You Can’t Tax What Is Not There

A recent article in the Wall Street Journal focused on the issue of government subsidies for real estate development. The article discussed the decision by Oak Creek, Wisconsin to provide a $2.75 million dollar tax break for a hotel developer. The municipality determined a need for a hotel near Milwaukee’s Mitchell International Airport, and, responsibly, commissioned studies to determine that the market had adequate demand.

While my views are usually closer to the libertarian view that less government is better than more government, I have no objection to these types of public/private endeavors for one reason: You Can’t Tax What Is Not There.

So Is It Taxable?

Most public support of real estate development is in the form of tax abatements. This simply means that the assessment on the new improvements (a building and appurtenances, like parking lots and garages) increase to full value over time, typically over five years at 20% per year.

This is hardly a crony capitalism government “giveaway”, as the bidding (or redeveloper designation) process is very specific and exhaustive (ask anyone who has been through it). Further, it is my contention that taxing a new building at full value is radically unfair because it may take two or more years for the property to stabilize and actually be as valuable as the tax assessor claims it is.

So in my view public/private partnerships of this nature are win/win. The developer gets a better pro-forma (and hopefully a real) return and the municipality gets an improvement to be proud of and tax dollars over time.

Government officials and developers, open your eyes. There is a lot more we can do. Let’s get started.

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