing else. Orlando had a NBA franchise, nothing else. Cincinnati has the NFL and MLB. Austin has no major team. MLS expansion offers some new places a chance to get in the sports game and signal that they are major players.

Could the loss of SALT deductions lead to cheaper and denser housing?

Perhaps a solution to the affordable housing issue affecting many major American cities and their surrounding regions is in the contentious current tax cut debates: removing the SALT (state and local taxes) deductions. The consistent commentary on this is that it will hurt residents and homeowners in blue states where local property taxes and sales taxes tend to be higher. But, could this drive people, developers and builders, and local officials toward cheaper and denser housing?

The reasoning could work like this: larger homes and lots mean more taxes that cannot be deducted from federal taxes. To avoid this, people might prefer smaller and cheaper houses. Communities could balance out the reduction in property tax value per housing unit by building more units. (This leads to another issue many communities do not want to face: providing more services for more residents, particularly schools.) Or, communities could pursue other kinds of development that could pay those higher property taxes – businesses, for example – or pursue creative solutions (merging public services? revenue sharing?) to address funding issues.

Could this help break the affordable housing logjam in places like New Jersey or the Bay Area? Wealthier neighborhoods and suburbs would still resist.

(Perhaps this should be part of a series of creative ways to address affordable housing issues. It reminds me of an earlier post where I suggested the lack of affordable housing could lead to population growth in less desirable locations.)

Chicago’s 29 year old white flight reassurance program has paid 5 homeowners

A Chicago program to help protect homeowners on the Northwest side has collected millions of dollars since 1988 and only been used 5 times:

The Northwest Home Equity Assurance Program was enacted via public referendum in 1988 in a bid to prevent white flight in a handful of bungalow belt neighborhoods. A tax-based fund was created to guarantee homeowners within its boundaries they would at least get paid the assessed value of their houses when they sold them.

In the years since, every one of the roughly 48,000 homes within its boundaries has kicked in a few extra dollars each year on its property tax bills to the equity fund. As the Chicago Tribune reported in May, the program has paid just five claims by homeowners who couldn’t sell their houses for the assessed value while amassing $9.57 million in two accounts…

Bucaro, who like other board members receives no salary, cautioned against starting to make home loans. The organization has neither the expertise nor the staff to figure out how much money it’s appropriate to lend people or to assess the risk of such loans…

Bucaro said the Northwest Home Equity Assurance Program has somewhat been a victim of the housing success in the neighborhoods it covers, since most people simply get more than the assessed value of their homes when they sell. Maybe the program has outlived its usefulness as a bulwark against white flight, he said.

I do not know the details of this program but it sounds like the money was simply not necessary. Even as Chicago still feared white flight in the 1980s – and the decades after World War II led to a significant population decrease in the city – the home prices in these neighborhoods did not fall. Even as numerous Chicago neighborhoods changed from white to black after 1950, the Northwest side did not. The neighborhoods in this area are still primarily white (though the Latino population has grown).

One ongoing issue is what will happen to this money but another is when the city of Chicago will officially put an end to a white flight deterrence program.

Politicians should not anger the “prosperous but far-from-rich suburbanites”

According to the Washington Post, one group that may not like the Trump tax cuts includes wealthy – but not too wealthy – suburban residents:

The tax push illustrates the political risks of attacking provisions favored by prosperous but far-from-rich suburbanites, a powerful voting bloc that often faces the financial stress of living in increasingly pricey neighborhoods. Many in the GOP already are worried about losing their grip on this important group after Tuesday’s result in the Virginia governor’s race, where Democrat Ralph Northam crushed Republican Ed Gillespie by running up votes in the dense areas outside cities.

Alpharetta is part of a booming region known as North Fulton, where no one bats an eye at $600,000 homes, Whole Foods and West Elm are eager to locate, and property taxes are relatively high to fund the top-performing public schools that attract striving white-collar professionals. And when it comes to their taxes, residents often have more in common with people living just outside New York City and Washington, D.C., than those in other parts of Georgia…

North Fulton seems like a place that could afford to pay more in taxes, but residents say their low-six-figure incomes obscure the economic challenges of living here…

Other residents say North Fulton is a place where earning $100,000 — nearly twice the national median household income — means a surprising degree of struggle.

I’ll refrain from saying much about whether suburbanites who are in the top 20 percent of American earners are leading difficult lives.

I will note that the true battleground between Republicans and Democrats is in suburbs just like this. Studies in political science and other disciplines from the last ten years or so suggest that cities and inner-ring suburbs vote consistently Democrat, exurbs and rural areas lean Republican, and the middle suburbs – including these sorts of communities outside of Atlanta – are up for grabs depending on the election cycle and the particular issues at stake. There actually may not be that many people who fit the bill of this article but (1) they can be very vocal and (2) they can be swayed in elections.