For folks who don’t know about it, the Land Value Tax (LVT) movement argues that we should assess property taxes based on solely the value of land and not on land plus the buildings on the land. Understand that there is no free lunch here – you have to raise the exact same amount of money under both systems – just the basis for calculating how much each individual pays would be different. Some of the LVT folks claim that this method of divvying up taxes will reduce taxes but it is not true.
Without getting into an exhaustive discussion, one of the major arguments for the land value tax is the argument that improvements to properties would not be penalized. Likewise, LVT proponents argue that open land would be taxed at a much higher rate under LVT than it is currently, reducing speculation and providing an incentive for the development of underutilized vacant land. Also, in theory, it is supposed to reduce the burden on the poor because the poor live on lower value land although in my mind this may not be true because that depends on how progressive your current tax system is.
Although no major city in the United States has gone to a sole LVT system, Pittsburgh is probably closest. It had a system where land was essentially land carries a six to one weighting over property.
We have three distinct desires with any tax system.
a. We want it to be easy to administer and easy to understand.
b. We want to decide whether we want everyone to pay the same or we want people who can afford to pay more to pay more. This usually comes out as talking about how progressive (the richer pay more) or regressive (the poor pay more) a tax is.
c. We want to further social goals. (i.e. mini-donuts are tax free while regular donuts are taxable, providing an incentive for people to eat more mini-donuts)
Taking these one at a time, LVT is very hard to administer because almost no transactions involve just the sale of just land. Almost every sale involves land plus buildings so it is very hard to come up with comparable figures to see whether or not your own particular assessment is fair. This results in fights about how much of a sale actually was for land. This has been a huge issue in Pittsburgh, which (when I last read about it – I haven’t kept up recently) is close to junking their system in part because of this. People fight saying that a smaller percentage of their total sale was for land while the assessor argues higher. They’ve proposed setting the value of land at a fixed percentage of sale (15%), but this ends up defeating the whole purpose of a system based on land by calculating value on both the land and property. But when you have no actual land sales to measure your system against, what else can you do? Because of this, it is impossible to implement a land value tax in the real world. This is the biggest drawback with this taxing approach.
You can come down on one side or the other whether taxes should be progressive or everyone should pay the same. The property tax system is our oldest tax, dating back to when property was equivalent to wealth. Back then, it was a pretty progressive tax. But over time, with the advent of the wage system, property ownership has been come a less and less useful measure of wealth. The question is whether property or property + land is a better proxy for wealth. In reviewing the Pittsburgh case, there is a perception there that their system is a poorer proxy for wealth than property + land like we use here. I haven’t looked at detailed studies on this but it seems intuitive.
The question about furthering social goals with the tax system is one that we could debate for a long time. Minnesota’s tax system is complex because we are trying to encourage certain social goals. We believe that home ownership is one of the best ways of an individual building wealth so give a break for that. We don’t want to burden those least able to pay so we provide a break to persons with disabilities. We want to encourage agriculture so we provide a break for that. Businesses are the center of the creation of wealth and so we tax them more. We could argue all day if these are good things or not but under a strict LVT, this goes away. Every person is treated the same and every usage is treated the same.
So what is my quick read on LVT? Not bad theory but substantive implementation issues, there is a question of whether you really end up with a more progressive tax system, and you lose the ability to further social goals. And there is no free lunch regardless of the tax system you use.
January 31, 2009 at 11:18 pm |
Dear Carol Becker:
Instead of theorizing as to why LVT doesn’t work, call the people in Pennsylvania who have been using it for a long time. They will tell you why it does work.
Robert Kroboth, Finance Director, Harriburg, 717.255.6507
Mayor Stephen Reed, Harrisburg, 717.255.3040
Mayor Anthony Spossey, Washington, 724.223.4220
February 1, 2009 at 12:36 am |
“Some of the LVT folks claim that this method of divvying up taxes will reduce taxes but it is not true.”
It is also not true that this is what we claim. It reduces taxes for some (mostly for home owners and builders of new buildings) and increase taxes for others (mostly for owners of shopping centers, blighted properties, small buildings in prime locations, and vacant lots).
“LVT is very hard to administer because almost no transactions involve just the sale of just land. Almost every sale involves land plus buildings so it is very hard to come up with comparable figures to see whether or not your own particular assessment is fair.”
Clearly, Carol wrote this without consulting assessors. It is the preferred practice to assess land first, then buildings. A fourth grader can’t do it, but anybody who mastered differential equations in algebra class knows how to factor out conjoined variables. It wasn’t even a problem before computers could fine tune these variables automatically. Pittsburgh suffered from privatized assessing by an incompetent company that has since gotten out of the assessment buildings. The only place in the where this company’s land values were terribly wrong was in Pittsburgh, and there is reason to believe that the fix was in. The land values were within 10% of accurate in Clairton, Duquesne and McKeesport, and Clairton has virtually abolished its building tax, as has the Clairton school district.
