Bishop: Taylor Swift Move Over

Thursday, April 02, 2015

 

This is the Caprio Tax, and the Chafee Tax and the . . .

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Taylor Swift

Honest, you don’t have to be a celebrity to fall victim to Governor Raimondo’s  proposed ‘luxury’ tax on real estate. But running the RI rolodex of who has been swept up by it quickly offers up the telegenic host of “Caught in Providence”, Frank Caprio. We all know the judge lives in modest circumstances in Providence but he has the good fortune to have bought a summer home in Narragansett in 1972 now tipping the tax assessor’s scales at $1.7 million.

And then there is the Exeter estate of Rhode Island’s former first lady, Stephanie Chafee. The Wee Hoose Farm, regarded by some as Rhode Island’s equivalent of Camp David, is better known as the site of Caleb Chafee’s graduation party gone wrong. It’s last posted assessment in 2011 is $937,000. Whew, that property may have just ducked the fastball, for now. Of course a piece of the same place under the same ownership is located across the street and is assessed for $345,000. So, who knows what the future will bring when the taxman cometh?

We could assume that the benevolent tax administrator wouldn’t’ view that as strategic separation and that the inflation being brewed for us by the fed is still corked in the bottle.  And its not abundantly clear that this isn’t now the couple’s home rather than their retreat so they might skate. But after all, who cares if they tax Chafee or Caprio, they can afford it? That appears to be the Governor’s point. But that is not the question, the question is will they afford it and that is why we care.

Who cares if the rich pay more? Or, will they?

As an Exeter newcomer of 30 some years I’ve been occasionally cutting firewood and buying hay bales from the Wee Hoose farm since my arrival. And that gives me a unique perspective on a little known incident in the history of taxing second homes there, a cautionary tale of swamp yankees and blue bloods.

It suggests that the ‘eat-the-rich’ lobby salivating over the Taylor Swift tax, and the inability of owners to exit, have more than they bargained for when it comes to human nature. Rest assured they say: even if we alienate a few Richie Rich folks who take the powder, they can’t take their mansions with them.

The Wee Hoose Farm was once dominated by a striking stone and wood lodge which only very occasionally served as a gathering spot for the Danforth clan. As the generations turned, the family would be confronted with administrative headaches that go along with such a property, not the least of which was a robust tax assessment on this sparingly used structure.

One can’t live in another’s shoes, but it is reasonable to expect that equating the lodge by size, cost to rebuild, number of bathrooms and fireplaces -- the nitty gritty of assessment as then being applied to newer year round upper middle class homes sprouting in Exeter -- would have struck the recipients of the bill as opportunistic for a property that already contributed mightily to the town’s coffers while using barely a service.

Of course they could afford it. But rather than continue to do so, the family had the manse demolished.

This anecdote serves as no allegation that Taylor Swift is likely to pull her mansion down, nor that town taxes were the only thing that brought down the house at the Wee Hoose Farm. But anyone, even we illiterate woodcutters down in Exeter, understands that for taxation to be fair it should not single out classes. Many of those who ‘can afford it’ will nonetheless bridle at being made to buy absolutions for their success. And perhaps more importantly, while this won’t end vacation home purchasing in Rhode Island, it will affect purchasing behavior.

The governor’s budget proposal ridiculously suggests that million dollar homes are dragging down property valuations when, in fact, it is her proposed tax that will undercut municipal assessments further. By the very nature of setting a class threshold, more properties will begin to sell for $950,000, just under the threshold. The 1.1 and 1.2 million sales will evaporate. Tax appeals will be filed to keep properties under the threshold.

Even those owners whose properties clearly fall over the threshold, if peeved at being singled out, are more likely to appeal their valuations. It is just human nature. And then knockon effects will lower property values that are not so near the threshold, e.g., if you can get a million dollar property for $950,000, the value of a $950,000 property falls as well reverberating through the spectrum of real estate values, if not in precise proportion.

True, some of the affected properties could be bought by folks planning to live in them who would escape the tax, but would they pay more for them out of the goodness of their hearts? 

A Statewide Property Tax disguised as a Luxury Tax

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Given that the proposed rate for this ‘luxury’ tax is low compared to the municipal taxes themselves, it is reasonably likely that the tax might net nothing. This leads to the kind of taxation spiral where the tax will have to be raised and the threshold lowered just to hold even with current revenues, never mind raise more. Its character as a luxury tax will quickly fall away as it becomes a statewide property tax. 

