New tax law's hidden advantage: boon for cities?


NEITHER THE PRESS nor real estate moguls seem to have noticed. But inner cities could reap a harvest of residential investment from a provision of the new budget-tax law that virtually repeals the capital gains tax on the sale of personal homes.

That's surely not what President Clinton and the Republican Congress focused on when they decided to allow individuals up to $250,000, couples up to $500,000, in tax-free gains on selling their residences. The politicos were making another play to America's perennially pampered homeowners.

But the initial idea of doing away with the housing capital gains tax didn't come from homeowners associations, Realtors, or any of the usual suspects.

The originator, instead, was Thomas Bier, head of the housing policy research center at Cleveland State University.

Through years of meticulous probing of people's house-to-house moves, Mr. Bier assembled statistical evidence showing that the 1951 tax law virtually forced movers with accumulated house value to look away from the city, to buy "up and out" -- to more expensive housing in the suburbs.

Home sellers had been obliged to pay capital gains tax -- often large, after inflation -- unless they rolled over their gain within two years into a new home worth at least as much. The sole loophole was value gained up to $125,000, and then only at age 55.

Even beyond factors such as crime and schools, Mr. Bier argues: "This single federal policy virtually dictates central city decline, and eventually inner-ring suburban decline, because it creates an extremely strong push toward more expensive homes."

In most markets, he found, builders were creating the main supply of those homes away from the city.

Mr. Bier proved his thesis the hard way, by using his university base to match the names of tens of thousands of home sellers and buyers on the computerized property records of Cleveland and Cuyahoga County.

Once the search system was perfected, Mr. Bier explains, "we knew where people sold, what for, where they purchased, and for what price. We could track the movement of sellers."

He arranged, through Ohio's Urban University Program, for parallel studies in Akron, Cincinnati, Columbus, Dayton, Toledo and Youngstown. Everywhere, the overwhelming numbers of moves were out from -- not toward -- the cities. But the small minority of people who decided to swallow the capital gains pill were 2.3 times more likely to move inward, toward the urban core, than out.

Quiet evangelist

His proof in hand, Mr. Bier became a quiet evangelist for reform, presenting the case to multiple policy groups and congressional tax committees.

"Tom was a lonely voice in the wilderness, making this tTC fascinating but counterintuitive point about tax law," says David Garrison, formerly his boss at Cleveland State, now a top policy aide to Health and Human Services Secretary Donna Shalala.

Mr. Garrison and David Rusk, the former Albuquerque mayor and expert on regional economics, pushed the idea of housing capital gains reform in key White House and Capitol Hill circles. Fortuitously, it matched the political ends of the political powers that be. Now it's law.

Yet there are real questions: Will city halls and developers seize on the golden opportunity? Will they see the opportunity to attract empty nesters now able to dump their big suburban houses, buy or rent for a lot less in the city, perhaps invest some of their profits in the stock market?

Check Chicago, Cleveland, Houston -- indeed almost any major city today -- and you discover a modest revival in inner-city housing. It ranges from loft apartments to townhouses to free-standing residences. Factors include the booming economy, falling crime rates and some buyers' distaste for suburban sprawl and ever-longer commutes.

Add 400 or so homes a year in an inner city like Cleveland's, suggests Mr. Bier, and in a few years it will have gained a solid, tax-paying population that enlivens the downtown and lets it be an equal player on the regional scene.

Cities need, in short, to be on the stick to assemble land parcels, minimize regulations, encourage recycling of old buildings.

The federal tax law's just one factor, of course. Mr. Bier's the first to note that most states, through massive subsidies for suburban ring roads and connectors, new water systems, sewers and schools, continue to finance suburban growth and discriminate against their established towns and cities.

Then there's the possibility the new freedom to sell residences ,, with big appreciated value will favor other areas -- that people selling their homes in affluent suburbs will opt for smaller American towns and regions, or areas of the South and Southwest.

Still, Tom Bier's persistence adds up to a golden opportunity for America's older center cities -- if they'll move aggressively to take advantage of it.

Neal R. Peirce writes a syndicated column.

Pub Date: 8/10/97

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