Friday, March 18, 2011

Gentrification is Apartheid; The Housing Bubble: Class War

The base line criticism of gentrification is obvious: upper middle class (there's no such thing as middle class anymore, darling) college graduates move from all across this great nation into NYC, and, in need of cheap rent* move into once impoverished neighborhoods, now celebrated for their stock of beautiful old rowhouses, convenient access to the subway system and "genuine" "gritty" "New York" feel.

In short, predominantly white young people move into a neighborhood, landlords raise rents every May and September (the college year, dummy!), until rent in the area is too expensive for the predominantly black and Latino residents, driving them further from even marginally desirable neighborhoods, uprooting them from their homes and destroying their communities.

You can argue that gentrification helps increase economic activity in the neighborhood, brings down crime, and desegregates neighborhoods racially. You'd be wrong, but not only because organic grocery stores replace bodegas and cafes replace barbershops, so that old businesses are pushed out, creating a new local economy rather than helping the existent one; not only because (unofficially, of course) the punitive consequences for violent crime against white people are significantly more severe, so that more white people in a neighborhood means fewer targets for violent crime, which, combined with increased police presence, just moves crime towards less gentrified areas; not only because, despite the visible mix of skin tone on the street, the populations tend to favor totally different hang outs (in my neighborhood there is a hipster bar, Sweet Revenge, literally next door to an old neighborhood stalwart, Franklin Palace: crowds of white twenty somethings divided by twenty inches of plaster from a crowd of black locals).

No, even those who manage to hold on to their homes in gentrifying neighborhoods do not see their schools or services improve because of our totally perverse property tax code: and yes, I realize how much less sexy that is than racist culture war.

First of all, most of the government services you like are funded by local property taxes (Your income tax mostly goes to war and, increasingly, health care costs).  Most fundamentally linked is public school funding, but also road maintenance, policemen, firemen, trash pick up: pretty much anything you get "for free" is funded by property tax. 

Still think the ghetto has bad schools because of tenured teachers?

The taxable value of any real estate property in New York City (and in New York State) is linked to its "assessed value", which the government determines once a year based on market data.  Seemingly reasonably, there is a cap on the year to year increase in assessed taxable value, meaning that if the market value of your house went from $300,000 in 2005 to $500,000 in 2006, the taxable value of your property would only increase to at most $360,000 (the range of potential assessed taxable value increase is 3-20% per year on the majority of houses in NYC). Therefore, you're not paying taxes on the entire value increase.  You're still paying more in property taxes, but in theory you're not being totally screwed by an increase in value, and anyway, the housing market is immune to speculative bubbles, right? 

The housing bubble was disastrous for the governmental budgets of middle class suburbs because their books were balanced against real estate taxes.  Property taxes went way up for ten years during the rise in housing prices without any increase in the salaries of the homeowners.  When it popped, and everyone got laid off, not only were income expectations of local governments suddenly revealed as fictitious**, but a huge number of homeowners couldn't pay their property tax, let alone their insanely high mortgage payments.  What does it mean for firemen, teachers and garbage men when there are way fewer property taxes being paid?  Not golden parachutes. 

But the housing bubble has a doubly perverse effect in gentrifying neighborhoods.  Because in the mean old NYC eighties and nineties, assessed values of property in huge swathes of Brooklyn (including Bed-stuy, Bushwick, Crown Heights, Clinton Hill, etc) fell to literally zero. Meaning that the house I write this in right now has a market value of $530,000, but, because of the cap on assessed value increase, the taxable assessed value is only $8,791, meaning that this building will owe less than $200 in property taxes this year, or less than half of one month of rent for one resident.  If the market value of this house were to stay exactly the same, and the taxable assessed value were to increase at the maximum %20 per year, it would still take 23 years before the taxable assessed value were to match the real value.***

Landlords in gentrifying neighborhoods pay next to nothing in property taxes. While tax on the rent collected will go into state, federal, and NYC income tax coffers, property taxes barely crawl up, so that vital neighborhood services funded by property taxes do not improve.  They can raise rents at will, as much as the market allows, without paying any more property taxes. Landlords are stealing money from schools, roads, fire departments, etc. Thus, the young and shiftless (who don't really care much about these services) take neighborhoods from the working class or impoverished families who rely on already terrible (see: assessed taxable value of $0) basic government functions, while those who manage to remain in the neighborhood see no improvement in these functions anyway. Gentrification maintains a permanent underclass of black and Latino NYC residents whether or not they have to leave their neighborhoods because of it. 

Meanwhile, middle class homeowners in Queens and Staten Island are being screwed by the simultaneous loss of equity and rise in property taxes, meaning they're defaulting, foreclosing, and generally not paying property taxes.

Which means a big fucking mess for everyone who relies on government programs in New York City, which means everybody.

The funding base line of most vital public services in New York City, New York state, and America was the theoretically solid, speculation-proof housing market.  The housing bubble destroyed this fiction, and Washington and Albany are doing everything they can to wipe out most of these services with it.  Budget cuts (or their lovely European euphemism, austerity measures) replace the revenue lost in property taxes by merely getting rid of the services.  Having no property taxes is only a problem if you need to pay teachers, policemen, road crews, bus drivers, garbage collectors, firemen, subway conductors, or anyone else employed by the city.

Meanwhile, the Fortune 500 see their biggest profits in a decade.

*Remember: the unemployment rate for Americans in the labor force aged 16-25 officially hovers around 21%, and that number is definitely low because A: it under counts people who have never been in the labor force before B: a huge number of people in this age range are in prison and C: many of these people are drastically underemployed

**This allowed local government budgets to "bubble" just like the housing market, so that the drastic cuts of the Bush years, which pushed ever more financial burden onto local governments, were not felt until the bottom fell out: then they were felt disastrously, all at once. 

***In other words, without the assessment increase cap, middle class homeowners would've gone under well before 2008 by property tax alone.  But, because of the assessment increase cap, property taxes in impoverished neighborhoods are doomed for decades. The cap helped hide the effects of the housing bubble, but it's NY state law, and plenty of states had no such cap during those heady days of CDOs and infinitely rising home prices.  The problem arises from tying public services directly to the market value of assets, not arcane flaws in the tax code.

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