Employment and Pending Tax Increases

If you are a regular reader of this StreetWise column, you know the importance that I believe the employment picture has on our commercial real estate markets. In fact, there is no other metric that more profoundly impacts the fundamentals of both residential and commercial real estate.


This is why last Friday’s jobs report was particularly troubling. In June, U.S. payrolls lost 125,000 jobs, the first monthly loss of 2010. These losses were due, mainly, to the elimination of 225,000 temporary government census workers. Just as 441,000 new census temporary jobs skewed the numbers higher months ago (and the administration seemed downright giddy over this “job growth”), June’s job eliminations have skewed the numbers to the downside.


The official unemployment rate, interestingly, dropped from 9.7 percent in May to 9.5 percent even though the market lost 125,000 jobs. You may ask how this can happen as elementary school mathematics would indicate this is an impossibility. The fact is that something called the “participation rate” impacts the official unemployment rate calculation. While the market lost 125,000 jobs, simultaneously, 652,000 discouraged Americans stopped looking for work. After their job search has ceased for more than 30 days, these unemployed workers are no longer technically considered unemployed. This quirk in the official rate calculation caused the reduction seen in June.


However, if these discouraged workers are counted and those who work part-time wishing to be employed full-time are included, the unemployment rates balloons to 16.5 percent. Equally troubling is the fact that the median duration of unemployment rose to 25.5 weeks in June from 23.2 in May.


The most important thing to extract from the jobs report is that the private sector created only 83,000 jobs in June. This comes after an equally disappointing private sector job creation number, in May, of only 33,000 private sector jobs.


During this recession, our economy has lost 8.4 million jobs. It is important to note that, depending upon which analysis you read, our economy needs between 100,000 and 150,000 jobs created per month just to keep up with population growth. Therefore, even with monthly job creation on the order of 300,000 or 400,000, it will take many years to regain the jobs that have been lost.


Additionally, in June, employers cut the average the work week of existing employees. The average work week fell to 34.1 hours after rising for the previous 3 months. Average hourly earnings also slipped in June down to $22.53 from $22.55.  


So, why isn’t the private sector creating jobs at the typical rate seen at this point in a recovery?  Economic growth shifted positively almost one year ago. In typical recoveries job creation becomes self sustaining. Jobs are created, more people have disposable income, and this creates demand, which creates profits, which leads to more new jobs. This process normally works very nicely.


Unfortunately, we are presently seeing an employment picture that is merely muddling along. The fact is that private sector employers are in a holding pattern. Hiring decision are being delayed as employers wait to see how much more politicians are going to increase their costs of doing business. Job creation and new investment have suffered from the destructive impact of trade restrictions, additional regulation and, most importantly, higher taxes.


Even before any new taxes are proposed to address budget deficits, Americans are bracing for the biggest federal tax increase in America’s 234 year history, which is expected in six months. Naturally, Washington will portray this tax increase as a “restoration” of old taxes, not new taxes.


 In 2001 and 2003, Congress enacted tax relief that spurred economic growth and development. These cuts will expire on January 1, 2011. Income tax brackets will shift significantly. The top income tax rate will rise from 35 percent to 39.6 percent. The lowest bracket will increase from 10 percent to 15 percent and all other brackets will increase by 3 percent annually.


Additionally, itemized deductions and personal exemptions will phase out which effectively create even higher marginal tax rates.


On top of these tax hikes, the marriage penalty will return and will be applicable to every dollar of income. The child tax credit will be cut in half and dependant care and adoption tax credits will be cut. The estate tax will increase to 55 percent on estates over $1 million.


Important to our real estate markets, capital gains rates will increase from 15 percent to 20 percent in 2011. The dividend tax rate will rise from 15 percent this year to 39.6 percent next year. Additionally, the new healthcare bill will increase both of these rates by 3.8 percent beginning in 2013. This increase will bring capital gains rate to 23.8 percent or 60 percent higher than its present level. Dividends will be significantly impacted as the top dividend rate will escalate to 43.4 percent or nearly three times today’s rate. The healthcare bill includes 20 new or higher taxes, several of which become effective January 1, 2011. In the face of these increasing costs, is it any wonder why private sector job growth is moving like a glacier?


For the sake of the commercial real estate market let’s hope policy makers realize the importance of job growth and that they understand what the real drivers of private sector job creation are. A clarity with regard to future costs, particularly taxes, and elimination of much of the uncertainty, which presently exists, would induce private sector employers to begin hiring again. Our economy needs this and so do our commercial real estate markets.          

