Wealth and Want theme: Assessment

Assessment

Frequent, regular and logical accurate assessment of real estate is vitally important to making taxes just. Assessment provides the criteria for rebalancing the tax load among all the property-owners within a particular jurisdiction. Not all sites appreciate at the same rate. Lots near positive amenities — attractive bodies of water, public transportation, highways, good schools, high-paying jobs, large populations — appreciate faster than properties which are poorly located — near negative amenities such as sewage treatment plants, the town dump, tollbooths where traffic idles; served by inferior schools, far from jobs or public transportation.

Frequent reassessment allows those who benefit the most from our common spending or the generosity of nature to heft their fair share of the costs of providing all those services that make their sites valuable, and frees those who own inferior sites from paying a disproportionately high share of the burden. This is generally considered to be consistent with justice.

Doing this well, including providing a meaningful figure for land value and for the value of the current improvement (be it a parking lot, an obsolete building, or a new building) provides the landholder important clues about his property's worth and potential. The next step, of course, is what the local government does with that information. Currently, most places tax both land value and buildings at the same millage rate. This website argues that this is a sad mistake: that a better way would be to reduce or eliminate the millage rate on the buildings and increase the millage rate on the land. This reduces the perverse incentives which discourage those who improve their properties, and encourage those who merely speculate on land values.

Louis Post: Outlines of Louis F. Post's Lectures, with Illustrative Notes and Charts (1894)

Note 4: The difference between site value and improvement value is much more definite than it is often supposed to be. Even in what would seem at first to be most confusing cases, it is easily distinguished. If in any example we imagine the complete destruction of all the improvements, we may discover in the remaining value of the property — in the price it would after such destruction fetch in the real estate market — the value of the site as distinguished from the value of the improvements. This residuum of value would be the basis of computation for levying the single tax.

The distinction is frequently made in business life. Whenever in the course of ordinary business affairs it becomes necessary to estimate the value of a building lot, or to fix royalties for mining privileges, no difficulty is experienced, and substantial justice is done. And though the exigencies of business seldom require the site value of an improved farm to be distinguished from the value of its improvements, yet it could doubtless be done as easily and justly as with city or mining property. Unimproved land attached to any farm in question, or unimproved land in the neighborhood, if similar in fertility and location, would furnish a sufficiently accurate measure. If neither existed, the value of the contiguous highway would always be available.

It should not be forgotten that land for which the demand is so weak that its site value cannot be easily distinguished from the value of its improvements, is certain to be land of but little value, and almost certain to have no value at all.

The objection that the value of land cannot be distinguished from the value of its improvements is among the most frivolous of the objections that have been raised to the single tax by people with whom the wish that it may be impracticable is father to the thought that it really is so.

No other tax, direct or indirect, conforms so closely to the third maxim. "Land lies out of doors." It cannot be hidden; it cannot be "accidentally" overlooked. Nor can its value be seriously misstated. Neither under-appraisement nor over-appraisement to any important degree is possible without the connivance of the whole community. 27 The land values of a neighborhood are matters of common knowledge. Any intelligent resident can justly appraise them, and every other intelligent resident can fairly test the appraisement. Therefore, the tyranny, corruption, fraud, favoritism, and evasions that are so common in connection with the taxation of imports, manufactures, incomes, personal property, and buildings — the values of which, even when the object itself cannot be hidden, are so distinctly matters of minute special knowledge that only experts can fairly appraise them — would be out of the question if the single tax were substituted for existing fiscal methods. 28

27. The under-appraisements so common at present, and alluded to in note 25, are possible because the community, ignorant of the just principles of taxation, does connive at them. Under-appraisements are not secret crimes on the part of assessors; they are distinctly recognized, but thoughtlessly disregarded when not actually insisted upon, by the people themselves. And this is due to the dishonest ideas of taxation that are taught. Let the vicious doctrine that people ought to pay taxes according to their ability give way to the honest principle that they should pay in proportion to the benefits they receive, which benefits, as we have already seen, are measured by the land values they own, and underappraisement of land would cease. No assessor can befool the community in respect of the value of the land within his jurisdiction.

And, with the cessation of general under-appraisement, favoritism in individual appraisements also would cease. General under-appraisement fosters unfair individual appraisements. If land were generally appraised at its full value, a particular unfair appraisement would stand out in such relief that the crime of the assessor would be exposed. But now if a man's land is appraised at a higher valuation than his neighbor's equally valuable land, and he complains of the unfairness, he is promptly and effectually silenced with a warning that his land is worth much more than it is appraised at, anyhow, and if he makes a fuss his appraisement will be increased. To complain further of the deficient taxation of his neighbor is to invite the imposition of a higher tax upon himself.

28. If you wish to test the merits in point of certainty of the single tax as compared with other taxes, go to a real estate agent in your community, and, showing him a building lot upon the map, ask him its value. If he inquires about the improvements, instruct him to ignore them. He will be able at once to tell you what the lot is worth. And if you go to twenty other agents their estimates will not materially vary from his. Yet none of the agents will have left his office. Each will have inferred the value from the size and location of the lot.

But suppose when you show the map to the first agent you ask him the value of the land and its improvements. He will tell you that he cannot give an estimate until he examines the improvements. And if it is the highly improved property of a rich man he will engage building experts to assist him. Should you ask him to include the value of the contents of the buildings, he would need a corps of selected experts, including artists and liverymen, dealers in furniture and bric-a-brac, librarians and jewelers. Should you propose that he also include the value of the occupant's income, the agent would throw up his hands in despair.

If without the aid of an army of experts the agent should make an estimate of these miscellaneous values, and twenty others should do the same, their several estimates would be as wide apart as ignorant guesses usually are. And the richer the owner of the property the lower as a proportion would the guesses probably be.

Now turn the real estate agent into an assessor, and is it not plain that he would appraise the land values with much greater certainty and cheapness than he could appraise the values of all kinds of property? With a plot map before him he might fairly make every appraisement without leaving his desk at the town hall.

And there would be no material difference if the property in question were a farm instead of a building lot. A competent farmer or business man in a farming community can, without leaving his own door-yard, appraise the value of the land of any farm there; whereas it would be impossible for him to value the improvements, stock, produce, etc., without at least inspecting them. ... read the book

Louis Post: Outlines of Louis F. Post's Lectures, with Illustrative Notes and Charts (1894) — Appendix: FAQ

Q8. What would be the expense of collecting the single tax as compared with that of collecting present taxes?
A. Much less. It is easier to assess fairly, and easier to collect fully; the machinery of assessment and collection would be simpler and cheaper, and it would not enable first payers to collect the tax with profits upon it from ultimate payers.

Q9. How would you estimate land values?
A. As we do it now. As real estate dealers estimate them. As appraisers in partition would estimate them. Read note 28.

Q10. How would you value the land of a farm when all the land of the neighborhood was fully improved?
A. By ascertaining the value per square rod of the adjacent highway. The value of that, for the purpose of adding it to the farms along which it runs, would denote the land value of the farms. Read notes 4 and 28.

Q12. How would the single tax be assessed on a railroad which passed through a farm worth (without its improvements) $30 an acre?
A. According to the value, not of the adjacent farms, but of the total right of way, much as the value of a navigable river might be determined if it were private property. ... read the book

Charles B. Fillebrown: A Catechism of Natural Taxation, from Principles of Natural Taxation (1917)

Q7. What is meant by land value?
A. Its site value -- its selling or market value -- its net value to the purchaser -- the capitalization of its net rent -- the value supposed to be adopted by the assessors as the basis of taxation.

Q53. How would the single tax effect the farmer?
A. It would greatly reduce his taxes. His buildings, stock, and crops would be exempt. His land is at present assessed at nearly twice its proper unimproved value, while town and city land is often valued at less than one half its actual value, thus subjecting him to a more than fourfold disadvantage. ... read the whole article

Ted Gwartney: Estimating Land Values

Land, in an economic sense, is defined as the entire material universe outside of people themselves and the products of people. It includes all natural resources, materials, airwaves, as well as the ground. All air, soil, minerals and water is included in the definition of land. Everything that is freely supplied by nature, and not made by man, is categorized as land.

Land holds a unique and pivotal position in social, political, environmental and economic theory. Land supports all life and stands at the center of human culture and institutions. All people, at all times, must make use of land. Land has no cost of production. It is nature's gift to mankind, which enables life to continue and prosper.

Land's uniqueness stems from its fixed supply and immobility. Land cannot be manufactured or reproduced. Land is required directly or indirectly in the production of all goods and services. Land is our most basic resource and the source of all wealth.

Land rent is the price paid annually for the exclusive right (a monopoly) to use a certain location, piece of land or other natural resource. People receive wages for work, capital receives interest for investment, and land receives rent for the exclusive use of a location. Equity and efficiency require that the local general public, who created land value, should be paid for the exclusive use of a land site. That Payment is in the form of a land tax.

