Urban Economics Short Essays

Urban Economics Short Essays Name Course Date Question A: Fiscal needs of local governments and property taxes Property tax and intergovernmental grants are the most important sources of revenue for the local governments and they are levied on residential, commercial, and industrial property. Since the local governments have the legal authority to levy taxes and borrow, property tax plays an important role in public financing to support public expenditure nonetheless, the governments have had to grapple with how to fill the fiscal gap between spending needs and revenue capacity when there is clamor for lowering taxes. The homeowners, some legislators, and real estate stakeholders clamor for less land and property taxes, despite this being an important source of revenue since it will reduce the taxpayers’ burden. There are negative consequences of the local governments collecting low revenues from the property taxes because of inability to meet their financial obligations and there is overreliance on the state/ federal governments and even heavy borrowing. On one hand, the local governments, which have the most contact with the residents are often the visible face of the state, have few financing options to provide quality goods and services. On the other hand, even when there transfers from the federal government, the local governments tend to be more efficient in spending when they collect most of their own resources. The transfers are sometimes spent inefficiently or wastefully. Since there is decentralization of public services through the local governments the public officials look into how best to improve service delivery The perception that there are few who pay taxes and that money is wasted reduces support for people paying taxes, and the largest proportion of taxes is from those with the most valuable homes, mostly the richest. When it comes to increasing tax the question of what is fair is contentious, since the rich bear the burden, but the benefits are distributed to more people through the local government expenditure. When taxes are imposed people tend to change their behavior to reduce and avoid the tax burden, which results in the tax being shifted to other people. Generally, taxes reduce investments in the housing markets because of the higher costs, and the residents are directly affected when the population increase, but the supply of housing is constrained. As such, imposing or raising property taxes can reduce the local governments, while increasing the housing costs. According to O'Sullivan, (2018) property tax generates approximately 75% of the local tax revenue and 50% of municipal revenue. When the service provided by the local governments are visible and useful, it is more likely that there will be voluntary compliance with the payment of taxes. Political perceptions on the effectiveness of the state in the provision of public services financed with this tax play an important role on whether people support or oppose the property taxes. As such, changes in perceptions are one way to increase the tax morale of taxpayers at the local level. There are incentives to move to desirable locations with low taxes, and the local governments ought to consider this when implementing the property taxes to avoid driving away people and businesses. Assuming that the residents are mobile, the residents move from highly taxed areas to areas with less properly taxes. This is a loss of revenue for the property owners and there is less returns on land. This may force the property owners to reduce the rent to retain the tenants, but they tend to raise the rent to avoid falling rent come. As the property taxes increases there are fewer incentives to invest in land. There are differences between taxed areas and the untaxed areas since the immobile households pay the higher house rents in the taxed areas while those in the untaxed areas pay less housing rent (O'Sullivan, 2018). Since the local governments rely heavily on real properties (real estate and land) the property taxes may become burdensome. However, the local governments are slow to reduce the taxes since they would need other sources of revenue or otherwise cutting expenditure and service provisions. The people directly affected by taxes include the consumers, landowners, owners of housing firms and capital owners, which implies the land and structures or property owners and the consumers (O'Sullivan, 2018). For the governments that seek limiting property taxes as they affect the property owners and consumers increase in sales and income taxes is the most common. When there are potential losses of the property tax revenues. The local governments then have to balance between lower revenue and expenditure and some result to freeze in increased spending and other borrow more. Question B: Secondary mortgage market The secondary mortgage market allows securitization of mortgages where they are converted into securities, with securitization providing money to the banks such that they have more moray to lend. The banks sell mortgages to investors and the federal government. Prior to the secondary mortgage market being established the big banks were the main players and they tied the mortgage loans to 15 or 30 years, but these are now more players who offer mortgage lending services. Each submarket has demand and supply functions that are influenced by the market forces. For instance, supply may depend on new construction, which is then influenced by the rate of returns while demand by the households may depend on market valuations. Typically, households adjust their housing consumption patterns to the equilibrium position, and this partly depends on the desired level of consumption and mobility. In any case, the agency influence the level of home purchase mortgages in certain submarkets, and the house prices have mostly risen sharply in the metropolitan areas. After recovery from the 2008/9 financial crisis Fannie Mae is now a major player in the mortgage market again and backs many of the new home loans When there is growing appetite for borrowing, and limited financing by banks to lend the secondary mortgage market thrives, whereby the forces of supply and demand in the secondary mortgage market stimulate both lending and housing production, while creating more funding. The funding then increased demand by the borrowers and higher demand creates more supply of the mortgage loans available in the secondary mortgage market. On the other hand, in cases where there are few wi...