 Mr. Knakal is the Chairman and Founding Partner of Massey Knakal Realty Services in New York City and has brokered the sale of over 1,075 properties having a market value in excess of $6.4 billion.

14 Responses to “Employment and Pending Tax Increases”

  1. 1 rknakal July 6, 2010 at 9:35 pm

    posted by Frank Farricker

    This is a selfish and highly inaccurate reading of the future. You complain about how taxes will take things from you, but there is nothing in this complaint about how to really fix things, unless you determine that not taxing you and making you rich will save the economy. Every last assumption you make is baseless, self-serving and detrimental to a real recovery. We all have to do our part to get America back except, it seems, you.
    Private sector employment is not moving, because nobody wants to hire, because nobody’s spending, because nobody has faith that anyone will work for the public good rather than just the rich getting richer. However, you can continue to employ like crazy because it costs you little. Most of your employees are on commission, anyway.

  2. 2 rknakal July 6, 2010 at 9:50 pm

    Hi Frank, thanks for your post.

    Unfortunately, your comments fail to take into consideration the reality of higher taxes on the American entrepreneurial spirit. Many buiness owners I speak to suggest that they will not hire because they expect tax obligations to balloon in the coming years to make up for irresponsible spending by politicians nationwide.

    If spending exceeds revenue, there are only two options. The first is to reduce spending and the second is to raise revenue. Few elected officials have demonstrated the political will to reduce spending. We have seen it in New Jersey and Virginia and that’s about it. In New York, spending continues to increase beyond the rate of inflation. Therefore, how could we expect anything but higher taxes.

    Consumers also expect higher tax obligations moving forward and that is why they have cut back spending.

    Small business job creation has led us out of the last 7 recessions and we need them to lead us out of this one. If we keep raising taxes on employers and employees, how is the economy expected to grow?

    You seem to think tax policy has no impact on the economy. If this is the case, why did Connecticut (a state you might know a little bit about) run TV commercials in NY within 24 hours of the proposed tax increase on, among others, hedge funds encouraging managers to move to CT?

    I know you are a “fair share” guy and, you know what, so am I. I am okay with the fact that nearly half of Americans pay virtually no federal taxes. Just dont strangle the rest of us. Before making acusations about my “doing my part”, try doing a little research about what my employees and our charitable foundation do for the communities in which we work. If you do, I will be happy to provide the toothpicks with which you can pluck out the shoe leather from between your teeth.

  3. 3 Bobby Guarino July 7, 2010 at 2:12 pm

    The commerical real estate tax has just incresed again on 7/1/10.while the value of the property continues to fall.Small bussiness cant pay the freight anymore,I dont think the polatition want mom&pops in bussiness anymore.In Brooklyn go down 86st street theres dozens of stores for rent, this was always a triving bussiness community.same gose for richmond ave in Staten Island.I own a strip mall in Staten Island and my R.E. taxes just went up 22% on july 1st.My tennents cant afford to pay it, there taxes are what there compleat rent bill was a couple of years ago.Keep taxing at the rate they are doing now and nobody is going to invest in anything because there will be no return on your money

  4. 4 David Bahr July 7, 2010 at 8:11 pm

    “I will be happy to provide the toothpicks with which you can pluck out the shoe leather from between your teeth.”

    Bob 1
    Frank 0

  5. 5 rknakal July 7, 2010 at 8:47 pm

    Hi Bobby, thanks for your post. Your feelings are very similar to many property owners that I speak to. Unfortunately, real estate taxes are an easy target for politicians to pick on. The most obvious other one is the capital gains tax, which will definitely be in the crosshairs of the administration next year. I believe the anticipation of tax increases is the biggest reason why the recovery is so sluggish. If you want to sell to beat the capital gains tax increase (like 2 dozen of my other clients) just let me know.

  6. 6 rknakal July 7, 2010 at 8:50 pm

    Hi David, thanks for your post. I am an entrepreneur and a capitalist but I agree that the government needs to help those who cant help themselves. Unfortunately, many act as if they cant help themselves while they actually can. Thanks for your support.

  7. 7 Chris Terlizzi July 9, 2010 at 12:10 pm


    I enjoy reading your blog and especially agree with your assessment of real unemployment and the chilling effect that tax increases will have on small business expansion, the principal source of potential job growth. As I see it, we need an overhaul of the way we fund government. While I am not an expert on this subject, it strikes me that taxing incomes and wealth creation serves as a disincentive to investment. Since investment drives job growth, what we need is a more rational approach to tax policy. Perhaps a move to a consumption tax that captures the underground economy and yes, the illicit economy might be a more rational approach?

