The following was submitted by John Case, a Realtor/Broker who shares that while the City of Antioch is hoping to increase city revenue through a “Landlord Tax” that the policy may actually hurt Antioch in the long run. He shares his analysis of why the policy may not work.
The Antioch Landlord Tax May Not Work
At the city council meeting of May 27th, the Antioch City Council has begun, for a 2nd time in the past year, a proposal to institute a ‘Landlord Tax’ to all owners of rental properties in the city to be placed on the ballot as a ‘business fee’. Their expectations are to raise sufficient money to fund various expenditures that they feel are required.
No matter what it is called; a business fee, a landlord tax, or a rental property fee, the effect is the same. While on the face of it, this seems like a reasonable action, it is in fact not going to produce the returns that they expect. There are several likely reactions to this proposal.
First and the one most hoped for by those who support the tax, is that the landlords will just absorb the tax into their models and accept their lower incomes as a result. I find this to be highly unlikely as people who make investments look to maximize their return. Investors in real estate, just as investors in other asset classes, will look toward the total income and make decisions to maximize their return. It is more likely that many of the investors in single family homes will do one of the following options.
The second possible reaction is that cost of this new tax will be passed on to tenants probably as an increase in rent. History shows that taxes are generally paid by consumers of goods, not the owners of the taxed entity.
Looking at most goods and services, you will see the costs of goods paid for includes the taxes that have been imposed on the producer. Over time, tenants who cannot afford the increased rent will move, causing a reduction in income to the landlord. Even if the tax on the tenant is $250 per year, given a rent of $1500 per month is a tax rate of just under 1.4%. One can assume that the $250 that was once used to buy other goods and services at a tax rate of over 9% will longer occur.
This result actually reduces the amount of tax revenue from tenants who are subjected to the landlord tax and decide to stay. Those that decide to move will no longer provide any tax revenue if they move outside the city. Additionally, landlords that ‘eat’ the tax will also decrease their discretionary spending as they are similarly impacted by the cost of the tax.
The third possible reaction of the tax is that the landlord may decide to sell the property. Given that the potential for new landlord to purchase in the city is decreased due to the tax, it is reasonable to assume that the landlord will sell to a homeowner. The end result is a loss of the tax to the city as the property which was expected to produce is now no longer a rental unit and the cities projected income will not be obtained.
Other impacts will be fairly obvious. Units that were once rentals often sell for less than market values, due to the potential deferred maintenance that often is present in rentals. This may mean in any transfer, a lower property tax than once was received by the city. Lower price level now may occur across the board for all sales giving the city a lower property tax base in the long run.
The city has already experienced this effect during the 2007-2011 price declines and can barely be satisfied with the potential for further price declines. In December of 2013 the average price of a single family home in Antioch was $322,430. In April the average price was $309,544. To add additional costs while prices are declined will not aid in property value recovery. While there are several factors that contribute to the decline in prices, adding another is not advised.
It is an economic fact that when something is taxed, there will be less of it. This may also be true of a landlord tax. Rental properties are an important part of any economy. To declare all of them a business, seems unfair to the concept of those people who invest in real estate as part of their investment portfolio.
An argument has been made that businesses pay a business tax to operate in the city. As a rule, most businesses lease their space and it is the tenants that pay the business tax, not the landlord. While there are businesses, for example large REITs or businesses whose primary endeavor is to purchase and lease apartments and homes, there may be a case for a ‘business’ tax. But to the single party who is using real estate as part of their investment portfolio, often as part of their retirement, it seems unfair.
We have many options to invest in things, stocks, bonds, gold, and of course, real estate. The taxation to an investor for an asset that produced income for a retirement or investment portfolio is not a ‘business’. Additionally, like any investment, the income produced from real estate is taxed by the federal and state government. There is one other impact on real estate investing as well; the investor cannot declare a capital loss, although a capital gain is readily taxed.
As to fairness, it seems blatantly unfair to tax all landlords for the transgressions of others. Assuming that the increased police and code enforcement costs are due to only a few, by percentage, landlords who do not actively manage their property and end up with a situation that causes excessive police involvement or code enforcement costs, if would seem reasonable to pass those cost onto the owners of properties where the transgressors claim to be renting (either legally or illegally). Charges for city services over the base contract are often done for events where extra security or traffic control is required. It is easy to extend the charges for this activity. In fact many cities and towns now charge for fire services when there is a need for fire services at properties that have caught flame.
Of course, working the details for this would take a little time but once implemented, there would be an immediate positive effect. Property owners would take better care in vetting their potential and existing tenants, perhaps by doing a full background search rather than just a credit report.
In this way it would be more likely that problems properties would be reduced in number and the cost of enforcement for this would also be reduced, allowing the police force to work on other important duties.
Side effects of this would be an improved status of the properties in the city, raising property values and revenues through increased property taxes. The reduction in property taxes is the main cause of the revenue shortfall is recent years. This approach may stem further reduction, while the landlord tax would more probably extend the loss in property values over time.
To sum up this long analysis; the expectation of increased revenues coming to the city may be overly optimistic, as the revenue expected from the landlord tax will bring less than is expected, sales tax revenue will be reduced, and property tax revenues will probably continue to fall. Costs for law enforcement, fire, and code enforcement will not be reduced but more likely remain the same or go up over time.
The implementation of the landlord tax is an exceptionally bad idea.
Written by John Case