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Free Lunches for Renters

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With the proposed increase in property taxes for this year, I thought I would revisit the claim that renters are affected by property tax increases just like property owners. Now we all know that your landlord does not assign a number to property taxes in your rent. Property taxes are an element of the costs that presumable the property owners pass on. I tried to find a simple reference that would specifically document tax increases contained in rent here in Lawrence. I could find none; therefore, I had to back into the relationship.

I researched the average increase in rents for a two-bedroom apartment in Lawrence since 2002. Believe it or not, one source puts that increase at about 13%. The Bureau of Labor Statistics reports that the CPI-U has increased by about 18% in that period. My calculated property tax increase is about 40% during that period.

When one considers that there are expenses that property owners have to meet and that those expenses likely increase proportional to inflation then an inflation rate of 18% suggests that the property owner has not passed on all the increases in costs that they have experienced given that rents have only increase by 13%.

Now property taxes are not part of the CPI-U baseline so tax increases are not in that calculation or in the costs represented by it. So it would appear that for any portion of the property tax increases to have been passed on the other costs to the property owner would have had to increase at considerably below inflation. Since this is unlikely, it would therefore appear that little if any of the property tax increase hereabouts has been passed on. I am not arguing that it is zero but it certainly is not the full 40% increase levied on the owner occupied homes.

Let me hear it again. Renters experience tax increases just like property owners so the game is not rigged and the majority of the citizens of Lawrence (renters) do not get a free ride when new amenities are provided through property taxes. Right! It would appear that about 40% or our citizens pay for all the “goodies” purchased with property taxes. Talk about taxation without representation!

Sounds just like Merrill who keeps arguing that property owners do not pay for the civic services they receive. He has never responded to my queries as to a source for that assertion but given the above data it must be the biggest bunch of “hooey” every published in Lawrence.

It is time for our “law givers” to levy a renters tax linked to property taxes and increases thereto. I am not seeking to punish anyone or to raise revenue but to insure that renters experience the full effect of their demands for civic services. No more “free lunches”.

Let us debate all you “free lunchers”.

Comments

boltzmann 4 years, 4 months ago

I'm not sure what your situation is, but my property taxes have only gone up about 5% over the past 5 years - I need to check my records more closely to find 2002. I think that to make a better argument, you need to look at average changes for all numbers you use. I'm not sure that comparing average rent increases with your specific property tax rise is a relevant comparison, as it is comparing average statistics with anecdotal statistics. I'm not saying your comparison is incorrect, but I don't think that it is convincing, in that it doesn't seem to agree with my (albeit also anecdotal) experience.

One does have to also remember that property owners get a tax deduction for paying property taxes that renters do not get on rent that they pay, so that any rise in property taxes is buffered somewhat by a reduction in income taxes.

George Lippencott 4 years, 4 months ago

Your right. I used my tax increase which is indeed 40%. Do you know where to find an average tax increase for the period. I could not find one since every property is different. I sure would be very angry if my taxes have gone up 40% (property valuation has gone up 7%) and the average is considerably less??? Perhaps I can back into it from the data on the annual tax report we all receive.

boltzmann 4 years, 3 months ago

I can find the mill levies for Lawrence those periods. In 2002, it was 102.732 and now it is 118.890 - an increase of 15.7%. You can find the mill levies on the Douglas County web site - Google "lawrence kansas mill levy". You can find the mill levies for all communities in the county - actually, it only goes back to 2003, but I found 2002 in the cities budget document for that year.

Anyway, if you had a 7% increase in valuation, that would correspond to a [(1.1571.07) - 1]100% = 23.8% increase in property taxes - at least according to my calculation.

This is a good topic - thanks for bringing it up. Maybe the collective minds here can figure it out!

George Lippencott 4 years, 3 months ago

Yep. That suggests an increase of about 16% voted upon, I will look up the average valuation increase because that is also part of the tax we pay.

DanR 4 years, 4 months ago

You need to revisit your math, because it certainly isn't supporting your argument for the need for a renter tax levy. Apples and Oranges.

