Spokesman-Review Flunks Economics

I suppose I just should be flattered that the Spokesman-Review paid attention to our work.  But while I agree with some of it, I’ve got to take issue with a few points in this column in Sunday’s paper—including a boneheaded error of basic economics that would earn the author a big fat zero in Econ 101.

At issue is I-1098, an initiative in Washington state that would eliminate some taxes for small businesses, and cut state property tax rates by 20 percent.  I-1098 pays for those cuts, and also gives a boost to health and education programs, by establishing a graduated income tax that applies to incomes over $200,000 for a single person, and $400,000 for a married couple.

Now, I’m the first to admit that the initiative doesn’t completely fix Washington’s wacked-out tax system—which, because of a series of unfortunate historical accidents, is far and away the most unfair in the nation.  (See our maps of state tax rates on the richest and poorest families to see what I mean: Washington’s poor pay the nation’s highest tax rates, while the wealthiest families pay among the lowest.) Still, if tax fairness is your goal, I-1098 takes a step in the right direction, since the trims in business and property taxes will disproportionately benefit the poor and middle class.

But the Spokesman-Review claims that the property tax cuts are merely an illusion:

And that 20 percent property tax break? Landlords will take that, and thank you very much, because rental income will be subject to income tax. Tenants, disproportionately low-income, will not see a dime’s worth or lower rents.

Sigh.  Please stay after class, Mr. Opinion Writer Guy.

First and foremost, people who own their own homes—and nearly two-thirds of Washingtonians live in owner-occupied housing—don’t have landlords. When property taxes go down, they pay less tax.  Period.  There’s no magic landlord to siphon off the cash.

Second, in a market economy like ours, when property taxes go down, renters generally pay less rent.  Landlords don’t just get to pocket the cash—not over the long haul, at least.  Instead, the “Invisible Hand” of the market quickly sets to work:  when property taxes fall, some landlords will start to charge a little less for rent, filling a vacancy quickly while maintaining their prior profits.  Any landlord who tries to keep rents high when property taxes fall risks higher vacancy rates or increased marketing costs; in other words, they’ll lose money unless they drop their prices.

Of course, the landlords themselves may not even be thinking about property taxes when they decide how to set rents—they’re too busy looking at their competitors and their overall bottom lines.  That’s the invisible part of the Invisible Hand—landlords don’t even have to be thinking about property taxes to be affected by them.

So I cringe every time I hear I-1098’s property tax reductions described as a “middle-class tax cut.”  In reality, Washington’s property tax falls heaviest on the poor.  If you don’t believe me, look at the numbers from the Institute on Taxation and Economic Policy:  Washington’s poorest families pay 4.2 percent of their income in property taxes, directly and indirectly; middle-income folks pay 2.9 percent; while the wealthiest families pay 1.1 percent.  And that’s true, even though the well-off are far more likely to own expensive houses. The numbers show, quite clearly, that a cut in property taxes would disproportionately benefit the poor—though it would also reduce property taxes for the middle class and well-off, too.

I’ve got other quibbles with the column—such as the writer’s reliance on a non-representative survey by the Association of Washington Businesses (a group that opposes I-1098) about how businesses think they might be affected by a tax, rather than actual data on business size and earnings.

But my biggest confusion remains:  is it really and truly possible that the guy who writes about the economy for Spokane’s biggest paper needs remedial help with economics?