“In reviewing the Pittsburgh case, there is a perception there that their system is a poorer proxy for wealth than property + land like we use here. I haven’t looked at detailed studies on this but it seems intuitive.”
City Council *did* look at exhaustive studies before shifting to land value tax five times in the 1980s. Home owners saved generally, and those in blue-collar neighborhoods saved the most. Consider that the value of a lot in poor Homewood averages around $400, and the value of a lot in trendy Shadyside averages around $90,000.
“We believe that home ownership is one of the best ways of an individual building wealth so give a break for that.”
Home ownership is least affordable where property tax rates are lowest, and most affordable where property tax rates are highest. See:
http://savingcommunities.org/issues/taxes/property/affordabilitycharts.html
http://qurl.com/msdyg
and
http://savingcommunities.org/issues/taxes/property/affordabilityrank.html
http://qurl.com/6pz63
“We don’t want to burden those least able to pay so we provide a break to persons with disabilities.”
Better to fund the people with disabilities than to have a tax system that rewards speculation and sprawl. That way renters with disabilities will benefit, too. Renters are poorer than property owners, after all, and land value tax increase the supply of housing, driving rents down. See “Higher Taxes that Promote Development,: *Fortune*, 1983
http://savingcommunities.org/articles/fortune/hightax.html
“We want to encourage agriculture so we provide a break for that.”
Unfortunately, the states that give farmland the most breaks end up with the least productive farmland and the most concentrated ownership. See:
http://savingcommunities.org/docs/gaffney.mason/farmlandtaxes.html
http://qurl.com/g3hnw
“Every person is treated the same and every usage is treated the same.”
Isn’t that what equality is all about? Still, as it turns out, those who pay more under land value tax tend to be much richer than those who pay less, because richer people tend to hold prime locations, tend to own multiple properties, and tend to do less with each property than those who acquire a single property in a modest location and do as much with it as possible.
February 1, 2009 at 12:46 am |
Please allow an advocate of land value taxation to respond to your assertions.
(1) Assessment of land only is simpler than the current land+buildings system. The chief assessor of Fairfield, CT, has written about this http://wealthandwant.com/docs/Gwartney_Estimating_LV.html
There was also an article by a fellow named Holland, who had been chief assessor of Washington DC, saying the same thing, but it isn’t posted on the Web and I would need to dig up the citation. Pittsburgh’s problem was, first, that their county apparently did not do assessments terribly well, and, second, that they still included buildings in their tax base.
(2) Studies have shown that the ratio of building value to land value is generally higher in areas with relatively low incomes, so on balance a land value tax shifts the burden somewhat up the income scale. The reason of course is that poor people tend to live in cheap areas. I can dig up a citation if you wish, but you might find it more helpful to examine data for your own area. And renters, who tend disproportionately to be low income, are essentially exempt from land value tax because landlords usually can’t pass it on. See for instance http://wealthandwant.com/docs/Kavanaugh_Landlord_can%27t_pass.html
(3)Most of us would like to encourage development of derelict lots in developed areas, and discourage sprawl onto cheap land. The land value tax tends to do this. See for instance http://wealthandwant.com/docs/Gwartney_Sprawl.html A land value tax does not necessarily prohibit other kinds of incentives and penalties, but tends to make them less necessary. A good description of the benefits on land value tax in an urban context is at http://masongaffney.org/publications/E37Ground_Rent_Urban_Decay_&_Revival.CV.pdf
I am assuming, based on your text, that you are considering land value tax only as an alternative to the conventional real estate tax, and not as a way to eliminate income tax and sales tax, which is another option.
February 1, 2009 at 2:14 am |
Albert – thanks for your comment. I have read about the experiences in Pennsylvania and in fact, reference Pittsburgh in my comments above. I also did some research on you and see that you are an advocate of the land value tax approach. Maybe you could explain to me where my arguments go wrong, especially the points about the difficulties in implementation. The things that I say in my post are the same things that they say in Pennsylvania.
I look forward to your thoughts.
Carol
February 1, 2009 at 2:34 am |
Ms. Becker,
I count myself among those who are strong advocates of moving to a land-only property tax base. The implementation issues are certainly real, and the effectiveness is limited when the school district does not adopt the same shift in tax rates as a town or borough. Pittsburgh dilemma, as I have come to understand, was that assessment was a county responsibility that was allowed to fester over several decades.
I spent nearly 30 years working on public/private partnerships to develop affordable housing. I eventually came to see the existing property tax as a real impediment to the construction of decent, affordable housing for working families. Land value taxation has the POTENTIAL to stabilize land prices and, by extension, the property taxes homeowners are asked to pay to support public goods and services.
