They say that the devil is in the details. The public policy equivalent to that would be that statism is in local government policies. The big principles being discussed and fought over at the national level of politics are often put to work in our own neighborhoods; counties and cities offer some of the most interesting examples of what misguided policy can lead to, especially when it comes to mismanaging taxpayers’ money.
One example of this comes from Whitehall, Ohio, where the city is trying desperately to boost its property values. Why? Well, let’s see what The Columbus Dispatch has to say:
Bringing homeowners into Whitehall is so important to city leaders that they might be willing to pay for them. A program introduced this week would lend up to $5,000 to homebuyers for down payments, a new tactic the city is considering to tackle its decades-old problem of rental saturation.
Where does the money come from? This is a city with a $25 million annual budget, half of which is spent on public safety. And, more importantly, why are they doing this?
More than half of the occupied homes in Whitehall are rentals. Its home-ownership rate from 2006 to 2010 was 43 percent, compared with Franklin County’s 57 percent and Ohio’s 69 percent, according to the U.S. Census Bureau. “Increasing homeownership has been something that city leaders have talked about for a great number of years without coming up with something concrete,” said Zach Woodruff, the city’s economic-development director. “Everyone is recognizing this is vital to Whitehall’s moving forward.”
The answer to why the city wants to give out down payment loans to home buyers is not to be found in fluffy statements about the city “moving forward”. The reason is instead, in all likelihood, that low and falling property values depress property values and thus erode tax revenues for local governments. As I explained last year, this is a major problem in other parts of Ohio.
That does not mean that the answer is for government to get back in the property lending business. So long as the free market has a say in where people choose to live, the elected and appointed officials in Whitehall should keep in mind that there is always a rational motive involved when people choose not to buy a house in their city.
More on that in a moment. First, let’s get back to the Dispatch story and learn more about the details of this loan program:
The city council is expected to discuss the program at its meeting on Tuesday and could vote on it on Sept. 18. If the council approves the legislation, the city and its partner, Huntington Bank, will immediately begin taking applications from potential homeowners. The city would forgive the loans as long as the buyers live in their home as their primary residence for five years. If they were to rent it out or move out of Whitehall, a percentage of the loan would have to be repaid, based on how long they lived there. If they would sell the home and stay in Whitehall, the loan would still be forgiven, but they could not apply for another one. The loans would cover 4 percent of the purchase price of the home, up to $5,000. Homebuyers would qualify if their household income is less than $125,000. The buyer would have to contribute at least $500 to the down payment.
Wait a second here. Are the city officials in Whitehall going to tell us that a family making $100,000 and more cannot come up with five grand for a down payment on a house?? Are we supposed to believe that a family that has broken into the six figures needs a $5,000 gift from government to buy a property??? What kind of warped reality do these politicians live in?
If you are making six figures in this economy, you’ve done well. You are a hard worker with lots of fortitude and commitment to your career and your family. You are among the last people in this country that needs a government handout.
The ridiculousness of giving a handout to six-figure income families becomes even more glaring when we contrast the potential costs of the program against the potential gains for the city. In order to motivate why the city should give a $5,000 check to a $100+K income family, the city must count on that family increasing the city’s tax revenues by five grand within a reasonable period of time. While governments in general are not known for sound finance, at least let us expect that there is some sort of net revenue calculation behind this whole thing. If so, it would have to conclude that:
a) the taxes that a family earning $100,000 is paying would have to be big enough to exceed $5,000 within the five-year period over which the loan is forgiven; and
b) the family’s tax payments would have to be a net addition to the city’s tax revenues.
The first condition is not that hard to meet: a $100K income should yield about $2,500 in income taxes for Whitehall. The property tax revenue is a bit more murky to nail down. The city only receives about $500,000 in property-based taxes per year; four out of five general-fund revenue dollars come from income taxes. This means that the property tax share of Whitehall’s revenues is about one tenth of what it is for the average local government in Ohio; income taxes, by contrast, are twice as important in Whitehall as they are in the rest of Ohio.
Therefore, the higher the income of the in-moving family, the more likely it is that the city will get the $5,000 back. If the average property buyer pays only $1,000 in local income taxes per year, the city will get the five grand back in five years.
Provided, of course, that we can meet the second condition as well. Which is a bit tricky. If someone buys a property, then reasonably someone else is selling that property. This also means that the property buyer, an inbound taxpayer, replaces a property seller, an outbound taxpayer. In order for the city to get its money back on the property purchase handout program, the inbound taxpayer must pay $5,000 more in income taxes over five years than the outbound taxpayers. (We assume that the property tax revenues will stay unchanged – Ohio does not have an acquisition-based property tax assessment system, and therefore there is no re-assessment when a property changes hand.) This means, plain and simple, that the inbound taxpayer must make $40,000 more than the outbound taxpayer.
Is this at all a realistic calculation? According to Sperling’s Best Places, a city comparison service, the average household income in Whitehall was $35,682 in 2010. This means that for the Whitehall property purchase handout program to fund itself, the inbound taxpayer has to make on average $75,000 – provided the outbound taxpayer has an average income.
A $35,000 annual income is a low income, while $75K is a high income. Why, now, would low income families leave Whitehall and high-income families move in to Whitehall? Has the city made any drastic changes that would allow it to compete with other suburbs of Columbus for the high earners and high taxpayers?
It is fair to say that the answer is “no”. First of all, this calculation assumes that the inbound taxpayer, which has to make more than twice what the outbound taxpayer makes, will move in to the same neighborhood that the outbound taxpayer is leaving. But it is very rare that a family making $75K buys a house in a neighborhood where people make $35K and houses are of a standard that meets a $35K budget. More likely, the home buyer will be someone who makes roughly the same as the home seller.
Furthermore, how likely is it that a family making $75-$100K, thus having the means to choose where to live, would buy a house in a high-crime neighborhood? Again according to Sperling’s, Whitehall has among the highest crime rates in America: the city scores a 9 out of 10 in violent crime and a 10 out of 10 in property crime. You have to travel to notorious Camden, NJ to find a place with higher crime (though I would not recommend a trip to Camden…).
This property purchase handout program is an extremely risky financial gamble. If the city ends up trading inbound and outbound taxpayers in the same income bracket, it will not gain a dime from the program. On the contrary, it stands to lose up to $5,000 per property that changes hand in the city. If 100 properties change hands in Whitehall over the next year, and all qualify for this program, the city will lose as much money on this program as it takes in on property taxes. Given that, according to realtor.com, there are 155 three-bedroom properties for sale in Whitehall today, this is not a far-fetched scenario.
It is understandable that the city officials in Whitehall want to revive their community. But instead of giving every new home buyer $5,000 the city should perhaps focus on reinforcing its core functions: the protection of life, liberty and property. It is not a good answer to say that the city is already working hard on that – the high crime rate shows that their efforts have not paid off yet. Until crime is down significantly, Whitehall won’t be able to attract the kind of residents it wants.
On the other hand, when crime is down the city will become attractive without having to bribe people to move there. That makes a lot more sense, both financially and morally.