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The Costs of Lower Taxes

By Jonathan D. Miller

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• I hear the story about a friend’s elderly parents who have run out of money and don’t know what to do—these are people who once lived in swanky Manhattan digs. Of course, Social Security can’t meet the bills. Their kids will have to pick up the slack, if they can.
• Last weekend when upstate, I noticed the roads are really getting bad—potholes, broken pavement along the shoulders, and you can barely make out the lines marking lanes. The local highway departments receive reduced funding from the state, because the state is getting reduced funding from the Feds, because the U.S. Highway Trust Fund is in the red, because Congress hasn’t raised the gas tax since 1993. Locals become concerned about driving at night and accidents have increased.
• A three-year-old public school, I work with, will get less funding from the city for the next school year even though it is adding 25% more students. And this is before any further funding cuts from the Washington deficit negotiations.

Less government and smaller tax bills sound awfully good until we realize we like most of what government provides us and really don’t want to give up any of it. But look around and you’ll start to see the impacts and consequences of what less government means, and Congress and the President have yet to enact an austerity mode, “grand bargain” budget. All they’ve done so far in the debt-ceiling contretemps is unnecessarily risk raising interest rates and possibly crashing recent real estate investments made during the latest round of capital-fueled cap rate compression.

Under any circumstances, the elderly parents, mentioned above, are a coming attraction. More seniors will be running out of cash in the years ahead without much of a safety net. Many baby boomers don’t have pensions or the pensions they expected will be abrogated in some way. The idea of house as nest egg has disappeared. Senior housing developers had been licking their chops over the exploding gray-wave demographic cohort—the numbers are indeed huge, but a high percentage of next generation seniors won’t be able to afford much--they’ll be living with their children or making due in their old homes. Oh and then there’s the inevitable reduction in Medicare—that won’t be pretty either—just ask the guys who run nursing homes.

The decrepit state of rural roads presents the leading edge of severe U.S. infrastructure decline. In survival of the fittest mode, states reduce spending on less traveled highways and try to direct funding at high-use systems. But years of under-funding across transport and water-sewage systems begins to overwhelm budgets, and money for major game-changing capital projects (including systems related to transit oriented development) just isn’t there. Besides the safety issues and greater costs involved in lost transportation time, all the private sector jobs associated with various capital works projects go by the wayside. And do we really want sewage backing up into our rivers and streams again—the pre Clean Water Act era was pretty ugly? Get ready.

School systems across the country must slash programming and decrease teachers. There’s no more job security for public employees or for organizations which depend on public funding to make ends meet. All those government jobs and government subsidized jobs put a lot of food on a lot of tables and generate a lot of business in malls. The ongoing assault on government will put a lot more people out of work—that’s not exactly an economic demand driver. Meanwhile, the chances of a kid getting a decent education diminish and when school districts hit the skids so do local property values. 

Sure we need to reduce the deficit and decrease our ridiculously high national debt service payments, but eviscerating government means threatening the way of life for many Americans and digging an even deeper hole for all of us. That will not be good for real estate developers and investors, who will pay less in taxes, not because tax rates will be kept low, but simply because they will be generating fewer gains. 

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