February 1, 2009 at 1:38 pm |
Carol Becker – LVT is working for over 100 years funding local governments in Australia. Pittsburgh is a poor example because they did not reassess land value for many years, they raised the tax rate on land assessments to no ill effect. Harrisburg is a better example. Implementation is easier than taxing land and buildings. Sales provide a total market value from which the replacement value of improvements is subtracted leaving a basis for land value. This is standard operating procedure for all real estate appraisals. If you bought an house you paid for a real estate appraisal with land value separated from the total. So much land value is underused and underassessed that the same amount of revenue can be raised with 85 % of home owners paying less. Land values are are highly concentrated in the commercial sector. Much land is held by corporations and trusts, booked at cost, and the controllers are unaware of it s value until an assessor provides an up to date (rarely done) assessment. LVT works well and it can be modified to accomodate social preferences (homestead exemption, payment deferral, charitable exemptions, etc.). The only reason we do not have it now is inertia.
February 1, 2009 at 3:19 pm |
Tax Myths
There are a number of myths about property tax that “everyone knows” to be true except those who have looked closely.
“Some of the LVT folks claim that this method of divvying up taxes will reduce taxes but it is not true.”
It is not true that this is what LVT advocates claim. We claim that a revenue-neutral shift reduces taxes for some (mostly for home owners and builders of new buildings) and increase taxes for others (mostly for owners of shopping centers, blighted properties, small buildings in prime locations, and vacant lots). Total tax burdens can be reduced only after shifts to LVT bolster the economy.
“LVT is very hard to administer because almost no transactions involve just the sale of just land. Almost every sale involves land plus buildings so it is very hard to come up with comparable figures to see whether or not your own particular assessment is fair.”
It is the preferred practice to assess land first, then buildings. A fourth grader can’t do it, but anybody who mastered differential equations in algebra class knows how to factor out conjoined variables. It wasn’t even a problem before computers could fine tune these variables automatically. Pittsburgh suffered from privatized assessing by an incompetent company that has since gotten out of the assessment buildings. The only place in the where this company’s land values were terribly wrong was in Pittsburgh, and there is reason to believe that the fix was in. The land values were within 10% of accurate in Clairton, Duquesne and McKeesport, and Clairton has virtually abolished its building tax, as has the Clairton school district.
After a private assessing firm sabotaged Allegheny County’s assessments, the thing taht taxpayers immediately noticed was that their land values were not the same as identical lots next door. It was only much later that citizens realized that the total property values were not right either. It takes much more information and expertise to appraise a building than to appraise the land.
“In reviewing the Pittsburgh case, there is a perception there that their system is a poorer proxy for wealth than property + land like we use here. I haven’t looked at detailed studies on this but it seems intuitive.”
Pittsburgh City Council *did* look at exhaustive studies before shifting to land value tax five times in the fiscal years of 1979 through 1989. Home owners saved generally, and those in blue-collar neighborhoods saved the most. Consider that, in 2000, the value of a lot in poor Homewood averaged around $400, and the value of a lot in trendy Shadyside averaged around $90,000.
“We believe that home ownership is one of the best ways of an individual building wealth so give a break for that.”
Home ownership is least affordable where property tax rates are lowest, and most affordable where property tax rates are highest. See:
http://savingcommunities.org/issues/taxes/property/affordabilitycharts.html
http://qurl.com/msdyg
and
http://savingcommunities.org/issues/taxes/property/affordabilityrank.html
http://qurl.com/6pz63
However, land value tax *does* give a break to most home owners, especially in poorer areas where land values are low. Studies in Pittsburgh showed that property tax had cost most home owners about 50% more than land tax raising the same revenue, and income tax cost more than twice as much.
“We don’t want to burden those least able to pay so we provide a break to persons with disabilities.”
Better to fund the people with disabilities directly than to have a tax system that rewards idle landholding. That way renters with disabilities will benefit, too. Renters are poorer than property owners, after all, and land value tax increases the supply of housing, driving rents down. See “Higher Taxes that Promote Development,: *Fortune*, 1983
http://savingcommunities.org/articles/fortune/hightax.html
“We want to encourage agriculture so we provide a break for that.”
Unfortunately, the states that give farmland the most breaks end up with the least productive farmland and the most concentrated ownership. This is because corporate agribusiness is labor efficient (hiring fewer people) but land inefficient (getting less yield). Family farms, on the other hand, have their highest competitive advantages when farmland taxes are high and labor taxes are low. See:
http://savingcommunities.org/docs/gaffney.mason/farmlandtaxes.html
http://qurl.com/g3hnw
“Every person is treated the same and every usage is treated the same.”
Isn’t that what equality is all about? Still, as it turns out, those who pay more under land value tax tend to be much richer than those who pay less, because richer people tend to hold prime locations, tend to own multiple properties, and tend to do less with each property than those who acquire a single property in a modest location and do as much with it as possible.
Dan Sullivan, director
Saving Communities
February 2, 2009 at 5:11 pm |
[...] For folks who don’t know about it, the Land Value Tax (LVT) movement argues that we should assess property taxes based on solely the value of land and not on land plus the buildings on the land. Understand that there is no free lunch …$anchor_text[$anchor_choice] [...]
