Not just another fairy tale, a warning about property taxes
This is the second in a series of interconnected essays. The first can be read here. This installment features a story … and with that story comes a moral.
Once upon a time there were two imaginary small towns which shared a boundary. The town to the east was called Eifel. The town to the west was Wembley. Eifel shared its western border with the eastern border of Wembley.
Astride this border had been constructed a mid-sized commercial building which the two cities’ common boundary neatly divided along a common wall. The western half of the building occupied a few thousand square feet. The eastern side of the building had the exact same square footage. Their parking facilities matched each other like twins.
In each half of the building was a successful bar – one on one side, one on the other. For reasons that no local could explain, the two bars had developed as essentially mirror images of one another – except for their names. The Wembley tavern was called Wynn’s Bar and the Eifel establishment called itself Eloy’s Tavern.
The two bars offered the exact same drink selections, priced identically. The sliders at both were equally greasy, the fries similarly crispy.
They both had the same operating hours and played the same pop tunes with an emphasis on Bob Seger’s hits. They were furnished the same. Their bathrooms were equally spic and span. Even the staff was comparable. Occasionally, a customer who had had a few too many would even mistakenly believe they were partying in Wynn’s when they were actually merrymaking in Eloy’s. And vice versa.
Each bar was also equally successful. Their entrances were a mere ten steps apart. On any given night, one would find about half of the population of each town in each of the bars. To say the bars were selfsame would be an understatement. Wynn’s and Eloy’s were the only bars for miles around. The surrounding area was decidedly rural.
Predictably, patrons would often frequent both bars, sometimes during the same evening’s reveling, since the two facilities were so interchangeable in every way except for one fact that didn’t matter much to customers (until it did): One bar was subject to the jurisdiction of Wembley while the other fell under the municipal authority of Eifel.
Now it came about that one day, the governing council of Wembley got to thinking about building a new city swimming pool. Or perhaps it was exploring the idea of reducing the burden of some of its tax burden on its residents. In any case, one member of the Wembley city council made a motion which was promptly seconded and unanimously approved.
The Wembley resolution imposed a new tax (authorized under its charter) – a cover charge of $20 to enter any bar. And by any bar, they meant the only bar, Wynn’s. Since about 100 patrons visited Wynn’s every night, they calculated, the tax should generate $2,000 a night – over $700,000 in tax revenues each year! More than enough for its new pool. (Or was it property tax relief? Locals years later couldn’t quite recall.)
What the locals do recall is the claim that the mayor had made in announcing the $20 cover- charge-tax: “Half the patrons at our beloved Wynn’s Bar on any given night are non-residents –they’re Eifelians; out-of-towners!
“And they represent an external revenue source – just waiting to be harvested!” However, as it turned out, the external revenue source didn’t wait around much at all. It skedaddled.
On the first night that the new tax was imposed, the patrons intending to enter Wynn’s were dismayed and irritated. A few dug into their pockets and paid the $20, but only a few; five, to be exact. Others called it a “shake down” and went next door. And even before the first night’s closing bell rang, those few who had paid the tax left Wynn’s dismal, half-empty atmosphere and trotted over to Eloy’s for their refreshments. There, a lively crowd had gathered.
The next night, the attendance at Eloy’s had precisely doubled and the attendance at Wynn’s had fallen to zero. Within a week, Wynn’s closed its doors and laid off its employees, all of whom were quickly snatched up by Eloy’s which needed extra help to serve all its new customers.
At the end of the fiscal year for Wembley, the city council reviewed the tax revenues generated by its cover charge tax. The total revenue banked was just $100. They were disappointed. Therewould be no new pool; there would be no tax relief.
Their treasurer explained that things were even worse than that. The half of the building located in Wembley was now vacant. The city had seen its sales tax revenue from the drinks that Wynn’s had previously sold plummet. Its tax-the-bar scheme had not generated $100 in taxes; it had resulted in net loss approaching $50,000 after taking into account the lost sales taxes.
The treasurer then cleared her throat. “That’s not all,” she said. “The property taxes on the space formerly occupied by Wynn’s are in default. I hear that its owner is consulting with a bankruptcy lawyer. And moving to a cheaper apartment in Eifel.”
Wembley promptly repealed the tax, but it was too late. Wynn’s never reopened. To their day, the aldermen rue their decision to tax an “external revenue source.”
* * *
The foregoing is a fairy tale, not a fable, but some fairy tales also have a moral. The moral to this one resonates with the axiom articulated by the 18th century American jurist, Chief Justice John Marshall: “That the power to tax involves the power to destroy is not to be denied.”
The power to tax = the power to destroy.
Chief Justice Marshall, in the context in which he made this assertion, was referring to hostility. He was pointing out (in McCullough v. Maryland) that if Maryland could impose a tax on an instrument of the federal government, then it could effectively destroy it. For example, if a state could tax a federal army base located within its borders, it could tax it out of existence and such a power would be inconsistent with the principles of federalism embedded in the constitution.
The nuances of the Chief Justice’s reasoning are not as important as the axiom itself. Because the power to tax is not only the power to destroy when exercised with hostility toward its object, it is also the power to destroy via negligence. That’s what happened to the aldermen of Wembley.
Caution is key when we consider any new tax, lest we inadvertently destroy the very commercial enterprise we wish to tax.
The moral of the story is for lawmakers – and gubernatorial candidates as well: Be careful what you tax – lest it simply depart – and leave you with less. This is especially true when the object of your taxation scheme is mobile, like bar patrons – or tourists – or, as we’ll see next – trusts.
Thomas E. Simmons is a professor at the University of South Dakota Knudson School of Law in Vermillion. The views and opinions are those of the writer and not those of the University of South Dakota, its Knudson School of Law, or the South Dakota Board of Regents.
Photo: public domain, wikimedia commons
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