When considering world-wide economics, most people think that land rent contributes only a small insignificant portion of value. But as societies progress, land has become the predominant force in determining the progress or poverty of all people within a community. Land in major or cities is so costly that people are forced to move further away and travel great distances in order to get to work and social attractions. In the more developed countries of the world, land rent represents more than 40% of gross annual production.

Since land is fixed in supply, as more land is demanded by people the rent will increase proportionally. Demand is the sole determinant of land rent. Changes in land rent and land taxes have no impact on the supply of land, because the land supply is fixed and cannot be significantly expanded. Labor and capital are variable in supply. A higher price for commodities causes more labor and capital to make itself available. Labor and capital are rewarded for their work. A high price is an incentive to work harder and longer, while a low price is not an incentive to work harder and longer.

The rent of land, however, serves no such incentive function, because the supply of land is fixed. The same amount is available no matter how high or low the price. Buildings are not a part of land rent. Land rent results from the desire made by everyone who lives within a community to use land. Economic rent is the only source of revenue that could be taken for community purposes without having any negative effect on the productive potential of the economy. Economists consider rent to be a surplus payment which is unnecessary to ensure that land is available. When a community captures land rent for public purposes, both efficiency and equity are realized.

The economic market rental value of land should be sufficient to finance public services and to obviate the need for raising revenue from taxes, such as income or wage taxes; sales, commodity or value-added taxes; and taxes on buildings, machinery and industry. Public revenue should not be supplied by taxes on people and enterprise until after all of the available revenue has been first collected from the natural and community created value of land. Only if land rent were insufficient would it be necessary to collect any taxes.

The collection of land rent, by the public for supplying public needs, returns the advantage an individual receives from the exclusive use of a land site to the balance of the community, who along with nature, contributed to its value and allow its exclusive use. ... read the whole article

Fred E. Foldvary — The Ultimate Tax Reform: Public Revenue from Land Rent

Land value taxation taps the geo-rent. Like today’s real property tax, a land value tax would have some tax rate that would tap some percentage of the land value or rent. I suggest 80 percent of the geo-rent be used for public revenue. The landowner would pay it from the rental he collects from the tenant, or if owner-occupied, from the implicit rental value he obtains from the site. The 80 percent rate would leave some of the land rent with the landowner to have a margin for assessment error and also to maintain a positive price for the land to facilitate its sale.

There are several methods of assessing land value or rent. One way is to calculate the replacement value of the existing improvements (unless they are historic), and then subtract the depreciation of the buildings. Then subtract the building value from the total property value. What is left is land value. For commercial property, one also can take the net income and subtract the return on the improvements (using some interest rate), the remainder being land rent. In some places there is vacant or bare land that has a market price, and sometimes there are separate owners for the land and the improvements, for which data can be derived from leases and sales. The assessors then smooth out the neighborhood land values, using computerized maps. It is not necessary to individually assess the values of most of the buildings in a neighborhood, since most lots in a locality will have a similar value per lot.

Assessors enter this data into computers, which generate neighborhood maps. The assessors interpolate or smooth out the prices of lots between those for which they have recent sales or rental data, since land values tend to be similar in a neighborhood unless there is some special feature such as corner lots or odd-sized lots. ...

...There will always be critics who concoct a huge cost in getting assessments correct down to the last penny, or claim, without any evidence, that real estate is a trivial portion of the economy. Such critics date back to the days of Henry George, when the landed interests felt threatened by his ideas. Those opponents have been thoroughly rebutted in the book, Critics of Henry George (the latest edition edited in 2004 by Robert Andelson). The reasons for such attempts to falsify and trivialize rent-based public finance, and even to eliminate the land factor from economics, are chronicled and analyzed in The Corruption of Economics, especially in the chapter by Mason Gaffney, “Neo-classical Economics as a Stratagem against Henry George.” This negative viewpoint is perpetuated by academics who learn of land value taxation from misleading secondary sources, not bothering to dig any further.

Those who argue it is impossible to assess the value of land apart from improvements need to answer why this is in practice accomplished well in Arden, Delaware, a community established by Georgists in 1900 explicitly to demonstrate its practicality. They also need to explain how cities such as Sidney, Australia have a real property tax only on the land value, and how Japan, Taiwan, Denmark, and many other countries had successful land taxes (see Andelson, Robert V., ed., Land-Value Taxation Around the World). Also, thousands of condominiums assess their owners independently of their personal property. If this is said to be impossible in theory, yet it is done in common practice, one wonders about a scholar who ignores the widespread practice in favor of the alleged doctrine. ...

Costs of collection and administration

Consider the effect of abolishing income taxes and sales taxes, replacing them with a land value tax. There would no longer be any tax audits. There would be no record-keeping for taxes. You, the landowner, would instead get a monthly bill, like you get for utilities. You would simply pay the bill or have it automatically deducted from some financial account. At the same time, government would avoid the high cost of processing complex accounts and keeping individual tax records. It would only need to keep real estate records and assess the land values, both of which it already does for property tax purposes.

Those who are retired or temporarily have little cash income would be able to defer taxes by accumulating liens on the real estate until they die or sell the property, as is commonly done today with real estate taxes.

If you thought the assessment of the land value was too high, you could appeal, as one can today’s real estate taxes. The land value assessments would be public records available on the Internet, unlike income tax records, which are quite properly hidden from public view. You could easily compare your assessment with those of your neighbors. If the appeals board rejected your claim, the assessment could be appealed to a jury, if you were willing to pay the cost of the jury’s decision.

Nobody would be sent to prison for tax evasion, because there would be no tax evasion. A non-payer would lose title to his land or lose the protective services of government, depending on the local enforcement practice. Property taxes are already being assessed and collected by counties in the U.S. A complete shift to the taxation of land values would not increase these costs, but would eliminate the expenses involved in collecting sales and income taxes. ... read the whole document

Winston Churchill: The People's Land

Unearned increment reaped in exact proportion to the disservice done. But let us follow the process a little further. The population of the city grows and grows still larger year by year, the congestion in the poorer quarters becomes acute, rents and rates rise hand in hand, and thousands of families are crowded into one-roomed tenements. There are 120,000 persons living in one-roomed tenements in Glasgow alone at the present time. At last the land becomes ripe for sale -- that means that the price is too tempting to be resisted any longer -- and then, and not till then, it is sold by the yard or by the inch at ten times, or twenty times, or even fifty times, its agricultural value, on which alone hitherto it has been rated for the public service. The greater the population around the land, the greater the injury which they have sustained by its protracted denial, the more inconvenience which has been caused to everybody, the more serious the loss in economic strength and activity, the larger will be the profit of the landlord when the sale is finally accomplished. In fact, you may say that the unearned increment on the land is on all fours with the profit gathered by one of those American speculators who engineer a corner in corn, or meat, or cotton, or some other vital commodity, and that the unearned increment in land is reaped by the land monopolist in exact proportion, not to the service but to the disservice done. ...

Tax on capital value of undeveloped land But there is another proposal concerning land values which is not less important. I mean the tax on the capital value of undeveloped urban or suburban land. The income derived from land and its rateable value under the present law depend upon the use to which the land is put, consequently income and rateable value are not always true or complete measures of the value of the land. Take the case to which I have already referred of the man who keeps a large plot in or near a growing town idle for years while it is ripening -- that is to say, while it is rising in price through the exertions of the surrounding community and the need of that community for more room to live. Take that case. I daresay you have formed your own opinion upon it. Mr Balfour, Lord Lansdowne, and the Conservative Party generally, think that is an admirable arrangement. They speak of the profits of the land monopolist as if they were the fruits of thrift and industry and a pleasing example for the poorer classes to imitate. We do not take that view of the process. We think it is a dog-in-the-manger game. We see the evil, we see the imposture upon the public, and we see the consequences in crowded slums, in hampered commerce, in distorted or restricted development, and in congested centres of population, and we say here and now to the land monopolist who is holding up his land -- and the pity is it was not said before -- you shall judge for yourselves whether it is a fair offer or not. We say to the land monopolist: 'This property of yours might be put to immediate use with general advantage. It is at this minute saleable in the market at ten times the value at which it is rated. If you choose to keep it idle in the expectation of still further unearned increment, then at least you shall he taxed at the true selling value in the meanwhile.' And the Budget proposes a tax of a halfpenny in the pound on the capital value of all such land; that is to say, a tax which is a little less in equivalent than the income tax would be upon the property if the property were fully developed. That is the second main proposal of the Budget with regard to the land, and its effects will be,

first, to raise an expanding revenue for the needs of the State;
secondly, half the proceeds of this tax, as well as of the other land taxes, will go to the municipalities and local authorities generally to relieve rates;
thirdly, the effect will be, as we believe, to bring land into the market, and thus somewhat cheapen the price at which land is obtainable for every object, public and private, and by so doing we shall liberate new springs of enterprise and industry, we shall stimulate building, relieve overcrowding, and promote employment ... Read the whole piece

