On Broken Windows And Amendment Two

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Sometimes, it is amazing what you can learn by spending time on Facebook. Once you wade through pet photos, and the political ravings of that guy from high school who thinks Olive Garden is fine Italian dining, you find a discussion that helps solve a vexing riddle.

It starts with a broken window.

There was a 19th-century French lawyer and economist named Bastiat. He observed that when someone threw a rock and broke a window, the townspeople would rejoice because the person with the broken window would need to pay for a new pane of glass – thus putting money into the local economy.

But Bastiat (rightly) asked, what happens if the person with the broken window, wanted to buy a new plow, or suit of clothes? They would not be able to do that, because they had to get a new window!

In economic actions, there is an effect you can see, and an effect you do not see.

Which brings us back to Amendment Two.

I kept thinking to myself: Why is it that two powerful statewide lobbies – the Association of Realtors, and the Chamber of Commerce – are spending untold millions of dollars to pass this amendment? Where is the largest benefit going to go?

And I got my answer from Facebook – in a discussion thread with a couple people I know reasonably well, and a few I don’t. (The magic of social media, when it works right.)

Amendment Two continues a 10-percent annual cap, forever, on increases in the assessed value of commercial and investment property, and on homes that do not have a homestead exemption. Thus it offers direct protection to those who currently own such properties (and, to a lesser extent, to renters). That’s the benefit we see.

However, per Bastiat, a new owner of such a property will be competitively disadvantaged in two ways. First, their property will be taxed immediately at essentially market (non-capped) value. Yes, this occurs currently on new purchases. But when current owners have their taxes capped, the gap between assessed value on currently-owned versus newly-owned property will widen.

And there is a second, perhaps more important, benefit to current owners regarding rents they can charge. New owners, who are taxed at a higher assessed value, will have to charge higher rents to cover their tax. Ultimately, current owners would be able easily to increase the rents they charge – to match market conditions, etc. But – and here’s the kicker – the current owners still will be paying a lower total tax than new owners, because their tax still will be based on the capped value. So their rent increase? Pure profit!

In other words, for current owners of commercial and investment property, Amendment Two could create a financial bonanza. Prospective future owners of such properties will bear the hidden future costs, and renters will also face future costs.

The voters will decide whether this is an appropriate public policy position. Actions taken in haste – whether by powerful special interests, or voters – are usually repented at leisure.

James Oaksun, Florida's Real Estate Geek(SM), is Broker-Owner of New Realty Concepts in Oakland Park. In addition to having degrees from Dartmouth and Cornell, he is a Graduate of the Realtor Institute (GRI).