February 2, 2009 at 6:18 pm |
Hello, Carol. I’m glad that you’ve been looking into the land value tax policy, and would like to quickly respond to some of your concerns. Our office does the research and implementation for land value tax in over 20 municipalities in PA, and can vouch for its real-world application.
(a) A land value tax is no more difficult to administer than the existing real estate tax, but instead of have one rate to calculate the tax bill, you would now have two. The challenges that you speak of are in determining assessments of the buildings and land, a separate but essential administrative task. Many states mandate splitting these two components out, and technology and advanced appraisal methods such as GIS and multiple regressions are making it both more easy and accurate. Transparent assessment processes, fair appeal hearings, and state equalization boards also can address inequities. Also, focusing on land valuations exclusively frees up time and resources to further improve assessments.
(b) In terms of progressivity, there are two types of wealth: earned and unearned. Wages and interest (returns on investments) are rightful claims on wealth; appreciation in land is not. Land values are based not on ability to pay, but benefits received from the surrounding community, including public services and infrastructure. The wealthiest tend to live in the areas with the best quality of life funded by public expenditures, and should compensate society for that privilege. The land value tax could be made more progressive by banding it into higher tiers as values rise, as is done with income taxes.
(c) Most public policies should seek to treat everyone fairly and equally. A land value tax does, but in the way I mentioned above: everyone is equally responsible for paying for the benefits they receive from society through their use of land. Homeowners generally do very well: our most recent analysis for Philadelphia results in 80% of homeowners are rewarded with a reduction (instead of penalized with higher bills for maintaining or improving the property). It also penalizes wasteful owners of vacant land, for example, another effective example of its “carrot and stick” influence. Like any tax system, relief programs for special cases can be provided through abatements, deferrals, rebates, exemptions, etc. Proper zoning can also protect agricultural, historic, and natural lands.
I hope this helps. Please feel free to contact us at the Henry George Foundation of America and Center for the Study of Economics any time to discuss your concerns further. The land value tax is a fair lunch, not a free lunch.
February 2, 2009 at 7:04 pm |
Dear Carol Becker,
In answering Mr. Hartheimer, you observe that his responses are insufficiently on point. You have argued in your blog that a land value tax (LVT), while fine in economic theory, won’t work in practice. I will try to be more direct. It’s reassuring first of all that you recognizes the theoretical merits of LVT, for this then offers a sound point of departure for a good discussion. Students of economics and tax policy have agreed on the theoretical merits of just taxing land value alone for decades — and even centuries. Several Nobel prize-winning economists have maintained this position, http://www.urbantools.org/research-and-studies/can-a-site-value-tax-be-an-answer?searchterm=Nobel , even when they were willing to concede other liabilities such as its administrative challenges. Leaving aside that reservation for the moment, it is evident that a tax on land value has the virtues of being economically neutral, efficient, progressive, certain, stable, simple, and, yes, administrable. I have noted these advantages in several articles accessible online — see http://www.wealthandwant.com/docs/Batt_Merits_SVT.html I won’t repeat those remarks here; I will address only those objections that you note.
LVT, you first note, “is very hard to administer because almost no transactions involve just the sale of just land. . . . it is impossible to implement a land value tax in the real world.” That argument might have held when the most recent computer technology was unavailable. Today, however, algorithms exist to triangulate and inferentially compare sites in a way that makes it easier to assess land sites than it is improvements. Geographic Information Systems (GIS) provides the means of bringing data arrays into proximity in ways that was impossible even two decades ago. The result is that it is now possible to create sound land value maps that display the gradients of site locations in ways that was prohibitively expensive in another time. The techniques was recognized a century ago, but the labor costs precluded their being widely applied. I have written an account of this history, shortly to be published. Provisionally it will soon be available at http://www.cityeconomist.com/useconomybudget/landvaluemapsbatt.html Today, it is true that the best technology is not being widely employed, but the answer is to use it, not to scuttle what is really the most ideal tax. For instances of its sound application, see http://www.urbantools.org/research-and-studies/imaging-the-land-value-tax. Argument for the ease with which land site can be assessed, even absent the use of GIS, can be seen at http://www.earthrights.net/docs/estimatinglandvalues.html.
A second claim you raise is that “property ownership has been come a less and less useful measure of wealth. The question is whether property or property + land is a better proxy for wealth.” This argument involves confusion about what constitutes wealth as well as an examination of the incidence (i.e., distributive burden) of a land tax itself. In classical economics wealth comprised those assets which were created by human hands and minds; natural resources such as land were regarded as the common heritage of humanity — our birthright, so to speak. When we partook in their use, we “owned” them provisionally in “usufruct,” and typically paid the community for the privilege either in coin or in labor. It has only been in modern times that titles in “leasehold” have been construed as “freehold” or “fee-simple” ownership. In reality, no title deed to a resource such as a land site has ever been absolute even today — it is always provisional and contingent. But in claiming such ownership, titleholders are subject to economic vicissitudes that alter the market prices of sites and make their valuation a matter of momentary fortune. Classical economists explained site values in terms of the ground rent that flowed out of their connection to community entrepreneurial vitality. Because this rent was socially created, it was by right the community’s to claim and the rightful source of taxation, not the labor and goods which people themselves created.