H.G. Brown: Significant Paragraphs from Henry George's Progress & Poverty: Chapter 9. Alleged Difficulty of Distinguishing Land From Improvements (in the unabridged P&P: Part VIII — Application of the Remedy: Chapter 4 — Indorsements and objections

The only objection to the tax on rent or land values which is to be met with in standard politico-economic works is one which concedes its advantages — for it is, that from the difficulty of separation, we might, in taxing the rent of land, tax something else. McCulloch, for instance, declares taxes on the rent of land to be impolitic and unjust because the return received for the natural and inherent powers of the soil cannot be clearly distinguished from the return received from improvements and meliorations, which might thus be discouraged. Macaulay somewhere says that if the admission of the attraction of gravitation were inimical to any considerable pecuniary interest, there would not be wanting arguments against gravitation — a truth of which this objection is an illustration. For admitting that it is impossible invariably to separate the value of land from the value of improvements, is this necessity of continuing to tax some improvements any reason why we should continue to tax all improvements? If it discourage production to tax values which labor and capital have intimately combined with that of land, how much greater discouragement is involved in taxing not only these, but all the clearly distinguishable values which labor and capital create?

But, as a matter of fact, the value of land can always be readily distinguished from the value of improvements.

In countries like the United States there is much valuable land that has never been improved; and in many of the States the value of the land and the value of improvements are habitually estimated separately by the assessors, though afterward reunited under the term real estate.

Nor where ground has been occupied from immemorial times, is there any difficulty in getting at the value of the bare land, for frequently the land is owned by one person and the buildings by another, and when a fire occurs and improvements are destroyed, a clear and definite value remains in the land.

In the oldest country in the world no difficulty whatever can attend the separation, if all that be attempted is to separate the value of the clearly distinguishable improvements, made within a moderate period, from the value of the land, should they be destroyed.

This, manifestly, is all that justice or policy requires. Absolute accuracy is impossible in any system, and to attempt to separate all that the human race has done from what nature originally provided would be as absurd as impracticable. A swamp drained or a hill terraced by the Romans constitutes now as much a part of the natural advantages of the British Isles as though the work had been done by earthquake or glacier. The fact that after a certain lapse of time the value of such permanent improvements would be considered as having lapsed into that of the land, and would be taxed accordingly, could have no deterrent effect on such improvements, for such works are frequently undertaken upon leases for years. The fact is, that each generation builds and improves for itself, and not for the remote future. And the further fact is, that each generation is heir, not only to the natural powers of the earth, but to all that remains of the work of past generations. ... read the whole chapter

Nic Tideman: Basic Principles of Geonomics

The rental value of land can be determined by having local assessors acquire, each year, samples of sites with little or no improvements. These would be auctioned as unimproved land, on the basis of bids that represented offers of payment for the first year, with payments in future years determined by future bids for similar sites. The rental value of each site in the initial year can then be determined by comparisons with sites that have been auctioned. ... Read the whole article

Nic Tideman: The Case for Taxing Land

I. Taxing Land as Ethics and Efficiency
II. What is Land?
III. The simple efficiency argument for taxing land
IV. Taxing Land is Better Than Neutral
V. Measuring the Economic Gains from Shifting Taxes to Land
VI. The Ethical Case for Taxing Land
VII. Answer to Arguments against Taxing Land

There is a case for taxing land based on ethical principles and a case for taxing land based on efficiency principles. As a matter of logic, these two cases are separate. Ethical conclusions follow from ethical premises and efficiency conclusions from efficiency principles. However, it is natural for human minds to conflate the two cases. It is easier to believe that something is good if one knows that it is efficient, and it is easier to see that something is efficient if one believes that it is good. Therefore it is important for a discussion of land taxation to address both question of efficiency and questions of ethics.

This monograph will first address the efficiency case for taxing land, because that is the less controversial case. The efficiency case for taxing land has two main parts. ...

To estimate the magnitudes of the impacts that additional taxes on land would have on an economy, one must have a model of the economy. I report on estimates of the magnitudes of impacts on the U.S. economy of shifting taxes to land, based on a mathematical model that is outlined in the Appendix.

The ethical case for taxing land is based on two ethical premises: ...

The ethical case for taxing land ends with a discussion of the reasons why recognition of the equal rights of all to land may be essential for world peace.

After developing the efficiency argument and the ethical argument for taxing land, I consider a variety of counter-arguments that have been offered against taxing land. For a given level of other taxes, a rise in the rate at which land is taxed causes a fall in the selling price of land. It is sometimes argued that only modest taxes on land are therefore feasible, because as the rate of taxation on land increases and the selling price of land falls, market transactions become increasingly less reliable as indicators of the value of land. The answer to this argument is that collecting a large percentage of the rental value of land through taxes will require new assessment methods based on observing the rental price of land rather than the selling price. I describe how such methods can be devised.

Another basis on which it is argued that greatly increased taxes on land are infeasible is that if land values were to fall precipitously, the financial system would collapse. ...

Apart from questions of feasibility, it is sometimes argued that erosion of land values from taxing land would harm economic efficiency, because it would reduce opportunities for entrepreneurs to use land as collateral for loans to finance their ideas. ...
.
Another ethical argument that is made against taxing land is that the return to unusual ability is “rent” just as the return to land is rent. ...

But before developing any of these arguments, I must discuss what land is. ...

While it is theoretically possible to capture fractions of rent approaching 100% by taxes on the value of land, there are practical difficulties in doing so. The selling price of unimproved land will be the present value of the part of rent that buyers and sellers expect to be left after taxes. Therefore, if taxes collect fractions of rent that approach 100%, the selling price of land will be dominated by the errors that are expected in the assessment process. Therefore a tax system that seeks to collect almost all of the rental value of land must use some assessment system other than observing market prices of land. There are several techniques that may be useful.

First, if nearly all of the rental value of land is collected in taxes, the selling price of land will be nearly zero. Assessors can purchase parcels of land with obsolescent improvements, demolish the improvements, and offer the land for sale at auction, under a rule that the bid will be the tax per year for, say, the first three years, and after that the tax will be determined by the assessor’s estimate of the rental value of the land, as determined by similar auctions and other processes.

If assessors were conducting such auctions regularly, they could hold assessment contests in which the contestants competed by offering land value functions that would be evaluated by the accuracy with which they predicted auction results. The contestant who provided the function with the smallest average error would be given a prize, and the winning function would be used to assess the value of land that had not been auctioned.

Another thing that assessors can do is to develop options markets in land. That is, they can enter into contracts with potential users of land to supply land with specified characteristics for specified tax rates. For example, someone who was interested in opening a restaurant might offer £3,000 per month for a parcel of 2,000 square feet within a quarter of a mile of the center of town. Such offers would set lower limits on the rental value of land. With such devices, land can be assessed for tax purposes even if the selling price of land is close to zero. ... Read the whole article

Nic Tideman: Using Tax Policy to Promote Urban Growth

Urban growth is desired because it raises peoples' incomes. In a market economy, incomes can be divided into components derived from four factors of production:

the rent of land,
the wages of labor,
the interest received from owning capital, and
the profits of entrepreneurship (the activity of choosing investments and organizing production).

Thus a successful urban growth strategy in a market economy must either increase the amounts of land, labor, capital and entrepreneurship that are used in a city or increase the payments that are made per unit of each factor, or both.

The land that a city has is fixed (or if it changes, it does so at the expense of other administrative units). Therefore, with respect to land, socially productive urban growth means adopting policies that raise the productivity of land. Labor, on the other hand, is reasonably mobile, and capital is highly mobile. Entrepreneurship springs up and fades away with the rise and fall of opportunities. Therefore, in a market economy, the payments that must be made to attract these factors are substantially outside the control of a city. Thus the growth of a city with respect to labor, capital and entrepreneurship is achieved primarily by making the city a place that attracts more of these factors, taking the rates of wages, interest and profits that must be paid to attract them as given by market forces.

Tax policy is critical for urban growth because taxes on the earnings of labor, capital and entrepreneurship drive these factors away. A city that desires to grow should refrain from taxing wages, interest or profits and concentrate its taxes on land, which does not have the option of moving away.

Certain other sources of public revenue, in addition to the rent of land, have the characteristic of not discouraging growth. These sources of revenue involve either charging people for using scarce opportunities that no one created, as with land, or charging people for the costs that their actions impose on others.

A city that wishes to grow should confine its search for revenue to these sources. In this way it will attract more labor, capital and entrepreneurship, thereby raising the rent of land, which can be collected publicly without discouraging growth.

