The Ethics of Tax Breaks

A few weeks ago at breakfast, a question came up about the stores across the street from our usual breakfast place, which have been empty for months now (and in some cases years). I’m working for UCLA Extension these days, and thus we’re eating breakfast in Westwood Village, just south of the campus. It’s an expensive part of town; in fact, the rents are so high that most small businesses have been forced out of the Village altogether. Most of the space, retail, food service and commercial, is now taken up by regional or national chains (which can absorb the overhead) and high-margin/low-volume retailers who can operate in very small square footage while making very large amounts of money on each sale. If you can afford to operate in Westwood in the first place, however, the tremendous population density (from both the campus and the office buildings along Wilshire) can make for an extremely lucrative business.

Past experience indicates that the primary barrier from this market is, in fact, the high cost of renting space in the Village. One could, of course, lower the rents until they become affordable to a customer without quite as much working capital, on the principle that 75% of a preposterous rental fee is better than 0% of the same fee. What a number of these landlords have chosen to do, however, is maintain the high rent level, wait for a client who can afford the rent they are asking for, and take the loss based on the empty (e.g. unrented) space as a tax credit. As a result, a number of storefronts, some in absolutely prime locations, are just sitting fallow.

Now, I’m not going to argue against the tax credits allowed for business losses; without those laws, most conventional business models would never work. And I’m not going to complain about extending those laws to include landlords who have rental properties sitting fallow; anything else would mean massive numbers of foreclosures and bankruptcies every time there was a downturn in the real estate markets. What I’m pointing out is that those laws were never meant to encourage property owners to just leave their buildings empty in order to maximize prices. Even worse, leaving all of those stores empty effectively lowers the overall property values in the area, both because the average rental income is lower and because the empty storefronts are unattractive to potential shoppers and residents.

So the question is, do those landlords have any obligation to their peers, to the other businesses in the neighborhood, or to the residents of that neighborhood, to actually rent those spaces to deserving businesses? Or should they be allowed to keep the rents artificially high and take the tax credit in order to improve their overall bottom line?

Before you answer that, there’s another problem. If we decide that the landlords DO have a responsibility to find tenants, then how do we enforce such a policy? Do we really want all of the knavery, chicanery and buffoonery that come with Rent Control? Do we really want to punish small landlords in other parts of the city who are having trouble renting? Do we really want to start passing laws that affect only one part of the city, or even worse, one 12-block area? It’s a well-known principle that passing laws, even local ordinances, to deal with one specific problem is bad government, and ultimately more trouble than it’s worth, but is there any other way to compel a private citizen – or even a private company – to do what we want them to do and not what they feel is in their best economic interest? At some point the good of the community must override the business interests of the few, but do we really want to bring that point down to something as trivial as setting the rents on a few commercial spaces in Westwood Village?

It’s worth thinking about…