PROPERTY TAXATION IN RELATION TO INVESTMENT IN URBAN AREAS

Abstract

THE INCOME TAX STATUS of the investor has become so dominant a factor in appraising investment that other tax considerations have come to seem insignificant. The marginal rate of tax for even a small investor approximates 20 per cent, for the wealthy, over 50 per cent. Since the gains from tax avoidance are such as to whet the interest of most investors, the opportunities for income tax avoidance are more significant determinants of investment than property taxes. Consider, for example, home ownership as an investment. Exemption of the return on the investment in owner-occupied residential property virtually eliminates competition from any other type of investment with comparable security. Moreover, if treating such investment by home owners as tax-exempt is not a sufficient incentive, the home owner can also consider the privilege of deducting from other income the property taxes that he pays on a tax-free investment as well as any interest charges. For those who are satisfied to own their living quarters, the attractiveness of this type of investment is assured by its treatment under the federal income tax. The income tax aspects of home ownership are not alone among the factors having special pertinence to investment in real estate. The fact that investment in real estate does not require a corporate entity and lends itself to the use of the capital-gain loophole raises all sorts of interesting possibilities to individual investors. Both corporate and individual investors find other for savings in property utilized as an adjunct to a commercial or industrial enterprise. Tax counsel will provide an infinite variety of suggestions for using real estate investment to minimize personal and corporate income taxes and to maximize the after-tax return. Many of these suggestions are not feasible for use in other avenues of investment. The foregoing considerations imply that the influence of property taxation on investment is definitely secondary to the impact of the incometax. It might be put in these terms: if the composite investor, a weighted fellow, not a simple mean, were confronted with the choice of a less favorable income tax treatment or higher property taxes, he would unhesitatingly choose the latter.