Tomorrow the Wichita City Council will consider a program designed to boost the sale of newly-constructed homes. While this program was undoubtedly developed with good intentions, government intervention almost always has many other effects other than the desired effect. Unfortunately, many of these unintended consequences have a negative impact, often far exceeding the good that the program might create.
In this case, the City of Wichita has developed a program called New HOME (New Home Ownership Made Easy). The crux of the program is to rebate Wichita city property taxes for five years to those who buy newly-built homes.
The program would run from March 1, 2012 through December 31, 2013, and would be limited to the first 1,000 new home buyers. There are some qualifications, most notable being the requirement that special assessment and general taxes must be current. On a new home valued at $200,000, with the city mill levy at approximately 32, the city property taxes — and therefore the rebate — would be about $736 per year. City documents estimate the value of the rebate to a homeowner, over five years on a $200,000 home, to be $3,873.
Unintended consequences
This program has several negative consequences that should lead the Wichita City Council to reject this program.
First, by making qualifying newly-built homes more attractive, existing homes are devalued, and will be more difficult to sell. This is an unfair burden placed on existing homeowners who may want to — or need to, in the case of many Boeing employees — sell their houses.
Second, there is the “Cash for Clunkers” effect. That program, in which the federal government offered incentives to buyers of new cars, is widely recognized as a failure. There were very few new sales. All people did was time their already-planned purchases of new cars to fall within the time frame of the government program. It is likely that a similar effect will happen in Wichita.
Related to this is the question as to how much new activity this program will induce. Often government takes credit for all economic activity that takes place. This ignores the economic activity that was going to take place naturally — in this case, new homes that are going to be built even without this subsidy program. According to data compiled by Wichita Area Builders Association and the WSU Center for Economic Development and Business Research, in 2011 462 new homes were started in the City of Wichita. The HOME program contemplates subsidizing 1,000 homes in a period of 22 months. That’s a rate of 545 homes per year — not much more than the present rate of 462 per year. But, the city has to give up collecting property tax on all these homes — even the ones that would be built anyway.
What we’re talking about is possibly inducing a very small amount of additional activity over what would happen naturally and organically. But we have to subsidize a very large number of houses in order to achieve that. We need to recognize the costs of this program based on the marginal activity it may induce, not all activity.
Third, government intervention into the housing market is widely recognized as one of the major factors leading to the present financial crisis and recession. While the proposed program in Wichita is not on the same scale, it still presents the same hazards: People induced to buy a more expensive home than they can really afford. Eventually, reality catches up, with disastrous effects.
Also, this program has a very real cost. City documents say the program will not have a “direct cost” to the city, but recognizes an opportunity cost in the form of lost future tax receipts. I welcome the city’s use of the term “opportunity cost,” as it is an important concept in economics. This is the first time I recall the city explicitly recognizing this concept.
In this case, consider the new homes that will be built but not contribute property tax to the city: Will these homes ever require police or fire protection? Will they ever ask for any other city services? Providing these services is indeed a direct cost, and one for which the city is not collecting property taxes as payment.
If you want to argue that this program is in fact without direct cost to the city, why not offer this benefit to anyone who buys a home in Wichita, new or existing? If the city were to consider reducing its spending specifically in response to the costs of this program, that would be a positive factor. But government spending almost always rises, despite claims by city officials that budgets have been cut. Wichita city government spending will undoubtedly rise during the period of this property tax rebate program.
Finally, a principle of taxation is that everyone pays equally. Tax policy should be applied uniformly to all citizens. But this program creates a special class of homeowners who do not have to bear their full share of the cost of city government.
The negative consequences of this program, when balanced against the likely very small positive effect, should lead the Wichita City Council to reject this program.