Additions to the stock of capital are extremely important for urban growth, because of the impact of abundant capital on wages and rents. When capital is abundant, labor and land are more productive, and the more productive they are, the higher wages and rents are. ...

... Every activity that is continued should pass a test of providing adequate value for money. Most of the worthwhile activities of local governments raise the rental value of the land in the vicinity of the activity by enough to pay a substantial fraction if not all of the costs of the activity.

Thus the rental value of land is a natural first source of financing for local public expenditures.

Making the rental value of land a principal source of local public revenue has both an equity rationale and an efficiency rationale. The equity argument for social collection of the rent of land is founded on a recognition that the rental value of land has three sources.

Part of the rental value of land is the gift of nature--the fertility of soil, the value of good rivers and harbors, the depletable value of minerals, and so on. This part of the rental value of land should be collected publicly because no individual has a just claim to more than a proportionate share of it. Public collection is just either if it is followed by an equal distribution to all citizens or by spending on activities that provide equal benefits to all.
A second part of the rental value of land comes from the provision of public services. The local agencies that provide these services can justly claim the increase in the rental value of land that results from their activities.
A third part of the rental value of any particular site arises from private activities that are conducted in the vicinity of that site. Social collection of this part of the rental value of land is particularly appropriate if this money is used to reward those private activities according to how much they increase the rental value of land.

The efficiency argument for social collection of the rent of land has two parts.

First, the rental value of land has the rare quality of being a source of public revenue that does not discourage productive activity. If people are taxed according to their labor earnings, they can be expected to work less, and to tend to move from the places that tax them. If people are taxed on their investments and savings, they can be expected to save and invest less, and to find it attractive to put their savings and investments in other places where they will not be taxed as much. But when the rental value of land is collected, no one will reduce the amount of land in existence, and no one will move his land elsewhere. Thus social collection of the rent of land does not reduce the productivity of an economy in the way that most other sources of public revenue do.
The second part of the efficiency argument is that social collection of the rent of land tends to make land more available to those who want to start new enterprises. When the rent of land is not collected publicly, those who have rights to land will tend to ignore the possibility of releasing it to someone who might make better use of it. On the other hand, if those who have rights to land are required to make annual payments equal to the market value of the rights they hold, then these continuing payments will induce people to ask themselves regularly whether they ought to release the land to someone who can make better use of it.

To achieve the potential efficiency of public revenue from land, it is important that people not be charged more for the use of land, just because they happen to be using it particularly productively. The rental value of land should be reassessed regularly, the values that are determined should vary smoothly with location, and they should be available for public inspection so that all users of land can see that they are being charged amounts commensurate with what their neighbors are being charged.

Social collection of the rent of land also facilitates the privatization of land. If every user of land is charged annually according to the rental value of the land that he or she holds, then it is possible to undertake a just privatization of land simply by passing out titles to the current users of land.

No one will be disadvantaged by not receiving land. Future generations will not be deprived by not having been awarded shares. And the community will have a continuing income from the rent of land.

The efficiency that is entailed in using the rent of land to finance public activities applies to certain other sources of public revenue as well:

1. Charges on any publicly granted privileges, such as the exclusive right to use a portion of the frequency spectrum for radio and TV broadcasts.
2. Payments for extractions of natural resources. Such payments should be set at levels that yield the greatest possible revenue of the resources, in present value terms.

3. Taxes on pollution. Every individual or enterprise that pollutes the air, water or ground should be required to pay the estimated cost of the pollution it generates. The effect of pollution on the rental value of surrounding land is one possible measure of its cost.

4. Taxes on any other activities that reduce the rental value of surrounding land.

5. Taxes on activities such as driving or parking in crowded streets, where one person's activities reduce opportunities for others. The administration of such charges may be so expensive that it is not worth implementing them, but if the administration can be handled sufficiently cheaply, these charges are efficient to the extent that they only charge people for costs imposed on others.

6. Taxes on activities, such as the consumption of alcohol, which impose costs on others (e.g., higher traffic fatalities).

7. Charges for local public services, such as water, electricity, sewer connections, etc. It is not generally desirable to make every service completely self-financing. Rather, what is desirable is that each user be required to pay the marginal cost of the service he receives. Extensions of service networks are efficient when they increase publicly collected land rents by enough to cover the costs not covered by user charges.

8. A self-assessed tax on permanent improvements to land, at a very low rate (perhaps 1/10 of 1% per year). With a self-assessed tax, each possessor of land names a price at which he would be willing to part with the land he possesses (and any immovable improvements). He pays a tax proportional to the value he names, and anyone who wishes to may take over possession at that price. The value of such a tax is that it makes it much easier to assemble land for redevelopment, and to identify appropriate compensation when land is taken for public purposes.

All of the above taxes are positively beneficial and should be collected even if the revenue is not needed for public purposes. Any excess can be returned to the population on an equal per capita basis. If these attractive sources of revenue do not suffice to finance necessary public expenditures, then the least damaging additional tax would probably be a "poll tax," a uniform charge on all residents. If some residents are regarded to be incapable of paying such a tax, then the next most efficient tax is a proportional tax on income up to some specified amount. Then there is no disincentive effect for all persons who reach the tax limit. The next most efficient tax is a proportional tax on all income.

It is important not to tax the profits of corporations. Capital moves from where it is taxed to where it is not, until the same rate of return is earned everywhere. If the city refrains from taxing corporations they will invest more in St. Petersburg. Wages will be higher, and the rent of land, collected by the government, will be higher. The least damaging tax on corporations is one that provides a complete write-off of investments, with a carry-over of tax credits to future years. Such a tax has the effect of making the government a partner in all new investments. With such a tax the government provides, through tax credits, the same share of costs that it later receives in revenues. However, the tax does diminish the incentive for entrepreneurial activity, and it raises no revenue when investment is expanding rapidly. Furthermore, the efficiency of such a tax requires that everyone believe that the tax rate will never change. Thus it is best not to tax the profits of corporations at all. If the people of St. Petersburg want to share in the profits of corporations, then they should invest directly in the corporations, either privately or publicly. The residents of St. Petersburg would be best served by refraining from taxing the profits of corporations. Creating a place where profits are not taxed can be expected to attract so much capital that the resulting rises in wages and in government-collected rents will more than offset what might have been collected by taxing profits.

The taxes that promote urban growth have at least one of two features.

The first feature that a growth-promoting tax can have is that it can serve to allocate a naturally occurring resource among competing potential users. Charges for the use of land, for the use of the frequency spectrum and for depleting natural resources share this feature.
The second feature that a growth-promoting tax can have is that of being a charge for the costs imposed on the city by the person who pays the tax. This feature is shared by taxes on pollution, taxes on other activities that reduce the value of surrounding land, taxes on imposing congestion and other costs on other residents of the city, charges for the marginal cost of publicly provided services, and a self-assessed tax on property, reflecting the hindrance to future growth represented by existing development.

A city that confines itself to these taxes can expect to attract capital rapidly, and therefore to experience rapid growth, raising the wages of its citizens and the publicly-collected rent of its land. Read the whole article

Michael Hudson and Kris Feder: Real Estate and the Capital Gains Debate

On the other hand, the Fed statistics37 understate land values for methodological reasons. Starting with estimates for overall real estate market prices, Fed statisticians subtract estimated replacement prices for existing buildings and capital improvements to derive land values as a residual. These replacement prices are based on the Commerce Department’s index of construction costs. Thus, building values are estimated to increase steadily over time, on the implicit assumption that all such property is worth reproducing at today’s rising costs.

However, the value of any building tends eventually to decline, until finally it is scrapped and replaced. It is the value of land which tends to rise as population and income grow (over the long run, with cyclical swings), precisely because no more land can be produced. Thus, capital gains in real estate result mainly from land appreciation.

Building values fall because of physical deterioration, but also because buildings undergo locational obsolescence as neighborhood land uses change over time, so market prices tend to fall below replacement costs. It would not be economical to rebuild many types of structures on the same site if they were suddenly destroyed.38 In particular, where land use is intensifying over the long run, rising land values effectively drain the capital value out of old buildings. This is because the salvage value of land (its worth upon renewal) tends to rise, while the scrap or salvage value of most immovable improvements is negligible. Where land has alternative uses, rent is not its current net income but its opportunity cost -- the minimum yield required by the market to warrant keeping the land in its present use instead of converting it to the best alternative use. As the land value rises, a rising share of the property income must be imputed to the land and a falling share remains to be imputed to the improvements.39

39 Indeed, where ill-maintained old buildings occupy prime locations, a parcel may be more valuable once the building is demolished and the lot cleared for reuse See Gaffney (1993 and also 1971). Some improvements, such as gas stations and refineries, are accompanied by ecological pollution, which can be analyzed as a negative improvement -- the property would be worth more without it. Pollution may greatly increase the saIvage cost of land making it uneconomical to salvage some lands despite the value they would have if clean. This “brownfields” problem has received considerable public notice in recent months.