    Governments (federal,state and local) have bloated payrolls that don’t increase GDP. These are funded with taxes of every variety, sales, income, property, etc. Government borrowing to redistribute wealth via pork laden stimulus measures is another challenge. Reduce the size of government, cut back on government spending and incent growth with a rational tax code and we’ll soon have a growing economic base to support the government’s funding needs without raising taxes.

    If I ran my business the way we run our country, I’d soon be out of business.

  8. 8 hummbumm July 9, 2010 at 1:09 pm

    I have to disagree again. it is clear that business investment is not taking place due to a shortfall in end demand. why build new plants when capacity utilization is in the low 70s. this has nothing to do with fear of future tax increases. The 2001 and 2003 tax cuts did not spur job growth as the 2000s were a terrible decade for job creation. Advocates of tax cuts will now demand further tax cuts to spur further growth. Clearly we have hit the point of diminishing returns here. it is also evident that the bulk of the revenue shortfall currently is due to 1) a decline in tax receipts due to the recession, 2) the cost of ongoing conflicts and 3) the bush era tax cuts. Yes we were running a structural deficit prior to the recession. Current new spending is a drop in the bucket and yet and yet of course is laid to blame for everything. Very well if we must talk of spending cuts, let’s talk of the three primary sources of savings: Medicare, social security and defense. My rough calculations and that of many others point to the fact that taxes have to go up in addition to a restructuring of entitlement programs as well as cuts in defense. I always marvel at this trope of entrepreneurianism being stifled if taxes go up, when taxes were higher in the 90s, a period of dynamic entrepreneurship, and both taxes and regulation were much higher in the postwar decades, a period of sustained economic growth. there is no one i know and i know quite a few who make more than $1M who will work less because their incremental tax rate went up.

  9. 9 rknakal July 11, 2010 at 1:02 pm

    Hi Chris, thanks for your post. I couldn’t agree more with your last sentence. Onward and upward!

  10. 10 rknakal July 11, 2010 at 1:07 pm

    Hi HummBumm, Thanks for your post. Based upon your comments, I would guess you do not belive in the assumptions underlying the Laffer curve. If taxes were 100% you must believe people would still work. I know that the government couldn’t exist with zero taxes and that fair taxes are necessary. One of the most important things is the expectation of tax’s direction and that is what people are reacting to. I know many people who are selling buildings because they believe capital gains taxes will rise and I also know many people who have said they would probably retire early as opposed to working longer and taking home less. At some point there is a straw that breaks the back.

  11. 11 hummbumm July 12, 2010 at 10:45 am

    That is clearly a very small subset of the population who can choose to retire early based on less incremental income!
    In addition we’re talking about a return to the capital gains and income tax regime of the 90s. I presume said individuals worked hard then and sold/acquired buildings then. They aslo presumably worked hard throughout the sixties and seventies at much higher marginal tax rates. Come on, I must have missed the news were marginal tax rates were going to 100%, or even more far fetched that all income was being taxed at 100%!!!
    We have just come after a lost decade of economic production and almost total collapse. What that points out to me is the relative irrelvance of tax policy on mactro outcomes. If we all agree that the budget has to come into better alignment, then taxes will have to increase. Here again, I would say if we extended the progressive nature of the income tax, such that income over $1M was taxed at 45% and income over $5M was taxed at 50% and income > $10M was at 55%, no one would look at that and say stuff the $10M bonus. In your example someone would rather not earn $500K because he would be paying $15K more taxes (6% on 250K with marginal tax rate going back to 39%). Common sense says that only truly wealthy individuals would value their leasure at such a level, maybe less than 0.5% of the pop. Perhaps if marginal rates get to the 90% level like the 1950s, then I will reassess.

  12. 12 Christopher Schulz July 19, 2010 at 2:43 pm

    Very Insightful article.

    In other words the good times are over. Death and taxes.

    I remember having read a book written by Felix Rohatyn in the 80s about the collapse of the New York State/City finances. They resolved it then in a very creative patchwork fashion that lasted till now.

  13. 13 rknakal July 25, 2010 at 8:33 pm

    Hi Hummbumm, thanks for your post. I was not suggesting that tax rates will go to 100%, merely questioning your feelings about the Laffer Curve. That thesis suggests that there is no motivation to work IF taxes were 100%. Incentives and disincentives impact private sector behavior. We see evidence of this everyday.

  14. 14 rknakal July 25, 2010 at 8:35 pm

    Hi Christopher, thanks for your post. The good times are not over, just on hold until a more friendly environment returns. Investment sales are picking up and will continue to thrive for the balance of this year. After that, we will have to wait to see what the landscape looks like. Check out my next StreetWise column for some hints.

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