A 40% increase in property tax is likely much less than a 13% increase in rent. Compare a 2002 property renting at $600/month with a $1000 tax to that same property in 2010 with a $1400 tax and a 13% increase in rent (which would be $678/month). It would seem that the tax increase IS indeed being passed on to the renter.

tax: 1.4 x $1000 = $1400 (annually) -- $400 increase or $33/mo. rent: 1.13 x $600 x 12 (months) -- $936 increase or $78/mo.

George Lippencott 4 years, 4 months ago

If I understand you, you are absolutely right in theory if you assume all of the increase in rent is applied to taxes and that the valuation you chose is accurate.

Using an average valuation here in Lawrence would yield a tax of about $2000 per year in 2002 with an increase to $2800 per year using the 40% number. If all of the rent increase is applied to the tax increase, we essentially break even.

My argument is that the landlord’s other costs (ownership, maintenance, insurance, regulatory, management and the like) have also increased consistent with inflation meaning that inflation would consume all of that $78/mo rent increase plus without considering taxes as they are not in the BLS CPI-U data.

Certainly some of that tax increase may be passed on but unless everything else the landlord pays stayed the same, an unlikely event, the full tax increase was not passed on to the renter (if any of it).

George Lippencott 4 years, 3 months ago

I could not find average property values fori 2002 but coulod for 2000. The LJW did a story. From 2000 to 2007 the aVERAGE PROPERTY TAX INCREASEd BY 61 % OR 7.5% PER YEAR. Using that 7.5 percent/year figuree the tax increase from 2002 to 2010 comes out = hold your breath 60%. I guess I am fortunate or the average hiides some fits and starts which it does. However my 40% number is not suspect

boltzmann 4 years, 3 months ago

Actually, a 61% increase over 8 years is represents an annual rate of 6.1% annual rate = [(1.61)^(1/8) - 1]*100% You have to include compounding in your calculation. Also property valuations for the most part were stable or went down in 2008, 2009, 2010, so your calculation will significantly overestimate the rise.

Also, changes average property values do not accurately reflect the average increase in value for individual properties. Each individual property can go up only 5% in a year, but many expensive new homes are built that year, the average can go up by much more - because in changes in the distribution of housing stock.

If you go to the Douglas County website, you can find the newsletters for the Douglas County appraiser. There I got the following data. Note, these are for the county as a whole, but a) Lawrence is 90% of the county in terms of housing stock and b) the values in the other classifications are not different enough to cause significant deviations from these conclusions.

Year Median Home Value 2002 $121,000 2003 $133,000 2004 $145,000 2005 $151,000 2006 $160,000 2007 $164,900 2008 $164,900 2009 $162,000 2010 $162,000

which is a 33% increase from 2002 to 2010. Again, the application of this number to the average increase for any individual property is an approximation because of the reasons given above.

boltzmann 4 years, 3 months ago

Sorry for the double post above.

Note that, 98% of the increase occurred between 2002 and 2006. The past 5 years have been mostly flat.

George Lippencott 4 years, 3 months ago

Actually the 7.5% was an LJW number - I do not know how they calculated it. My use of it is inacurate because the average hides the variations and applying data from one period to another is always dangerous unless you check to see that the variations are consistent. It does demonstrate that the increases are far more than the 5% I think you referenced earlier.

See add at bottom

boltzmann 4 years, 3 months ago

If you remember my 5% was for 2006 to the present - which I did state as a caveat. It seems now that the majority of the increase was front loaded to 2002-2005.

boltzmann 4 years, 3 months ago

Actually, a 61% increase over 8 years is represents an annual rate of 6.1% annual rate = [(1.61)^(1/8) - 1]*100% You have to include compounding in your calculation. Also property valuations for the most part were stable or went down in 2008, 2009, 2010, so your calculation will significantly overestimate the rise.

Also, changes average property values do not accurately reflect the average increase in value for individual properties. Each individual property can go up only 5% in a year, but many expensive new homes are built that year, the average can go up by much more - because in changes in the distribution of housing stock.

If you go to the Douglas County website, you can find the newsletters for the Douglas County appraiser. There I got the following data. Note, these are for the county as a whole, but a) Lawrence is 90% of the county in terms of housing stock and b) the values in the other classifications are not different enough to cause significant deviations from these conclusions.

