Wednesday, August 5, 2009

Property impairment poker

I've been trying to find ways to better illustrate an alternative approach to taxation when one popped up on television: my city is beginning another round of what appears to be a game of property impairment poker. It consists of picking the winning hand of property rights rhetoric to determine whether to issue another Conditional Use Permit. This time the unit is in a condominium complex where nearly two thirds of the units already have permits.
Like many cities in America, we broadcast our city council meetings so that residents can watch from home. Because Avalon is so small, it's easy to just walk up there and join the meeting if you see something you want to comment on. So when no one seemed to have a straightforward way to reach a decision, I decided to walk in and offer a rather rambling and fragmented summary of what I explain below.
Avalon's city council reviews each player's hand (seek-able video)

It's an interesting issue to me because it represents an opportunity to use the tax code to fairly resolve a conflict of interests between neighbors in a community. It is to everyone's benefit that all property be as useful as possible because that maximizes its value. In a resort community, like Avalon, this means a substantial fraction of residential properties are vacation homes owned by people who use them infrequently and rent them out like timeshares between those visits.

At the same time there are others who live here year round. Obviously the folks who come here to vacation are, well, on vacation. They're apt to party rather late into the night, wake up early to fish or hike, and generate a far greater disturbance than any normal use of that residence would. That's the conflict; allowing one person to use their property in a commercial way has an unavoidable consequence for nearby residents. Not letting them use it that way isn't fair either.

Our state government did what I think is the right thing to address this issue. It granted each city the power to decide whether or not any particular residential unit is suitable for this sort of commercial use and allows that use to be taxed. These two powers give a city government the means to regulate this sector of its economy.

Prior to our electronic age, it would have been too expensive to employ the people necessary to measure the impact that this policy has on our community. Each event is a tiny inconvenience for very few people, the overhead of even reporting it is in most cases more of a hassle than the event itself. But that is no longer true. Pressing a single button on your phone and going back to sleep isn't much to ask. Nor is emailing a cell phone photo of some minor vandalism, trash, or other nuisance. Especially when you know its because your city is trying to measure the impact that their policies are having on you so they can pay you back for it.

The Transient Occupancy Tax (TOT) is intended to repay the community for the additional costs it incurs from a more commercial use of its residential property. Part of doing that must include some redress of the additional cost to residents, not just their city. I can think of no other way that genuinely treats both forms of residential property rights (income generation and use as a residence) equally. Even if we assume we'll never be able to do an adequate job of resolving the conflict between residents and permit holders, this step is still necessary to avoid the exact situation we find ourselves in now--facing yet another contest with no real basis for evaluating whether a permit should be granted or refused.

If the city commits itself to using a portion of the TOT to measure and redress the actual impact the permitted units are having on residents then there is no reason why permits could not be issued by a completely automated process that didn't require anyone to judge a particular application. The map created by measuring the impact these units have will answer that question for us. It will tell us if there are any critical densities (where the impact starts to scale nonlinearly with the number of permits, peaks, or even declines.)

Keeping track of these incidents and analyzing them periodically will allow us to estimate the true cost in dollars experienced by the residents most disturbed by these units and provide for repaying them. Whenever that cost is less than what the TOT generates to repay the neighbors, a permit should be granted. And wherever it is more the city should refuse the permit, but add the application to a list of those pending, and inform the applicant that they will be issued as soon as the TOT can be raised enough to fairly compensate the community.

This approach gives the city council a fine degree of control over the sector without having to address the individual applications. The smaller the fraction of TOT they allocate to redressing its impact on residents, the fewer units will qualify for permits, the less revenue the city will receive from the TOT, and the less incentive managers have to police their clients. Conversely, allocating more to repay the residents would have an inverse effect, enabling more properties to qualify, increasing the incentive managers had to rent only to responsible clients, and increasing the revenue raised by the city.

But best of all, this mechanism allows the city to automatically monitor all such units and maintain a map anyone can view to see the data. Such a map will give the homeowners associations and managers a greater incentive to become fiercely intolerant of rowdy clients and the basis to compete with each other more vigorously because such a clear measure of their performance is visible for all to see. Finally, it will create an objective basis for revoking permits that consistently generate the highest payments to neighbors. Perhaps all such permits should come with expiration dates or need periodic extensions.

Additional Comments, Notes, and Links to related information

The impact on neighbors

It seems unreasonable to expect residents to just endure this trauma. Yet it must be what we expect because we have no mechanism to redress such minor injustices as being repeatedly disturbed at odd hours by partying vacationers. But why not? Because when it happens frequently enough it can become a significant but difficult to quantify impairment of a residence. The only remedy, not issuing a permit, is too severe as well.

This predicament effectively bars residents from any meaningful civil remedy and is the sort of needless systemic injustice that does a great deal more harm than we can notice. Until you experience a repeated inconvenience like this first hand it is difficult to appreciate how much stress, frustration, and anxiety it can add to one's life. But much worse than that is the way it undermines our expectations of and respect for justice and our community itself. It diminishes our interest in even looking for genuine solutions to other problems too because so much about our infrastructure is unjust it hardly seems worth fixing tiny parts of it. And it makes adversarial relationships between residents and owners more likely simply because we neglected to redress the civil as well as civic externalities with our TOT. This is an extremely expensive and socially dysfunctional dis-ease to accept for lack of the small amount of prevention it would take to fix it.

