The Effect of Modern Taxation on Real Estate Ownership
NEED FOR TAX INTEGRATION
By MYERS Y. COOPER, Former Governor of Ohio
Delivered before the Annual Convention of the Pennsylvania Real Estate Association, Harrisburg, Pa., October 15, 1942
Vital Speeches of the Day, Vol. IX, pp. 124-128.
MR. PRESIDENT and Members of the Convention: It affords me very great satisfaction to be with the Realtors of Pennsylvania at this State Convention and I wish to thank you for your generous reception. . . .
While I am engaged in a number of enterprises, I want to say to you that I like the real estate business best, because it has in it not only the opportunity to make a living, but also the broader service to stimulate people to realize the great American ideal of a self-owned home.
The Realtor is a trail-blazer of progress. There is none of the defeatist attitude in his makeup. He is a born optimist and frequently gets along better on what he expects to get tomorrow than some people do on what they have got today. He knows how to make a practical application of Mr. Lincoln's philosophy, when necessary to do so, of "Eating it up, Wearing it out, and Making it do." And the whole Nation is beginning to see the virtue of that philosophy in this crucial period.
I am not unmindful of the fact that I am speaking to Realtors who have but little to learn from me.
I recall the story of the tramp who hailed the banker for the gift of a dollar. The banker responded, "why not ask for a more modest sum, say a dime?" To which the tramp replied, "give me a dollar or don't give me a dollar, but don't tell me how to run my business!"
Now while I may not have much that is new to offer, it is a time for cooperative thinking in the great enterprise in which we are engaged.
It is of the highest importance that those participating in the broad field of real estate activity should be prepared to render a service to their clients, characterized by experience, sound judgment and high moral standards.
The man who sells service and satisfaction at one and the same time builds an enduring business structure. A "hit and miss Realtor" passes this way but once.
The responsibility which a reputable real estate man assumes and must maintain is to make good on the assurance given that it is not only desirable but profitable to own property; that it is the soundest investment which one can possibly make with his capital and that the yield will compare favorably with other types of investment.
The right of the individual to own property and to beprotected in that right is something more than a figure of speech. It is a great American heritage and must be protected at all hazards.
Must Win the Peace
Our nation is at war and we are all concerned that we shall not only win this war on the battlefield—and with God's help we are going to win it there—but that we shall also win the peace for the continuance of the American way of life.
We are hearing much these days from self-constituted planners who at least give the impression they are out of sympathy with our form of government and who seem to feel that we must scrap the past, junk the present, and that we must have a so-called new order to get going when the war is over and peace is restored.
We are told that our form of government, with its guarantees of freedom and liberty so essential to the continuance of free enterprise and individual initiative, is outmoded and will no longer answer.
I listened to a radio address recently by a professional man who boldly asserted that "the new order, when peace comes, would mean the end of free enterprise; that the profit incentive would have to be taken out of business; that personal rights would have to go and that economic values as such would have to be deflated." He was in fact advocating the very thing we are fighting to stop. We are fighting to preserve the right to make the most out of our lives and be recognized for the character of service that we render. And this can only be accomplished through the preservation of the institution of free enterprise; and by that we mean the preservation of our form of government, which has made possible the highest standard of living in all the world, and which we proudly acclaim as the American way of life.
Men who insist the American system of government is all wrong and that everything must be changed are tampering with freedom and what they offer is a cross-breed between Naziism and Communism, with the State supreme ruler over the lives of the people.
We know that conditions will be different when the war is over, with a debt of astronomical proportions, with destruction of life and property as toll of war; but Americawill not side-step its humanitarian responsibility, nor its world-wide political and economic responsibility, to do its part to maintain the peace within the concepts of American institutions.
We cannot rebuild America; we cannot restore prosperity in this nation; we cannot meet the huge debt which this awful war is inflicting on the people, by becoming a nation of parasitical mendicants dependent upon the state for support, as some are in reality advocating.
We are all ready to make whatever sacrifices may be necessary, but when this conflict is over we want our suspended liberties restored and free enterprise again given its chance, so that the American way of life shall be preserved and continued.
The fact that the Constitutional guarantees of property rights are deeply imbedded in our national life under which we have reached heights never before attained makes it clear that to lose these rights would mean a breakdown of political rights, and this would be destructive to economic well being.
Attack on Property
The attack on property, by those openly seeking the nationalization of property, or a system of taxation which would lead to the same result, directly or indirectly, constitutes an assault on the American system of government, disregarding the sound advice of Abraham Lincoln, who said:
"Property is the fruit of labor; property is desirable; it is a positive good in the world. That some should be rich shows that others may become rich, and hence is just encouragement to industry and enterprise. Let not him who is houseless pull down the house of another, but let him work diligently and build one for himself, thus by example assuring that his own shall be safe from violence when built."