Thus, the correct way to separate land values from building values is to appraise land values directly in terms of opportunity cost -- how much would a vacant lot at that site fetch in the market? If the observed market value of the improved property exceeds the land value, the residual is the implied value of the standing improvements. The Fed’s land-residual method theoretically understates the land share of real estate values.40 The pitfall of this methodology is demonstrated to an almost comical degree by the fact that according to Fed statistics, the land component of corporately owned real estate has been reduced to near zero over the past five years (while the nominal reproduction costs of factories and other corporately held buildings are inflating).

The measurement problem is exacerbated by assessment bias in many states and localities. Particularly where land values are trending upward, overestimates of building values relative to site values reflect the steady under-assessment of land. Note that as a larger share of real estate value is imputed to buildings, a larger share of cash flow can be claimed as depreciation. In effect, assessment bias allows investors to partly depreciate land, at no cost to local government budgets. Read the whole article

Michael Hudson: THE LIES OF THE LAND: How and why land gets undervalued.

Turning land-value gains into capital gains
Hiding the free lunch
Two appraisal methods
How land gets a negative value!
Where did all the land value go?
A curious asymmetry
Site values as the economy's "credit sink"
Immortally aging buildings
Real estate industry's priorities
THE FREE LUNCH: Its cost to citizens Its cost to the economy

... when one begins to look beneath the surface of national income statistics and the national balance sheet of assets and liabilities, one can see that modern economies are all about obtaining a free lunch. However, to make this free ride go all the faster, it helps if the rest of the world does not see that anyone is getting the proverbial something for nothing - what classical economists called unearned income, most characteristically in the form of land rent. You start by using a method of appraising that undervalues the real income producer, land. Here's how it's done.

Two appraisal methods

PROPERTY IS APPRAISED in two ways. Both start by estimating its market value.

The land-residual approach subtracts the value of buildings from this overall value, designating the remainder as the value of land. Building values may be estimated in terms of their replacement cost (which usually produces a very high estimate, leaving little land value) or their depreciated value (which gives an unrealistically low building estimate, inasmuch as maintenance and repairs save most buildings from deteriorating through wear and tear). Using the depreciated value method leaves a higher residual land value. The Federal Reserve Board recently has experimented with a hybrid intermediate method that values buildings on the basis of their "historical costs".
The building-residual approach starts by valuing the land, and treats the difference as representing the building's value. The first step in this approach is to construct a land-value map for the district or city. This displays fairly smooth contours for land values. Overlays would show zoning variations. Most of the variations in property prices around this normalized map will be for structures, along with a sizable component of "errors and omissions." This approach rarely is used, and most assessed land values vary drastically from one parcel to the next. The problem is especially apparent in the case of parking lots or one-story "taxpayers," that is, inexpensive buildings in neighbourhoods that are heavily built up. Their purpose is simply to be rented out at enough to carry the property's tax bill, not to maximise the site's current economic value.

Note that the Fed's land-residual appraisal methods do not acknowledge the possibility that the land itself may be rising in price. Site values appear as the passive derivative, not as the driving force. Yet low-rise or vacant land sites tend to appreciate as much as (or in many cases, even more than) the improved properties around them. Hence this price appreciation cannot be attributed to rising construction costs. If every property in the country were built last year, the problem would be simple enough. The land acquisition prices and construction costs would be recorded, adding up to the property's value. But many structures were erected as long ago as the 19th century. How do we decide how much their value has changed in comparison to the property's overall value?

The Federal Reserve multiplies the building's original cost by the rise in the construction price index since its completion. The implication is that when a property is sold at a higher price (which usually happens), it is because the building itself has risen in value, not the land site. However, if the property must be sold at a lower price, falling land prices are blamed.

If it is agreed that any explanation of land/building relations should be symmetrical through boom and bust periods alike, then the same appraisal methodology should be able to explain the decline of property values as well as their rise. The methodology should be as uniform and homogeneous as possible. By that, I mean that similar land should be valued at a homogeneous price, and buildings of equivalent worth should be valued accordingly.

If these two criteria are accepted, then I believe that economists would treat buildings as the residual, not the land. Yet just the opposite usually is done. ... Read the whole article

Nic Tideman: The Case for Site Value Rating

The Social Justice of Site Value Rating
The Efficiency of Site Value Rating
How Valuations would be Made

Both for reasons of social justice and for reasons of economic efficiency, site value rating deserves a continued place in the programme of the Liberal Party.

The case for site value rating in terms of social justice is founded on two understandings: first, that the value of land in the absence of economic development is the common heritage of humanity, and second, that increases in the rental value of land arising from economic development and government expenditures should be collected by governments to finance those activities. What is meant by "land" is the unimproved value of sites and the value of extractable natural resources such as North Sea oil.

While there may someday be institutions capable of implementing a recognition of land as the heritage of all humanity on a worldwide basis, in the absence of such institutions each nation should implement a recognition that land within its boundaries is the common heritage of its citizens. This is accomplished not by making the nation a gigantic Common or by instituting government management of all land, but rather by requiring all persons and corporations that are granted the use of land to pay a fee or tax equal to what the rental value of the land they control would be if it were in an unimproved condition.

The case for site value rating in terms of economic efficiency is founded on the fact that a tax on resources that are not produced by human effort is one of the few sources of government revenue that does not reduce incentives for people to be productive. Two other revenue sources that have this virtue are taxes on other government-granted privileges such as exclusive use of radio frequencies and taxes on activities with harmful consequences, such as polluting the air. An economy will be more efficient if revenue sources that do not diminish productivity are employed to the greatest possible extent before any use is made of taxes that impede productivity.

What makes a tax efficient is that the amount of tax that is due cannot be reduced by reducing productive activities. When incomes are taxed, people can reduce the amount of taxes owed by working less. They do so, and the productivity of the economy falls. When houses are taxed, people can reduce the amount of taxes owed by building fewer house and smaller houses. They do so, and the housing shortage worsens. But when the unimproved value of land is taxed, there is no resulting diminution in the quantity of land. Thus taxes can be levied on land without diminishing the productivity of an economy. And shifting taxes from other, destructive bases to land will improve the productivity of an economy.

Subsequent sections explain in more detail these social justice and efficiency arguments for site value rating, describe procedures for implementing such a tax system, and explain why a variety of potential objections are without merit. ...

How Valuations would be Made

Before describing the valuation process, which employs auctions, it is useful to discuss the concept of a "second-price auction." A second price auction is one in which each bidder submits a single sealed bid, and the object is sold to the highest bidder at a price equal to the second highest bid. Second-price auctions have the advantage of making bidding simpler and more straight-forward. In an ordinary sealed-bid auction, in which the highest bidder pays what he or she bids, bidders are induced to under-bid strategically, not revealing the full value to them of the auctioned item, so that they can obtain it at a more advantageous price. This incentive for strategic underbidding is eliminated by a second-price auction. With a second price auction, a bidder who bids less than the object is worth saves no money as long as he or she is the highest bidder, and if the bid is low enough not to be the highest bid, the object is lost to another bidder. Nor is over-bidding beneficial. Either it makes no difference, or it results in the object being bought at a price of more that it is worth to the bidder. Thus honest statements of the value of the thing being auctioned are in the self-interest of bidders in second-price auctions. By a similar line of reasoning, when a contract is to be let to the lowest bidder, honest statements of the lowest price at which a party is willing to do the work can be obtained by letting the contract to the lowest bidder at a price equal to the second-lowest bid. There are two efficiency advantages to second-price auctions. Bidders do not have to spend resources trying to compute their strategically most advantageous bids, and because bids represent accurate valuations, the winning bidder is the person who values the object most, or can truly do the work at the lowest cost. It might seem that the amount received by the seller would be smaller in a second-price auction. However, the higher bids that result from removing the incentive for strategic under-bidding approximately offset the reduced returns from charging only the second-highest bid.

In the proposed system of site value rating, valuations would be made by property market professionals, who would be rewarded according to the accuracy of their valuations, as revealed by occasional auctions. An administrative agency would divide territory into blocks of a convenient size and take bids for valuation of all sites in a block, with the valuation contract going to the lowest bidder, at a price equal to the second-lowest bid. The valuer would provide a formula that could be used to compute the value of any site in the block, taking into account such features as size, proximity to shops and transportation, width of the street on which the property was located, and any other objectively measurable attributes that were thought to be related to site values. The actual payment to the valuer would be reduced in proportion to the average inaccuracy of the valuations, as revealed by subsequent auctions of some of the sites.... Read the whole article

Nic Tideman: Improving Efficiency and Preventing Exploitation in Taxing and Spending Decisions

For truly national public goods, other ideas must be explored. One of the major national public goods is defense. In a perfectly just world, everyone would be so respectful of the rights of others, and everyone would feel so safe that no defense spending would be desired. In a less perfect world, many people, but not all, want public defense expenditures. How can they be provided justly?

