Unintended Consequences

On today’s show we’re talking about what can happen when politicians monkey around with taxation structures. Tax structures are designed to raise revenue to provide services for the citizens. Unlike the Federal government which has the latitude to print money, states and cities eventually have to balance their books.

Cities and towns are not officially recognized entities in the constitution of the country. They are given their powers by state or provincial legislation, depending on which country you live in. So state or provincial legislation always trumps the local legislation. At the state level, they can enact new regulations that can turn things upside down for a city.

On today’s show we’re going to look at a well intentioned piece of state legislation that is having some unintended side effects at the local level. It’s a cautionary tale of what can happen even when things look stable and predictable. It’s the reason why you need to have an unreasonable amount of cash reserve available to handle the possible delays that can result.

The State of Idaho has implemented new legislation designed to protect home owners from surprises in property taxes. These rules put limits on cities and towns in terms of how they can increase property taxes on their citizens. Now the new rules are complex.

A really fast growing city might experience annual growth of 2% a year. So if the state imposes a cap of 8% growth in their budget for property taxes to grow from one year to the next, that seems reasonable. It seems reasonable until you look at specific boundary conditions. Let’s say that you have a number of small satellite communities outside the boundary of a major metro area. The overall metro area might be experiencing 1% annual growth. But if the growth of the city happens outwardly as it often does, then you can have a situation where a satellite community may experience hyper growth for a period of a few years. It’s not uncommon for a few major developers to come in and build 1,000 houses in a town of 5,000. That town of 5,000 might be on the edge of a town of 500,000. In that case, 1,000 houses as measured on 500,000 seems insignificant, but on 5,000 is 20% growth. That small town cannot support the growth because they would be required to expand services faster than they’re permitted to expand their tax rolls.

Now I won’t go into all the nuances of this particular legislation. It took a few hours to explain in the city council meeting I reviewed. For those of you who take the time to fully understand the new legislation will quickly realize that there are many provisions of these new rules which I’ve not included in this short discussion.

The city in question is Caldwell Idaho. Caldwell is a suburb of Boise which has experienced a tremendous amount of growth in recent years. Boise is one of the fastest growing areas in the country right now. We have several land development projects underway in the area.

So the city of Caldwell immediately implemented a 120 day moratorium on approval of any new development in order to give them time to figure out how they were going to respond to the new rules.

There is already very low inventory of properties for sale, and the continued migration of population into the area doesn’t know anything about why development applications are being slowed down. The result of that is that prices for existing homes will likely increase further and faster than they already have over the past year as the pent up demand is not satisfied. As the market values increase due to the higher demand, the assessed value for those properties will also increase. That means that those same communities will experience an increase in property taxes because of the rising values which was caused by the shortage of supply which was caused by the legislation aimed at reducing property taxes.