Capital Gains, Taxes, Regulation and Some Behavioral Affects

​With many new taxes being proposed and considered at both the local and national level, people are beginning to ask “How will this affect my family or my business?” However, an equally important question is “How will this affect business in America in general?”  But for the purpose of this article, we are going to look at how these taxes may potentially affect the local industrial real estate market in Southern California and the decisions or considerations market participants face on a daily basis. 
 
Taxes or fees are being proposed at the local level for items as basic as road maintenance caused by heavy truck traffic, and at the national level from income to capital gains.  These taxes, coupled with more and more regulation, continually put financial pressure on owners and occupants of industrial properties as they try to provide for their employees and families.  As we talk with these groups, we hear how discouraging and frustrating the continual addition of more taxes or regulation is on both productivity and morale.

While this article is not in any way advocating for no taxes or no regulation, we must recognize that in general, most of these recently proposed or enacted taxes and regulations cause owners and occupants of industrial property significant constraints on efficiency and income.  As a result, people change behavior to counterbalance this effect.  For example, the desired effect of increasing capital gains taxes on certain individuals will in turn cause more people to actually not sell an asset so as to minimize the effect of those increased capital gains taxes (if not sold, no new taxes generated). Less overall taxable sales equates to less tax revenue, both from the capital gains directly but also from all the personal income that would have been generated by those professionals assisting with the sale of that asset.  Fewer sellers creates more scarcity, thus creating inflationary pressure on the market values making it even harder for small business to get started and succeed.
 
Another effect of increased taxation is that people will leave (one of the main reasons our country was founded in the first place).  The steady effect of growing taxation in California has caused many people to move out of the state taking valuable jobs, resources and revenue from Californians. This is only further exacerbated by California raising the tax on those who remain to make up for that which was lost by those who left.  The impact is that we are trading high employee count production operations for low employee count distribution operations, further reducing the taxpayer pool.
 
Finally, we continually see opportunistic market participants navigate the rough waters of heavy taxation and still manage to make a few dollars.  California real estate has continued its steady and long -standing appreciation model. That has helped many groups and families absorb the burden of the increased taxation.  Creative developers are also building new inventory to meet the needs of our local businesses and changing needs.  Another effect is that we do see push back against this trend of raising taxes and one day we might actually see them go in the other direction – imagine that! ​