Wednesday, December 10, 2014

Tax code uber alles

A recent piece in Smithsonian magazine, The Death and Rebirth of the Mall, points to a 1996 article by Tom Hanchett, staff historian at the Levine Museum of the New South, that I read almost 20 years ago. As always, Hanchett's thinking and research were impressive. But this article opened my eyes to a reality: Our cities and our neighborhoods are shaped less by city planners or the wishes of the people than by intricacies in tax laws and financing strategies.

It's like the time I realized (because David Walters told me) that the reason suburban sprawl didn't happen in Britain and Europe the way it does in the U.S. is because the laws there don't allow developers to build outside of the urban growth boundary. Until then I thought it was because Europeans were somehow more in tune with the beauties of nature and the importance of farms. Nope. It's what their laws say.

Hanchett's 1996 article, "U.S. Tax Policy and the Shopping-Center Boom," in the American Historical Review, describes how a small change in the U.S. tax code in 1954 – creating something called accelerated depreciation – "fundamentally altered the economics of real-estate development in the United States."

If you read the whole article you'll get a clear explanation of things like 200 percent declining balance and sum-of-the-years'-digits accelerated depreciation. If you're a real estate finance expert, you already know that stuff.  But here's the key information: This tax incentive applied fully only to new construction, not to renovating existing buildings.

"Suddenly, all over the United States, shopping plazas sprouted like well-fertilized weeds," Hanchett wrote. The
amount of shopping center square footage shot up from an average of 6 million square feet yearly in the early 1950s to an average 30 million a year starting in 1956.

The tax incentive encouraged quick turnover, selling the property after six or seven years when the tax deduction was about to end. It was a disincentive to upkeep, and by 1970 this one tax break equaled a fourth of the total federal annual budget deficit, Hanchett wrote. And like so many federal provisions starting in the 1930s, it did not assist those who would have preferred to renovate older buildings in cities, and instead helped people building new construction in the suburbs. (See "Yet another way the feds promote sprawl.")