Even if one concedes that owners are “entitled” to the land value that connects to a location, a tax on that value is arguably far more just than taxes on wages or goods. Consider first of all that land, being inelastic in its supply, does not allow any shift of a tax onto others; it is borne solely by the titleholder. This means that no tenant — whether in an office building, a household apartment renter, or any other leaser — pays even a dime of its taxes. Given that about 35 percent of all households in the US are tenants and don’t own their own home, this means that they are totally absolved of any property tax burden. Taxes on structures, in contrast can be shifted, both backward in part to their original creators and forward in part to tenants. This tax incidence also has an effect on market supply as well, meaning that there is a depressive penalty imposed on their investment.
Of those property owners that would in fact pay land value taxes, they are split between residential parcels and non-residential (i.e., commercial, industrial, and agricultural) parcels. If land assessments are performed properly, there is a very steep gradient from downtown urban cores to the outermost reaches of farm and forest land. When not otherwise relieved of tax burdens by other statutory provisions, farm and forest land has a site value so low as to be trivial, and does not typically enter into calculations. Residential parcels are sited in most instances in rings of urban/suburban development so as not to have particularly high site value. It is the urban cores, the central commercial and office districts of cities, where one sees the precipitous increase in locational value. Studies that have been done show that it can be many multiples of residential unit value. In New York City, for example, one recent study put the highest land value at $12,650 per square foot. Records of property value in other world cities are even higher. One need only look at the skylines of major world cities to appreciate how the building investments reflect the value of the site values underneath them. Typically, in fact, the split in land value tax burden between residential and non-residential parcels is about 50-50. This differs of course with the quality of the assessments, the sprawl configurations, city limits, and so on. But one can see immediately, taken generally, that there is a rough equity involved in LVT distribution.
Lastly, as a matter of equity, it is important to examine the criteria by which it is being applied. There are generally two frameworks by which we typically judge tax fairness — one is the ability to pay, the other is the extent of use. Some tax scholars regard user charges not as taxes but as a class in their own right. As has often been argued, LVT is really a very appropriate user charge, based on the extent to which services are enjoyed and linked to location. Especially since also site locations are in essence a function of transportation costs, proximity to strategic locations (such as business and employment centers) has an inverse correlation with transit or road service. Payment will be due in one form or another, even though cross subsidies by public design don’t often make these burdens apparent to users. See http://www.wealthandwant.com/docs/Batt_SSFA.htm
You also propose that the “question about furthering social goals with the tax system is one that we could debate for a long time.” Unless you are willing to leap into total relativism, I think there is a good deal of progress that we can make in response to such challenges. In enumerating the virtues of LVT, we can typically accept the broadly outlined principles stated above, but one of them particularly requires closer examination with respect to this last matter. For it is precisely the present property tax design which is not neutral in its effects and which profoundly influences the design configuration of cities, which discourages development initiatives, and which alters choices throughout the economy. Phasing in the adoption of LVT removes that distortion; it invites developers to locate at choices most optimal rather than driving them to sub-optimal and second best locations on account of price, zoning, unavailable sites held out of use by speculators and other compensating rationales. If we are looking to further social goals by our tax system, it is necessary to start by evaluating what distortions and what goals are being fostered by current practices. In many instances employment of tax policies for such purposes does more harm than good.
In your final observation you argue that “there is no free lunch regardless of the tax system you use.” This is not what John Stuart Mill concluded. He made the observation that there is a free lunch, and it is “landlords” that get it by its flowing to them “in their sleep.” The accretion of wealth that flows from community enterprise to the hands and wallets of titleholders of sites, regardless whether they invest in their properties or simply hold title while they appreciate in the wake of others’ efforts, is exactly the “free lunch” that constitutes such an inequity. It is an injustice to others who work and pay taxes on their labor, an injustice to other entrepreneurs in the community who witness the “free-rider” phenomena of absentee owners, and an injustice to the community which is degraded and debilitated by these practices. It is precisely for this reason that LVT ought to be reexamined for the promises that it offers. Cities that have adopted an LVT regime in recent years have seen payoffs of a measurable kind that far exceed the promises of other panaceas.
Yours are very thoughtful concerns, and I have taken the time to respond at length for this reason. You are welcome to contact me further if you have more questions. For more of my essays, see http://www.urbantools.org, http://www.wealthandwant.com, and others still, searchable through http://www.askhenry.com.