The 15,000 Realtors of this nation can do as much, or more, to keep America's thinking straight as any other group.
We must be alert and on the job to see to it that the fundamental right of individuals to own property shall be held secure, and that real estate ownership shall not be discouraged as the result of confiscatory burdens of taxation, destroying not only income on capital invested in property, but also the capital itself. That's why I came all this way from Cincinnati to talk to this Convention today about "The Effect of Modern Taxation on Real Estate Ownership" and the part Realtors must play in the preservation and maintenance of property rights and in the development and promotion of a sound and equitable taxation system.
Unless we do actually modernize the tax structure in many states of the Union and thus relieve property of an unjust burden which it cannot carry, then I say to you that we shall fall short of our responsibility to existing owners of property and we will have but little to offer in the way of encouragement to investors in farms, homes and business property.
The real estate men of the nation who dispose of nine-tenths of all property sold; the home builders who are an actual part of the real estate movement, and who erect 80 per cent of all homes in peacetime, have got to combine their efforts to preserve and improve living standards for the American people. The future is largely in our hands to adequately house 130 millions of people. It is a big and responsible job.
We want to stimulate the interest in home ownership by removing the fear of excessive tax assessments which frequently have led to debt creation to meet unbridled local government spending.
That is why we have got to talk about a modern taxationsystem in relation to local government at a time when there is but little said about economy in public spending.
When half the property is on the delinquent tax list, as is the case in many subdivisions throughout the nation, and some have a tax rate three or four times higher than the prevailing rate in other sections of the country where the public service is the equal or better, we can understand why there is such loss of confidence in investment in property in some sections and the favorable position it holds in others.
There was a feeling that the growing interest in real estate taxation throughout the country would diminish when we became involved in the war, but instead, the interest is even greater now than ever before. The urge is that a sound program be developed and that property owners be aroused to the necessity of protecting their rights and that a stop be put to the ever-increasing number of forfeitures, due to excessive taxation and inability to pay taxes.
My attention has just been called to some facts developed by the Pittsburgh Realtors which clearly show the inequity which prevails in the matter of taxation in that city and which is a pretty general condition. In the sale of 63 properties the purchase price was $4,804,358 on property with a tax valuation of $9,672,080. Thus you can see that this property is taxed for twice the amount of its sale value which in reality taxes away the principal investment.
One of the guarantees of our beneficent form of government, and one which the people hold dear, is the right to own property and be protected in that right; but I say to you that when taxes are levied on a basis of municipal or local requirement, rather than on a basis of fair valuation and ability to pay, we have something to deal with which threatens the stability of property rights with destruction.
Tax Inequities Forecast Danger
It has long since been contended that inequities of the property tax would sooner or later lead to a serious breakdown in adequate revenues to meet orderly functions of local government. This stage has now been reached.
Herbert D. Simpson, Professor of Public Finance, Northwestern University, stated the situation very clearly when he said:
"We have pyramided the growing costs of municipal and local government substantially upon one category of tax-paying capacity, namely, real estate. Upon this we have imposed a fixed charge of from two per cent to three per cent which must be paid, year in and year out, regardless of income, business, or the financial status of the property owner."
There was a time in the early development of our country when real estate could carry the entire load of the cost of local government and did carry it for that matter. Land and improvements thereon constituted the principal taxable values.
The demoralization in our tax system today finds its genesis in the fact that in an industrial age we are still clinging to an archaic system of the property tax as the principal maintenance source of municipal and local government despite the fact that the greater wealth is now in other forms of investments.
On this account there is a wavering in the disposition of people to own their own homes despite the fact that such an investment is recognized as socially and economically desirable.
Home ownership has been falling behind population increase until today only 40 per cent of our citizens are in the property-owning class.
Under normal conditions real estate yields but one-fourthof all governmental income and this one-fourth is paid by 35 per cent of the taxpayers who own real estate and who foot anywhere from 65 to 80 per cent of the cost of local government.
A statement issued by H O L C some time ago tells of its struggles with undue tax burdens on average homes throughout the country which cost the H O L C., on a million-odd loans which it refinanced, the stupendous sum of $225,000,000 in delinquent taxes.
It sounds fantastic, this report runs, but to quote: "Our records show not a few isolated cases but many instances where monthly charges on account of taxes exceeded principal and interest payments on our loans. Tax rates and unjustifiable valuations did the damage."
That is why it is so tremendously important that this matter be taken in hand by representative organizations who are interested in stabilizing real estate values and which believe in the ownership of private property.