Year Median Home Value 2002 $121,000 2003 $133,000 2004 $145,000 2005 $151,000 2006 $160,000 2007 $164,900 2008 $164,900 2009 $162,000 2010 $162,000

which is a 33% increase from 2002 to 2010. Again, the application of this number to the average increase for any individual property is an approximation because of the reasons given above.

beatrice 4 years, 3 months ago

Just as losses businesses experience from shoplifting are passed on to consumers through higher prices, landlords pass expenses of doing business onto renters. This includes taxes. There is no such thing as a free lunch. The taxes might not be directly paid, but they are paid. End of discussion.

beatrice 4 years, 3 months ago

Not fair DIST. I called "end of discussion," you agree with my point, then you added stuff! Not fair at all!

Okay, my point was just on the "free lunches" aspect of taxes, and that the cost of taxes do get transferred to renters. They may not be direct, but the renters do end up paying for increases in property taxes. To suggest otherwise, as this blog states, is not accurate (putting it nicely).

I agree with you that many renters likely don't appreciate the costs in taxes they will have to pay when voting for various bond issues. They just know they like the idea of things like a new and improved library. They will, however, pay for it when they go to renew their lease and discover their rent has gone up, including the rent for those who don't bother to vote or change their residence status from their prior home town or home state when they move to Lawrence for school. (I voted and owned property when I was in Lawrence, just an fyi. Did rather well on the resale, I might add.)

Just to be fair, I'm sure many home owners don't understand how bonds for things like improved libraries and parking structures eventually get paid either.

George Lippencott 4 years, 3 months ago

Not really, Bea. The blog was about increases in taxes and the Lawrence market. You don't live here. Your statement is true in general as my earlier blog and Did I Say That’s contribution to this discussion indicate. I maintain Lawrence has a different dynamic. When people are unaware of or partially protected from tax increases they become more fervent supporters of whatever the tax is about. But than you know that, don’t you!

beatrice 4 years, 3 months ago

And what gives Lawrence a different dynamic from any other college town in America, or any town with a high percentage of rental properties?

George Lippencott 4 years, 3 months ago

Bea,

It isn't!! What difference that may accrue is the percentage of properties owned by the homeowners and the percent owned by landlords (of whatever stripe). When renters begin to outnumber homeowners the dynamic changes and it becomes easier for the "law givers" to raise taxes given my argument about the pass through of taxes into rent.

It also can differ if the other college town has many non-government industries/businesses. They pay property taxes and can become a break on tax increases. Unfortunately for homeowners in Lawrence that is not the case here.

Lastly, if many of the private homeowners work in a business where COI increases protect their income (or enhance it) it is easier to increase taxes as the increase is but a portion of the inflation increase in individual income. Think KU.

Property tax increases hit hard at those with fixed incomes or with little ability to negotiate a good raise – think of telephone sales/help.

MyName 4 years, 3 months ago

The problem is that the owner of a property does not always pass on the costs of doing business. The price of an apartment is dictated by supply and demand as well as cost. Even if property taxes go up, the rent price could still remain static if the owner realizes that they wouldn't be able to raise prices without losing business.

The owner would then be forced to cut costs in some way (through reduced services or staffing) or take a reduction in profits in order to pay the property tax bill. There may be an indirect cost to the renters, but would still not affect their direct costs.

Moderateguy 4 years, 3 months ago

Good points George. Another component to this is the transient nature of the student population. Someone entering their last year at KU signs a lease fixing their costs for the year. While they are here, they show up at the poles. A simple question is asked. "What would you say to a bus service / new library / outdoor recreation area?" They say, "sounds great to me, I like those things." Then they graduate and move away and never pay another dime. I don't have a solution to this problem, but it does bother me that people can vote to increase taxes for others when they can get off scott free.

beatrice 4 years, 3 months ago

If you choose to live in a college town, you should expect certain things.

Moderateguy 4 years, 3 months ago

There are many things I have come to expect living in a college town. First and foremost is "never underestimate the power of stupid people in large groups." The other major item is nothing good ever happens in this town after 10pm.