February 2, 2009 at 7:30 pm |
Dear Carol Becker,
In answering Mr. Hartheimer, you observe that his responses are insufficiently on point. You have argued in your blog that a land value tax (LVT), while fine in economic theory, won’t work in practice. I will try to be more direct. It’s reassuring first of all that you recognizes the theoretical merits of LVT, for this then offers a sound point of departure for a good discussion. Students of economics and tax policy have agreed on the theoretical merits of just taxing land value alone for decades — and even centuries. Several Nobel prize-winning economists have maintained this position, http://www.urbantools.org/research-and-studies/can-a-site-value-tax-be-an-answer?searchterm=Nobel , even when they were willing to concede other liabilities such as its administrative challenges. Leaving aside that reservation for the moment, it is evident that a tax on land value has the virtues of being economically neutral, efficient, progressive, certain, stable, simple, and, yes, administrable. I have noted these advantages in several articles accessible online — see http://www.wealthandwant.com/docs/Batt_Merits_SVT.html I won’t repeat those remarks here; I will address only those objections that you note.
LVT, you first note, “is very hard to administer because almost no transactions involve just the sale of just land. . . . it is impossible to implement a land value tax in the real world.” That argument might have held when the most recent computer technology was unavailable. Today, however, algorithms exist to triangulate and inferentially compare sites in a way that makes it easier to assess land sites than it is improvements. Geographic Information Systems (GIS) provides the means of bringing data arrays into proximity in ways that was impossible even two decades ago. The result is that it is now possible to create sound land value maps that display the gradients of site locations in ways that was prohibitively expensive in another time. The techniques was recognized a century ago, but the labor costs precluded their being widely applied. I have written an account of this history, shortly to be published. Provisionally it will soon be available at http://www.cityeconomist.com/useconomybudget/landvaluemapsbatt.html Today, it is true that the best technology is not being widely employed, but the answer is to use it, not to scuttle what is really the most ideal tax. For instances of its sound application, see http://www.urbantools.org/research-and-studies/imaging-the-land-value-tax. Argument for the ease with which land site can be assessed, even absent the use of GIS, can be seen at http://www.earthrights.net/docs/estimatinglandvalues.html.
A second claim you raise is that “property ownership has been a less and less useful measure of wealth. The question is whether property or property + land is a better proxy for wealth.” This argument involves confusion about what constitutes wealth as well as an examination of the incidence (i.e., distributive burden) of a land tax itself. In classical economics wealth comprised those assets which were created by human hands and minds; natural resources such as land were regarded as the common heritage of humanity — our birthright, so to speak. When we partook in their use, we “owned” them provisionally in “usufruct,” and typically paid the community for the privilege either in coin or in labor. It has only been in modern times that titles in “leasehold” have been construed as “freehold” or “fee-simple” ownership. In reality, no title deed to a resource such as a land site has ever been absolute even today — it is always provisional and contingent. But in claiming such ownership, titleholders are subject to economic vicissitudes that alter the market prices of sites and make their valuation a matter of momentary fortune. Classical economists explained site values in terms of the ground rent that flowed out of their connection to community entrepreneurial vitality. Because this rent was socially created, it was by right the community’s to claim and the rightful source of taxation, not the labor and goods which people themselves created.
Even if one concedes that owners are “entitled” to the land value that connects to a location, a tax on that value is arguably far more just than taxes on wages or goods. Consider first of all that land, being inelastic in its supply, does not allow any shift of a tax onto others; it is borne solely by the titleholder. This means that no tenant — whether in an office building, a household apartment renter, or any other leaser — pays even a dime of its taxes. Given that about 35 percent of all households in the US are tenants and don’t own their own home, this means that they are totally absolved of any property tax burden. Taxes on structures, in contrast can be shifted, both backward in part to their original creators and forward in part to tenants. This tax incidence also has an effect on market supply as well, meaning that there is a depressive penalty imposed on their investment.
Of those property owners that would in fact pay land value taxes, they are split between residential parcels and non-residential (i.e., commercial, industrial, and agricultural) parcels. If land assessments are performed properly, there is a very steep gradient from downtown urban cores to the outermost reaches of farm and forest land. When not otherwise relieved of tax burdens by other statutory provisions, farm and forest land has a site value so low as to be trivial, and does not typically enter into calculations. Residential parcels are sited in most instances in rings of urban/suburban development so as not to have particularly high site value. It is the urban cores, the central commercial and office districts of cities, where one sees the precipitous increase in locational value. Studies that have been done show that it can be many multiples of residential unit value. In New York City, for example, one recent study put the highest land value at $12,650 per square foot. Records of property value in other world cities are even higher. One need only look at the skylines of major world cities to appreciate how the building investments reflect the value of the site values underneath them. Typically, in fact, the split in land value tax burden between residential and non-residential parcels is about 50-50. This differs of course with the quality of the assessments, the sprawl configurations, city limits, and so on. But one can see immediately, taken generally, that there is a rough equity involved in LVT distribution.