Surely there is a better way to underwrite and maintain property values than to continue a tax system which rests its case on getting the money where it is easiest to get while resorting to penalties demoralizing the ownership of property.
Unfortunately, existing tax laws furnish but little relief when taxable property values are much higher than true values. This is in direct contradiction to the real purpose of our local taxation system as originally intended.
Such tax laws impose rigid burdens which cannot be passed along since there is little attempt to relieve the home owner and but little sympathy for the investor who seeks to increase rents to help meet added expenses and the mounting cost of government. This of course does not refer to rent control as an anti-inflation measure which is bound to work considerable hardship, but in this we must be highly cooperative as a purely wartime requirement as an anti-inflationary measure.
My discussion naturally is in the nature of post-war thinking based upon pre-war experiences.
The building of homes has been virtually stopped by the Government, since practically no priorities are available for private building. We face an acute shortage of civilian housing which will call for planning and preparation when the ban on private enterprise is lifted.
Must Provide 1,500,000 Homes
When the war is over the building enterprise will be called upon to meet a great economic and social need, since the shortage will run as high as 1,500,000 to 2,000,000 units, and the Realtor must be prepared to meet this requirement; otherwise we shall face government construction on a large scale which will include subsidizing housing improvements with the taxpayers' money and which will constitute the severest kind of competition since it will be cheaper to rent such properties than to own one's own home.
You know that the average tenant feels that he pays no taxes anyhow. Twenty-five per cent of the people, according to a survey, who are in gainful occupation, have reached the conclusion that they pay no real estate taxes at all, despite the fact that one-third of a house rental bill is in taxes, and over one-fourth of a business property rental is in taxes. Or in other words, a house renting at $400 per year has in it a tax which the tenant pays of approximately $90.
Let's Stick to Real Slum Clearance
No one seriously objects to real slum clearance projects undertaken by the government in blighted areas. The objection is to the erection of low-cost subsidized housing in suburban areas destructive to the incentive to own homes and which deny local government its legitimate tax income.
The growth of cities has resulted in an expanding framework of municipal needs. These relate to education, hospitalization, sanitation, safety and welfare and other essential requirements. Such needs must be met, and we want to see these needs met and maintained on a basis of efficiency and economy. There is no thought of property ownership demanding escape from a just and fair proportionate share of the burden of government.
But complaint has to do with the disposition to penalize property by compelling it to carry not only its rightful share, but also to carry the share from which other forms of wealth too often escape.
There must be a general leveling up of responsibility and this will not come about voluntarily.
Frederic Nelson, in a recent article in the Saturday Evening Post, captioned "Death by Taxes," emphasized this point when he said:
"Although tax schedules on real property reflect the confusion of municipalities confronted with new demands for money and without a clear conception of how to get it, the real evil at this state of the economic cycle is over-valuation of property for purposes of taxation. In some communities tax assessments are double or even triple the best price that the assessed property will bring in the market. Some authorities estimate that business property must set aside 25 per cent of its gross income for local taxation; residential-property taxes average about 15 per cent of rental value." And he utters this warning:
"Nevertheless, few will contest the cogency of the argument that unless we want our cities to continue planlessly toward a point where every house is a potential parking lot in a town with no reason to park, something must be done to co-ordinate the tax structures of cities with state and Federal requirements and to make real estate taxes bear some relation to municipal development.
Indirect Realty Taxes
The Federal government, whether we are aware of it or not, is taxing real property through estate and capital-gains taxes. There are 175,000 separate governmental agencies with the power to levy taxes, and such power seldom remains in disuse.
It is one thing to air our grievances and another to offer a workable plan. We are not without a remedy to improve conditions and I offer for your consideration to stabilize real estate values and to make home and land ownership attractive the following National program:
No doubt you are all familiar with the general program of the National Council of Real Estate Taxpayers and its support of the bill recently introduced by Representative John M. Coffee, of Washington. For some time the National Association of Real Estate Boards and the National Council of Real Estate Taxpayers have advocated a comprehensive study of the tax structure of the Nation on the three levels of government, Federal, State, and local.
The preamble of this Bill sets forth the Congress has a very great responsibility here to preserve orderly government when this war is over by preventing utter collapse of the financial structure during its prosecution.
The Coffee bill calls for readjusting Federal, State and local fiscal relationships and to this end it provides that a Commission be established to be known as the Commission on Tax Integration to make a study of the tax structure and laws of the United States and of the various states and local governments and to analyze and assemble statistics and facts concerning their inter-relationship and overlapping,
and to suggest ways and means to integrate the various tax structures to the end that inequitable burdens be avoided and the financial stability of the various governmental units assured.