Some financing of defense expenditures can be provided by a Pigouvian tax on the externality of accumulating capital, which makes a nation a more attractive target of aggression. If the U.S. requires a greater defense budget than Canada, which is larger in area, it is because the greater value of the assets in the U.S. makes the U.S. a more attractive target of aggression. Thus anyone who owns capital might reasonably be charged for the increase in the defense budget that is needed to make other citizens as safe as they would be if that one person's capital were not adding to the attractiveness of nation as a target. It would be interesting to know how much of the defense budget could be covered by such charges. I propose a self-assessed tax of, perhaps, 1% per year on the value of all assets and contractual rights, to pay the costs of defense. The owner assesses the value and pays a corresponding tax, and if anyone wants to buy the asset at the assessed value, it is sold. There could be a personal exemption of perhaps $50,000 per year, and an exemption for personal papers. There could be a local add-on to pay the costs of local police and courts. ... Read the whole article

Fred Foldvary: Geo-Rent: A Plea to Public Economists

I concede that geo-rent is a hypothetical. Geo-rent is based on two fictions.

The first is that the site is devoid of improvements.
The second is that it is being rented out.

One occasionally hears criticisms of geo-rent taxation like this from the textbook by McConnell and Brue (2005, 300): “[I]n practice it would be difficult to determine how much of any specific income payment actually amounted to [geo-rent].”

Yet, professional real estate appraisers routinely separate a site’s ground value and the improvement’s value. This separation is typically required for fire insurance. Banks for mortgages also commonly require it. These parties estimate site value as a residual after the replacement cost of buildings, adjusted for depreciation. This process is combined with computerized contour mapping of site value per square meter, based on actual land-sale and lease data. The computerized mapping works to smooth out the assessments, and can be done to emphasize long-term trends rather than year-by-year fluctuations in land values (as is done today with the assessment of property-tax). Adam Smith (1776) advocates geo-rent taxation (832 - 844) and explains that separating out the value of improvements is not that big a deal (833, 844).2

2 George carefully rationalized the single tax in terms of Adam Smith's "canons of taxation." On the affinity between Smith and George, see Petrella (1984).

Of course this is inexact. Of course there will be judgment calls by assessors, as well as some politicking in the details. But serious economics is comparative. All tax rules will involve inexactness, judgment calls, and politicking. Let’s ask honestly how serious these problems are compared to other forms of taxation.

Sales, incomes, profits, imports, and estates are easily hidden. Deductions, cost accounting, and expenses are devilishly particularistic, involving whatever human activities the taxed party says are involved in generating sales, income, or profits. Documentation is a tangle of complex record keeping, and is very difficult to make accountable. Documentation is easily fabricated. Enforcement is intrusive and encroaches on civil liberties. The dimensions of earning sales, income, etc. are myriad, and all call for particularistic tax rules, each highly subject to arbitrariness and politicking because of the particularism.

By contrast, it is impossible to hide land. It is impossible to shrink, move or disguise land. Moreover, the dimensions of valuing ground space are relatively few. The government can set general rules that apply universally. In contrast to income-tax records which are for good reasons kept from public view, the site-value assessments for geo-rent would be a public record, as in fact real-estate assessments are today. In principle, absolutely no record keeping is required, apart from title to the land. Compared to taxing income, sales, estates, etc., taxing geo-rent is objective, transparent, and non-intrusive. These virtues were emphasized by Adam Smith (1776: 848).

Those who allege a relative difficulty in separating the value of land from the value of improvements lose sight of the main policy issue. The relative efficiency of tapping geo-rent is that doing so imposes no marginal cost on additional income, sales, or personal property. Condominiums assign to each unit a fixed percentage interest in the association, which is also its percentage of the assessments. This percentage interest is often based on the site value of the unit relative to the other units, i.e. its location and size, irrespective of any personal property inside the unit, let alone the owners’ income or spending.
Thousands of condominium associations are thus accomplishing what some claim is impractical. They tap the site value of a unit without reducing extra income or burdening extra spending or possessions. Residential associations, hotels, and other private communities do likewise with their rental charges and assessments. Some private communities such as shopping centers do practice modern sharecropping, basing some of their charges on the gross revenue of the tenant shops as a way of sharing risks, but this is not an essential feature of private-community financing. Read the entire article

Nic Tideman: Farm Land Rent and the Renewal of Rural Society: The Self-Financing Model

there is a way of raising revenue for local public services that does not have these disadvantages. That way is to use a combination of fees for services and public collection of the rent of land.

The rent of land is the amount of money that would be bid for the use of land in an auction. It can be thought of as 100 rubles more than the second-highest bid, that is, the amount of money that the person for whom the use of land is most valuable must bid to outbid the person who places the second-highest value on it.

What land is worth to a person who wants to use it depends on the length of time for which he will be allowed to use it. For the purpose of defining rent, this length of time should be indefinitely long, but with provision for revising the rent as market conditions change. In other words, if similar land rents for 20% more three years from now, then the person who secures the use of a site this year would be required to pay that additional 20% at that time.

The rent of land also depends on the condition of the land. The rent of land is what people would bid for unimproved land. In a town, unimproved land is land without any structures on it. In an agricultural area, many things other than structures can count as improvements--drainage, stone removal, fertilization, leveling, etc. It might be hard to find agricultural land that had no such improvements. Thus in agricultural areas, one must subtract something from observed payments for the use of land, to account for the value that is being paid for such improvements.

The comments above describe how one might observe the rental value of land. Economics can also say something about how a bidder would decide how much to bid. A bidder would decide how he could use the land most profitably, compute the net revenue from the most profitable use after all costs including the cost of his own entrepreneurial effort and a premium for the risk to his finances, and what was left would be the total rent of the land for the period of the investment. The bidder would then estimate future rent, subtract that from the total rent, and what was left would be rent for the current period. Read the whole article

Mason Gaffney: Full Employment, Growth And Progress On A Small Planet: Relieving Poverty While Healing The Earth

Renewal as intensification. George observed land speculation in California when it was young and raw. Today, an equally or more baneful aspect of underusing land is found in older blighted slums, where underuse takes the form of non-renewal. Thus, land of high capacity is providing only minimal service and employment. Why do we not get timely renewal? The most obvious reason is that the sites under old buildings bear low tax valuations, because assessors mistake the building for the site and overlook its reuse value, or opportunity cost. Let the owner renew the site, and taxes shoot up: not only on the new building, but often on the site as well. Result: nonrenewal. So capital that should go to renew these sites of high potential migrates outward instead, to where tax rates are lower and subsidies are higher, wasting capital in duplicating the infrastructure, and of course also wasting land.

Many Georgists fail to see that a major part of the problem is underassessment of the land. Land is underassessed when tax-valuers lapse into using the “building-first, land-residual” method of separating land from building values. This results in land valuations so absurdly low that one observes, in many cities and neighborhoods, most of the joint value of land/building being allocated to the building in the very year that the owner chooses to demolish the building, i.e. when the building really no longer has any value at all. Then the assessor raises the land valuation under the new, or replacement building – making the land tax in effect an additional tax on the new building. The correct method is the “land-first, building-residual” method: value the land as though vacant, and give the old building the excess, if any, of the joint value over the land value. Then the land value remains fixed when a new building arises, and the land tax serves, as it should, as a stimulus to rebuilding (Gaffney, 2001). Read the whole article

Mason Gaffney: Land as a Distinctive Factor of Production

The price of land is closely related to that of adjoining land, for they are usually near substitutes. Richard Hurd, pioneer author of the classic Principles of City Land Values (1903), posited this rule, noting the continuity is both concentric and axial. It is therefore possible to map land values as one would map elevations, drawing contour lines of equal unit value. ...

In dividing value between land and a building affixed to it the standard practice of appraisers, and speculative buyers too, is the "building-residual method." The land is appraised as though vacant; the building gets the remaining value, if any. The building, once attached to a specific site, loses the mobility of place and form that fluid capital possesses and has no opportunity cost but scrap value, which is often negative. Land, always lacking mobility of place, retains mobility of reuse because of its versatility, permanence, and irreproducible location....

Many buyers have little understanding of valuation theory. Loan officers should be better trained than naive new buyers, but the recent history of U.S. and Japanese banking suggests otherwise. Without understanding, there is little basis for pricing other than the behavior of other buyers and sellers. "A nerd follows the herd." But then valuation is purely circular and loses its anchor in reality. The history of land values, accordingly, is one of manic-depressive mob psychology with swings of high amplitude.