Nor is this kind of sin tax on real estate ownership necessary to obtain a progressive system of financing municipalities. The property tax in Rhode Island is progressive by its very nature. It funds municipal services that are much more closely related to the population of the municipality than the worth of particular properties within its boundaries. You pay more for municipal services not if you use more, but if your property is worth more. So the property tax is a flat tax with progressive effect.

Don’t forget the Ted Kennedy and HW Bush lesson in human nature

There is plenty more then an isolated anecdote to support these expectations. We say these behaviors with Ted Kennedy and HW Bush’s infamous luxury tax on boats over $100,000 that well to do boat owners could surely afford. This little ‘soak the rich’ plan helped to single handedly set back Rhode Island’s boatbuilding industry decades. It was the nail in the coffin for Pearson, already struggling, and Bristol Yachts, the quintessential Rhode Island brands.

Certainly, the impoverished John Kerry docking his yacht in RI avoiding a cool half mill in taxes in Massachusetts serves as a contemporary reminder that sensitivity to taxes does not decrease with wealth. When outed, Kerry said he would pay the taxes and apparently it was such a deep blow he couldn’t afford to have his walk shoveled this winter, so perhaps he truly could barely afford it.

Despite these high profile tails of woe, there are indeed families of far more limited means with farm, forest, shore and historic urban properties who would be challenged by this tax, much as by the burdensome threshold based estate tax which has only recently begun to be reformed. So the real question is whether these properties are placing a burden on municipalities. It seems that most upstate towns would prefer to suffer the mix of slackers you see in Westerly, Charlestown, and Narragansett or at the extreme Jamestown and Block Island.

Absurd Allegations.

Is someone really suggesting that the 175,000 odd dollars Taylor Swift pays to Westerly in taxes is shirking her duty as a part time citizen? That her mansion is running down property values because she fails to keep it up?  Yet these are the harms caused by such deadbeat celebrities according to declarations in the budget provision. It is likely the Governor didn’t write this language, but did any adults in her office review it to see if someone had actually inserted a revolutionary proclamation of Fidel Castro in the place of thoughtful policy?

The Governor recently told reporters that the text of the budget legislation will be revised if it accidentally levies the tax more widely than she intended. Accidentally? This budget provision so completely misses its purported target that the provision’s author felt it necessary to clarify that it actually applies to vacation homes! 

Is it an accident?

If you look through the budget for a “luxury tax” or a “vacation home tax”, you will search in vain. Rather, what you will find is a “non-owner occupied property tax”. Anyone with any experience in real estate law and taxation will recognize “non-owner occupied” as a term of art most often applied to small apartment buildings. Tax officials have noted that the provision clearly covers at least 2 to 5 family buildings. But that is not by accident. They are centrally targeted by this language in the budget that goes on to trot out caricature lingo for ills associated with absentee landlords, were there any doubt.

If the intent was a luxury tax, the governor has a staff that is apparently incapable of drafting one. For such an important initiative which departs from the state’s long tradition of local property taxes and local accountability for their expenditure, this is either gross incompetence or revelatory of negative attitudes, at least amongst the governor’s staff, towards real estate investment.

Good for the goose but not the gander?

One hesitates to imagine that Governor Raimondo wouldn’t have immediately recognized hostility to an important industry if a staffer had written a provision citing hedge funds as creating systemic risk to the state’s economy and proposing the solution of a new tax on anyone investing a million dollars in any RI based fund. It seems quite unlikely that the Governor would have closed ranks with political bromides suggesting that the tax was small compared to the management fees; that keeping financial offices in Providence was cheaper than Greenwich , CT and anyone who could afford to invest that kind of money could afford the tax.  Rather she might have recognized that the financial management sector is a small bright spot for RI with potential for growth. Brown produces a great share of investment professionals and entrepreneurs and the state’s proximity to major financial markets means it isn’t isolated from face time on Wall Street in NYC or State Street in Boston. These are modest advantages that one would capitalize on and the state would benefit far more from growth of conventional taxes on sales and income for those working in the industry if it grows.

Is it somehow better that the state undercut the modest je ne sais qua it has established in both vacation and historic urban homes? Why the Governor sits idly by, suggesting merely that this anti real-estate investment provision just needs a little tweaking is beyond this illiterate woodcutter.

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Brian Bishop is on the board of OSTPA and has spent twenty years of activism protecting property rights, fighting overregulation and perverse incentives in tax policy.

 
 

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