Capital Reduction Program (CRP)

By S.D. Plissken | January 10, 2019

The Milton Board of Selectmen (BOS) approved a slew of so-called Capital Improvement Program (CIP) Warrant Articles at their most recent BOS meeting last Monday night.

Consider, if you will, the following explanation extracted from a standard economics text. It discusses how a property tax reduces the capital value of real estate properties.

One peculiarity of the property tax is that it attaches to the property itself rather than to the person who owns it. As a result, the tax is shifted on the market in a special way known as tax capitalization. Suppose, for example, that the social time-preference rate, or pure rate of interest, is 5 percent. Five percent is earned on all investments in equilibrium, and the rate tends to 5 percent as equilibrium is reached.

Suppose a property tax is levied on one particular property or set of properties, e.g., on a house worth $10,000. Before this tax was imposed, the owner earned $500 annually on the property. An annual tax of 1 percent is now levied, forcing the owner to pay $100 per year to the government. What will happen now? As it stands, the owner will earn $400 per year on his investment. The net return on the investment will now be 4 percent.

Clearly, no one will continue to invest at 4 percent in this property when he can earn 5 percent elsewhere. What will happen? The owner will not be able to shift his tax forward by raising the rental value of the property. The property’s earnings are determined by its discounted marginal value productivity, and the tax on the property does not increase its merits or earning power. In fact, the reverse occurs: the tax lowers the capital value of the property to enable owners to earn a 5-percent return.

The market drive toward uniformity of interest return pushes the capital value of the property down to enable a return on investment. The capital value of the property will fall to $8,333, so that future returns will be 5 percent.

The sum of those CIP warrant articles, should the voters pass them on the March ballot, would be at least $435,500.00 (some article prices were inaudible). That would be added to an already bloated $197,395.85 Budget increase (making a combined total increase of at least $632,895.85).

Chairman Thibeault: That’s not all of them, just all we have right now.

By the logic of the explanation above, the Town government proposes to further reduce the capital value of every single property in town, including Town property. The BOS voted unanimously to approve these proposed CIP warrant article capital reductions.

Whenever you hear a Town official talking about their Capital Improvement Program (CIP), you should know they are actually just talking CRP.


References:

McEvoy, Eleanor. (1996). Trapped Inside. Retrieved from www.youtube.com/watch?v=tiK-I-cRqfg

Town of Milton. (2019, January 7). BOS Meeting, January 7, 2019. Retrieved from youtu.be/qx6Nfzafn98?t=4424

Author: S.D. Plissken

I thought he'd be taller.

2 thoughts on “Capital Reduction Program (CRP)”

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