Suppose one decides to consult a professional real estate appraiser, to make sure he does not overbid. What do appraisers do? They locate comparable properties that have sold recently, and advise you accordingly. The buyers of those other properties hired appraisers who did the same thing. If there is a building, he tells you it is not worth more than its reproduction cost, a known figure in the trade. With land, however, value is based mainly on what others are paying, i.e. the general opinion. Everyone is setting his watch by everyone else's.

There is one important party whose following the herd will actually restrain the herd, and temper its excesses. This party is the assessor of land taxes. If land assessments rise with a herd mania, land taxes will also rise, dashing freezing water on the mania and stabilizing the market. Here is compensatory fiscal policy in the best and original sense. This can really work. It did work in the Progressive Era, 1900-17, when reliance on property taxes was at an all-time high in the U.S. The major crash that was "due" in 1913 or so never happened.41 Several factors were at work, but this was clearly a major one.... Read the whole article

Mason Gaffney: Property Tax: Biases and Reforms

Priority #1. Safeguarding the property tax
Priority #2: Enforce Good Laws

Reassess Land Frequently
Use the Building-Residual Method of Allocating Value
Federal Income Taxes

Priority #3. De-Balkanize Tax Enclaves

A. Rich and Poor
B. Timber and Timberland
The Role of Timber and Timberland
Two More Areas Deserving Attention
Offshore Oil
Tax All Natural Resources Uniformly and Comprehensively

Priority #4. What Tax to Fight First?
Priority #5: Make Landowners Pay Their Taxes

Use the Building-Residual Method of Allocating Value

It is equally important to use the "Building-Residual Method" of allocating value between land and buildings. This means you value the land first, as though it were vacant, based on highest and best use. You subtract this land value from the total value of land-&-building as currently improved: the residual, if any, is building value.

Valuing one lot or parcel this way, you have information needed for valuing neighboring and other comparable parcels. Using a map with value contours, you can value a whole city this way with surprising ease and speed.

Using this method, I valued Milwaukee land in 1963 and 1967. The building-residual method nearly tripled the land values reported by the City Assessor, who was using the assessor's usual inconsistent mix of various other methods. How's that again? Did I say tripled? Yes, I really said "tripled." By his methods, buildings on the eve of demolition were carrying values higher than their sites; by the building-residual method these old buildings had no value at all, which of course is why they were being torn down. Besides depreciation and technological obsolescence, many buildings suffered severe "locational obsolescence," owing to shifting demand patterns. The land was re-usable, and had as much or more value without the extant buildings.

Using the building-residual method requires no change in present laws. It is within the latitude of assessing officials, who, in turn, respond to public opinion. The conscientious citizens' move is to educate and bring pressure, just as the old single-tax campaigners like Jackson Ralston did. In the process of "losing" they won over half of what they sought, just by taking a stand and making the effort.

Federal Income Taxes

One of assessors' greatest problems today is the strong pressures from owners who want to allocate as much value as possible to buildings that they may depreciate for federal income tax purposes. Here is where we must study how the parts form the big picture. Here is where federal and local tax policies intersect. Some Georgists have neglected or misunderstood the income-tax treatment of land income. Let us see how this works.

Congress and the IRS let one depreciate buildings, but not land, for income tax. This important distinction harks back to when the income tax was new, and Georgist Congressmen like Warren Worth Bailey, from Johnstown, PA and Henry George Jr., from Brooklyn were instrumental in shaping it.

When a building is new, the depreciable value is limited to the cost of construction. The non-depreciable land is the bare land value before construction. So far, so good. Over time, however, building owners have converted this into a tax shelter scheme. Owner A, the builder, writes off the building in a few years, much less than its economic life, and sells it to B. "A" pays a tax on the excess of sales price over "basis." The basis is reduced by all depreciation taken, so any excess depreciation is "recaptured" upon sale. It is defined by Congress as a "capital gain," and given the corresponding package of tax preferences:

deferral of tax,
lower rate,
step-up of basis at time of death,
tax-free exchanges, etc.

Thus far, any tax preference goes to A, the builder, and may be seen as a wellconsidered building incentive. Watch, however, what happens next. "A" sells to B and B depreciates the building all over again, from his purchase price. To do so, B must allocate the new "basis" - i.e., his purchase price - between depreciable building and non-depreciable land.

How shall B allocate the new basis? Enter the local tax assessor. Here is where local assessment intersects with Federal income tax policy. The IRS does not try to assess land and buildings. Instead, IRS instructions tell taxpayers they may use locally assessed values to allocate basis between depreciable buildings and non-depreciable land. The IRS accepts this allocation as conclusive. As a result, local owners of income property press their assessors to allocate as much value as possible to buildings, and as little as possible to land. This does not affect their local taxes, but lowers their federal taxes. It lets them depreciate land.

Local revenues are not immediately affected. Local assessors have little reason not to accommodate their constituents, local landowners, to help them depreciate land for federal and state income tax purposes. They have little reason to use the correct "building-residual'' method of allocating value, and a compelling reason to use the wrong method that understates land value. Thus they convert non-depreciable land value into depreciable building value. It is the modern version of "competitive underassessment." In the process, they also convert the local property tax from a land tax into a building tax.

After a while B sells to C, who in turn sells to D, so each building is depreciated many times. So is a large part of the land under it, time after time, although it should not be depreciated at all. This is carried so far that real estate pays no federal or state income taxes at all.

The solution to this lies with the U.S. Congress. The need is to limit depreciation to one cycle only. It is a most urgent problem for both federal and local treasuries. We all have Congressmen. Write to them and raise their consciousness. They are brokers who respond to public opinion. It is we who are derelict. ...

Timberland owners around the country have sold this bill of goods to legislators. In many states, less than half the private land is fully taxable, because of such laws. These are not all western or southern states, either, as one might surmise. In NH, for example, only 45 percent of the private land (and none of the Federal land) is fully taxable. The rest is sheltered by the State's "Current Use" tax law, their version of our TPZ law.

Advocates for these laws argue that land taxes, accumulating with interest over long growth periods, would eat up all the profit from growing timber. Let us see. Taxes of $1.56 per acre per year, accumulating over 60 years at a real interest rate of five percent, come to $552 per acre in constant 1995 dollars. At that time the timber stumpage will be worth about $20,000 at 1995 prices, or 36 times the accumulated future value of the land taxes. (In addition, the investment will have served to shield the owners from the eroding effects of inflation, a benefit assumed away by using constant dollars. On top of that, it is a good bet the real value of timber will have risen after 60 years of population growth.)

Thus, land taxes would have to be 36 times what they are now to consume the whole value of timber harvests. The fact is, present taxes are a negligible token. Timberland is effectively sheltered from the full weight (light as it is) of the one percent property tax imposed on ordinary land. It pays, as we have seen, only about $1.2 million a year in Mendocino County.

The acre value of timberland is low compared with downtown values in San Francisco, where one little square foot in the hottest spot may fetch $2,000. That is $87 million per acre! However, there are very few such golden acres, compared to a million acres of timberland in Mendocino County, some 35 million acres in California, and 737 million acres in the U.s. That is 32 percent of the area of the 50 states. (The fraction of private and public land in forests is, by coincidence, the same: 32 percent.)

Owing to the success of timber people in spreading their gospel, almost all of their land is underassessed. Almost all state yield taxes, imposed in lieu of property taxes on standing timber, are too low to be revenue-neutral. Add to that, Congress since 1943 has made timber a "capital asset" for federal (and therefore state) income tax. Many costs of managing and carrying this capital asset are expensible - certainly interest and property taxes are. The net result is that timberland contributes very little to public revenues at any level.

Residents of timber counties are typically scattered and poorly organized. Timber companies are huge, rich, few and tightly organized. In Mendocino County, Georgia Pacific and Louisiana Pacific, absentee owners, together own the best 500,000 acres - 58 percent of the County's timberland - and Georgia-Pacific owns Louisiana-Pacific. They control state forestry schools, paying professors as consultants. They support research in forest economics at think tanks like Resources for the Future in Washington, which has never criticized their tax preferences but trained its big guns on public agencies, the Forest Service and the Bureau of Land Management. "The industry" controls tax laws in 50 states, and sloughs tax burdens onto others. It will continue to do so until other taxpayers in the timber counties wake up and organize to control state timber tax laws. Read the whole article

Walt Rybeck: Have We Forgotten The Foundation?