Lastly, as a matter of equity, it is important to examine the criteria by which it is being applied. There are generally two frameworks by which we typically judge tax fairness — one is the ability to pay, the other is the extent of use. Some tax scholars regard user charges not as taxes but as a class in their own right. As has often been argued, LVT is really a very appropriate user charge, based on the extent to which services are enjoyed and linked to location. Especially since also site locations are in essence a function of transportation costs, proximity to strategic locations (such as business and employment centers) has an inverse correlation with transit or road service. Payment will be due in one form or another, even though cross subsidies by public design don’t often make these burdens apparent to users. See http://www.wealthandwant.com/docs/Batt_SSFA.htm
You also propose that the “question about furthering social goals with the tax system is one that we could debate for a long time.” Unless you are willing to leap into total relativism, I think there is a good deal of progress that we can make in response to such challenges. In enumerating the virtues of LVT, we can typically accept the broadly outlined principles stated above, but one of them particularly requires closer examination with respect to this last matter. For it is precisely the present property tax design which is not neutral in its effects and which profoundly influences the design configuration of cities, which discourages development initiatives, and which alters choices throughout the economy. Phasing in the adoption of LVT removes that distortion; it invites developers to locate at choices most optimal rather than driving them to sub-optimal and second best locations on account of price, zoning, unavailable sites held out of use by speculators and other compensating rationales. If we are looking to further social goals by our tax system, it is necessary to start by evaluating what distortions and what goals are being fostered by current practices. In many instances employment of tax policies for such purposes does more harm than good.
In your final observation you argue that “there is no free lunch regardless of the tax system you use.” This is not what John Stuart Mill concluded. He made the observation that there is a free lunch, and it is “landlords” that get it by its flowing to them “in their sleep.” The accretion of wealth that flows from community enterprise to the hands and wallets of titleholders of sites, regardless whether they invest in their properties or simply hold title while they appreciate in the wake of others’ efforts, is exactly the “free lunch” that constitutes such an inequity. It is an injustice to others who work and pay taxes on their labor, an injustice to other entrepreneurs in the community who witness the “free-rider” phenomena of absentee owners, and an injustice to the community which is degraded and debilitated by these practices. It is precisely for this reason that LVT ought to be reexamined for the promises that it offers. Cities that have adopted an LVT regime in recent years have seen payoffs of a measurable kind that far exceed the promises of other panaceas.
Yours are very thoughtful concerns, and I have taken the time to respond at length for this reason. You are welcome to contact me further if you have more questions. For more of my essays, see http://www.urbantools.org, http://www.wealthandwant.com, and others still, searchable through http://www.askhenry.com.
February 3, 2009 at 3:27 am |
I live in a city of 120,000 people where, for the 34 years I’ve lived here, there has been a 4.3 acre “hole in the ground” very close to the 100% location in town. (Even the assessor’s data base calls it that!) Across one street there is a large shopping mall. Across another is a Marriott hotel on a comparable sized lot. The Marriott provides jobs, hotel rooms, meals, meeting space, parking. We charge its owners considerably more in taxes than we do the owners of the hole in the ground. I think that if we lowered the taxes on the Marriott, and raised them on the Hole in the Ground, we would be aligning our incentives with where we want to go. Why do we penalize those who put their land to something approaching its highest and best use — creating jobs, or housing or both — and reward those who do nothing, and sit and wait for the activity and efforts and public spending of the rest of us to raise the value of their nestegg?
Landowners are inert. They do nothing. They sit and wait, and grow rich in their sleep. They reap what others sow … which means that the sowers don’t get to reap what they ought to. Land speculators’ gains do not come out of thin air, or out of the pockets of some faceless folks elsewhere. They come out of the pockets of those who work, those who produce products we tax, those who pay sales taxes, and wage taxes, and taxes on buildings they created or bought from those who did.
This puts a tremendous burden on the economy. We can’t afford it. We shouldn’t permit it. We can do things much more wisely and justly. Land value taxation seems to me to be the right way. And I think it will help solve many of our most serious social, economic and justice problems, and help us have a vibrant economy in which all of us can prosper. It is us or the land speculators, and I’d rather have it be us.
February 3, 2009 at 2:04 pm |
Wow – I have to say I never expected to generate this much of a response with this post. Thank you so much for responding. I am amazed that this many people are interested in this subject.
Let me see if I can respond to at least some of these comments:
One of my biggest issues with a land value tax is that you never have any true comparables. The essence of assessing is looking at what properties sell for on the open market and estimating what another property is worth based on those sales. Because almost no one just sells vacant land, there are never any true comparables to base your valuations on. You are right in that you can make estimates, have computer models, etc but you never have true comparables. And if you fix the percentage of a sale that is for land, then you no longer have a land value tax. In Minnesota, we are required by the state to be within a certain percentage of real sales in order to calculate other state aid and the loss of that “reality” would be a big problem in our system.
As to providing an incentive for development, what we do here in Minnesota, we have a property classification of “vacant land” which is distinct from agricultural land or other land that isn’t built on. This is the highest tax rate and it provides a strong incentive for not letting vacant land sit. So we do do the same thing that you want out of a land tax without resorting to the land tax.
As to renters being except from a land tax, this is not true. A landlord passes on all their costs to their renter, including taxes. What we do do in Minnesota, however, is provide a renters credit which rebates a portion of what renters pay, based on income. That also helps the progressiveness of our property tax.