Atlas is about to shrug.

workinghard 4 years, 3 months ago

The rental market has been tough since the city is allowing overbuilding of rentals. I have not raised my rent since 9/11, in fact I lowered it. Meanwhile the taxes, insurance, and cost of repairs have gone way up. My renters are indeed getting a free lunch, but I realize they are hurting just like the rest of us. I will be voting no on the library.

Adrienne Sanders 4 years, 3 months ago

That's certainly not the norm. Everywhere I've lived in Lawrence over the past 12 years, the rent has gone up every year, anywhere from $5 to $20 a month increases.

George Lippencott 4 years, 3 months ago

Yep, the data presented suggests just that. The question is whether the increase was property taxes or just the costs of renting (insurance, maintenance, regulatory, et al). See the input here from an apparent landlord.

OreadHawk 4 years, 3 months ago

I agree that everyone should pay an even share for using civic goodies regardless of income, size of house, type of car. I say a Flat tax of 3k for property tax per individual or may be 5 k to live, play and drive in Lawrence. We also need to come up with a fair income tax solution like 10k regardless of your income. This way if you don't pay , U borrow from the government to pay your dues. If U don't have enough $ by retirement U don't get any services . When we have all this real Cash , we can then decide to build new library, parks, jails, homeless shelter, streets. We should off course let the Landlords off the hook and get the renters directly for their dues. Not to forget with the flat tax of 10k the landlords wont be able to deduct the property tax as write offs. No more write offs!. No more free Lunch! pay to play system is needed.

Adrienne Sanders 4 years, 3 months ago

Does anyone think it matters that property owners OWN the property, whereas renters, who are certainly paying property tax as a portion of their rent, don't actually get to keep, or modify, or do anything else with the property that they're using?

grammaddy 4 years, 3 months ago

My thoughts exactly. I cannot take out a loan on my rental property. Our rent has increased $25 year since we moved in. We have only seen the landlord twice in those 10 years. Once after the micro burst when he came with the insurance adjuster to get the roof fixed, and once when the City inspector ordered him to put new safety outlets in the kitchen. I have replaced the dishwasher and the hot water heater myself as he was on vacation overseas and left no one to care for the 13 properties he owns while he was gone. I love my house and hope to stay here a long time but I didn't buy the place even though the landlord expects me to act as if I did.

George Lippencott 4 years, 3 months ago

Bea and Company. Below is my take on what renters actually pay. The following is from a comment (not a blog) I made back in early summer (sure a lot of comments over the dam since then). Of course they pay a portion of the costs of the taxes that the landlord pays. As noted by "Did I Say That" and suggested by the following analysis what they pay is a lot less than many of you seem to think.

The above blog deals with how fast increases in property taxes are passed on to renters (if at all). It would appear that here in Lawrence (the data I used) that process has been slow supporting the point that renters (an apparent majority in this town) are protected from votes to increase property taxes - particularly if they are only here for a few years.

"". jafs (anonymous) replies… Renters also pay taxes - do you think landlords don't charge enough rent to cover that expense?"

Another myth. Renters pay taxes as an element of their rent. Rents are not driven by taxes but by market conditions. Despite “merrills” best advice we are overbuilt so rents are very competitive.

I did an analysis comparing a duplex and an owner occupied home of comparable value. If I did it right the taxes were about the same. In the owner occupied property, that one family paid the full tax bill. In the rental duplex three families pay the same tax (if passed on at all). Remember, the rental property owner writes off the taxes in full and we pay them through a need for higher taxes to cover the tax expenditure. The renter cannot write them off because (if they are paid) they are not so identified in their rent.

There is also a time delay. The rental property owner to the extent he/she passes on the tax cannot do so until the next lease cycle. The renters can demand things and at best the costs of what they demand will be delayed (to the extent they see any increase) until the next lease.