Urbanologists and the public need to be awakened to the central role played by taxation. They need to see that loss of our historic land tax has made speculation our top national sport -- a treacherous one at that. As Hans Blumenthal wrote in Metropolis...and Beyond (edited by fellow panelist on this program, architect Paul Spreiregen):

There is no doubt that the present real property tax...contributes more to depressing the standard of housing than all government housing policies combined do to raise it. The current property tax may fairly be called the upside-down tax. It taxes land values too lightly, buildings much too heavily. It rewards bad land use, penalizes good land use. Consider three identical homes and lots:

Owner No. 1 adds a rec room, new roof, great landscaping. The assessor comes by and says, in effect: "As punishment for making a showplace, and for generating jobs and profits for local businesses, we're raising your assessment by the amount of your investments. Your tax bill will go up, not just for a year, but for as long as you keep the house in good condition."
Owner No. 2 lets his house of the same size run down -- loose banisters, torn screens, broken gutters, junk-filled yard. The assessor tells him, in effect: "Because you created an eyesore for your neighbors and an unsafe dwelling for your tenants, we're reducing your assessment and your taxes. If your place is more dilapidated next year, we'll reduce them even more."
Owner No. 3 tears his building down; the idle lot neither houses nor employs anybody. The friendly assessor tells him, in effect: "For completely wasting your property, and for making no use of the infrastructure provided for this area, we'll give you the lowest assessment and tax bill of the three."

These all-too-familiar examples condemn not the assessor but our present tax system. And the same perverse property tax incentives apply to commercial properties. Is it any wonder cities are torn apart? The wretched tax on buildings is only the half of it. The low land tax is the other half. A speculator sees that the annual increase in his or her land value is greater than the tax bill. This signals the owner to do nothing, to sit back and collect the values generated by productive neighbors and the community.

Speculation feeds on itself. The more land held out of use, the tighter the supply of available sites. This raises land prices further, seducing more speculators into the land game, hastening the flight of residents and businesses from central cities and even small towns. This is far from the only cause of sprawl, but one of the most potent. It cannot be stressed too much because it is one of the least recognized causes. Read the whole article

Mason Gaffney: Sounding the Revenue Potential of Land: Fifteen Lost Elements

Correcting for downward bias in standard data (Items 1-3)

1. Standard data sources neglect and understate real estate rents and values. These standard sources include:

a. Assessed valuations used for property taxation. I will only enumerate, not elaborate much on the many reasons assessed values usually fall short of the market. This in itself is a dizzying experience, and you may want to skip ahead to point “b”. Scanning the bullets below, however, gives a clue as to how landowner pressure has subverted the property tax over the years.
Failure to assess land first, using maps (with building value as the “residual”) Read the whole article

Conventional use of fractional assessments in many states
Lag of assessments behind the rise of land values, and behind the fall of building values with depreciation and obsolescence. Increasingly, this extra-legal process has been institutionalized, as in Prop. 13, California
Use of capitalized income method for assessing business properties (other than apartments). The bias is against intensive uses in zones of transition (ecotones), at every margin between lower and higher uses.
Conventional preference given to acreage, regardless of location, regardless of industrial use. (Allis-Chalmers example in center of West Allis, Wisconsin. Omission of acreage from otherwise good studies by the U.S. Census of Governments under Allen Manvel.)
Classification of land for taxation, with preferential low assessment for lower uses (rarely are assessments above the market for any use, except apartments and rentals for the poor). In California, some favored use-classes are farming, timber, and golf. Alabama has another set of low-tax classes, favoring land in forests and hunting grounds, catering to the Heston vote in league with absentee corporate owners (and, for no visible theological reason, organized fundamentalists). Lands in classified uses are assessed by capitalizing their visible money income from the official use only, thus exempting from the tax base all values from rustic manorial, recreational, and blood-sport uses, and all speculative values based on higher future uses. In vast rural and sylvan areas these other influences are the main source of market value.
Assessments capped by zoning, even when the market does not believe the zoning will endure, or be enforced
Regressive assessments, swayed by case law which reflects differential ability to finance lawsuits and appeals.
Discounts for large lots or other holdings that should be subdivided
Failure to publicize assessed values. In some states the values are not even open to public inspection - Lee Reynis, Director of the Bureau of Business & Economic Research, University of New Mexico, has told this audience of secrecy enforced by law in New Mexico
Reluctance to recognize premium for plottage potential
Exempt lands, owners, and land uses. Churches, often targeted by critics, are minor offenders. Cemeteries are major: they also include commercial ventures holding vast lands for future sale. Commercial or not, they consume more than their share of water, often at preferential rates. In industrial dependent Milwaukee, cemeteries preempt more space than all industry, which helps account for the city's 20% population decline since 1960. Public lands held by schools and the military tie up much of San Diego. New York City and Washington, D.C., are notorious for their “free lists” of exempt lands. Once an agency acquires land it never again appears in the budget, so bureaucrats squander it.
Homestead exemptions, in some states - widely abused.
Preferential underassessment of lands with low turnover. Extreme underassessment of lands that do not sell:

corporate holdings;
proprietary golf clubs;
dynastic holdings;
inherited lands.

Rail and utility adjunct landholdings, i.e. other than their ROW. (These are state-assessed, not on local tax rolls; are assessed as acreage, usually, which means underassessment; anyway, taxes are passed on to ratepayers in the rate-regulation process. Vast holdings by rails, e.g. 10% of Chicago; 5% of Milwaukee; vast SP holding south of Market Street in San Francisco, and statewide. Hydrocarbon holdings by regulated utilities.)
Rights of way. Assessors ignore monopoly power inherent in ROW, assess ROW land on its value in the best alternative use
Discounts to large owners who have policy of slow sales or leasing. (Such discounts are given to Oregon timber; to Appalachian coal; and many extractive resources. They are given to laggards in ecotones.)
Conventional reluctance to base assessments on speculative values, even when condemnation awards are so based ... Read the whole article

Mason Gaffney: The Taxable Capacity of Land

The question I am assigned is whether the taxable capacity of land without buildings is up to the job of financing cities, counties, and schools. Will the revenue be enough? The answer is "yes."

The universal state and local revenue problem today is whether we must cap tax rates to avoid driving business away. It is exemplified by Governor Pete Wilson of the suffering State of California. He keeps repeating we must make a hard choice: cut taxes and public services, or drive out business and jobs. (When a public figure gives you two choices you know they're both bad, and he wants one of them.)

The unique, remarkable quality of a property tax based on land ex buildings is that you may raise the rate with no fear of driving away business, construction, people, jobs, or capital! You certainly will not drive away the land. However high the tax rate, not one square foot of it will put on a track shoe and hop out of town. The only bad thing to say about this tax's incentive effects is that it stimulates revitalization, and makes jobs. If some people think that is bad, maybe this attitude is the problem.

The taxable capacity of land is camouflaged in our times by a consistent modern tendency to underassess it, relative to buildings. There are several studies in point. The most general one is the quinquennial Report of the U.S. Census of Governments. It actually understates the tendency a lot, by omitting the class of land most underassessed, that is, raw acreage in and near cities.

There is great latitude in the assessment process. This latitude is now used to lower the fraction of the property tax base that is listed as land value, and raise the fraction that is listed as building value. It could just as well be used the other way, and used to be in many cities, whenever assessors were getting that message through the election returns. This would have roughly the same effect as going to a two-rate system on a more formal basis -- except, obviously, that the formal basis is more permanent, reliable, and generally respectable.

I have here data ... I worked up in Milwaukee from 1969 data indicating that, if land were assessed correctly, the land fraction of the real estate tax base would be over twice what the City Assessor reported. His fraction was 31%; it should have been 70%.

How does one come to so startling a finding? Wisconsin is not a backward state. It prides itself on the high quality of its public administration. What I did was study sites on the eve of demolition. When you buy an old junker to tear down and replace with a new building, you (the market) are obviously recognizing that the building has no residual value. All the value is then in the land. However, in Milwaukee in 1969 the Assessor was saying the building was worth about three times as much as the land, just before tear-down. That is a good way to measure to what extent land is underassessed.

Try that in Manhattan. When the visitor first gapes at its skyline from afar, it looks like one big modern high-rise. If you poke around on foot much, though, you soon realize those are the exception. Most of the lots are covered with obsolete junk, some of it tumbledown, commanding rents mainly for their location value.

Check the Empire State Building. Old as it is, it is still nearly the tallest building in the world. As to its site, it is in a so-so reach of 5th Avenue (34th Street), many blocks from the 100% location (57th Street, I would guess). Even so, when the site and the building sold in separate transactions a few years ago, the site represented 1/3 of the total value. What does that say about the land fraction on neighboring parcels, covered only with the remains of ordinary old structures? What does that say about the land fraction nearer the 100% location? ....

In other cases, industries occupy land of high value that is wrongly assessed low simply because industry occupies it, and it has not been subdivided. What has subdivision to do with it? The bias of assessors is to value industrial "acreage" low, relative to improved "lots," even though they lie cheek by jowl. It is a kind of wholesale discount for owners of "raw" (undivided) tracts.

For example, in West Allis, Wisconsin,

Wealth and Want
... because democracy alone is not enough to produce widely shared prosperity.
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