So we pointed out last week that some of our highest taxed places—New York, Washington, Boston, the Pacific Coast gateways--are the most favored commercial and residential real estate markets, and that many low or no income tax (so-called “business friendly”) states have just as severe budget issues, offer fewer services to their constituents, and don’t rate as high on real estate investor lists.
Now it would be disingenuous to argue that high taxes are good for real estate, but they are not necessarily bad either. The most favored property markets, generally 24-hour places, have more complex and expensive infrastructure and services needs—police, fire, sanitation, water, sewer, road and transit. To keep these more densely populated places operating efficiently—they require more costly and sophisticated government machines. Is there waste and corruption? Sure. Are the public pension plans unsustainable? There’s no doubt that they need to be modified drastically to balance future budgets.
But the business friendly, low-tax places have corruption, waste and pension issues too. Up until now, they also have been benefiting by getting more back from the federal government in funding, earmarks and aid than states with country’s primary 24-hour, gateway markets. Not surprisingly, the gateways—where real estate investors want to be—are also the most productive economic and tax paying generators for the country.
According to the Tax Foundation (based on most recent 2007 data) Arizona received back from the Feds $1.19 for every federal income tax dollar paid out of the state; Georgia got back $1.01; Florida $.97, and Texas $.94. This compares to federal funding coming back into the big gateway market states: Illinois (Chicago) received only $.75 on the dollar, California (L.A. and San Francisco) received only $.78, New York $.79, Massachusetts $.82 (Boston), and Washington State (Seattle) $.88. Among states getting the most back are Mississippi $2.02, Alaska $1.84, and Alabama $1.66. Two states getting the least back—New Jersey $.61 and Connecticut $.69—feed off the New York City generator.
So now what happens in the cut and slash atmosphere gripping Congress? All states can expect to be more on their own, which means local and state taxes will be increasing to make up the federal void or else there will be severe service cuts. Places more dependent on the federal trough could suffer more or else could become less business friendly.
It will be interesting to see how the President and Congress seek to divide up a less deep-dish federal funding pie—will they try to support the places that generate the most economic activity—the 24-hour gateways or continue to spread dollars around, favoring places that have been using federal bucks to keep their own taxes low.
Put another way, will the federal government use a value for dollar analysis like most businesses do in deciding how to spend tax proceeds. If it does business friendly places might not look as business friendly.
The big outlier in this discussion is Washington DC—home base for Fed Incorporated, which gets back $5.55 for every federal income tax dollar paid out. Neighboring Virginia ($1.43) and Maryland ($1.30) do pretty well too. No wonder the metro is always number one on the Emerging Trends market list in recessionary periods—what a cushion.
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Jonathan D. Miller
A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.