Remember, property taxes are the bill for city services. Yes, they are assessed on the property value and are therefore proportional to perceived wealth, but in Lawrence that just serves to aggravate the differences. I defy you to identify anything I get as a property owner that a renter does not get. At best, they pay about a third of what the property owner pays. Not fair or just and more importantly conducive to runaway “government” services and intrusion.”

boltzmann 4 years, 3 months ago

You do get a tax deduction on both your mortgage interest and your property taxes. There are often quite significant and are not available to renters - so a renter with the same income will be paying more in federal and state income tax as a home owner. This has to be factored into the mix to be fair.

George Lippencott 4 years, 3 months ago

boltzmann (anonymous) replies…

Sure do - about 20% of those costs - if Mr. Franks and company do not take my deductions. I can only deduct property tax if I do not deduct sales tax. Sales tax is approaching property tax.

Again, if renters do not feel the costs of the increases in property taxes they will not be inclined to limit property tax increases as the amenities are there and the cost is either not clear or not sufficiently daunting because it is so small compared to that felt by an actual property owner.

madameX 4 years, 3 months ago

"Rents are not driven by taxes but by market conditions."

One of which could be property tax levels, no? If landlords wanted to itemize what each rent payment covers and specify how much goes for property taxes they could, couldn't they? But it would be up to individual landlords to actually do that.

On an anecodotal note, I rented a house for several years and the rent increased from $700/mo to $850/mo in that time and my landlord did specifically mention that part of the reason for that was that his taxes were going up.

George Lippencott 4 years, 3 months ago

Sure. Said that severaL times. Just how much of how much gets passed on is the issue

George Lippencott 4 years, 3 months ago

see MyName (anonymous) above… plus several other of my posts

somedude20 4 years, 3 months ago

I have been renting in one place for over 3 years and my rent went from $450 to $525 a month during that time so something is being passed. The nice thing about your prop tax is that you own (or will own when paid) your place (your choice) but I do not and will have nothing to show for my rent (my choice). i am paying $900 more a year now than I was back in 07' as are the other 5 ($4500 extra a year since 07') people in my building so again, something is getting passed

George Lippencott 4 years, 3 months ago

Probably but note the landlord's comments - a lot may be other than taxes.

Yes I will own but in the current market I will not recover the costs of ownership when I sell. Since I invested in this home (many people my age have) the investment will actually decline as the result of my ownership experience. Renting something equivalent is now an attractive option as you do not have the burdens of ownership - something the renters here have not mentioned.

The city has enjoyed a 34% tax increase from us based on a supposition that my property values have increased. Commercial appraisals suggest little or no increase.

George Lippencott 4 years, 3 months ago

You want to open that box??? Of course the cost of ownership to the homeowner inflates over time as the property needs more maintenance, as the government mandates more things, as the utilities pass on the costs of public policy initiatives and so on. That has nothing to do with taxes in rent. Remember the landlord can reduce the costs to him/her by reductions in income taxes. Deductions include depreciation, cost of making the rental, mortage costs, taxes and so on. Theerfore in order to make a profit the landlord does not need to pass on all costs. But yes, the amount of the costs passed on varies with market conditions. I do not know how to addres that with respect to homeowners??

George Lippencott 4 years, 3 months ago

boltzmann (anonymous) replies…

OK, I am not sure what all you calculating is about but let us reprise my argument

Using your data the average increase in valuations has been almost 34% since 2002.

Using the total mil rate from my tax statements (those are consistent for all residential properties in Lawrence) the mil rate will have increased by about 19% with the new 2010 increases added (104 to about 124 if the library initiative passes).

I leave the precise calculations to you but it sure looks to me like an increase in property taxes in excess of 40%, my initial argument.

Just exactly what is our debate about? I am making a point about tax increases not arguing about the precise number. Our personaL calculated tax increase is 40% suggesting that it may be an increase less than the average.

The valuation increases are sometimes referred to as a stealth tax. The “law givers” do nothing and the tax coffers are engorged. The mil-rate increases are enacted by those “law givers” suggesting that the 34% increase was inadequate.

The combined increase is clearly well above inflation (in excess of 18% for the period) suggesting a healthy does of progressivism adding new items to the budget and expanding on old items.