Now, gentlemen, I submit that this is a most important measure deserving your wholehearted support. It is designed to bring light where there is now darkness by developing information that will eliminate haphazard methods in the conduct of the business of the people. This committee, as you can readily understand, is empowered to lay the keel of a new Magna Charta of Taxation by giving the country the benefits of fact-finding research. This bill purposes to prepare not only schedules of sources of income available for taxation, but rates to meet varying budgets.
Thus, you see the importance of the adoption of this measure to give the people a clear understanding and close-up view of their tax problem on the separate governmental cost levels.
It is not hard to conceive that such an analysis would develop the fact that we are spending a lot of money for worthless services which might well be eliminated and which are not worth the cost of maintenance.
The national program to bring about an equitable tax system to preserve the home base against undue encroachment of taxation offers a set of sound principles that give great promise of lasting benefits. These suggestions heretofore stated but which will bear repeating include in part:
(1) The support of legislation authorizing a Federal survey to determine sources of revenue and expenditures on the three levels of government, Federal, state and local.
(2) Put government income property on the same tax basis with privately owned property.
(3) An over-all tax limitation to prevent unbridled spending of public money and to force a wider spread of tax contributors from sources other than real estate and to develop a fixed debt limitation.
(4) Encouragement of home ownership by the Government to improve social conditions and to make democracy work.
(5) Give full consideration to the value of tax revision based on earning power of property.
(6) The form and safety of our government rest largely on the home owners and farm owners of the land. Therefore, there should be every possible encouragement to increase their number and influence as a practical contribution to our national welfare.
As an organization we have supported tax limitation on real estate for its protection and to limit unbridled spending. Nine states enjoy this beneficial method of holding taxes within reasonable bounds and the results have been altogether satisfactory.
The fact that not a single state where tax limitation prevails would consider for a moment a return to the old methods is in itself the best evidence that it does protect and benefit the owners of property.
Limitation has encouraged new enterprises to come into states that have thus modernized their tax structure, for they know exactly what to expect. It has encouraged the ownership of homes and farms. Local taxing subdivisions have been benefited by realizing public revenues from sources heretofore not participating and it has stabilized local government.
Perhaps the most serious objection to tax limitation has been that it would be destructive to the maintenance of a thorough-going educational system, but the facts are quite to the contrary.
In the State of Ohio the report of the State Tax Commissioner, after eight years of experience, had this to say: "The revenue of the public schools in 1934 from property taxes and state funds amounted to about $107,000,000, but the revenues for school purposes in Ohio for 1940 totaled $134,000,000." Thus you will see that education benefited while the burden on real estate was lessened by more than $40,000,000.
Tax limitation has resulted in a school foundation receiving its income from state sources which equalizes educational opportunities throughout the state.
We have had many new demands for new taxes since tax limitation went into effect and it goes without saying that, without the restrictive influence of tax limitation, serious defaults would have occurred.
The Effect on Progress
Real estate taxation goes far and beyond its effect on the ownership of property. It has to do with the progress of education, social requirements, stimulation of new enterprises and the general welfare of the people.
Now let me say in conclusion, the fight we make is utterly unselfish. It is for every man's opportunity to ultimately acquire the American ideal of a self-owned home.
Today, as never before, we ought to thank God that we are American citizens willing to make any sacrifice for the preservation of the American way of life.
The effort we make is not merely for profit-taking dollars, but for the preservation of the institutions and ideals of a free people which center about the preservation of the home.
Every realtor has got a stake in the future. He believes tomorrow is going to be a better day and then sets about in practical fashion to make his dream come true.
Courage and Confidence
There are a lot of quitters today admitting defeat because they cannot see ahead. They have reached the conclusion that free enterprise is through, that our political situation is unbearable, but that in itself would not be so serious, for it is a great American right to grumble about politics. They insist that war debts will ruin America and hence we will have nothing with which to make a new start.
Now, my friends, this country deserves something better from those who have been the beneficiaries of its prodigality than carping criticism. With natural resources of illimitable value, with educational opportunities available for every child in America, with the flag of free enterprise flying at the masthead underwriting a standard of living unapproached in all the world, with the spirit of America, "God and Country"—who is there to say we cannot take it and win!
We are going to take time out to beat the enemies of civilization to their knees and then get busier than we have ever been before in an all-out creative effort to pay debts, instead of creating them, while supplying the needs of 130 millions of people as we go merrily to work pursuing peaceful pursuits.
Tomorrow, as today, you Realtors must be true soldiers of democracy, pledged to protect its most sacred institution, the American home.
Let us stand solid in a time like the present, grimly determined to preserve the ideals of our democracy.
There is no turning back; there is no surrender.
In this spirit, with renewed faith in our country, loyal to our glorious flag, let us go forward as a united people, confident in the ultimate triumph of the righteousness of our cause.