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Taxing Nothing

Virtually all forecasters are now projecting the unemployment rate to remain high for years into the future. This is the result of the political deadlock in Washington, where the Republican leadership has made it clear that it will oppose any further measures to create jobs.

If nothing happens in Washington, then state and local governments are left to fend for themselves. Unfortunately state and local governments have two serious disadvantages in the job creation effort relative to Washington. They can’t run deficits, since most are required to balance their budgets. And, they can’t just print money like the Federal Reserve Board.

As a result, the range of action for state and local policymakers is limited to what they can pay for. With the recession sharply curtailing revenue, that doesn’t leave much money for inventive job-creating agendas. These governments can raise taxes, but there is a limit to how much taxes can be increased without sending business into neighboring states, even if the political will exists.

However, there is one tax that state and local governments can raise without fear of losing businesses or people. They can tax vacant properties.

This is an especially desirable tax in the current economic situation since the real estate bubble created a glut of both residential and non-residential property in much of the country. Having housing units or commercial properties sit idle does no one any good. People could be living in the housing units and the commercial properties could offer new jobs in stores and offices.

The problem is that property owners often have difficulty coming to grips with the new market environment. They saw the run-up in prices of the bubble years and they expect that these prices will soon return. Rather than accept a lower price to sell or rent their vacant properties, they are waiting for prices to return to their bubble peak.

As a result, these pie-in-the-sky property owners are holding property that returns them no income. And, the whole economy suffers as a result of not deriving any value from these idle structures.

A vacant property tax would help these property owners to see reality. By providing an additional incentive to actually use vacant property this tax can both raise a substantial sum of money and bring down the cost of renting housing and commercial property.

Suppose properties that are vacant for a substantial period of time were assessed a tax of 1 percent of their assessed value. (One advantage of this tax is that we already have an assessed value on the books for almost every property in the country.) The value of the nationwide residential housing stock is over $16 trillion. In the most recent quarter, almost 11 percent of this property, or $1.8 trillion was reported vacant on a year-round basis.

If this property were taxed at just a 1 percent rate, it could raise $18 billion a year. If a comparable amount was raised from taxing vacant commercial properties, the sum would be $36 billion a year. Of course there would be large variations by state. The states that have been hardest hit by the downturn would stand to raise the most from such a tax.

Unlike most taxes, all the side effects from this tax are positive. If property owners don’t want to pay the tax, then they can just rent out their property. Or they may sell the property off to someone else who actually plans to use it. Either outcome would push down residential and commercial rents.

In some cases property owners may not be able to pay the tax and simply give up the property. That is unfortunate, but it is better that the property be in the hands of someone who can use it productively than have it just sit idle.

Lower rents could provide a big boost to living standards. For middle-income families, rents are often more than 40 percent of income. If rent fell by 10 percent this would be equivalent to a 4 percent increase in wages. Lower commercial rents will mean more stores and other businesses (think of it like a tax cut).

This route would be especially desirable in eurozone countries like Spain and Greece where it is necessary to reduce large trade deficits. Since there are on the euro, these countries lack the most obvious mechanism for fixing a trade deficit: devaluing the currency.

The route being pushed by the European Central Bank and the IMF is to have these countries experience an internal devaluation where wages and prices fall to the point where competitiveness is restored. This is likely to be a long and painful process.

However this process could be made much less painful if rents fell sharply. This would substantially reduce the cost of living for workers in these countries, possibly allowing them to see rising real wages even if their nominal wages remained stagnant or fell slightly.

This is a tax without a serious downside. When you tax something, you expect to get less of whatever it is you are taxing. In this case we are taxing nothing – valuable property being left idle. We want less of that.

The tax is easy to collect and it encourages people to do what we want them to do. It might even be possible to get politicians to consider it.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of False Profits: Recovering from the Bubble Economy . He also has a blog, ” Beat the Press ,” where he discusses the media’s coverage of economic issues.

This column originally ran on Al Jazeera.

More articles by:

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

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