The only point in the original blog is that taxes here are increasing faster than inflation so that an increase of rent below inflation as reflected in the data suggests that not all of the tax increases may have been passed on to the renters (so far).

George Lippencott 4 years, 3 months ago

Not to my knowledge. Market conditions drive.

unite2revolt 4 years, 3 months ago

This strikes me as funny. Of course most renters get a free ride, its just one of the many reasons renting makes sense. I will not pay one red cent for the new library if it passes tonight, but I sure will use it. So I am voting yes. Here is the reason I won't be paying anything for it: I am on a month-to-month lease with my landlord, based on the terms of my previous one year lease. This legal document is such that as long as I keep my end of the deal my rent will remain the same from now until I die, move out, or the property changes hands.

The other reason it strikes me as funny is that many of the property owners that do pay for my free ride, don't even live here so they can't use the stuff they are buying. No new library for them.

I feel so sorry for all you folks that live in those over-priced Lawrence houses with those really high taxes you have to pay. You ought to just move out of Lawrence and live somewhere where property values are low and nobody wants to buy houses, that away you can save the money you would have paid to the city for services you don't use anyway. Maybe when enough of you move away, housing will become more affordable and us renters will start paying taxes to live in you old empty houses and enjoy all the services we voted for in the first place.

Moderateguy 4 years, 3 months ago

There is a quote that is generally attributed to Margaret Thatcher that goes something like "the problem with Socialism is eventually you run out of other peoples money." I have been unable to confirm it anywhere. As much as I agree with your post, you fail to understand the consequences of your position. Yes, in the beginning you feel like you have the benefit of a brand new shiny library with no outlay of your own dollars. That may be true. In the long run, all those rich evil people will have moved elsewhere and taken the jobs they create with them. I purchased my home long enough ago to be able to get out what I put into it. If the library boondoggle passes, I will likely take my creativity and energy elsewhere. If you vote to create an unsustainable steaming bag of poo, don't be surprised when you're left holding the bag.

George Lippencott 4 years, 3 months ago

Of course we could choose to wait it out - should I lve so long!!

beatrice 4 years, 3 months ago

The thing that seems to be missing here is that renting a home to another person is a business, not just an ownership and property-tax issue. Would you say a business on Mass that rents its space is getting off without paying taxes since they are renting? If no, why not?

As a business, the landlord's expenses get passed on to renters. If the landlord can't turn a profit after paying the mortgage and various bills, including taxes, then he or she made a bad business decision. When housing is in demand, the landlords make more than enough to cover taxes.

George Lippencott 4 years, 3 months ago

In the case of a commercial property, I have not a clue. It has a different reality. However, if Merrill is correct and we are overbuilt for commercial properties the owner will have similar difficulties making a profit.

See my other post above on other factors that influence how much gets passed on to who. In fact an owner can just skimp on maintenance and change the dynamic. The property goes to h**l but who cares. The city will have to deal with the blight and the tenant will have to deal with the leak. It is a complicated system. That said, the data presented on rental properties pretty much indicates that taxes are not quickly passed on in full to renters of residential property or that Lawrence will soon have a major blight problem.

verity 4 years, 3 months ago

So what's the point? Landlords are in it for the sake of charity? Renters shouldn't be allowed to vote? Renters are socialists?

George Lippencott 4 years, 3 months ago

I doubt landlords are in it for charity. The scenario I suggest is that when a substantial tax increase is passed maintenance slips. Once the costs can be passed on attention to maintenance resumes. That can be as early as the next lease or maybe two or three lease cycles.

Of course renters should vote.

Why are renters socialist. Thay have little control over the situation.

IMHO the costs of tax increases need to be better understood by renters so that they can consider both the costs and the projected gains when voting about new taxes. One way is a renters tax. Some other college towns have them. Another way is to look for other sources of revenue so that all progressiveness does not fall on the property owners.

I remember Prop 13 in California - wife voted for it. Perhaps now that Mr. Brownback is governor and the legislature remains Republican we could see something like that in our future. Ping on people can lead to p coming back.

George Lippencott 4 years, 3 months ago

The latter. I have no love of landlords but like all critters there are the good and the bad - see LTE on codes.

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