Originally published on Forbes.com May 29th, 2013
In principle, I think we should have a tax system that raises the optimal amount of revenue with the least amount of distortion of the economy. There are a lot of alternative tax systems like the VAT and the Automated Payment Transaction Tax, but for purposes of this discussion, I am going to stick with the income tax.
One of the problems with an income tax is that there is inherent complexity, because income can be so difficult to define, but, of course, our income tax system goes well beyond the inherent complexity. One of the main sources of the extra complexity is the policy decision to use the tax system for goals other than raising revenue.
As I noted in a recent piece each special break will build a strong constituency. There is a general feeling held by probably the vast majority that the system as a whole is too complicated, but the attachment to each of the components that create the complexity is very intense. You can see that by studying the comments received by the working groups of the Ways and Means Committee. They generally take the form “Comprehensive tax reform. Great idea. Glad you are working it. Just want to let you know that the XYZ credit/deduction is crucial to the American way of life, so don’t mess with that.”
It gets so intense that people will go to the trouble of lobbying tax bloggers to get them on board. I recently received this note about WinnDevelopment which just held a:
….. ribbon-cutting to announce the completion of Phase I of Manomet Place in New Bedford, Mass. Formerly known as both Cliftex Mill and Manomet Mill, a 20th century cotton textile mill complex, the property is now home to 76 units of mixed-income housing for seniors age 55 and older.This cotton textile mill was originally developed in the early 20th century by leading textile manufacturer and commission agent William Whitman, with internationally known mill architect and engineer Charles R. Makepeace and notable contractor Benjamin F. Smith. When the recession hit New Bedford’s bustling textile industry in 1926, Manomet Mills was sold to the Delaware Rayon Company and remained stagnant.
The point is to let me know, so I will let you know, so you will let your Congressperson know, how important the historic tax credit is.
Thanks to extensive restoration work and preservation efforts by WinnDevelopment, and the property is now listed on the National Register of Historic Places. The rescue and conversion of this old mill would not have been possible without the Historic Preservation Tax Incentives (HPTI) program, which encourages private sector investment in the rehabilitation and re-use of historic buildings and creates jobs in local communities.
But today the HTC program is on the brink of extinction itself, threatened by sequestration and by potential permanent federal budget cuts. The conversion of the vacant Cliftex Mills to Manomet Place is just one example of how HTC can make it possible for communities to convert these vacant and forgotten historic landmarks and icons into development projects that serve a catalyst for economic development.
So here is the problem. They are right. The free market is a great thing, but even conservative economists will admit, it has one very serious flaw. It does not account well for externalities.
When you value real estate, the first thing you do is figure out its highest and best use. So you have a beautiful example of Greek Revival architecture on the main street of a small New England town. What is the highest and best use ? Tear it down and build a CVS, because there has to be a CVS every 4.7 miles or something like that. Maybe a Burger King or McDonalds, you need one of those every 6.2 miles.
Why is that the highest and best use ? Because it is what produces the highest present value in terms of money for the owner of the property. That is the definition of highest and best use . That is the way the free market works.
Clearly there is value in keeping that Greek Revival façade, but there is no way that the owner of the property can reap that value. If there is a CVS there, I will go in and buy a bottle of Mountain Dew or get a prescription filled which will help pay the rent that the highest and best use yields the property owner. Having me look at the façade and imagine the men and women who thought that there was an ancient precedent for the new form of government that they were devising is tough to charge for.
That is why there needs to be some sort of public support for the preservation of historic structures. It might be that supporting preservation with tax credits is inefficient. I used to think that the main function of the low income housing credit was to be a white collar jobs program. Any additional low income housing that was produced was incidental.
Nonetheless, the historic credit does motivate the preservation of historic structures and the low income housing credit does aid in the creation of affordable housing. Affordable housing is another one of those things that we can’t totally rely on the free market to provide, particularly since the 1% are less attached to the free market when it comes to zoning in the neighborhoods where they live.
Don’t take this as lets have comprehensive tax reform, except for the historic and low income housing credits. Those just happen to be the two that I am most familiar with. I suspect that supporting those causes with tax credits is probaby sub-optimal, but if the tax credits are yanked, will there be something that replaces them to address real needs ? What are the things that you care about that are supported by tax benefits ?
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