The bottom line is that to deny someone a permit may potentially cost the applicant thousands of dollars a year in lost income. While to grant one may potentially cost their neighbors a nuisance that has a very difficult to quantify cost that is easily undervalued. I think both of these options are simply unacceptably unfair and we must develop the means to better understand what effect this use of property has on all members of our community.

What is being done isn't enough

There is no doubt that the managers do their best to mitigate these problems by educating their clientele, posting rules, inviting complaints, and issuing 24 hour response numbers to residents. They live here too, and the sort of clients that are rowdy do more damage than they're worth in revenue, so they have similar interests in avoiding these problems. But none of these things compensate the folks for being repeatedly disturbed. Instead, those nearby residents are effectively drafted into doing surveillance service for the managers; forced to notify the managers when unruly clients break their rules if they want anything done about it. This is unreasonable to ask of someone in a residential neighborhood or housing unit--mainly because our local government could fix the problem with something like the mechanism I'm proposing.

Suppose a thoughtful management company wanted to simply share a small fraction of the rental income from each unit with the neighbors as an acknowledgement of the impact and a sort of payment for their unavoidable role in helping to police them. I'm guessing a lot of us, and perhaps some of the the city council, would actually misinterpret that as a bribe. Or at least be deeply skeptical of their motives. It would most likely seem wasteful to their property owners and disadvantage that management company in competing for properties to manage. It is really only our local government itself that can mitigate the inevitable impairment the various properties experience as a consequence of its policies. Forcing the handful of residents most inconvenienced by this to suffer so that all of us can enjoy a larger economy is exactly the kind of thing our government is supposed to prevent. A just society would either fix or abolish it.

Our goal is a parity of opportunity

Suppose the city set aside a tiny portion of the Transient Occupancy Taxes collected to create both a more compelling incentive for managers to avoid the complaints, and a resource that can pay residents for the damages incurred. All the city needs is a data gathering answering machine or web site to log the complaints. At the end of each year the city council could review a summary of the events recorded that year and come up with fees for each type of incident that would redirect some portion of the refund due managers to those injured neighbors.

The whole purpose of the TOT is to redress the extra costs the commercial use of residential property imposes on the city, but it does nothing to redress similar costs faced by the nearby residents. The very purpose of government is to protect our rights. The means to do so is available and the consequences of not doing so seem very significant:
  • an unavoidable nuisance befalls a very few members of our community
  • a great deal of our city council and staff's time is consumed to evaluate each application
  • a capricious, complicated, and expensive process awaits property owners seeking permits.
By setting aside a small portion of the TOT revenue to use as I describe, the city ensures it will collect the data needed to craft sensible and mechanical guidelines for evaluating permit requests. It gives the city a measure of the impact of different concentrations of transient housing, permits a more objective evaluation of the performance of management firms, and generates a map of the units most affected. These are the tools needed to craft a fair and objective mechanism to resolve these conflicts in property rights.

I'll bet the size of the cheque that affected residents end up receiving isn't as important as the knowledge that our city is tracking their complaints. Even if it was only a letter summarizing the impact on that resident and how it compares to the average it would go a long way towards making them feel heard, acknowledged, and offer hope that a fairer solution is in the works.

We should have a strategy that promises to get continuously better at mitigating the impact over the long term. We must convince residents that we are seriously committed to engineering solutions that protect all of our rights as efficiently and effectively as possible. Over a ten year period, I believe this approach will lead us to a permanent, simple, and extremely fair infrastructure for everyone involved. I'm only 54. But I've already noticed that people make a lot more progress when they cooperate rather than compete. Wise leadership finds a way to get everyone on the same team fighting the same enemy--in this case its the injustice. I believe this approach better aligns the interests of both the residents and managers.

Are there any reasonable objections?

In a discussion of this issue with someone after the meeting, he made the point that someone would have no recourse in dealing with a neighbor who's young children create a similar noise problem much more frequently. (I should note that his kids can scream at a pitch and volume that would easily drown out a smoke detector.) I don't regard this as a reasonable challenge for a number of reasons. Most notably that the TOT exposure is in addition to the normal noise of living in a small community of very densely packed housing.

But that example seems particularly inappropriate because children represent a tremendous positive externality as well--they are our future and, whether we realize, acknowledge, or even resent it--we are all part of their education. Thus we have a completely natural obligation to all children as a consequence of being adult human beings and that includes dealing patiently with issues like the noise they make. Even in the case of a recklessly inconsiderate adult neighbor, the common challenge we all face as members of a community to find ways to get along well with our neighbors seems incomparable to the uncommon burden of being forced to simply accept the consequences of the commercialization of adjacent housing.

His other objection was that it would encourage people to complain just for the compensation, and over issues they would otherwise not have considered a nuisance. I suspect this is true to some extent but would both fall off rapidly with time, and tend to reveal the unreasonable residents rather than become an intractable problem. (The city could discourage them by adopting a policy that penalized false reports by withholding the funds that person would have earned for their legitimate complaints.) I think there are also many people who don't bother to complain now because they don't like being nuisances themselves, and it doesn't really help--the noise generated by a security response might even extend the duration of a disturbance, and will almost certainly anger the visitors being interrupted and increase the potential for vandalism. A phone number where residents could leave a message (or send an email, text, or photo from a phone) without having to notify the managements security would give the city a much better idea of exactly how much impact the transient rentals are having on residents, as well as the tools needed to effectively redress that impact.

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