In Minnesota, we also charge businesses more under the assumption that they are revenue-producing and have more of a capacity to pay. Again, some folks may disagree with this kind of progressiveness in a tax, arguing everyone should pay the same, but I am an advocate for a progressive tax system.
In the Twin Cities, of late, half of our housing units are in multi-family configurations. A land value tax would significantly under-tax these housing units because these folks consume the same amount of government services as any other housing unit. And I don’t want to lose in this discussion that ultimately we are trying to distribute the costs of cops and firefighters and parks and streets. And many of these are not for low income people but million dollar condos downtown and in wealthy suburbs. As the region continues to concentrate, some homes would be significantly undertaxed under a LVT.
As to the statement that government should treat everyone equally, that is one concept of equity. Another one is the concept that people who earn more should pay more. Both are equally valid positions to advocate for. In Minnesota, our property tax system does make people with more expensive properties pay more, something that a land value tax doesn’t do. It also helps promote the poor paying less and the rich paying more. As I have said, both approaches are valid but I’d pick a progressive system over a regressive system.
These are a few of my thoughts but I will think more about your comments and add more later. I am especially intrigued by the idea that land values only exist because of what society does around a piece of property. Will have to think about that.
Thanks again to everyone.
Carol
February 3, 2009 at 4:15 pm |
Carol, you wrote:
One of my biggest issues with a land value tax is that you never have any true comparables.
Ed here:
For ten years I managed a team of mortgage loan auditors for Fannie Mae. My group reviewed property appraisals regularly, and appraisers definitely have the technical know-how to determine the split between house and land value. For most residential housing, the value of a house is replacement cost less depreciation; thus, the difference between this net value and total property value is the land. The appraiser must make adjustments to the comparables selected for differences in the buildings, but also for locational advantages and disadvantages recognized by the market.
You wrote:
… if you fix the percentage of a sale that is for land, then you no longer have a land value tax.
Ed here:
Fixing the percentage across the board for any market is a violation of public responsibility, in my view. The land-to-total value ratios for properties with older improvements versus new construction will be quite different. Almost all markets experience patterns of changing use over time (e.g., moving from residential to commercial along major roadways).
You wrote:
What we do do in Minnesota, however, is provide a renters credit which rebates a portion of what renters pay, based on income. That also helps the progressiveness of our property tax.
Ed here:
Rebates do improve affordability but only so long as the number of rebates provides are few enough in number so that the demand side of the equation is not materially enlarged. When that occurs, rental property owners will take advantage of the tenants higher disposable income and increase apartment rents.
You wrote:
In Minnesota, we also charge businesses more under the assumption that they are revenue-producing and have more of a capacity to pay. Again, some folks may disagree with this kind of progressiveness in a tax, arguing everyone should pay the same, but I am an advocate for a progressive tax system.
Ed here:
Why use the property tax to raise revenue on the basis of ability to pay? For businesses, I have advocated for a graduated tax on gross revenue, exempting most small businesses (i.e., those businesses that are locally owned and create the greatest number of jobs) based on gross revenue. Above this exemption limit, a graduated rate could be applied to higher ranges of gross revenue. The state can rely on analysis of revenue data to determine how much of every business’s gross revenue ought to be exempted from the tax base.
February 3, 2009 at 5:22 pm |
Carol, if you have transactions which are followed fairly quickly by teardowns, as is true in many rapidly-appreciating neighborhoods, particularly in locations well-served by infrastructure and good schools and other things people value, you have a very fine barometer of what land is worth: the selling price of the property plus the cost of demolition and removal. One or two of these in a neighborhood doesn’t tell you enough, but when there start to be a few more, you can read pretty clearly that the buildings themselves there may have little value (even though that same building in a less-served neighborhood might still have value — like the little diner downtown).
Those multi-family properties consume services, but their presence also contributes to the value of the commercial property near them, which has customers it wouldn’t have had if those properties had remained single-family detached. And being downtown, even if they are using the schools, they aren’t requiring school buses; they aren’t needing sewers and city water extended out further; existing police and fire and ambulance services serve their needs, without a need for new sites, buildings and equipment … economies of scale. LVT is a terrific antisprawl device, among its other virtues.
Charging businesses more sounds difficult and unjust. They struggle enough, just to stay in business. I’d rather remove the disincentives to them occupying and using well our best locations, with the idea that, unfettered, they will tend to locate centrally, where they can draw on a 360 degree pool of employees and customers, who can reach them via existing transportation infrastructure, reducing the need to extend further out.
You mentioned firefighters. They are a natural constituency for LVT, because it tends to lead to redevelopment of unsafe buildings into something new and safer. Reducing or eliminating the tax on buildings provides desirable incentives, and, separately, so does raising the millage rate on land value.
That “vacant land” tax sounds as if it would encourage landholders to leave an old building standing, so that the higher tax rate doesn’t get triggered!