Wednesday, October 31, 2007

Naïveté Is So Cute

Free State Politics's Andrew Kujan on the O'Malley tax extravaganza:

Either way, when looking at the list of included services, "property management" stands out like a sore thumb among the other services listed. Tanning salons, professional security, 900 numbers, cable TV, to name a few, and property management.No one needs a tan, cable TV, or the psychic friends, but they do need somewhere to live. Nearly 32 percent of Marylanders are renters (pdf), and in Balitmore City, close to half the population are cutting rent checks.

While the sales tax is regressive in general, when applied to property management I think it gets worse. I hope I am wrong when I assume that renters will end up paying the majority of this property managment sales tax, not the property mangers. I would hope that the Baltimore Delegation in Annapolis will get to the bottom of this as they work to perfect the Governor's package.
Here is one of the first lessons of economics. Businesses do not pay taxes. They raise prices and the consumer pays the taxes. Of course renters are going to pay an increased rent because the property managment company is going to charge the new 6% sales tax to the landlord. The landlord then has a choice between taking a $60 hit on a notional $1,000/month rental unit or raising your rent. Now the question is how much do you think your rent will go up? $60? Or $100?


Brian Gill said...

Streiff you are of course corret, but that explanation only tells half of the problem--there is deadweight loss all around.

Not only do the renters (or consumers in general) suffer, but so do the property managers (or businesses in general). The total cost of renting is now $1060 instead of $1000. For some people, it would make sense to rent for $1000 but not a penny more. These people may look to move in with family; they may move somewhere else; or they may miss their rent payments.

Any way you cut it, the property manager is making less money. So he can't hire as many people. There is increased unemployment, and the government LOSES revenue via the lower coporate income, the eliminated income of the people that lost their jobs, and the loss in payroll taxes for the same reason.

Sounds like fun to me.

Greg Kline said...

Brian has a point here.

Prices are set by what the market will bear. Yes, retailers may pass along the tax directly but consumers will have the same price limit. When margins are lower it means less profit, or cuts in cost elsewhere, chiefly labor costs. It is not as easy to say all these taxes can be passed on without a down side for the business.

Consumers will pay more and retailers, including suntans, haircuts, etc. which Mr. Kujan has decided we don't need, will make less money, hire fewer employees, rent less retail space, and on it on it goes.

Simply saying businesses don't pay taxes hides the real harm done to business and the economy by these taxes.

I agree naivete is cute, higher taxes are not.